Year-End Tips For Startups

• If you haven’t already done so, make sure you claim any Employee Retention Tax Credits (ERTC) that you’re eligible for.
• Assemble your documentation for research and development expenditures for the R&D tax credit. 
• Review the 2023 tax deadlines and make sure your documentation is ready. 
• Send your contractors their Form 1099s before January 31.
• Check with your payroll provider to make sure your employees will receive W-2s.
• Finalize all your 2022 financial statements. 
• Conduct employee reviews and distribute employee bonuses.
• Review your capitalization table.
• Update or create your financial model.
• Present your plan to your board of directors for approval.

Review your financial performance against your metrics and assumptions.

Finalize your 2022 financial statements. With any business, it’s important to close out your books for one year to get ready for the next. With startups, it’s critical to review your financial position with your investors and/or board of directors, both to increase their confidence in your startup and make sure there are no surprises in store for them later. As part of this process, you’ll need to:

• Record all financial transactions. This includes banking and credit card transactions. Make sure you close out outstanding accounts receivable, and do everything you can to collect on unpaid bills. If you have bad debt you’ll want to be able to write it off, so record your collection efforts.
• Reconcile your balance sheet. Your balance sheet shows your company’s financial position at a specific point in time. You’ll want to review things like total cash, accounts receivable, inventory (if applicable), any depreciation for fixed assets, and your capitalization table (more on that below).
• Review your income statement. Your income statement shows your performance over time. You should verify revenue and expenses, and use those to reach your net income. That’s what you’re going to pay taxes on.

Issue employee bonuses. Year-end reviews help employees reflect on the previous year and prepare for the upcoming year, though other times of the year may be more appropriate for some businesses, depending on when managers and employees have time to devote to reviews. If your reviews are scheduled for year-end and tied to bonuses, consider conducting them as early as possible to reduce year-end stress on your employees.

Reconcile your capitalization table. Your cap table is just as important as your balance sheet. Cap tables evolve over time, and should be updated every time an equity event occurs so that information isn’t overlooked and additions, deletions, and adjustments are recorded accurately. A year-end cap table review helps to make sure the information in the cap table matches your transactional documents. 

Build or update your financial model/budget. Your financial model should include key metrics and assumptions that you’ll use to run your business. If you don’t have a financial model, you should create one. Your financial model is the numeric representation of your business strategy, and you should consider:

• Constraints. Growth targets are important, but so is not spending too much. Project budgets can get strained by unexpected scope increases or costs, so it’s important to know how much wiggle room you have for expenditures. By starting with your spending constraints, you eliminate a lot of the budget iterations, where you may be asked to hit the same revenue targets but spend significantly less. 
• Margins. How much do you expect to earn? Larger margins could increase your runway. 
• Human capital. What will your team need to look like to achieve your goals? Finding the right people and managing their focus and productivity is a critical priority. 
• Go-to-market strategy. You’ll need customers for your product or service, which means creating marketing and sales plans, and budgeting for the associated expenses. 

Get board approval for your plan. Getting your financial plan finalized and approved by the board of directors in December or January lets you start the year with established targets and milestones. You’ll also be able to start recruiting at the beginning of the year. Many startups find themselves missing milestones later in the year because they didn’t staff correctly early in the year.

Review financial performance. If you have a financial model, you need to review the metrics and assumptions to see how you performed against them to see what changes you need to make for the upcoming year. This review should include:

• Check your budget against actuals. Proposed budgets rarely match the actual numbers, and a budget variance analysis will allow you to adjust your budget for next year, see areas to increase income or reduce expenses, and determine if you may need to seek additional financing. 

Incorporate yourfundraising strategy. Ideally, you should have 18 months of cash on hand or a definite fundraising date. You’ll need to review your milestones and fundraising goals.