Natural business year definition
/What is a Natural Business Year?
A natural business year is a period of 12 consecutive months, terminating in a natural low point in the sales activity of a business. This period is an ideal choice for being the official accounting year of a business (known as its fiscal year), since the natural low point at the end of the period should coincide with a decline in recordable business transactions. More specifically, there should be a decline in the accounts receivable, accounts payable, and inventory that a business states in its accounting records. At this point, more receivables than usual have been converted into cash, and inventory balances have been drawn down.
These lower balances make it easier to audit the period-end accounting records of a business, and verify that its ending balance sheet figures are accurate. The reduced amount of audit work means that audit fees can be reduced. In addition, with the sales level so low, it is much easier for the accounting staff to close the books at the end of the natural business year.
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Examples of the Natural Business Year
Several examples of natural business years are noted below, along with the advantages associated with each period used.
Retail Store Natural Business Year
Retail stores typically have their highest sales volume in December, followed by a steep decline in January. Thus, the 12 months ended January 31 is a reasonable natural business year. Adopting a natural business year that ends on January 31 offers several advantages to a retail store. This timing allows the business to close its fiscal year after the busy holiday shopping season, when sales and inventory levels peak, giving a clearer picture of annual performance. It simplifies financial reporting by capturing the full impact of holiday revenues and related expenses within the same accounting period. Additionally, it provides time in February, a typically slower month, to conduct physical inventory counts and perform year-end accounting tasks with minimal disruption to daily operations. This alignment with the store’s natural sales cycle improves accuracy in financial analysis and supports better decision-making.
Farmer Natural Business Year
A farmer will send crops to market in the Fall, after which there should be few stored crops on hand. Thus, a 12-month period ending in late Fall is a reasonable natural business year. Adopting a natural business year ending in late Fall offers several advantages to a farmer. It allows the financial year to align with the completion of the harvest and sale of crops, capturing the full cycle of production and income within one period. By the end of Fall, most crops have been sold and inventories are low, making it easier to assess the farm's true financial position and reduce the complexity of valuing stored goods. This timing also simplifies expense matching, as costs related to planting and harvesting are recorded in the same year as the resulting revenues. Overall, it supports more accurate financial reporting and better planning for the next growing season.
Ski Resort Natural Business Year
A ski resort finishes its ski season no later than April (in the northern hemisphere), after which it shuts down for several months. Thus, a 12-month period ending in April would be a reasonable natural business year. Adopting a natural business year ending in April offers key advantages to a ski resort. It aligns the fiscal year with the end of the peak ski season, allowing the resort to capture all winter revenue and related expenses in a single accounting period. This provides a clear and complete picture of the resort’s financial performance without splitting the season across two fiscal years. With operations shut down in the off-season, staff have more time to complete maintenance and year-end accounting tasks without interfering with guest services. This timing also improves budgeting and planning for the next season by basing decisions on accurate, season-specific financial data.
Use of the Calendar Year as the Natural Business Year
When there is no discernible natural business year, many businesses tend to adopt the calendar year as their official fiscal year. Except where mandated by the government, a company can select any fiscal year it wants. The use of the natural business year as the fiscal year is recommended, but a company can certainly use other dates.