The concept of financial knowledge and decision-making skills help companies to make reasonable decisions through problem-solving and thought-triggering financial concepts and factual information.
In the world of finance, accounting and taxes, it is vital to know that there is more than one type of year that every business owner should know. In addition to a regular year-end, there are also a number of various fiscal years.
If you are on the unfamiliar side of understanding what a fiscal year is, then you are on the right article!
Understanding Tax Year
Before leaping into the main context of this article, you must first understand how your taxes work, you should first have a baseline of your tax years.
So, what is a tax year?
A tax year is a yearly accounting period of time that consists of record keeping and creating reports on income and expenses. In doing your accounting and financial planning, you can use two different tax years namely, the fiscal year and the calendar year.
To cut it short, for many experts, the tax year is also synonymous with the Fiscal Year.
In the world of accounting, a required tax year is under the Internal Revenue Code and Income Tax Regulations. So when you have not filed an application for a time extension, employment identification number, and paid the estimated taxes for a year, your business does not probably adopt a tax year.
What is Fiscal Year?
The Fiscal Year (FY) pertains to a consecutive 12-month cycle period of time typically used by a company and even the government for their respective budgeting and accounting projects.
Technically, the fiscal year consists of a one-year period that is counted on the last day of any month which becomes the basis for calculating individual and corporate taxes.
This lets them prepare their financial statements easier as it considers both income and the revenue cycle. Utilizing the fiscal year as the basis of financial reporting, allows investors and company stakeholders to make comparisons of annual financial statements.
Therefore, it has become one of the fundamental ways that companies keep track of their financial performance which is vital for businesses in any industry. It is not surprising that the performance of any sector within the fiscal year (FY) has a direct impact on the budget year after and how marketing strategies are going to be carried out.
Knowing the fiscal year in any company is vital for accounting purposes and to accurately measure their revenue and earnings. The Internal Revenue Service (IRS) allows companies to follow either a calendar year or fiscal tax year.
Eligible businesses in the United States use a fiscal year for tax reporting by simply presenting records of their first income tax return of that fiscal tax year. These businesses can change to a calendar year. However, if the shift is from a calendar year to a fiscal year, the company must get special permission from the Internal Revenue Service or IRS approval and meet one of the criteria from Form 1128 or Application to Adopt, Change, or Retain a Tax Year. Check out the guide about the sales budget.
Going In-Depth on Fiscal Years
Now that we have an understanding of what is a fiscal year, it is time to delve deeper into the context and how it is applied in site work and accounting purposes.
As mentioned, the use of fiscal years is primarily designed to keep track of financial performance that helps organizations compare and analyze their overall performance. This is relevant to any business in the industry where financial reporting and accounting is very important such as in charities and government.
There are a number of ways to track different fiscal years. Here are some of them:
Calendar year
A calendar year is the 12 consecutive months that begin from January 1 and the end date of December 31.
Also known as the civil year, the calendar year pertains to a one-year period based on the Gregorian calendar that lasts for 365 days on a regular year and 366 days on a leap year.
Many companies, like Amazon, Google, and Facebook, use the calendar year as their fiscal year. Calendar years are also known to be used by many companies for tax reporting purposes. As a matter of fact, it is the most common fiscal year used for taxes among individuals and companies.
Financial reporting based on the calendar year consists of the entire year’s financial data which helps in identifying the income tax payable. Individuals and corporations alike can use the calendar year in regulating events in the future in order to strategically manage schedules.
Using the calendar year is best for companies that do not have extensive periods of revenue or expense between the year-end date and the following year.
This is by far the most clear-cut process for financial reporting for many companies and as well as the government. Many sole proprietorships and large enterprises also use this approach as it is seen as one of the most valuable in any type of business in different industries.
It is important to note that anyone can utilize the calendar year such as those who have no record to retrieve information from, no annual accounting year, unqualified tax for a fiscal year, and if you are required to use a calendar year by the provision of IRS. Explore what is gross revenue.
12-month model
The 12-month fiscal year model is another frequent way for many organizations to monitor the course of their actual financial performance. In this model, businesses choose their start date or the first day of a given month as its fiscal year (FY) that last up to 12 months. In this approach, the primary focus is when the fiscal year ends or their chosen end date.
This is why in many companies, such as in sales, the fourth quarter of the year has to end strong as it has better opportunities to show an increase in growth or profit.
The 12-month model is most popular among construction companies that have higher income and expenses during their peak seasons within the year. With this model, it becomes easier for them to track their gains and losses. Also, if they settle using calendar years, financial accounting can become quite difficult as their data may be split which makes it less meaningful. By modifying the Fiscal Year (FY), you have a clearer distinction of quarters that helps you analyze your data better.
52 to 53-week model
The 52 weeks to 53-week fiscal year is almost the same as the 12- month model. It is also a vital approach used for financial tracking during the times when the calendar year approach may conceal some important data. However, unlike the 12-month model, organizations use the model to end on the same day of the week each year-end. For example, a company chooses the Friday closest to March 31 as the end of their company’s fiscal year.
Retail businesses prefer this approach as sales continue during the holiday season until January. Thus, by including the holiday sales as part of the end of their company’s fiscal year, there is a higher chance of ending with stronger fourth-quarter sales. Although it could be a much more complex approach, companies can have a revenue flow that increases the sale towards the fiscal year-end.
Examples of Fiscal Years
Remember that the Fiscal Year (FY) does not necessarily follow the calendar year-end. A few examples of fiscal years may be 12 months from October 1, 2022, to September 30, 2023, and 12 months from February 1 to January 31 among others.
Some organizations such as school districts follow fiscal years that concur with their natural business year which typically starts from July 1 to June 30. Other businesses such as retailers often end their company’s fiscal year on the Saturday closest to January 31 to include sales during their peak holiday season. Another example is the fiscal year adopted by the federal government, which begins on October 1 and ends on September 30.
The Importance of Understanding Fiscal Years
Having a deeper understanding of the fiscal year or tax year can help you have a better metric for your performance. Generally, it improves your company’s project management capabilities and monitors your financial year.
Using a Different Fiscal Year
1. Federal Government’s Fiscal Year
A federal government’s fiscal year may vary in some countries. For example:
- The United States Federal Government’s Fiscal year starts on October 1st and ends on the 30th of September.
- The government fiscal year of Australia begins on July 1 and ends on June 30.
- The government fiscal year followed by Austria starts on January 1 and ends on December 31.
2. Seasonal businesses
The use of a fiscal year that is different than calendar years presents opportunities for seasonal businesses. It is important to know that any business or organization can use their Fiscal Year based on their preference or based on their industry.
For example, agriculture companies often adopt their fiscal year end right after harvest season as it can be good practice for accounting period to close it during a low point in their business activity.
As mentioned above, some retail businesses have their peak season during the holidays. Given this scenario, they often have their year-end on January 31st so they can include the entire sales record during the holiday season giving them stronger year-end sale numbers.
3. Cost savings for accounting purposes and audit fees
Since most businesses have their fiscal years end on the 31st of December, it makes accounting firms the busiest period of time. Thus, businesses tend to pick out a different year-end to reduce costs for accountants. This can help companies save money on auditing and accounting fees.
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