Overview
To most companies, selecting what type of business calendar to operate under is easy – just use the calendar year (January 1 to December 31). After all, 65% of publicly-traded companies in the US use this (per the Financial Times in 2011). I imagine it’s even higher for smaller businesses since it’s often regulated to some extent.
For other companies, it’s less straightforward. There are several reasons and scenarios that warrant using a non-traditional business calendar. In this article, we’ll examine the pros and cons of choosing a different type of calendar or year-end date, examples of common non-traditional calendar scenarios, and how to make a calendar change if you need to.
Pros and cons of calendar types
Traditional calendars
Using the standard Gregorian (did you know it was called that?!?) calendar is easy. It’s common. Many tools, businesses, processes, and cycles are built around it. However, it may not reflect the normal flow for your business. There might be seasonality aspects to your business. There might be tax or other financial implications based on when your year ends. Sometimes it’s as easy as shifting the year-end to a different month.
Non-traditional calendars
Choosing a non-traditional calendar and year-end has benefits as well. It can better reflect the normal flow and seasonality of your business. It can be more comparable to industry peers. It can improve the reported financial condition of your company (for example, ending the year when inventories are lower and cash is higher can dramatically improve your current ratio). If you shift the month your fiscal year ends in, it can make your audit less stressful and cheaper. And lastly, it can better match the cadence of your operations (i.e. ending the week after busy days and less inventory to count!).
There can also be downsides to a non-traditional calendar. Shifting the month can be inconvenient for team members as year-end tends to be the busiest time of year. If using a retail-style calendar (i.e. 4-5-4), it doesn’t line up standard months that vendors bill on, resulting on a litany of prepaids, accruals, and adjustments. It also has a 53rd week every five years or so (due to the 52-week years only having 364 days, requiring a catch-up), making comparability a little tricky.
Examples of non-traditional calendars
Non-December year-end
The simplest form of non-traditional calendar is ending the year in a month other than December, but otherwise using calendar months as fiscal periods within the year. This is common with school districts (which often end on June 30) and non-profit organizations (that tend to end their year based on when grants are due). It’s also common with companies that have significant holiday sales and subsequent returns (this gives an accurate reflection of sales, net of returns).
Week-based calendars
Week-based calendars tend to be common in retail and restaurant companies, where operations are tied to weeks (inventory receipts, sales, employee scheduling, heavy traffic days, etc.). The weekly operational procedures tend to trump accounting operations. For example, restaurants often end their periods/years on Sundays, after the busy weekend. There is less inventory to count, and it’s a natural break in the cadence of business.
Within week-based calendars, there are three factors to consider:
- What month to end in – generally this is in sync with calendar quarters (March, June, September) if not December, but other factors like holiday shopping, seasonality, and returns can play a factor as well.
- What day of the week to end on – generally this is Sunday or Monday, when business is slower, inventories are lower, and there is more time for week-ending administrative activities.
- Which fiscal type to use – the most common fiscal types are 4-4-5, 4-5-4, 5-4-4, and 13×4, and the spread of usage is fairly even, though 13×4 tends to be used most with restaurants.
Of the different fiscal types, 13×4 tends to be the most challenging, because of an extra accounting close being required and the periods are way out of sync with the rest of the world (requiring a ton of adjustments). 5-4-4 tends to be the most helpful, because of the extra week for quarter/year-end activities before beginning another month-end close, and a couple extra days to receive vendor statements, making accruals easier to estimate. It can be tricky to calculate the exact dates with a fiscal calendar like these, but luckily we have an easy solution that can calculate fiscal calendar weeks, months, quarters, and years for decades into the future!
Making a change
You might think that once you decide on a business calendar that you’re stuck with it, but it’s actually pretty easy to make a change. If you change the the month your fiscal year ends in, you’ll need to report a stub/transition period with your GAAP financial statements and likely also for tax purposes (international standards may vary). One thing to note – when you make a change, the first year of the change might result in a lack of comparability. That was the case with two companies I worked with when they changed from a 13×4 calendar to a 5-4-4 calendar: though the year-end date didn’t change, the weeks shifted to align to different months.
We overcame this by recasting the prior year income statement to show our best estimate of what it would have looked like had the new fiscal calendar been in place during the prior year. Some line items like sales, cost of goods sold, variable labor, etc. are recorded or easily available on a weekly basis – just add them up under the new calendar structure. Other line items can be calculated using a percentage of sales calculation to estimate the weekly amounts and add them up. We took this approach and loaded it in as a special, separate budget called “As-if Prior Year” and used that in our year-over-year reports for the transition year.
Summary
Determining your business calendar probably wasn’t on your to-do list, but it’s important to consider for some businesses. It can have implications on your perceived financial condition and tax liability. It can be a better reflection of the natural cadence of your business and make it easier for key operations. Benchmark against what others in your industry are using. If you need to make a change, consider the tips above and get all areas of your business involved to make sure all people, processes, and systems are covered.
What kind of non-traditional business calendars have you used in your different roles? What were the challenges or benefits you experienced? Please share your thoughts in the comments below!
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