What is a financial year?
A financial year, also referred to as a fiscal year or business year, is a period during which a company records and evaluates its financial performance. It serves to monitor the financial performance of the company, calculate taxes, and create reports for investors, shareholders, and management. The financial year does not necessarily have to coincide with the calendar year and can be determined individually.
How does one choose a financial year?
The choice of the financial year depends on the individual needs and goals of the company. Here are some common options:
Calendar year: The financial year corresponds to the calendar year, i.e., it begins on January 1 and ends on December 31. This is the simplest option and is chosen by many companies, especially small businesses and startups.
Fiscal year: The financial year does not begin on January 1 but starts at a different time of the year. This option can provide tax benefits, as companies can better plan their tax burden.
12-month period: Some companies choose a financial year that does not align with the calendar year or fiscal year but is simply a consecutive 12-month period. This allows flexibility in reporting.
Conclusion
The financial year is a fundamental aspect of the financial management of companies, regardless of their size or industry. It provides the foundation for financial reporting, tax payments, budgeting, and planning. Startups should carefully consider which financial year best suits their financial goals to maximize their long-term stability and growth opportunities. A well-chosen financial year can have a significant impact on business success.