80-20 Rule

What is a baseline?

A baseline is a fixed reference point used for comparison. In business, the success of a project or product is often measured against a benchmark number for costs, sales, or any other number of other variables. A project can exceed or not respect a reference number.

For example, a company that wants to measure the success of a product line can use the number of units sold in the first year as a benchmark against which subsequent annual sales are measured. The benchmark serves as a 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. It can be used to assess the effects of a change, monitor the progress of an improvement project or measure the difference between two periods.

For example, a public company will monitor the performance of each range of products by choosing a year as a benchmark and measuring all subsequent years against it.

A baseline is generally used when preparing a financial statement or a budget analysis. The statement or analysis uses existing revenues and expenses as a benchmark to assess whether a new project is successfully implemented.

The benchmark in financial statement analysis

A financial statement analysis that uses a baseline is called a horizontal analysis. It compares the historical financial information of a company over a number of reporting periods which can be monthly, quarterly or annual.

The first period of a horizontal analysis is called the reference period. All subsequent periods are then measured as a percentage of the baseline. Thus, a period which has the same income as the reference would have 100% of income.

In information technology, there are three commonly used benchmarks: cost, scope and schedule.

This exercise is useful for spotting trends, examining areas of growth or decline, and assessing overall financial performance. Ratios such as the profit margin are also compared horizontally to the base year to draw conclusions about the continued performance of a business.

The basis of budgeting

Project budgeting works from what is called a cost reference. The baseline of costs is the approved budget for the project, usually broken down in detail by cost category and time period.

If a company opens a new warehouse, for example, and the cost benchmark has been set at $ 100,000 per month each month for 10 months, any monthly cost greater than $ 100,000 is a red flag for the analyst budgetary.

However, project costs inevitably fluctuate from baseline as unknown and unforeseen expenses or even, in some cases, savings are made. The cost baseline can be updated to reflect the actual costs of the project.

Key points to remember

  • In the horizontal financial analysis, the figures from the first reporting period are used as a reference for the comparison of subsequent periods.
  • In project budgeting, the figures from the approved budget are the benchmarks for comparing actual expenses.
  • In information technology management, the reference level is the planned or maximum performance level.

The benchmark in information technology

In information technology management, a baseline can be established for expected or maximum performance levels. There are three commonly used benchmarks: cost, scope and timing.

The software applications used by project management professionals are generally designed to maintain and track these three critical benchmarks.

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