Trust Your Gut, But Don’t Cross Your Fingers: Year-End Planning 2021

HOST Clinton Laron Corporate Communications Manager  Eide Bailly

GUEST Jenni Huotari, CPA Partner-in-Charge of Business Outsourcing & Strategy Eide Bailly jhuotari@eidebailly.com

The Transcript

Clinton Larson: Hello and welcome to EB & Flow. I'm your host Clinton Larson. And today we are going to be talking about year-end planning. And joining me to talk about year-end planning is Jenni Huotari, a partner at Eide Bailly. Thanks for being on the podcast again, Jenni.

Jenni Huotari: Well, thanks for having me back, Clinton.

Clinton Larson: Yeah, we missed you.

Jenni Huotari: I missed all of you as well.

Clinton Larson: And so as I said today, we're going to be talking about year-end planning. It’s that time of year again. And you know, year-end planning is something that every business has to deal with. But this year, there's some added complexity because of COVID-19 related legislation and programs and things like that.

So I think that's just jump right in. What are some things that are important for organizations to consider this year as they enter year-end planning?

Jenni Huotari: Well, I think that businesses want to be aware of all of the legislation that was intended to positively impact or have a role in making whole their business from some of the COVID-19 impacts that happened over the last year and a half. And there were certainly multiple pieces, especially depending on what industry that your business was in.

But just that overall awareness to assure that you have been taking advantage of those programs, services, tax incentives, credits, whatever they might be to assure that you've addressed them, you know whether or not you were eligible, you have those calculated, filed, applied for, whatever it might be, so that you have benefited from that legislation.

Clinton Larson: Even without the added complexity, there's still a lot to consider when it comes to year-end planning. What are some of the common trouble areas that you see businesses fall into are things they overlook when it comes to your own planning?

Jenni Huotari: One of the primary things is might be more of a crossing your fingers and hoping for the best situation. When I say that, I mean that business owners hope that the financial information that they've been looking at is correct and adequate. But in their gut, they might know that something's not quite right. Something looks off. There was a question that they asked that they didn't get an answer to that they were really comfortable with.

And it is important to ask the right questions to understand, comprehend and agree with the responses that you're getting, because that information is important for your business. And now, as we approach year-end, you will hopefully be in a tax planning situation where you're meeting with your tax advisor in preparation for year-end. And there might be a couple of tax planning options you have before year-end, but you need accurate financial information to make the most of those tax planning items.

So if you have something that might be inaccurate now and you find that out after year-end, you might have made the wrong decision and you might have done the wrong thing. You might have put yourself in a poor situation based on having either inaccurate or incomplete financial information.

So I would say, trust your gut, don't kind of just cross your fingers and hope for the best, but really do take the time to dive in and assure that that information is correct and accurate, and that you're comfortable and confident with it.

Clinton Larson: And what's a good way to do that if you're looking at your accounting system, your finances, what's a good way to just sort of jump in and start to start to make those determinations?

Jenni Huotari: This is probably the time of the year where maybe at home you're doing some fall cleaning. And I would say, take that same approach with your financial statements and your financial information and schedules. This is that one time of year where you want to really clean them up and get them scrubbed tight.

So from a reconciliation perspective, as an example, look at your bank reconciliations and look at the individual line items on those. Assure the accuracy of those information for anything that is outstanding, especially deposits. Deposits do not usually sit outstanding for very long.

So if you have some that are aged, look into those. Look into any other odd items, especially things that we're supposed to be electronic payments or receipts through the system. Those should clear quickly. Those should be recorded after they've hit the bank. So assure that all of those things are recorded.

Look at outstanding checks as well. Question those. Determine whether or not any outstanding items look correct. If there's any unusual line items that look like a adjusting journal entry for a reconciling item that is incorrect, most likely, and not something that was put there to reconcile it temporarily and needs to be addressed. So really, dig into those reconciliations, especially your bank reconciliations or credit card or loans, and ensure that everything looks accurate.

And someone asked the other day a question on this too of the things that usually go wrong. And from a business owner perspective, you might look at your profit and loss, your PNL statement a lot. You're focusing on the operations of your business and how it's performing during the year, which is totally understandable. Now, if you're not also looking at your balance sheet throughout the rest of the year, year-end is the time where you want to look at that. You want to be familiar with it and assure that everything on it looks accurate.

