If you have a small business, you may be deciding whether a fiscal year or a calendar year is the best option for year business. While both have their own advantages, a fiscal year is incredibly beneficial for many organizations. Before deciding, it’s important to have a basic understanding of what a fiscal year is and the advantages it offers to you and your business.
What is it?
A fiscal year is a 12-month period that starts quarterly, on the first day of January, April, July, or October. Organizations use a fiscal year to keep track of their finances and report them to the federal government. The finances that are usually tracked include: revenue, profit margin, and general costs for the organization. It also works as a budget, allowing the organization to easily keep track of all expenses and plan for the following year. The organizations that use a fiscal year to report their finances may be a business, a government, or even a non-profit. A calendar year starts on January 1st and may correspond with a fiscal year (lots of organizations opt to start their fiscal year on January 1st so it matches up with their tax year, which is also when individuals start their fiscal years). This guide shows you examples of a fiscal year using the federal budget, so you have more tangible examples to understand how fiscal years work and how much time they span.
Normally, businesses use the same calendar year as their owners, which means they start the fiscal year on January 1st; the same time everyone begins their tax year. This way, all taxes can be filed at the same time and easily tracked by the owner. Corporations, on the other hand, usually find it most beneficial to have a fiscal year that begins a different quarter than January 1st. Regardless of when an organization commences its fiscal year, you’ll still have to file reports quarterly and stay on top of it.
What are the advantages?
If you run a seasonal business, you might find it most beneficial to start the fiscal year on July or October 1st. Most seasonal businesses are open during the summer, so July 1st is an ideal time to start the fiscal year, because it gives the business a chance to estimate their income for the year and make any necessary adjustments. For seasonal businesses, if they’re open through the winter, the tax year ends in the middle of their season, so they can’t accurately report expenses for a single tax year. It really depends on what works best for your individual seasonal business. Other businesses prefer to start the fiscal year on April 1st, because they’ll be able to shift expenses outside the fiscal year and improve the taxable income of the business. It’s also easier to find an accountant who can devote sufficient time to your business if you’re ending your fiscal year outside the normal calendar year. Accountants are incredibly busy during tax season, so it may be hard to get an appointment or find someone who can give sufficient attention to your company.