DEFINITION of Annual Basis
The term annual basis has multiple applications in finance. In each sense, it refers to an observed figure over the course of the year. It can also refer to something that happens every year.
Annual basis can refer to the return earned by an investment over the course of a year. Projections containing the phrase "on an annual basis" have usually used less than a year's worth of data to project a full year's worth of returns. Annual basis can also refer to the cost of something over the course of a year.
BREAKING DOWN Annual Basis
An investment might have returned 1.5% in one month. By multiplying this return by 12, an 18% annual basis is the result. The shorter the period of data used to determine an annual return, the less accurate that projection is likely to be. Statements about what an investment will return on an annual basis are always estimates.
Example of Annual Basis
For example, if Angela wanted to establish a household budget for the year and it was April 1, she could look at how much money her family had spent on groceries in January, February and March to estimate what her family's grocery costs would be on an annual basis. She sees that she spent $300 in January, $250 in February and $350 in March, for a total of $900. Since 25% of the year has passed, she multiplies $900 x 4 to determine that groceries should cost her family around $3,600 on an annual basis.