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.
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.