Look at your accounts receivable. If that looks too high and in your mind doesn't make sense with what your customers or your clients owe you, then look into that further and have that addressed.

As an example of an issue we might see most often is if we looked at that accounts receivable balance and it looked far too high and it didn't make sense for the operations of the business. What may have happened is when that revenue was earned, it was recorded and offset was to accounts receivable. And when that client then paid you, the cash was recorded and the offset was revenue. So the accounts receivable was never reduced for that client payment. And the effect of that was overstating revenue.

You may only see that if you're looking at your balance sheet to note that your accounts receivable doesn't look right. Those customers, those clients have actually paid you. And the result of that is that your revenue is overstated. So if that's the situation and you're at tax planning, you're going to assume that you made more than you actually did. It might result in you paying in more estimates, or it might result in you buying something at year-end if you're a cash basis taxpayer so that you can reduce the tax burden. But it might not actually be a tax burden because in that situation, you may have over recorded or overstated your revenue and you didn't actually have that tax burden. And now you don't have any more cash and you didn't have the tax burden in your in a really unfortunate situation because of that inaccurate financial information.

And so just as a rule of thumb, when you look through the balance sheet, you do want to be really skeptical of what's on there. Is it correct? Is the amount correct doesn't belong there because most often the offset to that entry, so the other side of that dual entry, when you correct your balance sheet, it goes to the profit and loss, it goes to your P&L. So impacts your current year results when you have to adjust or correct all those balance sheet items. And that happens a lot at year-end, because a lot of times the balance sheet isn't being looked at during the year, it's only being looked at year-end.

And sometimes it's not even being looked at until your CPAs or your accountants look at it for tax purposes, and then they make the adjustments in your actual year-end net income is much different than you thought it was going to be. And that's really impactful, and oftentimes it's not positively impactful for your business. So that's something I would say as a primary recommendation. If you haven't been looking at that throughout the year, give that a good hard look at this time of year. Do it right now, at tax planning time and then certainly again at year-end so that your 1231 balance sheet is also accurate.

Clinton Larson: That brings up a good question to me and just in general of like when should businesses start kind of this process? You know, obviously, you know what you're talking about sounds very time consuming. So what is a good runway for year-end planning? Is it this time of year that we're in? And also, when is maybe too late to get started? When do you not want to be sitting there crunching numbers and thinking, Oh my, am I actually going to get this done?

Jenni Huotari: Yeah, well, that's a great question, and I would like that to tell people, Oh, whenever your schedule is slow, but I think it's just felt like no one ever feels like it slows down. Most feel like something you have to make time for because time will never just naturally allow itself for you to do that. I would say you do want to start now. Most oftentimes after year-end is not any more convenient for anyone.

There's a lot of things that happen from a compliance perspective that you have to do after year-end or you're into the new year. The day to day duties don't stop. And the other seasonal activities have increased. So the more that you can do now to start looking at things. Start cleaning up some of the reconciliation items that we mentioned now, or scrutinize accounts receivable or accounts payable right now. And then when you do that again, at year-end, you're only looking at the time frame from when you did it last until year-end. So it's a much more manageable activity.

But as a general rule of thumb, for that too, the sooner you can start, the better. Generally waiting until January or later or a week before your tax appointment is not a great time and you'll just be too rushed and won't have the time and ability to give it the extensive look that it may need. Hopefully, everything looks like it should and is what we would call clean, but that might not be the case. And when you really crunch yourself for time, it can just result in a bad situation.

Clinton Larson: You mentioned, you know, having the tax appointment coming up and you know, in the time of year when you're meeting with your CPA, you know, whether that's in-person or virtually or however you like to do it. Are there questions that you should bring to that meeting with your CPA or your business advisor that are just good questions to have in mind as you're approaching year-end?

What are some of the other conversations that you could be having with your CPA or business advisor during this time? That just might help you not only get a better grip on year-end, but also just, you know, help your business along the way.

Jenni Huotari: Well, I think right now, based on how volatile the last year and a half has been, it's a great time to have some high level conversations about all the different changes in legislation and making sure that you're aware of them and you understand them and have that opportunity to ask questions just around them in general or especially around their impact on your business.

