Every business or organization must record financial statements to keep track of expenses, report profits and losses, and maintain a balance sheet. Of course, these statements and reports occur at predetermined periods, typically known as fiscal years or fiscal quarters. A fiscal year may sound like a simple concept, but there's more you should know.
What is a fiscal year?
A fiscal year is the 12-month period a business or organization chooses for its financial reporting and other business purposes. Many businesses may just use the calendar year for their fiscal year.
However, depending on the type of business, it may not make sense for them to use the calendar year. The fiscal year gives them the flexibility to measure their own year at a starting and ending point that fits their needs.
When is a fiscal year different from a calendar year?
Most publicly traded companies use the calendar year for their fiscal year, which makes sense. Industries that don't have much seasonality have little reason to depart from the calendar year. Some industries -- including financial (e.g., banks), industrial (e.g., car manufacturers), healthcare, and energy companies -- are fairly steady throughout the year.
However, some companies are exposed to seasonality. In the retail industry, for example, sales tend to spike in December due to the holiday shopping season. That creates another challenge for retailers because they are often inundated with returns after Christmas.
If their fiscal year ended on Dec. 31, that complicates their financial reporting. So, most retailers end their fiscal year at the end of January to avoid any confusion related to holiday sales and returns. The end of January also typically marks one of the slowest times of the year for retailers, and businesses typically end their fiscal year during slow periods.
Another example of businesses that use alternative fiscal years is vacation-related or outdoor-related businesses, such as lawn care, since they're subject to their own seasonality. Academic institutions will also use fiscal years that track with the school year, and businesses will use fiscal years that track with students. Even the federal government uses an alternative fiscal year, which ends on Sept. 30.
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