Year-End Financial Checklist for Small Businesses

Why: Reconciling ensures that your accounting records match the actual transactions that went through your bank, credit cards, and other financial accounts. By year-end, every account (checking, savings, PayPal, credit cards, loans, petty cash) should be reconciled so that your books are accurate.

Action: For each account, compare your statements for the year (or up to Dec 31) with your bookkeeping records:

• Match every transaction; investigate any discrepancies (uncleared checks, missing expenses, duplicate entries).
• Ensure bank balances in your books equal the actual bank statements as of Dec 31.
• Don't forget to reconcile less obvious accounts like merchant processing accounts or cash-on-hand.
• If you find transactions recorded in the wrong account or errors from earlier in the year, correct them before closing the books. It's better to address them now than have carry-over mistakes.

Why: Throughout the year, some expenses might slip through the cracks – maybe you paid cash for something or have an email receipt that never got forwarded to accounting. To get an accurate profit and take all eligible deductions, you need to capture every expense.

Action:

• Do an expenses sweep: Go through your business bank and credit card statements – look for any transactions that aren't in your books and add them. Check personal accounts too if you occasionally paid business items personally (ideally reimburse these to yourself and record that expense in the business).
• Organize receipts: Ensure you have receipts or documentation for major expenses. This is crucial for taxes (in case of audit, you have proof) and helps you remember what certain transactions were. Consider scanning paper receipts and saving all in a 2025 Receipts folder (digital organization pays off later).
• Prepaid expenses & accruals: If you paid for something upfront that spans into next year (like insurance or a service contract), ensure the expense is recorded properly (depending on cash vs accrual accounting – accrual-based should defer part of expense to next year). Similarly, if you incurred an expense in 2025 but won't pay it until January, accrual accounting would have you record an expense and accounts payable in 2025.
• Mileage and home office: If you use a personal vehicle or home office for business, year-end is time to tally that. E.g., calculate total business miles driven in the year and record the mileage expense (or prepare to give to your tax preparer). For home office, gather bills necessary to calculate the deduction (utilities, rent %, etc.). Don't wait until last minute; do it while records are handy.

Ensuring all expenses are in the books means your profit is stated correctly (and typically lower, which is usually beneficial for taxes!). It also helps you analyze where your money went this year.

Why: Outstanding customer invoices (Accounts Receivable) at year-end mean you did the work but haven't gotten paid yet. It's good to follow up now – both to get cash in the door (improving year-end liquidity) and to clear up your books. Plus, if you suspect some invoices won't be paid, now is time to decide on writing them off or reserving for bad debt.

Action:

• Review A/R aging: Generate an accounts receivable aging report (it lists all unpaid invoices by how old they are). Identify ones that are past due.
• Send reminders: For any late payers, send a friendly year-end reminder or call them. Many companies tidy up payables at year-end too, so catching them now could prompt payment. Emphasize any that are 90+ days; decide if you need to offer a payment plan or settlement for hard cases.
• Invoice for any work done: Ensure you've invoiced everything for the year. If you have unbilled work or projects completed in December, send those invoices ASAP. It's good practice to invoice in the same year whenever possible.
• Consider write-offs: If an invoice seems uncollectible (customer went bust or refuses to pay), you might write it off as bad debt. For accrual-basis taxpayers, writing it off before year-end means you can take a deduction for that bad income. Document your reasoning (for audit trail). If you later get paid, you can recognize income in that future year.
• Send statements: A year-end statement to customers with outstanding balances can spur them to clear the slate by year-end (some might do it for their own books too).

Not only does this improve cash flow, but it also cleans up A/R on your balance sheet. Ideally, go into the new year with as few unpaid invoices as possible.

Why: Similar to collecting money, you should also ensure you've paid what you owe (or at least know what's owed). Sometimes bills get lost or delayed; year-end is a good checkpoint so you don't start the new year with surprise past-due bills. Plus, paying certain expenses by Dec 31 might let you deduct them this year (if cash-basis for taxes).