I think it's always the right time to share what your intentions are for your business going forward. Oftentimes, we get really focused on what is happening, what did happen this year, what needs to happen as a result, and more of the compliance situation. What is correct so we can get things filed. But the planning piece is what is most important in what would most positively benefit your business.

And as CPAs and providers, it can be hard for us to ask all the questions or to know what you may be thinking about, what your next plan might be, what your goals really are. But I can assure you that accountants, the CPAs that you're working with, our goal, why we went into business is to help our clients be successful. So those conversations and that understanding allows us to help put you on that successful path or to offer the right advice or to look out for the next opportunity and the greater the understanding that we have from our clients about what they want from their business and what they hope to achieve and what they're thinking about doing, the more open dialog and understanding we have, the greater the likelihood that we are successful in helping our clients become successful or more successful.

Clinton Larson: That brings up a good perspective on this, too, in that year-end planning, well, it's called year-end planning, and it's about the past year. This is actually an opportunity for businesses and organizations to really look at the year ahead and sort of get ahead of the game. What are some common tips, what are some common ways that businesses can use year-end planning to get ahead for next year?

Jenni Huotari: A lot of times it can be about short term tax liability, and that might have an impact on cash. So considering the whole. Don't make any short term decisions that will impact long term without considering your operations in your goals in totality.

So for example, if you've got a short term liability and you want to just reduce the short term liability, so you make a purchase to do that, but then it impacts your cash situation for the next year, which may not allow you to do some of the other things that you have planned. Trying to reduce the reaction, but always stick to the strategy or the plan.

I think the ability to look out further than the short term or more, maybe more of a knee jerk type of reaction will increase the likelihood of achieving those goals of being successful. So in some cases, it's in talking through the likelihood of it, planning it, being able to just draft up a basic plan and understanding what all needs to go into it. What are the short and long term action items to help meet that success.

Clinton Larson: You were talking before about all the nuances and all the little things you need to look at in your finances in order to just be prepared for year-end. Is this also a good time to take a good, hard look at your accounting system and make sure that it's appropriate for your business and appropriate for your goals?

Jenni Huotari: Yes, I think it definitely is. One of the things I would look for is if things aren't correct. And once you do some of the dive intos that we talked about. Understanding why where things went wrong. Oftentimes, it's because we have to do parts of our operations in different systems, and those systems don't talk to each other. So the process from getting information from one system, as an example where you do your invoicing for your clients, may not speak to your accounting system.

And then it's hard to know which one is correct and should be relied upon. You know which one is the source of truth. And that may increase your desire to have a more robust system where all of the operations that you need are handled within the same system. So a more robust enterprise system where you're invoicing or you're handling all your client relations in the same system that will handle the accounting, that will also handle all the ordering and procurement of your inventory or those vendor relations.

So things are all happening within the same system. Then you have the same source of truth. Any time that we're operating, clients are operating in multiple systems that don't speak to each other, it can become a burden, and it increases the likelihood where things just get off. Something didn't get recorded or got recorded differently, and it doesn't match. And you spend a lot of time investigating why it is that happened. And then oftentimes it can be that information was relied on that wasn't accurate because it was input incorrectly or it was incomplete as a result of the systems not communicating.

So I think those things are certainly brought to the forefront at this time of year where we're able to give more scrutiny to our numbers. And we're, you know, we're scrubbing them a little tighter and looking at them more and then really asking the question of why we have these issues or these errors or the incomplete information. And oftentimes, it's the result of our systems not operating like we really want them to.

Which I think raises the next question of when is the right time to make an accounting system switch? And it's, you know, it's probably like the same answer as when's the right time to plant a tree? Which is the answer is like 20 years ago. You know, in the accounting system world, oftentimes it would have been easier if you had done it prior. It's never really a good time, just in the fact that it is a burden on the business. Because the business continues all the day to day needs still happen and still need to get done. And it's that extra project that is important, and time intense and stressful.

But the goal is always what the system will be when you're done, what it will allow you to do, how it will increase the quality and hopefully reduce the stress of the operations. But it's hard to really pick a good point. We get asked that a lot and you know, same with when will you have time to do this? There doesn't seem to be a lot of extra time in anyone's days lately, so it's hard to say the exact right time.

