Understanding the Nuances of Choosing a Fiscal Year
Published On: July 27, 2021|
Financial reporting is an important part of business management that focuses on disclosing financial information and performance over a particular time period. Business leadership makes informed decisions based on the financial facts on the organization’s health disclosed in the finance report. A finance report provides insights on how much money a business has, where is the money coming from, and where the money needs to go during the fiscal year for a business.
What is a Fiscal Year for Business?
A fiscal year for a business is a one-year period that companies mark for financial reporting and budgeting. A company’s fiscal year could be used for accounting purposes to prepare financial statements. A company’s fiscal year does not usually correspond to the calendar year. Although, educational institutes usually correspond their fiscal year with the calendar year.
The start and end of the year depending on the business. Financial audits, reporting, external audits, and tax filings are done within the company’s fiscal year. The specific nature and revenue cycle of the business determines the fiscal year. Different countries, companies, and organizations start and end their fiscal years differently depending on their external audit and accounting practices.
Most businesses start thinking about the fiscal year when it is time to file their taxes. The internal revenue system (IRS) is based on the calendar year. Sole proprietorships, S corporations, and partnership firms need to get permission from IRS to adopt a fiscal year for filing tax. C corporations get to choose between the calendar year and fiscal year for filing their taxes.
Choosing a Fiscal Year
Businesses that do not want to choose the calendar year as the standard fiscal year need to choose a 12 month period based on their business type.
How do I determine my fiscal year?
The fiscal year is sometimes referred to as the natural business year. The natural business year is when the company finishes the bulk of its business and the activity is at its lowest.
Seasonal businesses have very obvious fiscal year beginning and close dates, while businesses that aren’t seasonal do not have natural business years.
Examples of businesses that have natural business years different from calendar dates are:
Schools and universities: they usually pick fiscal years during the time when classes are in session.
Non-profit organizations: they pick the fiscal year such that it coincides with grant and award deadlines.
Retail businesses: they choose that time of the year when holiday sales subside and inventories are the lowest.
Agriculture: the time period after the year’s biggest harvest is chosen as the fiscal year.
Businesses that have a lot of inventory should pick the time when inventories are lowest as the end of the fiscal year. The end of the year for corporate organizations must be the time when activity is low and you have time to spare.
How to find a company’s fiscal year for accounting purposes?
Picking a fiscal year that does not coincide with standard calendar year-end is favorable for accounting purposes. Creditors and investors must choose that time of the year when most of their inventory has been converted into cash.
The best way to choose the fiscal year for your business is to identify the natural year-end for your business and use that as the fiscal year-end.
Aligning Strategic Planning
Strategic planning for your business must be aligned to the fiscal year. Setting and reviewing of Objectives and Key Results should be synced with the fiscal year. Annual and quarterly planning and review of business objectives should be according to the fiscal year. Datalligence provides an OKR software that helps your business plan, review, and track OKRs. Try out OKR software for free.
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