Action:

• List of all vendors/bills: Go through Accounts Payable in your software or your files. Confirm the list of open bills is accurate. Did you receive all vendor invoices up to year-end? If not, reach out to vendors for any missing bills (you want them in your books as expenses, even if not paid yet).
• Decide what to pay now: If you have the cash, consider paying all open bills before year-end. This gives you a clear slate and, if on cash-basis taxes, gets you the deduction in 2025. Prioritize any that might incur late fees or interest if not paid.
• W-9 info for vendors: As you pay vendors, check if any non-corporate vendor (individual or LLC not taxed as S/C-corp) was paid $600+ over the year – you'll need to issue them a 1099-NEC. Ensure you have their W-9 form with tax ID and address. Year-end is crunch time to gather any missing W-9s so you can prepare 1099s in January.
• Credit card reconciliation: If you charged business expenses on personal credit cards or vice versa, sort that out. Perhaps reimburse yourself or the business and record accordingly so all payables are correct.
• Prepaying expenses? If you have a high profit and want more deductions (and you're cash-basis), you might prepay some expenses (like upcoming insurance or rent or software subscriptions) in December to take the deduction now. Check with your CPA, as there are rules about how much you can prepay (12-month rule for some items). Don't hurt your cash flow just for a tax deduction, but it's a strategy to consider if appropriate.

Clearing A/P ensures you don't accidentally default on obligations and helps solidify your true expense picture for the year.

Why: Year-end kicks off tax form season. By January, you need to issue certain forms to contractors, employees, and the IRS. Getting a head start in December means you won't scramble at the deadline and reduces errors.

Action:

• Verify contractor payments for 1099-NEC: As mentioned, any non-employee (contractor, freelancer) whom you paid $600 or more in 2025 for business services typically requires a Form 1099-NEC to report that payment to the IRS. Review your vendor ledger and identify those who qualify. Ensure you have current addresses and Social Security Number or EIN (via W-9) for each.
• Review employee info for W-2s: If you have employees, you'll be issuing W-2 forms. Check that you have correct addresses, and spelling of names matches Social Security records. Total up any fringe benefits that need to be reported (like health insurance for S-corp owners, group term life insurance excess, etc.) and make final payroll adjustments in December if needed.
• State & Local Tax Forms: Consider if you need to file any other informational returns – some states require 1099 filing with them, some cities have local tax reporting. Mark those down.
• 1099-NEC and 1099-MISC due date: Remember, 1099-NEC (for nonemployee compensation) is due to the IRS and recipient by Jan 31, 2026. Other 1099s like 1099-MISC might have later IRS filing (Feb 28 paper, Mar 31 electronic), but recipients still by Jan 31. Plan to prepare these in the first couple weeks of January.
• Order forms or set up e-file: If you haven't already, decide if you'll use a 1099 e-file service or need to order official forms. Many accounting software can e-file these directly for a fee, which simplifies things.
• W-2 filing: W-2s also due to SSA and employees by Jan 31. If you use a payroll provider, they handle it, but ensure you run final payroll and label any special comp by year-end (e.g., bonuses, S-corp owner health, etc., should be in 2025 wages if for 2025).

By prepping now, you ensure January isn't a mad rush. Also, employees/contractors will appreciate timely and accurate forms.

Why: For businesses selling products, a physical inventory count at year-end is crucial. It verifies what inventory you have on hand and its value, which affects your cost of goods sold (COGS) and tax deduction. Discrepancies can reveal shrinkage or errors. Plus, it's often required for accurate financials and insurance.

Action:

• Schedule a count: Pick a day at end of December or very early January (but ideally Dec 31 or close) to count everything in your warehouse/store. If shutting down for a day is feasible, do it to get a clean count.
• Organize and count accurately: Use inventory sheets or system printouts, count each SKU or item type. Use at least two people and double-count high value items.
• Note damaged or obsolete items: During the count, identify any items that are unsellable or very old stock. These might be written down or written off (and possibly removed from inventory value).
• Reconcile to records: Compare the count numbers to what your software says should be on hand. Investigate differences. Adjust your accounting records to match the physical count (and record an inventory shrinkage expense if needed).
• Value the inventory: Once quantities are confirmed, apply costs to compute your ending inventory value. This will be used in the books and on taxes for COGS calculation (Beginning Inv + Purchases - Ending Inv = COGS for the year).
• Check for FIFO/LIFO consistency: Ensure you're valuing consistently with your chosen method. If you use FIFO, the cost pulled should reflect that.
• Document, document: Keep the count sheets and any adjustments you made as support. Auditors (and CPAs preparing taxes) appreciate that.

