Vertical Analysis Everything you need to know

When performing vertical analysis each of the primary statements that make up the financial statements is typically viewed exclusive of the other. This means it is atypical to compare line items on the income statement as a percentage of gross income. That being said, there are some times where cross comparing ratios https://www.bookstime.com/ of certain accounts would make sense, liabilities expressed as a percentage of net income for example. Cash in the current year is $110,000 and total assets equal $250,000, giving a common-size percentage of 44%. If the company had an expected cash balance of 40% of total assets, they would be exceeding expectations.

For example, let’s say that ABC Company has total revenue of $100,000 for the year. Datarails’ FP&A software replaces spreadsheets with real-time data and integrates fragmented workbooks and data sources into one centralized location. This allows users to work in the comfort of Microsoft Excel with the support of a much more sophisticated data management system at their disposal.

Advantages and disadvantages of vertical analysis

Vertical analysis of financial statements is where each line item on your company’s financial statement is listed as a percentage of the base figure on the statement. For example, if vertical analysis is used on an income statement, gross sales (not net sales) would be the base figure and all other line items a percentage of total sales. When used with your company’s balance sheet, total assets or total liabilities would be used as the baseline figure, with all subsequent line items shown as a percentage of that total. The balance sheet is the financial statement that provides a snapshot in time of the company’s financial position. It is composed of assets, liabilities, and stockholders’ equity and demonstrates the accounting equation is in balance. Liabilities are amounts a company owes like accounts payable and long-term debt.

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• A Vertical Analysis can be completed on both an Income Statement and a Balance Sheet.
• You can analyze financial statements using multiple methods, including horizontal and vertical analysis.
• Cash in the current year is $110,000 and total assets equal $250,000, giving a common-size percentage of 44%.

Now, it’s time for the most important step – analyzing and interpreting the results for the period. The interpretation of these results is likely to be more accurate if you can compare them to previous results, as well as those of your competitors. To get started with vertical analysis in LiveFlow, all you need to do is connect your data sources and build your reports. LiveFlow can pull in data from multiple sources and automatically update your financials, so you can always have the most up-to-date information. Plus, LiveFlow’s flexible reports make it easy to see different aspects of your business at a glance.

How Vertical Analysis Works

Finally, you need to compare these percentages across different periods or across different companies. For example, if cost of goods sold has increased as a percentage of total sales from one period to the next, this may indicate that the company’s cost-control strategies are not effective. The balance sheet provides you and your co-owners, lenders and management with essential information about your company’s financial position. The income statement and cash flow statement provide you with accounting data over a defined period. But the balance sheet provides you with financial and accounting data at a specific moment. You conduct vertical analysis on a balance sheet to determine trends and identify potential problems.

Whereas a low percentage rate compared to the average for the industry usually indicates an efficient use of Assets. Likewise, a high percentage rate indicates the need to improve the use of Assets. Vertical analysis, horizontal analysis and financial ratios are part of financial statement analysis. In this second example, I will be doing a vertical analysis of Company B’s current assets based on its annual balance sheet.

What is vertical analysis?

Stockholders’ equity is the amount of capital owned by the investors after the liabilities are accounted for. The income statement is the financial statement that gives readers the company’s bottom line, profit or loss, for the reported accounting period. Revenue is the money that comes into the firm for the sale of goods or services. This statement reveals the firm’s level of profitability during a specific time period. Conducting a vertical analysis of the balance sheet, an analyst may compare the firm’s capital structure to its rivals, and analyze debt levels, cash holdings, inventory, and goodwill. Vertical analysis of the income statement can provide the analyst with the net profit margin, gross margin, and operating margin and a means to analyze expenses.

Because this analysis tells these business owners where they stand in their financial environment. If a company has a gross sale amounting to $5 million in which $1 million represents the cost of goods sold, $2 million used for general expenses and a tax rate of 25%. For this example, the analysis will be carried out on the data reported for 2021. However, you can do this quickly for multiple years, particularly if you use a balance sheet template. Since the total will be the same for all line items in this section, use absolute referencing ($) for the total.

How does vertical analysis work?

By seeing the trend, which is a remarkable growth of over 100% from one year to the next, we can also see that the trend itself is not that remarkable of only 10% change from 2013 at 110% to 120% in 2014. The https://www.bookstime.com/articles/vertical-analysis ability to spot this trend over time empowers you to intervene and be pro-active in solving the problem. The search for answers to these questions begins with an analysis of the firm’s Financial Statements.

By doing this analysis get an idea of how line items compare to themselves over time and whether those changes make sense in the context of the current time period as well. Vertical analysis is the comparison of financial statements by representing each line item on the statement as a percentage of another line item. Before you can begin a vertical analysis, you must first have a current balance sheet prepared for the accounting period that you wish to analyze.

Once you know what time period to focus on, you need to choose the documents and values you want to analyze. For example, you could choose to study the contribution of each revenue stream to the total amount of revenue using the information from the balance sheet. Once you have that number, you can divide each line item by total revenue and multiply by 100 to get a percentage. This would mean that the ratio of years 1, 2, and 3 to year one would be 100%, 97%, and 94%, respectively. In this example, the business’s variable expenses have trended downward over the three-year period.

• By looking that the balance sheet above, you can see that while your current asset total went down in accounts receivable, your fixed asset total went up.
• If a company’s net sales were $1,000,000 they will be presented as 100% ($1,000,000 divided by $1,000,000).
• For instance, a large increase in Sales returns and allowances coupled with a decrease in Sales over two years would be cause for concern.
• The most common use of vertical analysis is within a financial statement for a single reporting period, so that one can see the relative proportions of account balances.
• In order to keep a complex model more dynamic and intuitive to the reader(s), it is generally a “best practice” to avoid creating separate columns in between each period.
• You can calculate the proportion of each line item from the total based on publicly available financial data.