Why do companies use fiscal year instead of the calendar year?
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Seasonal businesses like retail use a different FYE to finish out the year after their biggest sales. So, mostly timing circumstances.
The end of the financial year comes with a fair amount of paperwork and double checking. It is easier if the companies can set themselves up so that “busy because of end of year accounting” doesn’t line up with “busy doing business stuff/employees on holidays/etc.” They can also arrange it to make it easier to group expenses to when they’re paid. For example, many colleges/universities set their financial year to line up with summer holidays (eg US/Canada schools often using July-June) so that all the tuition paid in Sept is in the same fiscal year as the schooling it’s paying for.
FY end involves lots of people running around getting the books in order.
CY end involves lots of people running around buying presents, drinking heavily and trying to cop off with Sandra from accounts.
The two goals are not aligned!
Two main reasons.
First of all end of year is a lot of work and you dont want that in the month (december) where you make most of your sales (like retail shops) are and where a lot of people want time of (christmas).
Then you also dont want to cut your high sales season in half as this screws with reporting. For example your high sales season is from December to January and you had a bad last year but this year is much better. If your cut of is 31 of December it might look like you had an average year because the January sales from last season are still in your reporting when in reality your season was very good. Then there might other factos like you work a lot with schools so you want to line up your fiscal year with schools years. Or you work with farmers and so want to end your fiscal year after harvest or what ever else.
Makes it easier for taxes and other stuff. Calendar year ends with x-max, new years, vacations. Fiscal Year end doesn’t have anything in the way.
There are plenty of differences for fiscal/financial years. UK starts 1 April, Australia is 1 July, Thailand is 1 January for individuals and 1 October for companies.
In Taiwan a company can apply to change theirs as well.
[https://en.m.wikipedia.org/wiki/Fiscal_year#Chart_of_various_fiscal_years](https://en.m.wikipedia.org/wiki/Fiscal_year#Chart_of_various_fiscal_years)
Some form of convenience.
Imagine you own a ski resort. Like clockwork, you get your first skiable snow on October 1 every year. The last skiable snow melts on April 1.
You probably start prepping for your season sometime in August or September, and spend April and maybe May doing post-season work. But Jan. 1 is right in the middle of your season and your business is running at its heaviest. It would be massively inconvenient to have to worry about taxes then because there are a million other things going on. It’s also weird timing because it involves half of this season and half of last season.
Rather, it makes much more sense to deal with taxes during June and July when you have nothing else going on and know what the entire season’s profits and losses are.
Many businesses will shift their taxable year to better fall into a more convenient time of year. Add on top of this a sort of trickle-down effect. If you own multiple businesses, you may want to align all the businesses’ taxable years so you’re not doing taxes all year long. There are also rules designed to prevent manipulating taxable years in ways that disadvantage the government’s collection of taxes that may force a business to adopt a specific taxable year regard of what a specific owner may want.
My wife’s company recently changed fiscal year from July-June to match calendar. The fun part is they have no plans to change the insurance year. So insurance deductibles still reset in middle of the year
A few reason:
– start fiscal calendar when company was started.
– shift calendar due to seasonality of business, wanting to keep full holiday season in single fiscal year for example
– challenge to close books during holiday season, even if not holiday-critical business, due to time off and such.
It’s best to align financial reporting with the natural cycle of the business.
Not all businesses have cycles, but when those cycles exist, it’s best to align with them.
Some obvious examples:
Universities, aligning with a Sept 1 start date would make sense, that’s when the academic year starts. Nobody in any school ever thinks that 2024 is any different than 2025, but the academic year is far more meaningful.
Retail, obviously December is a massive shopping time for many, but the retail shopping season does not end on Dec 31. (or even Dec 24th). Many countries have “boxing day” sales the day after Christmas, and many “holiday sales” extend well past New Years day. Retail cycles do align very closely with calendar cycles, but most retail businesses make their Fiscal Year end a month later, Jan 31st. That means they can better group the holiday sales that take place around Christmas. It also means that they will have calls with analysts right after the big holiday season ends. Imagine if you were reporting fiscal results, and some analyst asked about your holiday sales, and you had to split the difference between Dec 2024 and Jan 2024 (a year earlier). It’d be dumb, confusing, and unhelpful.
Seasonal activities, like running a ski-hill. A ski hill would like to report all of the “winter season” in the same fiscal year. Vail Resorts Fiscal Year starts August 1st. That gives the benefit of having all the ski season in one year.
Also, think about how a business sets budgets for projects.
1. Set the budget before the fiscal year
2. At the start of the fiscal year, start executing on that project
3. ???
4. Profit.
Again, with a ski resort, if they started their new project on Jan 1, they’d be doing that in the middle of their busiest time, which would be disruptive, and they wouldn’t see results from that until the next ski season. Instead since Vail Resorts start the new fiscal year in August, they’ve can get further through the project. They could, if they’re lucky, completely execute a project during the year. Imagine Vail Resorts wants to build a new gift-shop. In one fiscal year, they could
1. Build a new gift-shop,
2. staff-it, stock -it
3. run it during their peak season
4. measure performance and decide to course-correct or do something different next-year.
You’ve phrased the question, “why is fiscal year different from calendar year” ? The better question is “why should it be the same”? Every business is different.
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