Accurate inventory ensures your profits are correct. If you skip a good count, you might be unknowingly carrying costs from missing items, or not realizing theft issues.

Why: Now that the books are basically done (or nearly), take a step back and look at the big picture. Your Profit & Loss statement and Balance Sheet tell the story of your year. Analyzing them can yield insights and informs tax planning.

Action:

Run a full-year Profit & Loss (Income Statement): Compare it to last year if available. Ask:

• Did revenue grow or shrink? By how much, and why (new customers, pricing changes, market conditions)?
• What are the major expense categories as a percent of revenue? Any spikes? For example, if advertising expense doubled but revenue didn't budge, evaluate that ROI.
• Check for unusual items – any big one-time gains or losses? Ensure they're categorized properly (perhaps separately identified).
• Is your net profit where you expected? If it's much higher, tax planning might be needed (maybe invest in assets or contribute to a retirement plan before year-end to reduce taxable income). If lower, investigate which costs or revenue shortfalls contributed.

Review Balance Sheet: Look at year-end balances vs prior year:

• Cash up or down? If down, where did cash go – possibly higher A/R or equipment purchases or debt paydown? The cash flow statement (if you prepare one) can illustrate this.
• Accounts Receivable – does it seem reasonable or too high? If high, maybe your collection needs improvement (see step 3).
• Inventory – higher than last year? Could indicate stockpiling or slow sales; lower could mean better turnover or stockouts.
• Accounts Payable – are you carrying more unpaid bills than last year? Watch liquidity.
• Debt – did you take on new loans or pay off old ones? Ensure interest vs principal is properly recorded.
• Retained Earnings (or owner's equity) – ties into profit; check that the equity section reflects any owner contributions or distributions accurately logged during the year.

Ratio analysis: If comfortable, compute a few ratios:

• Gross margin = Gross Profit/Revenue, compare to prior year or industry benchmarks.
• Current ratio = Current Assets/Current Liabilities (to gauge short-term liquidity).
• Profit margin = Net Income/Revenue.
• Any other metrics important to you (debt-to-equity, etc.).

Document notes: Jot down anything noteworthy that you might want to remember when discussing with your CPA or planning next year. For example, "Utilities expense high due to rate increase in July" or "Consulting income includes one-time project $X." This exercise gives closure to the year – you understand how it went financially. It's also critical for tax planning (next step).

Why: Before the year officially ends (if possible), it's wise to do a final tax check. There might be moves you can still make in the last days of December to optimize taxes. Even if it's already just after year-end, plan for how to handle the results in the return.

Action:

