Baseline

A baseline, in general, means a reference point (or, as the name indicates, a line) used to estimate another thing or value by comparing with it. Baselines of various indicators (such as cost, sales amounts, volumes of production) are often used for business purposes to determine if a certain good or service is successful or not. 

The basic example is comparing the results of an initial year of sales, which number is used as a baseline, with the results of the following years. If a measure is relatively close to a baseline, it’s generally considered to be a sign of stability, and any deviation is a signal, which might be positive or negative depending on an indicator’s nature.

What is Baseline

Baseline may represent almost any amount, rate or number which is suitable for being used as a basis for comparison. A wide range of variables might be assessed through the use of baselines. It includes such figures as price changes over time, differences of cost amounts, different aspects of change, movement directions of progress or regress, and so on. They are frequently used for analysis and reporting, with the numbers from previous periods or the first period are being taken as baselines. 

Companies often choose the figures of a certain year (usually with the best results, or the most average ones in some cases) as an appropriate baseline, and all the subsequent measures of the following time periods are matched against it to spot positive or negative changes and make conclusions based on this information.

Using Baselines

A typical application sphere of baselines is analyzing of various financial reports. It usually suggests listing and collating chunks of a company’s financial data over a set of time periods, which are standard reporting months or years. An initial period in such a set is considered to be a baseline, and a percentage rate in relation to this baseline is then calculated for the rest of the periods. For better understanding, it’s important to remember that a period with the same numbers as the baseline would have 100%.

This type of analysis is called horizontal, and is especially convenient for assessing financial achievements of a business, noticing trends in changes and make significant decisions on future development.

Another separate case of baseline usage might be found in budgeting. In this sphere, a baseline is considered to be a planned set limit of financing for a certain project, and actual expenses are assessed in relation to this baseline. If real expenses exceed the baseline, it’s a warning signal, although in some instances baselines might be altered and updated due to external or internal factors not accounted at the first stages of planning.

Baselines are also exploited for project managing in a manner similar to its use in budgeting, namely by setting a desirable level of results as a baseline. There are usually three parameters by which the performance is evaluated in relation to baselines, and those parameters are cost, scope, and schedule.