A fiscal year is the twelve-month reporting period that companies, and any organisation that produces financial accounts, use for their financial reporting. It doesn’t have to follow the calendar year or the government’s tax year. Fiscal year-end, simply, refers to the end date of your chosen fiscal year.
“In the UK, there are three key terms for the business year when it comes to accounting,” explains Jonathan Barber, Executive Director UK, at the Institute of Financial Accountants:
- Calendar Year: January to December, the calendar system used widely around the world by both businesses and consumers.
- Tax Year: 6 April of one year until 5 April of the following year. In the UK, this is the yearly period when a business will pay its tax.
- Fiscal Year: A 12-month accounting period that a company uses for financial reporting and tax purposes. The fiscal year does not have to be the same as the calendar year or tax year.
Here, we look at how a business goes about choosing the dates for their fiscal year, what date is optimal for fiscal year-end, and how easy it is to change the fiscal year after it's been set.
Why is the fiscal year of my business important?
Most official business documents including tax returns, balance sheets and cash flow statements cover a period of 12 months. So, while this doesn’t have to coincide with the calendar year or the tax year, you must set a fiscal year period for your business within which to record all its financial data.
Setting a fiscal year, also referred to as a company financial year, is not only necessary for regulatory purposes but also helpful for internal accounting purposes. It allows a business to compare what they are achieving year-on-year and to spot why they may have overperformed or underperformed compared to previous years. This comparative data can then be analysed and used to boost business performance in the future.
Understanding your fiscal year is crucial for predicting when cash will come in (revenue) and when it will go out (expenses), ensuring you have enough liquidity to operate. However, managing your small business' cash flow can still be a tough balancing act at the best of times, especially when the end of the month draws near and bills are due. With an American Express® Business Gold Card, you get up to 54 days to clear your Card balance, so you can keep your money in the account for longer and get more flexibility in your cash flow¹.
How do I choose a fiscal year-end for my business?
There is no right or wrong period within which to set your fiscal year. Some businesses start their fiscal year from the day they begin operations and continue on from there year-on-year. Others might set it so that the year-end coincides with a quieter time for their business. Your accountant should be able to help you decide when it runs from.
“Commonly, your fiscal year aligns with your date of incorporation," says Barber. “Your first submitted accounts will usually cover more than 12 months because accounting works to a calendar month-end. So, for example, if you incorporate your business on 7 May, your first accounts will run until 31 May the following year, thereby covering roughly twelve months and three weeks. After that point, only a twelve-month period will be covered.”
Stephen Davies, Chief Executive of Penderyn Distillery in Wales, which produces a range of premium spirits, explains that his company’s fiscal year was determined by the date he launched the business.
“Our fiscal year runs from 1st September to 31st August annually, this is because we first started distilling in September 2000 and we have remained with this arrangement ever since," he says. "We have never had any cause or reason to change our fiscal year. We have always been able to achieve a consistently high level of reporting over many years and have not experienced any issues.”
Do different industries have different fiscal years?
"As a company’s fiscal year is specific only to them, it doesn’t have an impact on any other company and, therefore, there is little reason for the dates to align,” says Barber.
While there is no onus on companies in a particular industry to run along the same tax years, sometimes you see companies in certain sectors pick similar time frames for their fiscal years.
"Sometimes, there will be commonalities between businesses in the same industry, but this is usually driven by seasonality in a particular industry," says Barber.
A Christmas card supplier, for example, might set its year-end in February, after the seasonal rush. Schools and universities often line their fiscal year end up with the end of the school year.
Can I change my fiscal year?
You can apply to Companies House to change your fiscal year but, initially, this can make it difficult to compare fiscal year-on-year if you’re comparing different time periods.
Barber says most businesses choose to stay with the fiscal year dates based on when the company began operating, but there are a few legitimate reasons why you might consider changing it.
"For those that do choose to make a change, however, it is often driven by resource issues, for example, simplifying your accounting to better align with your business, e.g. to avoid peak seasons within your business," he says.
Other ways that a fiscal year change could simplify accounting include aligning with the personal tax year or reducing the workload for your finance team during busy periods, potentially "avoiding a fine for late filing should your team be busy,” adds Barber.
"It is mostly a case of what is best suited to your business, your business growth and your team. A company is able to change its fiscal year in certain circumstances, as long as the year-end accounts are not overdue."
Every business has its own specific needs and requirements. Speak to your accountant or finance team to see whether your fiscal year is working best for you.
1. The maximum payment period on purchases is 54 calendar days and is obtained only if you spend on the first day of the new statement period and repay the balance in full on the due date. If you’d prefer a Card with no annual fee, rewards or other features, an alternative option is available – the Business Basic Card.
