Business Cycles
A business cycle is the minimum period of time which permits the performance of all the activities related to the function carried on by a particular business. As it relates to retailing, a business cycle is that period of time between the ordering of merchandise for a selling season and the order of merchandise for the next selling season; or that period of time from the beginning of a sales season to the end of that sales season.
In apparel retailing, the business cycles usually end on July 31 and January 31. Business cycles in apparel retailing are generally known as seasons. And while each business cycle may cover more than one season (especially in ready-to-wear), generally there is considered to be only one season in each business cycle. The February through July business cycle is called the Spring season, and the August through January business cycle is call the Fall Season.
Other special buying and sales events or peaks may, by habit, be called seasons. Examples are: Holiday season, Travel season, Transitional season, Back-to-school season, etc. And while each of these periods of time have all the characteristics of a season (buying period, sales peaks and valleys, clearance sales, inventory peaks and valleys, etc.), they are recognized, for practical purposes, as high activity events which fall within (or in some instances span) a season. To summarize then, for our purposes, a business cycle is a six-month period ending on July 31 or January 31 and is called a season.
Business Year
A business year is a period of time which includes one or more business cycles. A business year should end simultaneously with a business cycle. In apparel retailing, the majority of business years end on either January 31 or July 31 and include two or more seasons.
To complicate the matter somewhat, there are regulations issued by the Internal Revenue Service which state that a business year cannot exceed twelve months and restrict the use of year-ends other than December 31 (the calendar year-end) by some taxpayers (individual proprietors, partnerships, and Sub S corporations).
The purpose of the discussion up to this point is to show that certain taken-for-granted practices evolved as a result of convenience (for instance, it is easier and less costly to count inventory at the end of a season when the inventory level is at its lowest) and for the purpose of obtaining more accurate and complete results of performance (for instance, gross profit achieved in a merchandise classification or on a particular supplier’s line should be determined after a clearance sale and when a minimal amount of carryover is on hand).
Accounting Period
An accounting period is an artificial division of a business year. Universally, business years are divided into accounting periods so that management has information about a unit of time which is manageable. To be manageable, an accounting period should be long enough so that an infrequent and unusual event will not distort the results, yet not so long that management cannot respond timely.
There are other considerations in determining the length of an accounting period. For instance, an accounting period should never be longer than a business cycle. It would serve no useful purpose to get information in August which was intended to assist management in assuring adequate inventory levels during the last Spring/Summer season. The length of an accounting period should be relative to the time it takes to obtain the results of the activity which took place during the accounting period and take action on those results. For instance, a report which takes a day to analyze and act on should be produced less frequently than daily, perhaps semi-monthly or monthly.
There are specific tasks to be performed in conjunction with the end of each accounting period. Bank accounts must be reconciled, the books must be closed, reports must be run, etc. These tasks are time consuming and costly. It then follows that a business cycle should be divided up into the minimum number of accounting periods, the results of which provide the necessary guidance to management.
For purposes of comparing results in each accounting period from one business year to the next business year, it is very desirable that each accounting period be as near alike as that same accounting period in preceding and succeeding years as is possible. For example, the month of December should have the same number of selling days each year, and furthermore, the same number of Mondays, Wednesdays, Saturdays, etc. It is confusing when key selling holidays (such as Christmas) don’t fall on the same day of the week each year. The effect of holidays such as Easter, which have a great influence on sales and are determined by church calendar, cannot be isolated and compared from year to year.
The Julian calendar is the most commonly used calendar for determining accounting periods. This is the calendar with which we are all familiar. Its general availability and familiarity make it a natural selection for most businesses. But its selection was an arbitrary one and not particularly suited to apparel retailing.
The seasonal, holiday, traditional, and special event nature of apparel retailing simply precludes the Julian calendar from being a useful determinant for accounting periods.
4-5-4 Retail Accounting Calendar
For purposes of forecasting sales, preparing advertising budgets, and determining inventory requirements, a better accounting calendar is available. For purposes of comparing results, both as regards to sales and expenses, a better accounting calendar is available.
The better accounting calendar is the 4-5-4 Retail Accounting Calendar. The 4-5-4 Retail Accounting Calendar divides the year into quarters with the first and last month of each quarter consisting of 4 weeks each and the middle month of each quarter consisting of 5 weeks. Each accounting calendar month will begin on a Sunday and end on a Saturday. Each accounting calendar month will have the same number of selling days as the same month last year. For example, March has 5 perfect weeks every year, 5 Saturdays, 5 Mondays, etc.
For holidays that are a set day of the week, such as Thanksgiving, there will always be the identical selling days before and after the holiday, year after year. There will always be two selling days in November following Thanksgiving. Each month will consist of either 4 or 5 perfect weeks making it very easy to analyze payroll costs. With the 4-5-4 Calendar, each accounting period exactly matches the same period next year, and the next. This provides an invaluable review and forecast tool for management.
The 4-5-4 Calendar is especially suited for use in preparing sales forecasts and operating budgets. Also, since each month ends on a Saturday you will enjoy the convenience of taking physical inventory counts at week end and not having to either subtract or add sales which preceded or followed the physical count to arrive at a clean cut-off. The inventory counts should therefore be more accurate.
The 4-5-4 Retail Accounting Calendar was devised with the peculiar needs of the apparel and sporting goods retailer in mind. A retailer’s business cycles are those periods of time between the start and end of a sales season. In general, retail business cycles end in July and January. Therefore, the 4-5-4 Accounting Calendar begins with the month of February, which is traditionally the beginning of the Spring selling season.
Changing to the 4-5-4 Accounting Calendar will make very few differences in the store’s procedures. About the only difference is to realize that for the first year, sales comparisons can be made only at the end of each 13-week quarter. The 4-5-4 Accounting Calendar is also recognized by the IRS for income tax reporting purposes. The IRS calls it the 52-53 Week Year. To adopt the 52-53 Week Year it is necessary to file a statement with the tax return for the first tax year for which the election is made. Your local accountant can take care of this for you.
If you have any questions about the 4-5-4 Retail Calendar contact the author at retailghs@adelphia.net or Linda Carter at LCarter639@aol.com
Gerald H. Smith is a retired Retail Industry Consultant
