Baseline

What is the Baseline?

The baseline is a reference point which is employed to analyse a company’s performance and progress over a period of time. It is basically used for comparison purposes. In the success of a company, a number of factors play a vital role. Some of them are costs, sales and other variables.

The baseline number for these variables is measured to understand how successful a company is. A company may exceed the baseline number, which proves success or vice versa.

Three Types of Baselines

1. Project Baseline

A baseline can be defined with a starting number, which can be carried forward for comparison purposes. This can be used to measure the progress or improvement in a project or even measure the difference in two time periods. Baselines are used for a project’s schedule, cost and scope.

For example, company XYZ tracks the performance of a product by choosing one year as the baseline and comparing other years with it to understand growth and progress.

The baseline is usually employed with a financial statement or a budget analysis. The analysis uses the company’s revenue and spending as a baseline for assessing whether a project has been successfully implemented.

2. Baseline Budgeting

Baseline budgeting is used by the government to develop a budget for years to come. This is an accounting method, which includes the current financial year’s budget as the baseline for future years. The predictions are made using the Inflation rate and population growth rate.

Future Budget= Current Budget * Inflation Rate* Population Growth Rate

According to the formula’s assumption, the budget grows at the same rate as inflation and population growth rate. This could be wrong, but it allows a rough estimate of the increase in the financial needs of the country to be seen.

3. Horizontal Financial Analysis

The horizontal financial analysis takes into consideration a company’s current financial condition and compares it with the performance of previous Accounting periods. It allows them to assess the financial progress on the Balance Sheet and income statement.

The period used for comparison to the current year is the baseline. If a business is in its second year and is being compared to the first year, the first year becomes the baseline.