Natural Business Year
A natural business year (NBY) is a fiscal year that ends when business activities are typically at a low point. This is often industry-specific, depending on the annual cycle of business operations. For example, a retailer might choose to end their fiscal year in January or February after the holiday season has ended, while a ski resort may end their fiscal year in the spring or summer, after the peak winter season has passed.
The benefit of choosing a natural business year is that it can make it easier for a company to close its books and complete its annual financial audit during a quieter period. It also enables the company’s year-end financial statements to give a more accurate picture of the company’s annual performance, without being distorted by temporary peaks or troughs in activity that occur at other times of the year.
Please note that a natural business year may not align with the calendar year, which runs from January 1 to December 31. A fiscal year, on the other hand, is any 12-month period that a company uses for accounting purposes. Thus, the natural business year is a type of fiscal year, selected for its alignment with the company’s operational cycle.
Example of a Natural Business Year
Consider a company that sells outdoor gardening equipment, such as lawnmowers, garden furniture, and plant seeds. The peak selling season for this company would likely be in the spring and summer months, when customers are preparing their gardens for the warmer weather.
As the fall approaches, sales would begin to decline as customers have less need for these products. By the time winter arrives, the company’s business activities might be at a low point, with few sales of gardening equipment occurring.
In this scenario, the company might choose to have a fiscal year that ends in late winter or early spring, such as at the end of February. This would be the company’s natural business year because it aligns with the annual cycle of its business operations. By closing its books at a quieter period, the company would have more time and resources to dedicate to preparing its annual financial statements and conducting its audit, while also providing a more accurate representation of its annual performance.
This is just an example and the actual choice of the fiscal year can depend on several other factors such as tax considerations, industry practices, parent company’s fiscal year (in case of a subsidiary), etc.