Can I Change My Accounting Period to Fit My Natural Business Cycle?
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There are no rules regarding changing accounting periods to align with entrepreneurs’ natural business cycles. However, there are considerations business owners ought to take into account. While most businesses' traditional accounting period is a year, some businesses may find it more beneficial to change their accounting period to align with their natural business cycle.
However, before changing your accounting period you must first understand the reason behind your decision.
This article will highlight what accounting period is, why your business cycle should be in tune with accounting period for maximum benefits, and how you can modify it.
What is an accounting period?
Accounting period is a timeframe within which one reports about his or her financial transactions including revenues as well as costs. Generally, it could either span from January through December or take any arbitrary beginning or ending dates.
Businesses use accounting periods for reporting and analysing purposes.
Why change your accounting period to fit your natural business cycle?
Some common reasons for changing your accounting period include:
Simplifying financial reporting: Some business owners may want a consistent accounting period to simplify financial reporting. They won't be compelled to modify numbers or costs thereby making the entire process of complying much easier.
Businesses experiencing considerable seasonal shifts may find it beneficial for their financial year to coincide with times when they are at their busiest or least active. This will allow analysts to make accurate comparisons.
Better tax planning: Aligning your year-end with your business cycle allows for more effective tax planning. You can optimise tax deductions, credits, and allowances based on actual business activity.
Efficient audits and reviews: External auditors and stakeholders find it easier to assess financial statements when the accounting period aligns with business cycles. The swift and effective audit processes create trust among investors and financiers.
Enhance financial management: Financial performance becomes easier to track when the accounting period matches with your business operation thus enhancing financial management. This makes it possible to analyse revenue, expenses, and cash flow accurately to make better decisions.
How to change my accounting period to fit your natural business cycle?
Evaluate your business cycle to understand your peak and off-peak periods. Identify when your business activity is highest and lowest throughout the year.
Once you understand and identify your highest and lowest business activity period, choose a suitable fiscal year. You can make your fiscal year longer or shorter than the standard 12 months. For example:
A fiscal year starting on July 1, August 1, or September 1 may better reflect your business’s natural cycle.
A 52-53-week tax year can be useful for businesses with consistent monthly selling days and weekends.
If you want to modify your accounting period, you should apply for change by:
- • Completing form AA01 and submitting it to Companies House.
- • You can request changes online or by mailing the form.
What are the challenges of changing your accounting period?
Changing the fiscal year-end can be transformational for an organisation, but it comes with significant challenges. The challenges include:
Budget adjusting: Changing your accounting period will adjust the budget of your company which may affect your business cash flow.
Tax filing: Changing your accounting period may result in a short tax period (less than 12 months). In such cases businesses must file separate returns for the short period.
Financial statement challenges: Changing your accounting period can affect the comparability of your financial statements from one period to another. This could affect how well you track your funds and decide anything.
Disruption within business operations: Departments such as IT, HR, procurement, and logistics will need to adjust to the new fiscal year-end. Payroll cycles, inventory management, resource allocation will be affected.
What should I do to diminish the risks of changing my fiscal year-end?
Comprehensive planning: You can start by having a comprehensive plan for projects in detail. Engage important parties in finance, legal, HR, and IT departments. Clearly define roles, responsibilities, and timelines.
Communication: Let everyone know about the changes inside the company and outside too. You should tell workers, customers, suppliers, and regulators ahead of time. Quickly solve any problems raised. Legal and Regulatory Compliance: Get legal experts on board to ensure that local laws and regulations are adhered to. Take care of any legal implications related to contracts, leases as well as licences.
Tax implications: Tax advisors should work very closely with you. Know how it will affect income tax returns, deferred taxation assets/liabilities etc., so that you can figure out if there are possible tax incentives or disincentives.
Financial reporting: Be ready for financial statements for a short period. Maintain consistency in accounting policies and disclosure practices.
Budget adjustments: Formulate short-term budgets for the new financial year's end while observing motion functions and seasonal adjustments.
Audit considerations: Be prepared for more audit work that may result from this timeframe. Talk about this matter with your auditors.
Data migration: Plan data migration with care. Ensure correct transfer of historical data to the new fiscal year.
System changes: Make changes in accounting systems, payroll software, and reporting tools. Test carefully to avoid any disruption.
Employee transition: Address all the effects this would have on employee benefits, leave accruals, and performance evaluation.
Remember that when changing your accounting period it is important to evaluate what your business needs are. Balance the potential gains you will receive by aligning your accounting period with its natural fiscal cycle against the associated risks.
Changing your accounting period to align with the natural business cycle can be a very complicated exercise that requires detailed considerations. By extension assessing how they will affect financial reporting and analysis is one of determining whether a change in accounting period is right for you or not.
Icon offices help businesses with their accounting needs at an affordable price. We help companies to file accurate confirmation statements, annual accounts, and tax returns.
For more information, contact us at [email protected].