A fiscal year is a 12-month period used by a company to track annual accounting milestones and set budgets. This 12-month period does not need to coincide with a regular calendar year, which runs from January through December. Knowing your company’s fiscal year may help you make strategic business decisions. In this article, we discuss the meaning of a fiscal year, two kinds of fiscal calendars and why it’s important to know your company’s fiscal year.
What is a fiscal year?
A company uses its fiscal year to track accounting, reporting, forecasting and budgeting. This 12-month period can begin in any month but is usually coincides with the beginning of a quarter, such as January, April, July or October. A fiscal year that begins on April 1, for instance, would end on March 31 of the following year. In addition to businesses and the U.S. government, nonprofits also follow a fiscal year.
There is no difference between a fiscal year and a financial year, except that the term “fiscal year” is often used to refer to a business accounting period rather than finances overall.
What are the two kinds of fiscal calendars?
There are generally two kinds of fiscal calendars:
12-month fiscal year: This is the most common type of fiscal year. It starts on the first day of any month other than January.
52- or 53-week fiscal year: Defined by the number of weeks in the year, a 52-week or 53-week fiscal year will always end on a similar day in a month, such as the last Monday of September.
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What happens at the end of a fiscal year?
At the end of a fiscal year, your company may perform a wide range of tasks to close the previous year and make plans for the upcoming one. These tasks include:
- Reconciling financial accounts
- Reviewing assets
- Calculating inventory value
- Evaluating business performance
- Performing financial forecasting
- Budgeting for the next fiscal year
Setting new goals
Industries that use the fiscal calendar
Companies in all sectors use a fiscal calendar, but the following industries are most likely to do so:
Retailers that generate the largest amounts of sales during the holiday season typically opt for a fiscal year that ends in January so they can finish the year with high sales. Knowing their peak-season sales also enables them to better plan their budgets for the following year. They can also use the large amount of cash they received to pay their financial obligations, such as quarterly taxes. Having to prepare financial statements during peak season means they will have less time to devote to their sales and customer service efforts.
Retailers that get a significant portion of their sales in summer may prefer to end their fiscal year in September. This way, they can finish their fiscal year with summer or back-to-school sales and start it with holiday sales, which makes their financials appear more balanced. It also allows them to include their peak sales season in their first-quarter sales. If they use the calendar year, they will have to take their holiday expenses into account at the end of the year. As a result, their financial reports for the first three quarters may look less impressive.
Home improvement industry
In the home improvement industry, companies are likely to see a decline in sales during the cold and rainy seasons. As such, many home improvement businesses follow a fiscal year that starts in early spring. By doing so, they can put their peak sales months in the first two quarters of their fiscal year. This will make their financials look stronger, which can be beneficial for securing financing or investments.
Businesses in the fitness industry, such as gyms and personal training service providers, may also find a fiscal year more suitable for their business cycles. These companies typically generate more sales in January as people commit to new health resolutions. If they operate on a fiscal year that ends in November, they can start and end their year with high sales figures.
Government contractor industry
Many businesses that depend heavily on U.S. government contracts prefer to use a fiscal year. However, they usually choose a fiscal year that ends on Sept. 30 to coincide with the government’s year-end. This allows them to align their strategies and efforts with the government’s spending and planning patterns, resulting in increased chances of securing new contracts.
Also, by adopting the federal fiscal year, these companies show the government they are committed to working on its projects, which makes them a more appealing option when the government wants to contract a vendor.
Regardless of their industries, companies may decide to use a fiscal year for a variety of reasons. One common reason is that it allows them to record their revenues and expenses in the same year.
For instance, if a company holds an annual promotion in October that generates a large number of sales but pays its expenses in January, the spending will not reflect the sales if it follows the calendar year. Opting for a fiscal year that ends in August or September will show that the expenses are related to the sales.
Additionally, companies may operate on a fiscal year to work more efficiently with their business partners. If a company and all its partners use the calendar year, they may be busy preparing year-end reports, tax documents and budgets at the same time.
When the company needs certain financial information from its partners, it may not be able to respond promptly because of its busy schedules. In such a situation, confusion and errors are also more likely to happen. Adopting a fiscal year that ends on June 30 enables a company to work with partners when they’re both at their most efficient.
How does a fiscal year work with tax filing?
When it comes to filing taxes, most companies that use a fiscal year still have to comply with the IRS’ deadlines for tax returns. These deadlines are based on the federal calendar year. Only C-corporations, which are corporations that are taxed separately from their owners or shareholders, can file their tax returns according to their fiscal years.
For corporations that can file according to their fiscal years, they may prefer to avoid peak tax season, which occurs in spring. During this time, a tax preparer may have other commitments that prevent them from giving their full attention.
By following a fiscal year that ends outside the tax season, a company can give its tax preparer more time to work on its taxes. Additionally, it may be able to negotiate for lower rates. Tax preparers that generate most of their revenues during tax season may lower their fees for off-season work.
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Why is it important to know your company’s fiscal year?
There are several reasons you should know your company’s fiscal year, including:
Preparing for a performance review
For many business organizations, the end of a fiscal year is also the time to review the employees’ work performance and salaries. If you know when your company’s fiscal year ends, you can adequately prepare yourself to make a good impression on your boss during your performance review.
Asking for a raise or promotion
An annual performance review is also an appropriate time to ask for a raise or promotion if you are qualified. In addition, you can use this time to gauge your progress over the past twelve months and find ways to grow in the next fiscal year.
Assessing job security
As an employee, you should be interested in knowing how your company performed or whether it reached its goals in a fiscal year. If your company had a strong fiscal year, you will likely feel secure in your job and have a positive outlook for the coming year.
Preparing for next year
At the beginning of a new fiscal year, your boss may announce the company’s plans and goals for the next 12 months. This allows you to make the necessary preparations to adapt to these changes and perform better in the new year.