The first time we had a profit, we didn't find out until March ...
...when our accountant finished our tax return. We paid (modest) bonuses at Christmas based on feel and available cash on hand. An ’informed’ decision would have been a ’different’ decision.
Of course our accountant offered to review our books in early December so we could be more accurate and better informed. That's actually a good idea, but we only took advantage of the offer (and paid the cost) when we were pretty sure there was profit that needed planning. If we thought we we going to have a loss it wasn't because we were trying to have a loss, and no amount of planning would turn things around in 30 days - we would have already done what we could.
So the first tactic for predicting your profit for the year is to get your accountant to review your books and tell you where you stand. Depending on your bookkeeping system, this might be pretty easy. In any event you will be able to make a better decision about year-end issues.
Since there will be another month or so remaining in the year you will have to estimate your remaining income and expenses. We always assumed that December would be a break-even (or worse) month because of time off around the holidays and clients getting distracted with the season’s festivities.
I recommend that you take your accountant’s advice with a pinch of salt. There is a difference between accounting advice and business advice. You may have to filter your accountant’s advice through your feel for internal and external ramifications. There were recommendations I wasn’t willing to follow to save $200. You decide. You need to know the numbers, but you may not want to live by the numbers.
We eventually had software that gave us a good feel for where our profit/loss stood. I never felt the need to get down to the decimal point with this type of projection - hundreds of dollars either way was good enough. So this is the second way to go if you have the in-house tool to make a decent year-end projection.
The main reason to go through all this is to determine bonuses. Our situation, which I think was similar to most firms, created a tax liability if money remained in the firm past year-end. Get your accountant to explain how you will be impacted so you have a guide to go back to each year.
Another wrinkle to this year-end planning is that if you decide to pay out all the profit then you will very likely be short of cash for the first few months of the new year. We made every effort to avoid using our bank for a working capital loan. Often times I loaned my bonus back to the firm to avoid the bank.
The bottom line is that knowing the facts beforehand is much better than finding out the facts later. Mark your calendar to start working on this in mid-November.
Here’s hoping you always have a GOOD reason to do some planning.
Here is the link to the article that spurred me to write this one.
Photo credit: magictouch