What is the fiscal year and how does it affect my business?
The term “fiscal year” is a term which crops up often in business jargon. So what does it mean? It is essentially a twelve-month period of time that companies and governments use for the purposes of financial reporting and accounting. The definition of your fiscal year will depend on your sector of activity, the nature of your business and the reporting obligations binding upon you.Read on to find out more about why this key financial concept is important.
What is the fiscal year?
In a nutshell, the fiscal year, also sometimes referred to as the “tax year”, is a twelve-month period of time that companies and governments use for financial reporting.
It does not necessarily coincide with the calendar year which, of course, runs from 1 January to 31 December. Whatever day of the year it begins on, it ends exactly 365 days later. For that reason, a fiscal year may begin in one calendar year and end in another.
Fiscal years are usually referred to by the year in which they end, so a fiscal year which runs from 1 April 2022 to 31 March 2023 is referred to as fiscal year 2023 or FY 2023. In some countries, it may be referred to as 2022/2023.
Different companies, organisations and governments may start their new fiscal year on a different date, in line with their own accounting and auditing practices.
Variations in fiscal years
Different companies, organisations and even countries may use different fiscal year definitions, depending on their own internal and external auditing and accounting requirements and legal jurisdictions.
Some organisations, such as universities and schools, often align their fiscal year with the academic year, beginning in September and running until the end of the following summer, which helps when comparing policy decisions, expenditure over the year and opening and closing balances. The practical implications of beginning the fiscal year in July and closing accounts and preparing reports during the quieter month of June, when students are generally on holiday is also non-negligible.
Non-governmental organisations may choose to align their fiscal years with the calendar for grants being awarded, which may vary depending on the country.
The calendar year is used as the fiscal year for around 65% of publicly traded companies, and this is the case for the vast majority of companies around the world, with a few exceptions.
The United States
In the United States, the government’s fiscal year runs from 1 October to 30 September. According to federal legislation, companies may end their fiscal year on the last day of any month, with the exception of December. Another option is to end the fiscal year on the same day of the week every year, such as the first Thursday of September. The knock-on effect of this is that some fiscal years will amount to 52 weeks, while others will extend to 53 weeks, depending on the year.
The United Kingdom
Unlike many other countries, the reporting obligations on individuals, businesses and government in the UK do not coincide with the calendar year. The fiscal year in the UK starts on 6 April and runs until 5 April of the following year.
The reasons for this date back to the 18th century and the introduction of the Gregorian calendar, and the date of 6th April has been in place since 1800!
Slightly different rules apply to limited companies, which use an anniversary fiscal year according to the date upon which the business was registered with Companies House.
To muddy the waters even more, the UK financial year, which is the period the government uses to set the Budget, runs from 1 April to 31 March.
What does the fiscal year mean for business?
The fiscal year is used to structure financial reporting and, among other things, to identify how much
To make things simple, most companies align their accounting cycle with their fiscal year. This means that the business’s journal entries, chart of accounts, and balance sheet can be used for both tax reasons and for their own internal purposes, such as financial statement analysis. Aligning both the fiscal and accounting year means that all the procedures involved in preparing the year-end accounts need only be undertaken once.
This is particularly convenient for small- and medium-sized businesses, while large corporations may decide to define a different fiscal year for accounting purposes. This may reflect a particularly seasonal business cycle, such as holidays, peak travel times, or fashion seasons. Adopting a simple calendar year approach may in fact penalise companies whose revenue is uneven over the course of consecutive years.
Reporting on the fiscal year is also important to external stakeholders such as investors and clients, who can analyse performance over the fiscal year in order to inform their decisions about their future relationship with the business.
Streamlining your fiscal year
Whether you have adopted cash or accrual accounting methods, introducing streamlined financial reporting procedures into your business, regardless of its size, is guaranteed to make your end-of-year reporting infinitely less stressful.
Mooncard’s all-in-one software solution can be tailor-made to your company’s fiscal year and can help you keep track of the financial health of your business over the year. Generating reports for tax purposes as well as for your own internal strategic analysis becomes a breeze.
Book a demo today to find out how Mooncard can help you optimise your accounting procedures, turning a chore into an opportunity.
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