What Is a Base Year?
A base year is the first of a series of years in an economic or financial index. It is typically set to an arbitrary level of 100. New, up-to-date base years are periodically introduced to keep data current in a particular index. Any year can serve as a base year, but analysts typically choose recent years.
Understanding Base Year
A base year is used for comparison in the measure of a business activity or economic index. For example, to find the rate of inflation between 2013 and 2018, 2013 is the base year or the first year in the time set. The base year can also describe the starting point from a point of growth or a baseline for calculating same-store sales.
Base Year and Growth Rates
Many financial ratios are based on growth because analysts want to know how much a particular number changes from one period to the next. The growth rate equation is (Current Year - Base Year) / Base Year. The past, in ratio analysis, is the base period. Growth analysis is a commonly used way to describe company performance, particularly for sales. If company A grows sales from $100,000 to $140,000, this implies that the company increased sales by 40% where $100,000 represents the base year value.
Base Year and Same-store-sales Calculations
Companies are always looking for ways to increase sales. One way that companies grow sales is by opening new stores or branches. New stores have higher growth rates because they are starting from zero, and each new store sale is an incremental sale. As a result, analysts look at additional factors such as how much sales grew on a same-store sales basis. This is also referred to as measuring comparable stores or comp store sales.
In the calculation of comp store sales, the base year represents the starting point for the number of stores and the amount of sales those stores generated. For instance, if company A has 100 stores that sold $100,000 last year, each store sold $10,000. This is the base year. Following this method, the base year determines the base sales and the base number of stores. If company A opens 100 more stores in the following year, these stores generate $50,000, but same-store sales decline in value by 10%, from $100,000 to $90,000. The company can report 40% growth in sales from $100,000 to $140,000, but savvy analysts are more interested in the 10% decline in same-store sales.