Now is about time that I start to plan my year end. Unless your fiscal year end is June 30th.
Think about that for a second. I used to scoff at those who had year end closes in the middle of the year. What blasphemy! How can you call a year end in the middle of the year a year end. That is a lot of year ends in one sentence so I apologize for that, but it is really that ludicrous! Or is it? As a CFO of a manufacturer that did 70% of their business in the 4th quarter, (Oct – Dec) I found that it was nearly impossible to come up with accurate accruals for returns from the major customers like Bed Bath Beyond, KMart, Sears, and others who reported those returns in February and sometimes as late as March. So December 26th, I am looking at the sell through rate and developing some really elaborate Excel sheet to estimate maximum exposure.
This can make you look like a hero or a failure depending upon how you plan it. If you over accrue for those items, you lower your income, but got yourself covered. You may miss your profit target though and then there is the audit from your accountants that may not like that over accrual. You may need some history to get them to sign off on those amounts and “gut feel” sometimes will just not cut it. Then, on the other hand you could under accrue for those possible returns. Make your profits soar, get the bonus that you think you deserve and singing the praises of the CFO. If you are lucky and customers bought all your stuff, you are still the hero, but if they don’t….well, remember that there are few soup kitchens around anymore.
The savior? Choosing a June 30th year end. Or for that matter choosing ANY quarter end that is not in your busy season. For me, this sudden moment of inspiration was not all that new. I was way behind the times in thinking about this. By setting your fiscal year end you allow those expenses to happen and correct them as necessary while you are still in your fiscal year. This was able to save me a lot of heartache when developing accruals because I knew that the corrections would not carry over into the following year and make me leave two notes for the auditors. Explaining why I made the accruals and then why they were incorrect.
By taking your business cycle into consideration you may save yourself a lot of hassle and double work, but note, there are tax rules to think about as a sole proprietor making you year end December 31st ONLY. In addition, if you choose to change your year end, you must file a Form 1128 to get approval to do so from the IRS. Research all of the benefits and pitfalls with a tax CPA to ensure that you are all covered, but it will make things much easier in reporting if you choose the proper date.