Fiscal year
A financial year (or fiscal year) is an accounting period that is used for reporting and taxation purposes. Companies can pick any day to begin their fiscal year, often taking into account their peak sales or peak operational timeline. This allows them to measure their financial performance over the course of a specific duration.
Every business has a “fiscal year-end” or “year-end,” which marks the end of their financial period. Establishing a consistent fiscal year helps organisations compare and measure their performance over time, and more accurately.
A Scenario : Understanding Fiscal year
AABBCC Inc., a retail company selling outdoor gear & clothing, has seen impressive growth in the 5 years of its operations. To broaden their business further, they are considering to increase their product portfolio and enter new markets in the near future.
AABBCC Inc. is introducing a fiscal year system into their strategic planning process. This will entail dividing their financial operations and reporting into 12-month periods, beginning January 1st of each year.
The fiscal year system is a cornerstone of the management team’s financial planning and budgeting process. It also serves as a way for them to track their progress, enabling them to make necessary changes promptly if they plan to go over-budget in any particular area.
By using a fiscal year system, AABBCC Inc. can easily compare their performance from one year to the next and decide on future investments and expansion confidently. This data gives organizations more understanding of pricing and distribution decisions as well.
At the end of the fiscal year, AABBCC Inc. issues an Annual Report annually, which features financial statements such as Income Statement, Balance Sheet and Cash Flow Statement. This report is necessary for management, investors and other stakeholders to make well-informed decisions about the company and its performance.
In this scenario, establishing a fiscal year system enabled AABBCC Inc. to set and track financial targets, identify progress, and make wise decisions in regards to their business. This process also let them assess performance year-on-year and apply the necessary modifications to remain on target.
