A version of this article previously appeared in Forbes.
During a Invoca Board meeting, an interesting idea was raised by Brett Queener, a former Salesforce senior executive. He noted that early in Salesforce’s tenure, the company changed its fiscal year to end on January 31st, rather than the traditional calendar year end.
This approach has been commonly used by retailers since the start of the last century. However, it remains fairly rare within the tech world. Intrigued, I conferred with Brett after the meeting and identified a number of advantages (some obvious, some less so) that a tech company can derive from a non-traditional fiscal year, especially one which does NOT end on the last month of a calendar quarter (i.e., March, June, September or December). <Note: I am an investor in Invoca via Rincon Venture Partners>
Advantages Of A Non-Calendar Quarterly Cadence
According to Gregg Johnson, Inovca’s CEO and former SVP Product Management of Salesforce’s, Marketing Cloud, “Although it comes with some short-term administrative costs, we have modified our fiscal year to end on January 31st. I saw this unconventional approach work extremely well at Salesforce and I am confident that Invoca will benefit in many of the same ways.”
- Fewer End-Of- Quarter Discounts
As described in Real Startups Never Ever Discount, technology buyers routinely stall their purchases until the end of the calendar quarter because they know that many of their vendors will discount their prices as the quarter end looms, in order to spur a purchase. This irregular revenue stream makes it difficult to plan implementation resources and manage cash flows. It also puts some deals at risk, as the avalanche of last-minute activity during the final days of the quarter can cause sales to slip into the subsequent quarter. Whenever a deal is pushed out, there is a chance it will not close.
- Restorative Holidays
Although the year-end Holidays are a wonderful time to reflect and enjoy the company of family and friends, they can wreak havoc on a startup that is frantically trying to reach its annual goals. According to Brett Queener, “Your employees likely work really hard all year and make tough work life sacrifices. And they need downtime with family to reconnect and recharge their batteries to hit the ground running the beginning of January. Many of the buyers are trying to do the same thing and it’s a tough way to start a customer relationship to jam a deal through when they and many of their peers need a break.” Thus, by allowing your team to actually enjoy the Holidays and enter the New Year ready to make the final push to close out the year.
- Year-end Planning – The inherent time and focus conflict between finalizing the year’s sales and mapping out the coming year’s pro forma financials, strategic plan and product roadmap is reduced.
- Public Exposure – Companies that are either public or contemplating an IPO will garner more attention from Wall Street and Industry Analysts if they announce their earnings during an off month.
- Financial Audit – Annual audits can occur later in the year, during a non-peak time, which can result in lower audit fees.
- Performance Reviews – Greater focus can be paid to employees’ annual evaluations and compensation reviews.
- Dollar Capture – Since most companies consider January the start of a new fiscal year, they often have budget dollars available that they could not spend during the prior December.
- More Bandwidth – It is easier to control the cadence and timing of deals because you are not competing with other vendors for your customers’ personnel resources, such as their legal team, purchasing department and the CFO’s deal desk.
Although there are a number of advantages to an unconventional quarter-end fiscal year, there are downsides as well. Though as Gregg pointed out, these disadvantages are relatively short lived.
Accounting Restatement – At the time the change is implemented, one-time adjustments will be required to the prior year’s financials so proper year-over-year comparisons can be made. There are also one-time tax issues associated with changing your fiscal year.
Inertia – As with any change, it will take time, effort and education for the organization to internalize the new calendar cadence.
It certainly is easier for a relatively young organization to change its financial calendar, as there are fewer legacy issues to address. However, it is never too late to make the change and begin reaping the associated financial and operational benefits. It worked for Salesforce and it will likely work for you as well.
You can follow John on Twitter: @johngreathouse.
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