Not the most riveting of subjects, I’ll grant you. But this is one of things I wish I’d spent more time thinking about. It would have saved me money.
When you set up a company and register it with Companies House and HMRC you need to decide which month is the company’s financial year-end. Your company’s accounts are run on an annual cycle, say from January to December. But your year-end doesn’t need to be 12 months after the company was registered – it can be anything you choose, and it’s worth giving it some thought.
I generally take three things into account:
The personal tax year – which runs April to March and is the same for everyone. I’ve generally enjoyed more flexibility by not aligning the company financial year to the personal cycle. That enables me to decide in which tax year I might take a dividend, for example.
The potential timing of bonus payments and dividends through the year. If I’m not taking a regular salary in the early years it can also include occasional salary payments.
The seasonal nature of the business, if it has one. For example, if the business has its biggest sales’ month running up to Christmas and is liable to returns after Christmas, like a fashion clothing business, I really don’t want the year-end in December. I get the sales upside in Q4 and start the New Year with low sales and a pile of returns. Maybe I want to start the financial year with the biggest selling quarter ahead of me, so I could choose September or October. Or maybe yours is a summer business – so would you prefer to start each new year with the biggest month ahead of you or behind you? Personally, I like to go out with a bang, so if mine is a summer business I’d end my financial year at the end of September. Then I can get performance bonus payments handed out to the team by the end of November and in time for Christmas, which is when they is when they need money for their families.
If you set up your business in May and decide your financial year will end in December, then your first financial year will run for 20 months, which is fine. After that you’re on a 12-month cycle.
There, I hope that wasn’t too tedious.
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