Baseline: Meaning in Financial Statement Analysis

What Is a Baseline?

A baseline is a fixed point of reference that is 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 serves as 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 horizontal analysis. It compares a company's historical financial information over a number of reporting periods that may be monthly, quarterly, 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 that has the same revenue as the baseline would have 100% revenue.

In information technology, there are three commonly-used baseline points: cost, scope, and schedule.

This exercise is useful in spotting trends, looking at areas of growth or decline, and assessing financial performance overall. Ratios like profit margin are also compared horizontally against the baseline year to draw conclusions about 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 of time.

If a company opens a new warehouse, for example, and the cost baseline has been set at $100,000 per month every month for 10 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 even, in some cases, savings are realized. The cost baseline can be updated to reflect actual project costs.

Key Takeaways

  • In horizontal financial analysis, the numbers for the first reporting period serve as the baselines for comparison of subsequent periods.
  • In project budgeting, the approved budget numbers are the baselines for comparison of actual expenses.
  • In information technology management, the baseline is the anticipated or maximal level of performance.

The Baseline in Information Technology

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

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

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