Baseline: Meaning in Financial Statement Analysis
A baseline is a fixed point of reference used for comparison purposes. In business, the success of a project or product is often measured against a baseline number for costs, sales, or any number of other variables. A project may exceed a baseline number or fail to meet it.
For example, a company that wants to measure the success of a product line can use the number of units sold during the first year as a baseline against which subsequent annual sales are measured. The baseline is the starting point against which all future sales are measured.
Understanding a Baseline
A baseline can be any number that serves as a reasonable and defined starting point for comparison purposes. It may be used to evaluate the effects of a change, track the progress of an improvement project, or measure the difference between two periods of time.
For example, a public company will track the performance of each product line by choosing one year as a baseline and measuring all subsequent years against it.
A baseline is typically used when a financial statement or budget analysis is prepared. The statement or analysis uses existing revenues and spending as a baseline for assessing whether a new project is implemented successfully.
The Baseline in Financial Statement Analysis
A financial statement analysis that uses a baseline is called a horizontal analysis. It compares a company’s historical financial information over several periods, whether quarterly, annually, or annually.
The first period in a horizontal analysis is denoted as the baseline period. All subsequent periods are then measured as a percentage of the baseline. So, a period with the same revenue as the baseline would have 100% revenue.
Information technology has three commonly used baseline points: cost, scope, and schedule.
This exercise helps spot trends, look at growth or decline areas, and assess financial performance overall. Ratios like profit margin are also compared horizontally against the baseline year to conclude a company’s ongoing performance.
The Baseline in Budgeting
Project budgeting works from what is known as a cost baseline. The cost baseline is the budget approved for the project, usually broken down in some detail by cost category and cost period.
For example, if a company opens a new warehouse and the cost baseline has been set at $100,000 monthly every month for ten months, any monthly cost exceeding $100,000 is a red flag for the budget analyst.
However, project costs inevitably fluctuate from baseline numbers as unknown and unexpected expenses or, in some cases, savings are realized. The cost baseline can be updated to reflect actual project costs.
The Baseline in Information Technology
Information technology management may set a baseline for anticipated or maximal performance levels. There are three commonly-used baseline points: cost, scope, and schedule.
Typically, project management professionals use software applications to maintain and track these three crucial baseline measurements.
Conclusion
- In horizontal financial analysis, the numbers for the first reporting period serve as the baselines for comparisons of subsequent periods.
- In project budgeting, the approved budget numbers are the baselines for comparing actual expenses.
- In information technology management, the baseline is the anticipated or maximal level of performance.
