To annualize something is to convert it to a yearly, or annual basis. Basically, you are looking at something that takes place over an irregular period of time and standardizing it, providing a statistic that shows what would happen if you did that thing for a single year.
In finance, most information is reported on either a quarterly or annual basis. Standardizing reports in this way makes it easier to compare. Investors can see how one period of time stacks up against another. Along these lines, short-term events often get transferred into annualized rates for easier comparisons.
This comes up often in relation to interest rates, which are often given as annualized rates (See: Annualized Rates). Annualization also comes up often when reporting salaries and other income (See: Annualized Income).
Businesses often annualize their revenue and expenses so they get a better idea of the long-term impact of seemingly small decisions. If people did that, you might learn, for instance, that the number of burritos you eat in a year has reached 107, giving you an Annualized Rate Of Burrito Consumption (ARBC) of 29.32%. Based on this level of ARBC, you might decide that skipping Chipotle once and a while might be a good idea.
Related or Semi-related Video
Finance: What are Revenues?73 Views
finance a la shmoop what are revenues? well revenues are this magical thing.
they happen when you sell stuff from your business. 14 opera singing [man shrugs]
Teddy bears, forty bucks each five hundred sixty dollars. total nine custom-built
Japanese body pillows eighty bucks each seven hundred twenty dollars total. a
business so weird you can't tell your family and friends about it? [man peeks from behind a door]
priceless. revenues are what Wall Street analysts call top-line. because on an
income statement shows up right here. seems simple right? but from an
accounting perspective revenues get recognized in different ways. like let's [accounting document shown.]
say you sell a season pass to a golf course for five hundred bucks. on this
golf course happens to be somewhere in the Arctic Circle so the season is only
five months long. unless you like playing in the snow and stressing about hungry
polar bears and are basically a complete idiot. so the customer pays you five [man golfs in the snow]
hundred bucks up front to play as much as they want on your course. you made the
sale of five hundred dollars on May 1st, the first day of the season, but are
those all recognized as revenues that day? well it depends if there is no [definitions on screen]
money-back guarantee and you keep the five hundred bucks no matter what, well
then maybe yeah. you can recognize all of those revenues then upfront and you're
done. but what if there's a fine print that [man and woman exchange documents]
says if you play zero times in a month well you don't have to pay for that
month and you get a refund at the end of the season in October.
well you can't recognize the revenue upfront now, at least not all of it. [ATM machine]
instead you can recognize a hundred dollars worth of revenues each time
someone clearly plays on your course. ie even one round of golf confirms that
they have used the hundred dollar all-you-can-eat in a month deal on your
course. you can imagine then that well you have to reserve some kind of money [man drives golf cart]
back refund set of payments when the season is over and you just have to
track every single season and pass fires progress on your golf course. all right
well the key idea here is that revenues don't necessarily equal sales,
and that recognizing revenues usually entails that the revenues are [man smiles from golf course]
irrevocable. that is they have passed their money-back guarantee period and
will remain in your little piggy bank until next season. and what do you do
with all those revenues? well ever hear of polar bear repellent? yeah will do [people run from polar bear]
wonders for customer retention rates.
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