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Ever heard your business accountant reference a “fiscal year?” Not sure about the fiscal year definition, or how it applies to your business? You’re in the right place. The accounting term fiscal year gets tossed around in business and applies to your business, no matter how big or small it is.
That’s for good reason—your 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 do your own books, or are really hands off with your finances, you’ll want to know the definition of a fiscal year. 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. 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.
A fiscal year (FY) is a 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. What makes a fiscal year unique, though, is that it doesn’t necessarily start at January 1 and end on December 31. Instead, businesses can begin their fiscal year at other times throughout the year.
This may sound paradoxical—after all, why have a different fiscal year that a calendar year? But there are reasons for determining your fiscal year at a different point than the first day in January. 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.
Sound a little weird, maybe? That’s understandable. But, if you’re willing to look dive into the details of a fiscal year, how the fiscal year differs from the calendar year, and how a fiscal year ending date impacts your business, you may come away wanting to figure out when to begin and end your fiscal year.
Now that we’ve laid the ground rules for what a fiscal year is, what a fiscal year end signifies, and why it’s important for businesses, we can dive into the difference between a fiscal vs. calendar year. A fiscal year can begin with any quarter of the year. So, for example, your fiscal year might begin on April 1 and end March 31. This would mean that the difference between a fiscal year vs. a calendar year would be pretty significant for your business. This setup would be quite different than a calendar year, which is the standard January 1 to December 31 period within a year.
Both of these periods of time measure 12 consecutive months—the full year. But whereas a calendar year is inflexible (good luck getting people to celebrate New Year’s Eve on May 31), a fiscal year is customizable for your business needs. You may not be able to control time, but a fiscal year at least lets you decide when to measure it as it pertains to your business.
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. After all, the end of a fiscal year is still year-end for you financially, even if no one else is popping champagne and counting down on the last day.
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’ year with a different start and end than you would for your personal life.
Luckily, professional bookkeepers and accountants are used to working with different fiscal years depending on what their clients choose. So, you don’t have to worry about your financial professionals keeping up!
Another potential bonus: If you use an accountant 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 since they’re seasonal businesses too, so doing your year-end financial wrap could end up being more cost-efficient for you during the non-standard calendar year.
For most business taxes, the IRS uses the calendar year. So, even if you have a different fiscal year during which you track your finances, the IRS will still look at your business taxes using the period between January 1 and December 31 (or, as they say, fiscal year ending December 31).
It’s likely that you have one of the slightly simpler types of business entities: a sole proprietorship, partnership, LLC, or even S-corp. These types of business entities file their taxes using the calendar year. (If you file quarterly estimated taxes, you’ll use the calendar-year quarters, too.) We mention business entity because C-corps have a slightly different allowance with regard to their tax years; they can file their taxes according to their fiscal year.
Ready to determine your own fiscal year end? Awesome. Here are a few things to consider when picking your dates:
Almost every industry has peaks and valleys—landscaping companies aren’t booming with business during winter seasons, and retail businesses tend to do the bulk of their business around the holidays. 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.
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. Fewer people are taking care of their lawns, paying to have people manicure their backyards, or taking on large-scale renovation products when temperatures plunge and short days lead to cold nights.
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.
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 getting fit, 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 in front of 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.