What is a Fiscal Year (FY)?
A Fiscal Year (FY), also known as a budget year, is a period of time used by the government and businesses for accounting purposes to formulate annual financial statements and reports. A fiscal year consists of 12-months or 52-weeks and might not end on December 31. A period which is set from January 1 to December 31 is called a calendar year.
Here is an exmaple of the difference between a calendar year end and a fiscal year end:
Example of usage
A Fiscal Year (FY) that does not necessarily follow the calendar year. It may be a period such as October 1, 2009 – September 30, 2010. Accountants will reference revenue accrued on July 30 as revenue accrued in the fiscal year 2010.
Fiscal years that follow a calendar year would refer to the period between January 1, 2018, and December 31, 2018, for example.
Why use a Different Fiscal Year?
Government fiscal year
The application of a fiscal year could be different in each country. Here are a few examples:
- Australia’s FY starts on July 1 and ends on June 30.
- Austria’s FY is the calendar year, January 1 – December 31.
- The United States Federal Government’s FY starts on October 1 and ends on September 30.
The use of a fiscal year that’s different than the calendar year presents a better business opportunity for many companies, as it is geared toward the natural seasonality of the company.
Business and organizations may choose their FY based on preference. A good practice of accounting principle suggests closing the FY at the low point of the business. For example, agriculture companies end their FY right after harvest season.
Another common example is consumer retail businesses. They have their busiest season in December and January, therefore they often have their fiscal year end as of January 31 so they can capture the entire holiday season in their year-end numbers.
Cost savings on accounting and audit fees
Since the majority of businesses have their fiscal year end on December 31, that is when the accounting firms are busiest. Sometimes businesses will pick a different year-end when the accountants are less busy, and they may get a lower rate. This can be particularly true with private businesses who prefer to save money on audit and accounting fees.
Applications in financial modeling and valuation
In financial modeling and when performing company valuations it’s important to pay close attention to when a company’s fiscal year ends. If comparing two or more companies, adjustments may need to be made to ensure it’s an apples-to-apples comparison. For this reason, analysts typically use a metric called Last Twelve Months (LTM) when comparing companies. LTM removes the issue of different year ends by simply taking whatever the latest 12 months are that are available. Read how in our guide to LTM financials.
This FY guide has shed some light on the reasons why companies often choose to change their business year end date to be something other than December 31. To keep learning and advancing your career, explore these additional resources below: