Warren Buffett has often been quoted as saying, “Accounting is the language of business.” Accounting is more than just counting numbers and balancing a company’s books. It is an organization’s approach to financial integrity, accuracy, and clarity in decision-making. Good small business accounting is crucial for the financial health and success of every small business.
Why is Small Business Accounting Important?
The central purpose of accounting is to record, report, and help manage all of a company’s transactions, including all income sources and expenses. Accounting is important in the creation of a budget and in using that budget to manage cash, expenses, and debt payments. Accounting helps determine how much tax a company owes, how and when to pay taxes, and how to prevent negative actions on behalf of the IRS. A key element of small business accounting is selecting the business’s fiscal year.
How to Choose and Set Your Fiscal Year
A fiscal year is a consecutive 12-month accounting period that every business defines for its financial and tax reporting purposes. A company automatically chooses and sets its tax year when it files its first business tax return. After that, the business must get the IRS’s permission to change the fiscal year.
The vast majority of small businesses use the calendar year as their fiscal or tax year. A fiscal year can be the 12-month time period of your choosing. For example, July 1 to June 30. Within each fiscal year, a business may also have shorter accounting periods, often monthly or quarterly, to track its performance.
Many sole proprietors, partnerships, LLCs, and S corporations are required to use the calendar year as the fiscal and tax year unless they receive special permission from the IRS. Owners of pass-through entities report their business income and loss on their personal tax returns based on a calendar year.
When choosing a fiscal year for your business, consider these business goals and your unique circumstances, aligned with your small business accounting:
- You want to demonstrate high profitability if your company is seeking investors. Thus, you may want to start your fiscal year during your busy season.
- Your business has a specific busy season. For example, you are a small retailer, so consider starting your fiscal year after your busy season ends when inventory levels are lowest. This reduces the complexity of taking inventory and enables more accurate financial statements.
- You need more time for strategic planning. Thus, some enterprises start their fiscal year after their busiest period.
- You want to align your fiscal year with your business cycle or the cycles of your competitors.
To get permission to use a different tax year, most business types must typically file IRS Form 1128, Application to Adopt, Change, or Retain a Tax Year.
A professional small business accounting firm can help you determine the right fiscal year for your business and help you determine the strategic and tax implications.
Seek Professional Accounting Assistance
Contact Irongate Financial Partners based in Charleston and serving small businesses in South Carolina. We provide bookkeeping, financial analysis, and outsourced accounting services. Some of our major client categories include construction companies, restaurants, HVAC and home services companies, and medical practitioners. We aim to empower growing small businesses with accounting and financial insights and services that otherwise might be out of reach.