What is the fiscal year?
The fiscal year is a 12-month period in which companies conduct business. This contrasts with the calendar year, which begins in January and ends in December. Different businesses operate on different fiscal years according to their business cycle. The choice of fiscal year can affect financial planning, budgeting, and reporting.
The fiscal year is used for accounting and financial reporting purposes, and organizations choose their fiscal years based on their operational needs or industry practices. Some retail companies, for example, might have a fiscal year ending in January to better capture the impact of holiday sales.
Fiscal years are also usually divided into four three-month quarters. Financial performance is reported on a quarterly basis, and stakeholders can evaluate the company’s performance at this time. When businesses report having a “good quarter” or that sales are “up,” they are usually referring to quarterly results, called Q1, Q2, Q3, and Q4.
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Why do businesses operate on a fiscal year?
Whether or not your business reports to shareholders or other stakeholders, it’s a good idea to operate on a fiscal year to better keep track of your operations. For example, many businesses, especially in the colder regions of Canada, have seasonal variations in sales and revenue. A fiscal year can be chosen to align with these cycles, which can provide a more accurate picture of financial performance. A retail company might end its fiscal year after the holidays or back-to-school to capture the full impact of its peak sales period. That company can scale up or scale back headcount and other assets to match these peak periods based on quarterly forecasts.
Operating on a fiscal year also provides a structured time frame for financial reporting and tax planning. Some businesses choose to align their fiscal year with the conclusion of tax season, while others might choose to end it just before. By selecting a fiscal year that fits their operational cycle, businesses can optimize their accounting and reporting cadence, making budgeting, forecasting, and performance evaluation more relevant and manageable.
Fiscal year pros
Choosing to operate on a fiscal year can afford several benefits to your business, such as the ability to plan and budget according to your calendar. This is especially important for industries that have one or two very busy months. Those in the educational industry might choose to plan around the school year, while those in the financial industry might try to plan their fiscal year around tax season. Outdoor businesses that close over the winter might choose to orient their fiscal year to the warmer months. This makes financial planning and performance evaluation more accurate and predictable, and things like employee benefits become easier to budget for.
This also has the benefit of helping your company manage cash flow and fiscal resources. You’re able to forecast revenue and expenses more accurately, which can prevent you from ending up in a tricky situation with your vendors, employees, or the government.
Your fiscal year can also provide you with tax planning advantages. By aligning your fiscal year-end with cash flow patterns and investment schedules, you might be able to take advantage of certain tax liabilities and deferrals available to your business.
Operating on a fiscal year offers consistency, which further improves your ability to forecast and assess business trends. If you have investors, donors, or other stakeholders with involvement in your operations, these forecasts will assist them in determining the amount and kind of support they provide your business on a quarterly basis.
Fiscal year cons
There are usually more pros than cons when it comes to operating on a fiscal year, but there are still drawbacks you may consider before committing to this way of operating.
The main drawback to operating on a fiscal year is that some businesses do not, which can complicate financial reporting and comparison to other companies in your industry. This can put you at a competitive disadvantage if your competition reveals finances before you. Unless you are an industry leader, you will likely need to invest additional time and effort into making sure you don’t lose out by operating on a fiscal year while your peers operate on a calendar year.
Switching from the calendar year to the fiscal year also carries with it a massive administrative burden associated with switching up accounting systems, financial reporting practices, and tax filings. Not only will it take up valuable time, but many details can also be lost in the shuffle and items can be missed. You would also need to continuously educate investors, lenders, the government, and other stakeholders on the particulars of your fiscal year so there is no ambiguity or doubt over the financial information you are presenting.
Depending on where you do business—specifically, if you operate part of your business outside of Canada—there is a good chance that these different jurisdictions have specific regulations about financial reporting. It can be complicated trying to remain compliant across multiple regions, so you might enlist the help of a financial advisor with experience in this realm of business administration.
Choosing to operate on a fiscal year that differs from the calendar year can be a wise move when done properly. When done improperly, it can lead to administrative, legal, and financial burdens. Always consult a competent financial professional before making significant changes to your financial year.
