A fiscal year marks the beginning of your annual financial records. It’s a stake in the ground that demarcates when your company’s year begins, and it doesn’t just have to be when the ball drops on New Year’s Eve.
Even if you don’t handle your own business accounting processes, you should understand what a fiscal year is and how to determine one for your business. Choosing the right time to start your fiscal year can have a big impact on how you account for your company’s finances and how you track its overall fiscal health. In this article, we’ll review fiscal year vs. calendar year, how a fiscal year is important for your business, and what you need to know about finding the right fiscal year for your business.
Fiscal Year Definition
A fiscal year (FY) is a consecutive 12-month period over which you track and report your finances. In this sense, a fiscal year is pretty straightforward—you want to track a year of your company’s financial progress over the same amount of time as a regular year. Where a fiscal year and calendar year differ, though, is that a fiscal year doesn’t necessarily start on January 1 and end on December 31. Whereas a calendar year is inflexible, a fiscal year is customizable for your business needs.
Fiscal years are set up for optimal tracking for a business owner, which means that you set them up to line up with high-revenue periods throughout the year, or to start off your financial year on a high note. To make things even more customized (or complex, depending on your perspective), you can start your fiscal year during whatever period you’d like (although most business owners opt to start their fiscal year at the beginning of specific quarters).
To make matters a bit more complicated, it’s important to know that when people talk about fiscal years, they typically do so in the context of the fiscal year end, rather than the beginning. So, for example, if your fiscal year begins on July 1, then you’d talk about the “fiscal year ending June 30.” This means that your quarters will adjust as well. The first quarter of the calendar year may then be the third or fourth quarter of your fiscal year dated the year prior.
This may all sound a little weird, but if you’re willing to dive into the details of a fiscal year, how it differs from the calendar year, and how the ending date impacts your business, you’ll have a better idea of how to determine your own business’s fiscal year.
Why the Fiscal Year Is Important
A fiscal year tells a story for your business—if you decide to set it up that way, that is. Different businesses in various industries have stories they want their finances to tell: They have high-revenue periods that help them get into the black, low points where financial performance is low, and other predictable patterns that may not tell the full tale of how well their business is doing.
The good news is that you don’t have to be stuck with the boundaries of the calendar year when trying to tell your company’s story. We’ll explain how to choose a fiscal year for your business in a little bit. First, however, you’ll want to understand how different fiscal year end periods affect you from a reporting standpoint, a tax standpoint, and in the broader financial picture for your business. Once you do, you can help build your business’s financial strategy that takes advantage of a fiscal year setup that’s right for you.
When most people think about “end of year” periods, their minds likely turn toward January 1. This isn’t necessarily the case for fiscal years, however. Since fiscal years can end at any point throughout the calendar year, your company’s year-end statement may actually be in March or November, depending on the fiscal year you’ve established.
Depending on the fiscal year end that you choose, the dates that mark the beginning and end on your year-end financial statements that you put together will vary. You or your bookkeeper will still run yearly financial statements in the same way, but you’ll be reporting on dates that don’t begin and end as a regular calendar period. Otherwise, everything else should remain the same—you’ll just be treating your business’s year with a different start and end than you would for your personal life.
Plus, if you use an accountant or bookkeeper to wrap up your year and put together your financial statements, you may actually be able to save a little bit of money on your financial statement preparation if you use a fiscal year that’s different from the calendar year. Financial professionals have high seasons too, so doing your year-end financial wrap could end up being more cost-efficient for you during the non-standard calendar year.
The IRS defines the tax year as either the calendar year or fiscal year. Depending on your business entity, you may have to use the calendar year. For example, pass-through entities like a sole proprietorship file their business taxes with their personal taxes, so they would need to use the calendar year. Additionally, you’ll need to use the calendar year if any of the following apply:
- You keep no books or records;
- You have no annual accounting period;
- Your present tax year does not qualify as a fiscal year; or
- You are required to use a calendar year by a provision of the Internal Revenue Code or the Income Tax Regulations.
However, other entities have the option to use their fiscal year for tax purposes as well. The IRS defines the fiscal year as “12 consecutive months ending on the last day of any month except December.” According to the IRS, to adopt a specific tax year, you simply file your first income tax return using that tax return. If, at some point down the road, you need to change your business’s tax year, you can file Form 1128, Application to Adopt, Change, or Retain a Tax Year.
How to Determine the Fiscal Year for Your Business
Ready to determine your own fiscal year end? Here are a few things to consider when picking your dates:
- Are you a seasonal business? Do you have high seasons and low seasons?
- Are your financial peaks and valleys tied to any holidays? Do you want to account for certain shopping seasons or days (such as the holidays or Valentine’s Day) during certain quarters?
- Does your industry have any common fiscal years from which you can take a cue?
Fiscal Year Examples
Almost every industry has peaks and valleys. As much as we’d all love to stay busy year-round, the fact of the matter is that business tends to be cyclical—or at least filled with discernible patterns every year. This is where setting your own fiscal year comes in handy, as it allows you to account for your cycles in a way that puts your best financial foot forward. Here are a few common examples of when different fiscal years might be useful for your business, depending on your industry.
Retailers that experience highs during the holiday buying season benefit from ending their fiscal year at the end of September. This allows them to account for the peak holiday buying season within the entirety of their first-quarter sales. If retail businesses kept their fiscal year in line with the calendar year, they’d have most of their holiday spending accounted for at the end of the year, which means that their books for the first three quarters of the year might look unimpressive (or, worse yet, in the red). This way, retailers can begin their year with holiday sales and end them with back-to-school sales figures that make their financials look more balanced.
Lawn Care and Home Improvement: April-March
Unless your business serves a part of the country that’s gorgeous and sunny year-round, odds are that your outdoor-based business goes quiet during the winter months. If this is the case for you, consider using a fiscal year that ends in late winter and begins in early spring. Doing so will put your peak business months within the first two quarters of the year, rather than later on in the yearly cycle. This can help strengthen your financials when applying for loans or financing, as you’ll be able to lead with your best foot forward.
Gyms and Personal Training: November-October
Speaking of new years, there are few resolutions more common (or profitable) than those relating to getting in shape. If you own a gym, personal training service, or anything else related to fitness, you might want to consider starting your year once the holiday season kicks off, and ending it when trick-or-treaters come home with pounds of candy in tow. This strategy can help you front-load your fiscal year with top-grossing months, as holiday revelers try to get in shape (or keep some of the holiday-related gluttony at bay).
No matter when you decide to begin your fiscal year, there are advantages and disadvantages to picking any period on the calendar. For starters, you’ll have to make sure you’re comfortable choosing a fiscal year that might vary from the conventional calendar year. It might be tough to be in the fiscal fourth quarter of the year when you’re knee-deep into the new year. You’ll have to keep track of two different calendars in your business and personal life, and make sure you pay taxes on time. Uncle Sam doesn’t care when your year starts, so long as your taxes get paid on time.
Next, be certain to think about your fiscal year strategically. Plan your year to coincide with your busiest months if you want to make your financials sparkle for would-be investors and lenders. Try not to split high-profit quarters into two separate fiscal years, lest you run the risk of making your financials look less stellar than they really are.
So long as you keep these core concepts in mind, you can define your own fiscal year to maximize your business for growth, excellent recordkeeping, and the kind of accounting that helps you keep track of the core metrics you use to measure success.
- IRS.gov. “Tax Years“