How to Annualize Expenses

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Businesses and individuals often have expenses that are necessary to sustain normal operations or a basic standard of life. Budgets represent a tool that businesses and individuals can use to estimate their expenses for upcoming months and years. In many cases, businesses and individuals can start by estimating monthly expenses and then annualizing them for the next 12 months. This process provides a simple method for estimating expenses, assuming all other items remain equal, such as no major unexpected expenses.

Write down each individual expense. These should include all items necessary to maintain operations or the standard of living for one month. Rent, utilities and insurance costs are among the most common expenses.

Attach a dollar amount to each expense. The cost should be the standard or average monthly payment you expect to pay for an item.

Multiply each expense item by 12. This takes the monthly expense and translates it to the total cost paid for the item per year.

Add all the annual costs for each expense. The total represents the annual costs to run a business or maintain a specific standard of living.

Tips & Warnings

  • Adding a small amount to the total annual expense figure can help account for unexpected costs. For example, an additional 10 percent can allow for any unplanned expenditures a business or individual may experience.

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References

  • "Accounting"; Charles T. Horngren, et al.; 2007
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