A natural business year is a period of 12 months that ends at the time when a company’s sales activity is naturally lowest. It is also sometimes referred to as a budget year or fiscal year. In general, a business’s accounting records at the end of its fiscal year should show a low level of accounts receivable and inventory balances.
This makes it easier for a company to complete its annual financial audit during a quieter period, and provides a clearer, more accurate representation of a company’s performance than what is shown by a calendar year. The choice of a fiscal year can also help minimize potential tax burdens and make it easier to compare the growth of the company from year to year.
Retailers, for example, have their highest sales activity in December and January, so it would not be logical for them to close out the books on December 31 and cut their busy season in half. Similarly, many landscaping and home improvement businesses have their slowest periods in the winter when clients are less likely to be available for services.
Companies can choose any fiscal year they want, except where it is mandated by a government agency. Many small businesses follow the calendar year, but it is possible for a company to use a different fiscal year as long as IRS regulations are met. These include meeting the annual-business-cycle test, the seasonal-business test, or the 25% gross-receipts test (Rev. Proc. 2002-39).