Meaning of Baseline
A baseline refers to a fixed point of reference that is used for comparison. In a company, the success of a project or product is always evaluated against a baseline number using factors, such as cost, revenue, etc. A project can exceed or fail to meet a baseline number.
The Concept of Baseline Explained
A baseline can be any number which serves as a fair and established starting point for the purposes of comparison. It can be used to calculate the results of a transition, to monitor the progress of an improvement project, or to measure the difference between two time periods.
For example, a public and listed company will measure the success of each line of goods by selecting one year as a benchmark and using it as a base of comparison for all the subsequent years.
Another example can be a business seeking to measure a product line's performance. It may use the number of units sold in the first year as a benchmark against which subsequent annual sales are calculated. The baseline serves as the starting point for measuring all the potential sales.
A reference is usually used when planning a financial statement or an overview of the budget. The report or study uses current revenues and expenditures as a benchmark for determining whether a new initiative is being effectively implemented.
Applications of Baseline
The concept of a baseline is similar to benchmarking. It has several applications across the fields of cost management and corporate finance.
Budgeting
The budgeting of programs works with a cost base. The cost estimate is the accepted budget for the project, which is typically broken down in some detail by cost category and period.
For example, a company opens a new warehouse, and the cost benchmark is set at Rs 3,00,000 per month for the next twelve months. Any monthly overheads incurred beyond Rs 3,00,000 is flagged off by the budget analyst.
Nevertheless, project costs often fluctuate as unknown, and unpredictable changes occur from the baseline figures, or even savings are realised in certain situations. The cost estimate can be revised to reflect the actual cost of the project.
In the Analysis of Financial Statements
An evaluation of the financial statements using a comparison method is called the horizontal analysis. It measures the historical financial details of a company over a variety of reporting periods which may be monthly, quarterly, or yearly.
For a horizontal analysis, the first period is referred to as the baseline time. All subsequent times are then calculated as a baseline percentage. So, a cycle of the same revenue as the baseline will be considered as a revenue of 100 per cent.
The exercise is useful for identifying trends, looking at areas of growth or decline, and assessing the overall financial results. Ratios, such as profit margin are often measured horizontally against the baseline year to conclude the continued success of a product.
Information Technology
A benchmark can be set for planned or maximum levels of output in information technology management. There are three baseline points which are widely used: cost, scope, and schedule. Computer systems usually used by professionals in project management are designed to define and monitor these three vital baseline measurements.
