Companies change their fiscal periods for various reasons, the most important of which are strategic reasons and the ability to match corporate revenues with the financial reporting process. Modifying fiscal periods -- say, fiscal year or quarter -- obviously has tax implications. This operational change affects the timing a profitable business must follow to remit funds to the Internal Revenue Service.
Fiscal Period Explained
A fiscal year covers any period of 12 consecutive months and may be distinct from the normally used Gregorian calendar, which runs from January 1 through December 31. For example, a company may set its fiscal year to start on February 1 and end on January 31. Fiscal quarters follow the same historical pattern of fiscal years. If the organization’s fiscal year starts on February 1, its fiscal quarters will end on April 30, July 31, October 30 and January 31. The concept of fiscal month is not uncommon, but it is a curio in the business environment. This is because regulatory agencies generally do not mandate monthly fiscal remittances or the issuance of monthly financial reports.
A business may change its fiscal year for operational convenience, liquidity reasons, industry benchmarking or all of the above. For example, if an organization makes most of its money in September, it may change its fiscal year to end on September 30 or October 31. The IRS usually sets a company’s tax filing deadline three and half months after the end of its fiscal year. For top leadership, adopting a fiscal year that ends on September 30 means that the company must send a check to the taxman by January 15 -- a good move, given that the business will be awash in cash during that period and readily can settle its fiscal debts.
Organizations change their fiscal years for financial reporting, especially to show rosy results that generally come from the most active period of the year. For example, the management of a toy manufacturing business sees that the company makes most of its cash during the year-end holiday season, starting with Thanksgiving Day and culminating on Christmas Eve. Senior executives also note that operating results are rather sluggish during the other nine or 10 months, representing only 20 percent of corporate profits. Company principals may adopt a fiscal year that ends on December 31, so they can show investors the business is doing well overall.
A publicly traded company may change its fiscal period for stock-trading reasons, hoping to set the tone for industry performance and prevent adverse security-exchange fluctuations in its share value. For example, if the business is the first to announce operating results, investors might give it a “benefit of doubt” reprieve and not bid the worth of its shares down, even if it posts less-than-rosy results. This is because security-exchange players wouldn’t have -- at the reporting date -- any benchmark to which they can compare the organization’s performance.