Why Consider a 4-4-5 Accounting Period Setup?
While not commonly used, a 4-4-5 accounting period can be very valuable if are seeking to uniformly measure business performance by weeks and by quarters. The idea is that can start your fiscal period on the day that starts your business week and then create a four week period, another four week period and then a fifth week period which will correspond to your first quarter.
When you measure comparative performance, you can measure week-to-week without being concerned to the actual calendar date but more about your business operation’s rhythm. For example, in my NetSuite Systems Integration professional services practice, I run in a weekly cycle primarily because my consultants report their time entries from Sunday to Saturday. This is natural given the way we serve our clients. Typically, we do not have much time reported on Saturdays and Sundays; so the bulk of time shows up Monday to Friday.
Given we are projects based organization, our deliverable work often runs over four weeks long. All this means is that for business performance, looking at quarters is more meaningful than traditional months. I also meet with my Board of Advisers every 90 days as that is our planning time horizon.
Hence, I measure the business weekly and quarterly and a 4-4-5 period setup really makes the financial system easy to use and meaningful. Furthermore, we have adapted our payroll to be bi-weekly with the first day of the week being Sunday and the last day of the two week period being Saturday all falling in line with our weekly perspective. Finally, we ensure that our revenue transactions (invoices) and disbursements (vendor bills) land in the proper weekly period so that we get good matching principles.
See the illustration for how a 4-4-5 accounting structure looks. The twelve periods are similar to months; yet the consistency is perfectly symmetrical.
Bottom-line, we avoid the extra closing effort to get financial and operational reports to coincide with our business cycle.
The Downside of 4-4-5 Reporting Periods
The negative aspects of 4-4-5 reporting periods is the third period having one more week compared to the previous two period. To the uneducated listener, they may see the third period and think performance is significantly erratic. If you find that you are really accustom to measuring your business monthly, then the compromise position is to setup NetSuite to use 13-4 Week Periods. However, under this approach, what you give up is consistent quarterly and half-year reporting.
NetSuite 4-4-5 Setup Instructions
Setting up NetSuite to run 4-4-5 is straightforward but be prepared to help the system determine the correct periods. Here are the key steps:
1. As a NetSuite Administrator, go to Setup –> Accounting –> Manage Accounting Periods and then select Setup Year. Here are the screens for selecting a new year. However, you can modify the existing year by manually modifying the accounting period structure.
2. Set the Fiscal Period Start and End Dates. It may be easier to set the Start date to the correct date but push the End date out beyond the intended date to give NetSuite “some room” to manipulate the more detailed periods.
3. Continue to manipulate the period definitions at progressively more granular levels.
4. Once all the most detail periods are setup, you may need to go back and ensure that the quarterly and fiscal year end periods are all setup.
Should you do this work correctly, there will be no gaps or overlaps in days. NetSuite does a good job warning you of this situation — but take care to avoid future frustration.
Stay tuned for another article on the IRS tax guidelines when electing a 4-4-5 fiscal period setup.
Download a 4-4-5 Calendar Calculator
We have provided a handy calculator here to help you with the date math.
If you are interested in talking to professionals that are experts in Accounting, Technology and NetSuite, contact us.
Good stuff. I think we might pursue this right away. Either than or the thirteen 4 week periods. I will need to find out which of those two choices is best for us. And then implement.
A few follow-up questions:
I understand that the default setting is a simple 12 months, yes?
I understand that there are a total of 3 choices, yes?
And that the analysis here really boils down to choosing either 4-4-5 or choosing thirteen 4-week periods, which of those is the best fit, yes?
And that the definition of best fit is whether you want to more strictly adhering to monthly or quarterly periods for your comparison, yes?
And, that you one can or can not change this retroactively? Or if one can retroactively, it would be a bad idea? or that it would potentially have IRS effects one would need to be fully aware of, yes? (we happen to have a very simple calendar year fiscal year). And, last, that one puts this in to place for the coming periods only. And if that sub-sub-point is true, then when do you think the best point in time to choose to flip this switch might be? month end? mid-year? year end only?
Is there any cross-over or ramifications with this setting for cash versus accrual based organizations?
Thanks so much.
Jason Sjobeck
I have been cranking on this all day.
🙂
I wonder out loud if the positives of the weekly timesheets outweighs any small month-to-month (or month to same month last year) comparisons.
I admit to having the slightly hardest time letting go to our very engrained way of thinking by the month. At the same time noting that the random amount of days in each month is of little value to us.
Thanks again.
Jason
Hello Jason,
1. Yes, the default is calendar months which is the most common.
2. There are three choices: “Calendar Month”, “4 Weeks”, and “4-4-5 Weeks”.
3. Yes, the difference with 13 – 4 Week Periods versus 4-4-5 is that you give up Quarterly analysis. So if you want a more “month” orientation, then 4 Week Periods is a good choice. If you want Quarterly analysis, then 4-4-5 is better.
4. Yes, you can change it retroactively. But it is dangerous from the system standpoint on a few dimensions: 1) you are effectively changing the description and time overlaps on the period record which may not be how transactions records are stamped. 2) It may be very difficult to recalculate the underlying transactions to get them to be stamped with the updated period record.
5. There are IRS considerations. See IRS Publication 538 and speak to your accountant. https://www.irs.gov/publications/p538/
6. As far as cash vs. accrual, there should be no difference from the normal way you look at the different worlds. The rules still apply. The only thing we are doing is defining the time boundaries of economic / accounting performance.
Marty
Hello Jason,
It’s probably more about habitual thinking versus organizing around a new interpretation of business performance.
Marty
Marty, will the new defined periods propogate themselves to become available date range options for Saved Searches?
Hi Dave,
Not directly. When you select period based ranges in saved searches, it will used the period definitions to get the data. That means it will only find records that fall within the periods that are stamped on the transactions which may be independent from the specific transaction date.
The date ranges in the Saved Searches follow a calendar orientation.
Finally, keep in mind the user preferences under “Preferences, Reporting / Search, Reporting, Report by Period” as this will drive the way the date picker works.
Marty
Marty, we have fiscal calendar from June to May. We are importing Trial Balances for the year Jan 2023 to date. But we will have P&L beginning balances of 7 months prior as it beings on June 2022. How do we get the beginning balances before Jan 2023?
I assume you are starting a new implementation and you constituted the fiscal periods correctly in NetSuite. I suspect I don’t understand your question. This article may have some guidance:
https://blog.prolecto.com/2015/06/14/how-to-upload-a-netsuite-trial-balance/
Marty