What Is a Baseline?
A baseline is a fixed point of reference used for comparison. In business, baselines measure project or product success against initial values like costs, sales, or other variables. A project may exceed or fall short of its baseline number.
For example, a company wanting to measure a product line’s success can use the number of units sold during the first year as a baseline. Subsequent annual sales are then measured against this point of reference, ensuring consistent and meaningful comparisons.
Understanding a Baseline
A baseline is a well-defined starting point for comparisons, often used to evaluate changes, track progress in improvement projects, or measure differences across periods.
Example in Business
A company might track each product line’s performance by choosing one year as a baseline, measuring all subsequent years against it. Baselines in financial statements or budget analyses evaluate the success of new projects based on existing revenues and spending.
The Baseline in Financial Statement Analysis
A financial statement using baselines is called horizontal analysis. This method compares a company’s historical financial data over various periods, such as monthly, quarterly, or annually.
The first period in horizontal analysis acts as the baseline. All subsequent periods are measured as percentages of this baseline. For instance, a period with the same revenue as the baseline shows 100% revenue.
This method identifies trends, growth areas, declines, and overall financial performance. It also employs ratios like profit margin compared to the baseline year to conclude the company’s ongoing performance.
The Baseline in Budgeting
Project budgeting relies on a cost baseline. This budget reference, detailing cost categories and time periods, guides project expenditures.
For example, if a company opens a new warehouse with a cost baseline of $100,000 per month for 10 months, any cost exceeding this is flagged. Though project costs fluctuate due to unforeseen factors, the cost baseline can be updated to reflect actual expenditures.
Key Takeaways
- In horizontal financial analysis, the first reporting period’s numbers serve as baselines for subsequent comparisons.
- In project budgeting, approved budgets are baselines for actual expense comparisons.
- In IT management, baselines reflect anticipated or maximal performance levels.
The Baseline in Information Technology
In IT management, baselines set expected or maximum performance levels. Common baseline points include cost, scope, and schedule.
Project management software often maintains and tracks these essential baseline measurements, aiding consistent project oversight.
Related Terms: horizontal analysis, financial analysis, project budgeting, cost baseline, scope, schedule.