• Provide preliminary numbers: Share your almost-final financials with your CPA. They can estimate your tax liability. If you're significantly profitable, maybe make an additional estimated tax payment by Jan 15 (for Q4) to avoid underpayment penalties.
• Consider deferrals or accelerations: Depending on cash vs accrual and your situation, a CPA might advise: If cash-basis and income is high, could you defer some income into January (delay sending certain invoices by a couple days)? Only do this with propriety and if cash allows. Accelerating expenses (as mentioned, maybe stocking up on supplies or prepaying some expenses) to get deductions in 2025. If you have too low income (maybe even a loss), perhaps you don't need to spend on that new equipment now; you might wait so the deduction falls in a year where you have profits to offset.
• Retirement contributions: One big year-end item: if you haven't maximized a retirement plan and you have the cash, consider doing so. For example, contribute to your Solo 401(k) or SEP IRA. Some can be done up to tax filing date, but 401(k) deferrals for yourself often needed by year-end payroll. If you don't have a plan, you can still set up a SEP for 2025 by the tax deadline and fund it, or even establish a new 401(k) by 12/31 if you act quick (rules changed allowing some setup in new year but simpler to start in year).
• Section 179 or Bonus Depreciation decisions: If you bought equipment, decide if you'll take full expense (179 or bonus) or spread out depreciation – a CPA can advise which is better given your profit and future outlook.
• QBI deduction, etc.: If you're eligible for the 20% Qualified Business Income deduction (for pass-through entities), make sure your salary (if S-corp) is reasonable but not excessive (affects QBI), and see if your taxable income is within thresholds. Maybe deferring a bit of income or doing a SEP contribution could keep you under a threshold for full QBI benefit.
• State tax issues: Discuss any multi-state tax concerns (from previous section) if applicable, to ensure you accrue any necessary state taxes or filings.
• Estimate personal tax situation: If your business is pass-through, your business profit flows to you. Ensure you've either paid enough estimates or have a plan to cover the tax by April. If not, you might do a bonus payroll for yourself to withhold taxes (S-corp owners sometimes do a Dec payroll with extra withholding to catch up on taxes, as withholding is treated as evenly paid through year which can reduce penalty).

This meeting can save you money and future stress. It's much better to know now that you'll owe, say, $15k in taxes than be shocked in April.

Why: Though technically not "closing the books," planning for next year is a natural extension of year-end closing. You've learned from this year's outcomes; now apply that to setting targets for the next. Also, creating a budget or at least a list of goals (financial and operational) gives you a measuring stick for the new year.

Action:

• Draft a 2026 budget: Using your 2025 results as a base, project each month or at least full-year 2026 for revenue and expenses. Factor in changes you expect (rent increase, hiring plans, new marketing efforts, etc.). This helps identify if you might be short on cash or need financing at any point, and sets expectation for profit.
• Set specific goals: e.g., Increase revenue by 10%. Cut overhead by 5%. Improve gross margin by sourcing cheaper supplier. Reduce A/R days from 60 to 45. These goals can come directly from weaknesses you spotted in the review step or opportunities.
• Plan initiatives: Outline what actions to take to reach those goals. This ties your year-end analysis to concrete plans.
• Schedule periodic check-ins: Mark quarterly or monthly reviews on your calendar for 2026 now. For example, plan to run financials on the 15th of each month and review against budget. That way you continue the good practices beyond year-end.

Completing the year-end process with a forward-looking step ensures you're not just cleaning up history but also improving the future.

Why: After closing the books, safeguard your data. You should keep records for at least 7 years (tax backup). Data loss can be devastating, so ensure you have backups of your accounting file and documents.

Action:

• Backup accounting software: If you use desktop software, make a backup file and store a copy offsite or in cloud. If online software, export key reports or data (most allow a full data export to Excel) and save it.
• Backup documents: Ensure your cloud drive or physical file cabinet with 2025 records is complete. Consider making an archive (digital zip file of all receipts/invoices, etc.) labeled "2025_financials_backup" and keep it in multiple places.
• Security: If you'll be sending financial info to CPAs or others, use secure methods (encrypted email or file share). And update passwords on financial accounts in the new year – good habit for cybersecurity.
• Close the books in software: Some systems let you set a closing date with a password, to prevent further entries into 2025. Do that once you're certain everything is done (perhaps after your CPA gives the green light). This keeps anyone from accidentally messing with closed periods.

Now you have a locked and backed set of books for 2025 – ready for any audit, tax prep, or historical analysis without worry it will change.

Completing this year-end checklist might take a bit of effort, but it's effort well spent. Think of it like a "financial deep cleaning" of your business. You'll step into the new year with:

• Accurate books (which means reliable info for decision-making and easier tax filing).
• All compliance boxes checked (no late 1099s or surprise penalties).
• A clear understanding of your business performance.
• A plan for improvements and growth.

Many business owners procrastinate these tasks, but those who tackle them head-on reap benefits like stress-free tax seasons and improved financial health. You've worked hard all year – taking a moment to tie up loose ends will ensure you fully capitalize on that hard work.