Annualised Savings

I am at a project in Germany right now and had to explain the concept of annualisation of savings. I actually quite liked what I wrote and want to keep it on my blog, for future reference: 

There are 2 kinds of savings - some can be annualised, those are recurring ones that get regularly consumed. This can be raw materials, planned maintenance, discount (Skonto), and some cannot be annualised, such as one-off repairs, or a sell-off of old stock. 

If we do NOT annualise we would start every year from 0 and count up savings till the year is over. And then back to 0.

Any non-annualisable saving would count as as one off. All other savings count for the rest of the year from the date of when the saving initiative started to take effect. 

The concept of annualisation is more like a speed test in order to show that savings, once they have reached a certain level, remain on that level. It is an extrapolation and it should show confidence that once you have reached a certain speed or level of saving, you will not lose it. 

It is like driving a car. If you need to drive a distance of 50 km in 30 mins you will need to accelerate for a bit and then keep the accelerated speed on a certain level, something about 100 km/h. And this is annualisation. Your annual target is those 50 km. But "annualised" it is 100 km/h. 

Let's look at the one work stream of ours, the price discount where you agreed on € xxx. This is an annualised saving, adding to your annualised target. We assume, once the CFO letter and all the other tasks are done, from then on we can assume, that for the running time of a year (52 weeks) we have € xxx savings. This is the speed for this workstream so to speak. If you do NOT annualise those € xxx, you would only be able to claim a fraction of it.  

So, going back to our project, by mid September you should be at the speed of € yyy and by mid November at a speed of € zzz. This does not mean you need to have the cash in the pocket by then, it only shows a confidence level that your initiatives will be worth € zzz after one year if you keep on going like you did getting those savings.