Normalization has many meanings. This article discusses its meaning in a financial context.
When reviewing the financial performance of a company, consideration must always be given to unusual events that occurred during the period. Normalization is removing of these items to estimate the ongoing earnings of the business under normal circumstances. This may be done as part of an internal management review, discussions with lenders or in conjunction with the sale of the business.
Normalization would normally remove the effect of any:
- windfall gains from the sale of non-inventory equipment, real estate or division of the business.
- windfall losses of a similar nature.
- the ongoing impact of a significant new customer or lost customer.
- personal expenses run through the business (many privately held businesses run huge amounts of the owners personal expenses through the business).
- impact of win or loss of a lawsuit.
However, the important thing to remember about normalization, is what any business manager or owner would tell you, "there is no such thing as a normal year."