What Is a Baseline?

What Is a Baseline?

Let me tell you directly: a baseline is a fixed point of reference that you use for comparison purposes. In business, you often measure the success of a project or product against a baseline number for costs, sales, or any number of other variables. Your project might exceed that baseline or fail to meet it.

For instance, if you're running a company and want to measure the success of a product line, you can use the number of units sold during the first year as your baseline. Then, you measure all subsequent annual sales against that starting point.

Understanding a Baseline

You should know that a baseline can be any number that serves as a reasonable and defined starting point for comparisons. You might use it to evaluate the effects of a change, track the progress of an improvement project, or measure differences between two periods of time.

Take a public company, for example: it will track the performance of each product line by choosing one year as the baseline and measuring all subsequent years against it.

Typically, you use a baseline when preparing a financial statement or budget analysis. In that case, the statement or analysis takes existing revenues and spending as the baseline to assess whether a new project is implemented successfully.

The Baseline in Financial Statement Analysis

When you perform a financial statement analysis using a baseline, it's called horizontal analysis. This approach compares a company's historical financial information over multiple reporting periods, which could be monthly, quarterly, or annually.

In horizontal analysis, the first period is your baseline period. You then measure all subsequent periods as a percentage of that baseline. For example, if a period has the same revenue as the baseline, it shows as 100% revenue.

This method is useful for spotting trends, identifying areas of growth or decline, and assessing overall financial performance. You can also compare ratios like profit margin horizontally against the baseline year to draw conclusions about a company's ongoing performance.

The Baseline in Budgeting

In project budgeting, you work from what's known as a cost baseline. This is the approved budget for the project, usually broken down by cost category and time period.

Suppose your company opens a new warehouse and sets the cost baseline at $100,000 per month for 10 months. Any monthly cost exceeding that amount becomes a red flag for you as the budget analyst.

Of course, project costs will fluctuate from baseline numbers due to unknown expenses or even savings. You can update the cost baseline to reflect actual project costs as they occur.

The Baseline in Information Technology

In information technology management, you set a baseline for anticipated or maximal levels of performance. There are three commonly-used baseline points: cost, scope, and schedule.

Software applications that project management professionals use are typically designed to maintain and track these three critical baseline measurements.