Sure, the end of the financial year is a very important time for businesses and individuals. It’s when you need to ensure your accounts are in good order, and soon after, prepare to complete your tax returns. It’s also the time when you can implement some simple tax strategies, prepayments, deferrals, capital purchases and the like.

However, the truth is that (if the focus is on tax) the importance of tax management happens far earlier: in the structure of the business and in how the owners remuneration is structured (for example), which needs thoughtful implementation. Further to that, if you are waiting until June to “see how things are going” or to “get your accounts right”, you are missing the point that this is something you should be doing every month. Some of these items you can’t solve with a checklist from your accountant in June each year, nor can you go back in time to fix them.

In this article, we’ll discuss all the dos and don’ts of the end of financial year (EOFY), and why you should be treating it as just another month.

Why Every Month Should Be Treated as EOFY

During EOFY, businesses are focused on meeting annual budgets and KPIs. The team is usually more thorough, more productive and more efficient during this time. All of these happen because the financial year end is set arbitrarily as June, and everything is aligned around it. Yes, external people will look at financial year trends, but there are also calendar years, quarters, month on month - plenty to obsess about. If every month were considered in the same light, we would get tight operations and procedural flow year-round; and that should be the goal of any business, not just when June comes around.

Consider what would happen if you were to treat every month as EOFY. There are huge benefits to any organisation if this approach is adopted. We equally believe, in SME businesses, that it doesn’t need to cause copious amounts of work. If every month is treated equally, including reporting and incentives aligned to, the company will do its best to meet targets. The idea that there will be other months to catch up is not applicable. From an accounting perspective, we should always:

• Do the same entries every month

• Seek to record inventory balances to get the right margin

• Look at provisions for leave, or bad debt

• Ensure our accounts are perfectly reconciled

• Care about the accuracy of the balance sheet of the P&L - and finally

• Find ways of sharing this information with the team

Commons Mistakes of EOFY and How to Avoid Them:

Sporadic Contact with Your Accountant

Some businesses only reach out to their accountants and bookkeepers at EOFY, or in many cases, after it has happened but just prior to their reporting deadline. It is important to be engaging with your accountant regularly to consistently check in on everything from tax planning, personal remuneration, compliance, and to see if there are any changes in the legislation that can benefit them.

No Month-end Close Process

Leaving financial statements to the last minute is a detrimental mistake that prevents businesses from achieving better quality and accuracy. To avoid this, you need to have a regular month-end close process that always caters for the preparation of financial statements with fully reconciled accounts and balance sheet reconciliations. Some companies only process certain journals like inventory, accruals, prepayments one per annum - this, we feel, can be done monthly as it will be the only way to give you accurate reliable figures around gross margin and profitability.

Underutilisation of Business Accounting Software

There are now a plethora of different software programs that can help ensure a smoother accounting process. Get yourself familiar with this kind of software, or hire someone who can. This software helps you keep all business accounts accurate and up to date, making EOFY a more thorough and less overwhelming experience for everyone involved. We strongly suggest Xero, and there are a few handy features you can take advantage of. Be sure to save copies of your invoices within Xero (or by using Dext/Hubdoc).

Inadequate Resources in Place

Often, at very early stages, the owner of the business is spending time in the accounting systems, reconciling, and sending invoices. This is a terrible use of time and it can almost be guaranteed that there are errors as a result. The prevalence and excellence in offshoring and cloud-based software means that it is very cost effective to have this done for you, and have a month-end process from an early stage. We suggest connecting with great firms such as D&V Philippines or TOA Global. Please let us know if you need any introduction.

Furthermore, for those that are a little further on in the journey, consider Virtual CFO services as a great way of improving your finance function - which is our game, but there are plenty out there to choose from.

“I don’t want to pay tax” - Eliminating Profitability.

If business owners can see that they are profitable and due to pay tax, there is often an immediate disgust, and will look at ways to push back revenue, procure capital items, prepay expenses, or reshuffle things to avoid it completely. However, after years of doing this, we see it all the time: the owner goes to purchase a home, gets business debt, or sell the business. Their business is not profitable, or not consistently profitable. Then they are trying to explain their way around anomalies, often not getting the results they want. Remember, when you want to borrow money, you need to show strong results; and when you want to sell your business, the same applies. If you are constantly trying to reduce your profit (and poorly documenting it too) you will regret it later. If you are doing this, be sure to leave some very serious bread crumbs.

Preparing for the Year Ahead

When June rolls around each year, people generally spend time running around, making sure everything is accurate, finding receipts and looking back over the last 12 months. Fielding questions from their accountants and digging through inboxes, cursing people that have since left the business.

It is OK to do this, but remembering this should really be completed during the year progressively. Even if you find yourself in this situation you need to recognise how much time you are spending looking at last year and quickly recalibrate into looking at the year ahead.

Start this process by going over all the issues or roadblocks you encountered during the previous financial year. Figure out what measures your business can take to avoid or lessen those issues moving forward.

Create new goals and metrics and turn them into a P&L and cash flow forecast. List all your business objectives and come up with a strategy that will allow you to attain those goals. You should also review the data from the previous year to come up with a new budget and complete a cash flow forecast.

Take a meeting with your tax accountant and talk about how you’ve set up the business and your personal affairs, and invest in the tax planning that you declined in last year’s engagement letter.

Take a meeting with a Virtual CFO and see if they can add value to your business and structure of how things are done internally.

Summary

If you are a business owner waiting for the end of the financial year to get your house in order then frankly, you are missing the point. The focus on good financial governance, accurate reporting and optimum tax outcomes needs to be built into your operating rhythm throughout the entire year. You need to be set up well and have strong financial literacy. Embrace it, don't avoid it.

Yes there is an investment to make by way of resources and time, but you will find that there should be a positive return on investment by freeing up your time, your headspace and giving you and your management team clarity of information to make better business decisions - measure it that way.