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. The natural business year 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 the accounts receivable, accounts payable, and inventory that a business states in its accounting records. 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. 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.

Here are two examples of natural business years:

• 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.
• 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.

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 use other dates.

Related Topics

Change of tax year 
The tax year 
What is an accounting period?