Probably not at your peak time of year if you have that cyclical nature of your business. But I would say, if you're kind of holding off now waiting for things to slow down or get better, you might not reach that point. You know, it might just be you just have to just have to do it. You have to draw a line in the sand and make that determination that you're going to start now or you're going to be done by then and just do it because it's probably not going to be an easier, more appropriate time. It's just something you need to address.

Clinton Larson: I imagine, too, that this is also a time of year when many people, and no offense to you, but determine that, Hey, I don't really like accounting. I don't really like this side of the business. This wasn't the reason I got in the business. Is this also a good time to think about other ways to help alleviate that problem, like outsourcing that kind of stuff?

Jenni Huotari: Yeah, certainly. And I think it comes up at this time of year because we get in conversations that are between the clients, our small business owners, managers, those decision makers and then our team about the information. We ask questions, we dig into things a little more and then, you know, it comes up that things weren't able to be handled timely during the year. Or they're incorrect, but at the client or at the company, they weren't able to determine how to correct those or there wasn't a challenging item or something we hadn't been dealt with before.

And a lot of those conversations lead us to the point where the individuals that who are tasked with that have that is one of their responsibilities. And oftentimes it might be one of many responsibilities and they're wearing too many hats. They do too many different roles. And the accounting, the bookkeeping piece is just something that they were asked to do, but it's not really what they set out to do.

Same might be true for our business owners who do that as part of their overall responsibility, but have a lot of other responsibilities as it relates to their business. And so to your point, I certainly think outsourcing is something you want to consider at this time of year, any time of year, and it will allow you to put your individuals in the roles that you really intended them for, that you hire them for that usually match up with their strengths, their highest and best use of their time, and really allows you then to rely on a team who's also working to their strengths in their highest and best use, which is to understand the accounting within your business and help translate that to you.

Communicate that to you as a business owner in a way that you really understand and feel comfortable and confident about to take that relief off of you, and you can feel like you have that information you can rely on throughout the year, even when you, as an operation, might be really busy in your crunch time. You know that it's still getting done because you've outsourced that to a team charged with that responsibility.

I think it ends up being such a huge stress reliever for our business owners once they have that burden off of them, because I have yet to meet anyone who went into business because they wanted to moonlight as an accountant and they didn't know what other way to get into that. And generally, it's for their products, their customer, their client base. That's what drives them. And this is just one more burden. And it turns out it's something that can be outsourced so that you can eliminate or reduce that burden on the business owner.

Clinton Larson: Speaking of easing the burden a little bit on this, too, I just want to mention to our listeners, too, that we have a year-end landing page on our website EideBailly.com/yearend. And we have tons of free resources and information about year-end planning and how to make it go smoothly. So I just want to mention that as well that, you know, for those of you who still aren't ready for outsourcing, you still want to do this yourself, we do have resources available for you to help you out, you know, in lots of different ways.

Jenni Huotari: Yeah. Clinton, to that point, it's that time of year where we start getting a lot of questions around 1099s, and W2s and year-end payroll reporting. The year-end website has a lot of those resources, whether there are things that you read, listen to, or attend our year-end webinars. It is never too early to start thinking about year-end, so hopefully it's popping up into your mind right now when you start thinking of all the things you can do to make year-end a little bit easier. Whether that's pulling all your information together so the 1099 process is not a huge burden for you, or from a payroll perspective, and assuring that all your employee information is up to date and accurate. So you're ready to file W-2s.

And then just thinking about taxable fringe benefits that you might be paying or offering to some of your employees. Those have to get through the payroll system at some point. Our payroll team says it's always better to do it early rather than the last couple pay periods when employees may be relying on those funds for holiday shopping and some other year-end bills that seem to come up when they see the taxes for the fringe benefits, come out right at year-end. It's preferred that it comes out earlier than right at year-end. So those are some things that we offer up to make year-end go a little smoother for you and also for your employees.

Clinton Larson: Sounds like next steps, though, could be year-end 2022 already, huh?

Jenni Huotari: Probably will be year-end 2022 before we know it, right? Like right now.

Clinton Larson: Right. It's just a good message. Always keep planning. Always keep this kind of stuff top of mind.

Well, thank you very much, Jenni, joining us again on the podcast and talking about this very important subject.

Jenni Huotari: Absolutely, Clinton. Thank you for having me. We look forward to offering any types of advice that we can do to help make year-end a little smoother for our clients so that they start 2022 off on the right foot.