Why do companies have a fiscal year different from the calendar year?

Question

There are many companies that have their year end occur on dates other than December 31. What are the advantages to this?

Answer 1

I know some companies or entities have large incomes or expenses at certain times of the year, and like to close their books after these large events. For example where I work, the primary seasonal income comes after summer, so our fiscal year ends at the last days of October. This gives the accountants enough time to collect all the funds, reconcile whatever they have to, pay off whatever they have to and get working on a budget for the next year sooner than a calendar year would.

There also might be tax reasons. To get all of your income at the beginning of your fiscal year, even if that is in the middle of the calendar year would allow a company to plan large deductible investments with more certainty. I am not to sure of the tax reasons.

Answer 2

I can think of a few good reasons:

• A company, especially public, usually wants their fourth-quarter earnings to be the strongest of the year. That ends each fiscal year on a high note for the company and its investors, which helps public sentiment and boosts stock prices. So, travel agencies and airlines usually like ending their year in October or March, in the lull between the summer and winter travel seasons with a large amount of that revenue falling within the company's fiscal Q4. Oil companies sometimes do the same because fuel prices are seasonal for much the same reasons.

  • The downside of the above approach is that you make or break your entire year on your last quarter, which can cause problems for companies with scheduled dividends. Usually that's not a huge concern, as dividends are based on profits, so if there aren't any profits there aren't any dividends. However, in such cases a bad Q4 which also sends the entire company's year into the red is a double-whammy for stock prices. If this is a concern, a schedule with strong Q1 and Q3 earnings, with decent Q4 (second or third-best season) and a "dump" in Q2 (weakest season) is typically the best overall bet.

• December is a really bad month to try to close out an entire year's accounting books. Accountants and execs are on vacation for large parts of the month, most retail stores are flooded with revenue (and then contra-revenue as items are returned) that takes time to account at the store level and then filter up to the corporate office, etc etc. It also doesn't tell the whole story for most retail outfits; December sales are usually inflated by purchases that are then returned in January after all the hullaballoo. As a result, a fiscal year end in January or even February keeps the entire season's revenues and expenses in one fiscal year.

  • The downside of the above is that a February fiscal year-end normalizes your December earnings. Investors expect bad Q1 reports for most retail; consumers are looking at credit card statements and tightening belts. Conversely, investors expect huge calendar Q4 numbers; to lump some of the bad news of returns and lower revenues in with your best sales quarter may cause you to continually fail to meet speculator's expectations which will cause your stock to be devalued relative to competitors.