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Definition of a Fiscal Year
A fiscal year is a one-year period in which businesses, government agencies, and other organizations calculate their finances, profits, taxes, and projected budgets. It can affect other things like projects, yearly job duties, and so on.
It may not be a calendar year that starts in January and ends in December. It could be different to adjust for profits, losses, taxes, flows of the business, etc. A fiscal year is typically required by law for tax purposes. Fiscal years allow investors to watch the profits and losses of a company and adjust their investments accordingly.
A fiscal year typically consists of four quarters; various financial estimates can be made at the end of each quarter. This is also important for investors and impacts the entire fiscal year.
It can also be called:
- "FY" for fiscal year. For example, FY 15/16.
- Budget Year
- Financial Year
What Determines the Fiscal Year?
Companies and organizations vary in what type of fiscal year they choose to follow. Below are some examples of fiscal year types and why they are necessary for the organization:
- U.S. federal government: The fiscal year for the federal government of the United States starts on October 1st and ends on September 30th of the following year. This change was made in 1976 to allow the government to have more time to work on a budget.
- Other government organizations: Some choose to use the calendar year as the basis for their fiscal year. This allows it to be consistent with the year that most everyone follows, allowing for simplicity. The calendar year is also used for most tax purposes. However, a July through June fiscal year can also be used.
- Seasonal businesses: Some businesses that do more work in the summer than any other season would not want their fiscal year to end in the middle of that busy season. Instead, they will choose a time when it's slow to end the financial year.
- Consistent businesses: Businesses that do steady work year-round should attempt to adopt the calendar year, just so it adopts with the calendar year most everyone is used to and for tax purposes.
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Examples of a Fiscal Year
The chart below will show examples of fiscal years depending on the organization. Each has a reason why they may set their fiscal year the way they do:
- U.S. federal government: This is set by law and may only be changed by law.
- Grocery store: Does business year-around, so follows the calendar year. Organizations that do business year-around can be flexible in what they choose to be their fiscal year.
- Local government: May choose to have a different fiscal year, depending how that government is ordered to do so by law.
- Retail store: Does more business during the Christmas season, so chooses to have their fiscal year end in March. It's easier to end the fiscal year when it's slow so inventory can be done, taxes prepared, etc.
- Beach resort: Conducts their business during the summer, so ends their fiscal year at the end of October when it's colder. This allows the resort to close down, do repairs, and prepare for the next summer season.
Why Is a Fiscal Year Important?
There are various reasons why planning for the fiscal year is important:
- Planning budgets: Companies could be getting short on funds towards the end of the fiscal year, so the beginning of the fiscal year means a new flow of funds would be made available. This makes it easier to plan for future budgets.
- Predicting trends: If dips or rises happen at certain points of a fiscal year, it could be changed to allow for those dips or rises, making it a smoother fiscal year.
- Making investments: This is just as important for investors. If they see profits rise for an organization during a certain point each fiscal year, they will pour their money in. Each quarter in a fiscal year can make a big impact.
- Starting or ending something: Contracts, agreements, work schedules, etc., can be set based on the fiscal year. This can be tricky to do since a lot may have to be changed/resolved all at the same time, so you can stagger some of these things too. For example, you can have work schedules change at the middle of a fiscal year.
- Field Listing :: Fiscal year — The World Factbook - Central Intelligence Agency
- Tax Years | Internal Revenue Service
You must compute taxable income on the basis of a tax year.
This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.
© 2013 David Livermore
Judy Specht from California on March 14, 2013:
Brother is a CFO for a company. We have to plan all our vacations with him at the beginning of the quarter. The video was great.