I
am often asked by clients who are starting up a new business what
year-end they should choose.
Most
businesses generally have a business year than operates on a natural
12 month cycle, with peaks and valleys of business activity occurring
within this time frame. For instance, retailers will build up
inventory levels leading into the Christmas season. Once
Christmas is over, sales will take place in January and February to
clear out merchandise, inventory levels will drop and trade suppliers
will be paid. The ideal time for a business year end is when
the activities of a company have reached the lowest point in their
annual cycle.
Advantages
to having a year-end at the lowest point in the annual cycle include:
Financial
statements will reflect the outcome of a complete business cycle. If
any other year end is chosen, financial statements show the results
partly of one business season and partly of another.
Financial
statements prepared at the low point in the operating cycle show the
ability of management to bring the affairs of the business into a
liquid financial position.
As
the normal activities of a business enterprise have substantially
decreased, the inventory may be counted with less interference in
day to day operations than at a busy time of year.
Inventory
levels are greatly reduced and may be counted with greater ease an
in less time than at a busy time of year.
Staff
have more free time to assist in counting inventory
The
risk of inventory counting errors is reduced with less inventory on
hand
Costing
the year-end inventory will take less time with reduced inventory
levels
As
can be seen, choosing a year end is an important first step in
setting up your business. Some thought should be given to what
year-end best suits the nature of your business in order to save you
time and money.
