What is Baseline?
Baseline is a reference point that is used to analyze the current performance of a project, company, or budget relative to historical records and measure progress over time.
Baseline – Applications
1. Project management
In project management, a baseline is used as a reference point for each new project that a company undertakes. Typically, baselines are used for a project’s schedule, cost, and scope.
The schedule refers to the timeline of the project and the expected completion dates for given project milestones. The cost of the project is the total amount of expenditure required and may be divided into certain parts depending on the type of project undertaken. The scope of the project refers to its reach and scalability – so for a new product that’s being developed, the scope may refer to the projected number of units sold.
By creating a basis for all three of the important components mentioned above, companies and managers can keep track of how the project is performing relative to a set benchmark – which can be modified according to the needs and goals of the company.
However, it is also important to keep the baseline flexible, as the scope and economic environment surrounding the project and the company are subject to change with changes in the market.
For example, a risk advisory company may have a benchmark for the number of clients it expects to acquire each month, based on how many clients were acquired historically. The benchmark can be referred to as the baseline for monthly client acquisition.
2. Sales projection
The graph below illustrates another example: Baseline for the sales timeline of a new product. The green line shows the sales of a product that was developed two years ago by the company, whereas the orange line plots the sales of a product that was commercialized six months ago and projects the volume of sales over time (the dotted line).
Here, the baseline is used as a point of comparison and allows the company to measure the performance of a newly launched product against a historical record of sales.
2. Baseline budgeting
Baseline budgeting is an accounting method that is used by governments to develop a budget for future years. The current fiscal year’s budget is used as the baseline for future years, and projections are calculated using the inflation rate and the population growth rate.
Future Budget = Current Budget x Inflation Rate x Population Growth Rate
The formula assumes that the budget grows at the same rate as the inflation rate and the population growth rate. Although this may be inaccurate, it provides a rough estimate of the increase in financial requirements as a country’s population grows, prices of domestic goods and services increase, and it experiences economic growth.
3. Horizontal financial analysis
Horizontal financial analysis is the process of comparing a company’s financial condition to a benchmark that is set according to its performance in previous accounting periods. It allows companies to examine their financial progress on the balance sheet and the income statement.
In horizontal analysis, the period that is used for comparison to the current period is the baseline. For instance, if a business is in Year 3 and is comparing the current financial condition to that of Year 2, Year 2 is the baseline year.
Baseline – Advantages
- Projects a clear picture of the expected timeline for a project, which allows the team to stay on track.
- Provides a plan for which resources are needed and when they are needed in the project’s life cycle.
- Allows progress to be reflected and reported accurately.
- Allows companies to compare current performance to a particular benchmark based on their own historical performance (horizontal financial analysis) and benchmark created relative to comparable firms in the industry
- Project financial injections and leakages so that funds can be managed accordingly.
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