The founder of a successful Series B SaaS startup recently asked me if I thought it was a good idea for the company to move its year-end close from December to a different month. It wasn’t the first time I had heard a question like this, and over the years, our team has worked with a few enterprise SaaS startups that have made this shift.
For mid- to late-stage SaaS startups with IPO plans, there can be material benefits to ending the fiscal year outside of December. However, it’s not a move to be taken lightly. Before going down the path, it’s important to analyze the potential pros and cons for your business closely.
5 Potential Benefits Moving Your Fiscal Year-End:
1. Maximize Dollar Capture
Ending your financial year outside of December can maximize dollar capture. Most significantly, by closing your year outside of December, you can gain the ability to capture year-end budget use up in December and capture new annual budgets starting in January. Plus, many of your sales team’s prospects will likely be on vacation during the second half of December, and you can’t close a sale if your prospect is out of the office.
2. Focus on Planning for the New Year in December
Moving your year-end close away from December also lets your team focus on strategic planning during Q4. Instead of looking backward and closing out the past year’s books in December, your finance and business development teams can look ahead and plan the best course of action for the new year before it arrives. This can provide a month’s head start over your competition.
3. Improve the Quality & Cost of Your Audit Resources
If you’re getting ready to go public and undergo the requisite audits, you’ll find the best people available in non-peak times, like with January or July year ends for example, instead of the peak audit times for a December year end. You’ll typically get better resources on your audit, possibly at a lower cost.
4. Gain More Public Exposure on an Off-Month
Releasing your financials before an IPO will likely receive much more media coverage and public attention if done outside of the busy time when companies with December year ends release theirs.
5. Have a More Restorative Holiday Break
Your sales and finance teams work hard for your startup all year, and the December holiday break can be an important time for relaxation and restoration before the new year begins. Moving your year-end close outside of December can give your team a better opportunity to enjoy time off with family and friends, celebrate the seasonal holidays, and rest up for the year ahead.
For these reasons, it’s worthwhile for mid- to late-stage SaaS startups with IPO plans to seriously evaluate moving their year-end close from December.
Have You Considered a July Close?
If you don’t close your fiscal year in December, then when do you close it?
There is no “one size fits all” answer. To identify the best month for your company you need to analyze a number of important business factors. That said, I’ve identified a few compelling reasons to consider a July close. It’s unconventional, but consider these potential benefits:
- Closing your fiscal year in July can distribute revenue more evenly and predictably throughout the year, relieving the pressure of hitting or missing your sales targets in one crazy quarter at the end of the year. A July close can provide a good sales bump in January driven by your customers’ natural buying and budget cycle and another in July driven by your company’s annual sales cycle.
- Ending your year in July puts the federal government’s 9/30 fiscal year-end in your Q1. If government sales comprise a significant portion of your bottom line, this alignment could help with the seasonality of the rest of your business.
- If you typically hold your user conference in Q3, a July close puts it in Feb/Mar/Apr. This could reduce competition with other conferences over attendees and venue space and prevent your conference from competing with summer vacations.
- For many enterprise SaaS companies, August is a slow month, so there can be a benefit to making this the first month of the new financial year.
Despite the potential benefits of moving a company’s year-end close, it isn’t for everyone and shouldn’t be approached lightly. There are a few considerations and potential drawbacks to consider.
Considerations & Potential Drawbacks
- Most people and businesses think in terms of a December year-end. So it can add a layer of complexity to reporting and communication. It can also make it more challenging to compare your company’s performance to those with a calendar year-end.
- Some sales teams may worry about losing the traditional end-of-year urgency. This will need to be weighed against the potential dollar capture benefits I laid out in the first bullet of this article.
- Moving your fiscal year close requires time and resources for a one-time accounting restatement. Companies undergoing this transition should plan accordingly and ensure their accounting team is sophisticated enough and ready for the job.
- If you move your fiscal year-end, you’ll need a short tax return year to switch the tax year to align with fiscal. There will be some hard costs associated with this, and it could impact your company’s R&D tax credits.
3 Questions to Ask Yourself:
Before deciding to move your SaaS startup’s fiscal year-end, consider these three questions:
- What funding stage have we reached? Moving to a different fiscal year-end isn’t usually worth it for early-stage startups. My general advice is to start giving it serious consideration at Series B, and if you decide to go ahead with it, plan to make the switch at Series C or D.
- Do we really expect to go public? If you aren’t sure about this, wait. The major benefits of moving your year-end are realized most at IPO. If this isn’t necessarily on the horizon, hold off until you’re sure it is.
- Is our accounting team up for the job? Moving your year-end close from December to a different month will require some sophisticated accounting work to be completed correctly. It’s a complex maneuver with significant implications, and there are important nuances for financial planning, reporting, and tax along the way.
Burkland’s CFO, accounting, and tax teams are available to help with all of your SaaS startup’s finance needs, including evaluating and implementing the move to a different year-end close. Contact us to request more information.