Why do companies use fiscal year instead of the calendar year?
In: Other
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.
Latest Answers