Do twelve sequential months always add up to one fiscal year? Technically yes, but we’ve recently observed that not all sequences seem to be created equal.
In our role as an investors in B2B software companies, we’ve noticed an interesting trend lately: a shift away from the traditional, calendar-based fiscal year, meaning a fiscal year that ends on Dec. 31. Non-calendar fiscal years are not particularly new (in fact, Oracle has long had tremendous success with a May year-end), but Salesforce has made the January year-end en vogue among SaaS companies recently – in large part because of its positive impact on third-quarter earnings, which we’ll explain below.
So why make your business calendar different than the regular calendar? How could it possibly be that February to January might equal more than January to December? Here are three reasons that could be eye-opening.
1. Dodging that dreaded July-August-September Q3
Anyone who’s been involved in B2B sales knows how difficult it is to string together solid numbers for the months of July, August and September. Your reps push to make Q2 sales targets, take a break to recover around July 4th, lose most of August to customers on vacation (particularly if you’re selling in Europe) before trying to rally again in September. It’s a nightmare that can be brutal to navigate.
By shifting to a fiscal year ending in January, Q3 starts with the lightest sales month of the year (August), giving your reps time to catch their breath while Europe is on holiday. Then, it ends with eight solid weeks spanning September and October. For many B2B companies, this rhythm makes a lot more sense.
2. There’s less competition for attention
If the ultimate contract signer has any type of budget, you’re likely not the only firm vying for his or her signature at the end of the quarter. Shifting your fiscal year could reduce the number of vendors you’re competing against to lock in a sale.
3. Firm up your pricing
Software buyers are extremely sophisticated, and they know that generally the best prices will come at the end of March, June, September and December—when your sales reps are scrambling to make quota. By shifting to a non-calendar fiscal year, you might improve your reps’ ability to hold firm on price to make their numbers. While weaker reps are slashing prices to hit those highly contested quarterly targets, your reps can hold strong longer, not particularly concerned that a contract might role over to January.
We recently tested this theory by pulling the fiscal years for all companies that have ever been public in our SaaS Success Database(1). On the X axis you’ll see the months for ending a fiscal year; on the Y axis you’ll see the combined market capitalizations for companies with fiscal years ending in a particular month. Correlation doesn’t always imply causation, but it’s definitely intriguing to note how four companies with fiscal years ending in January have created nearly as much value as a few dozen companies ending their fiscal year in the more traditional month of December. In our view, the smart money in B2B software does seem to favor non-calendar fiscal years.
* Denotes a current or former Battery investment. For full list of all Battery Ventures investments and exits, please click here. Market capitalization as of 12/31/15
As we gear up for the (mostly year-end) board meeting season, it’s worth thinking critically about this issue; the benefits of taking the less-traveled, fiscal-year path might pleasantly surprise you.
(1) Overall SaaS Success Database includes companies that have achieved a $500M+ exit through an IPO or M&A or private companies valued over $1B+
Neeraj Agrawal is a general partner and Logan Bartlett is an associate with Battery Ventures in Boston.