I am often asked by clients who are starting up a new business what year-end they should choose.
Most businesses generally have a business year than operates on a natural 12 month cycle, with peaks and valleys of business activity occurring within this time frame. For instance, retailers will build up inventory levels leading into the Christmas season. Once Christmas is over, sales will take place in January and February to clear out merchandise, inventory levels will drop and trade suppliers will be paid. The ideal time for a business year end is when the activities of a company have reached the lowest point in their annual cycle.
Advantages to having a year-end at the lowest point in the annual cycle include:
Financial statements will reflect the outcome of a complete business cycle. If any other year end is chosen, financial statements show the results partly of one business season and partly of another.
Financial statements prepared at the low point in the operating cycle show the ability of management to bring the affairs of the business into a liquid financial position.
As the normal activities of a business enterprise have substantially decreased, the inventory may be counted with less interference in day to day operations than at a busy time of year.
Inventory levels are greatly reduced and may be counted with greater ease an in less time than at a busy time of year.
Staff have more free time to assist in counting inventory
The risk of inventory counting errors is reduced with less inventory on hand
Costing the year-end inventory will take less time with reduced inventory levels
As can be seen, choosing a year end is an important first step in setting up your business. Some thought should be given to what year-end best suits the nature of your business in order to save you time and money.