A Beginner’s Guide to Vertical Analysis in 2024

For finance and FP&A leaders, it’s a great way to quickly spot any problem areas or parts that need a bit more attention, making their job a bit simpler and more focused. Sync data, gain insights, and analyze business performance right in Excel, Google Sheets, or the Cube platform. The vertical analysis also shows that in years one and two, the company’s product cost 30% and 29% of sales, respectively, to produce. However, you can do this very quickly for multiple years, particularly if you’re using an income statement template. 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.

1. 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.
2. The following example shows ABC Company’s income statement over a three-year period.
3. While horizontal analysis remains valuable for assessing changes over time, vertical analysis offers unique perspectives and granularity in financial analysis.
4. For each account on the income statement, we divide the given number by the company’s sales for that year.
5. It also shows how a vertical analysis can be very effective in understanding key trends over time.

It’s a key responsibility of the FP&A team to keep track of this and foresee how different strategies might affect the company’s finances in the long run. We often see this approach taken in the earnings announcements for public companies. IT and software costs have increased on a dollar basis, which could initially cause some concern for FP&A executives looking to cut costs. However, when reviewed against the overall revenue of the business, this line item has actually gone down slightly. Vertical analysis streamlines financial analysis, offering a clear and concise view of the most significant financial metrics.

Vertical Analysis for Income Statements

To reiterate from earlier, dividing by total assets is akin to dividing by the sum of liabilities and equity. This shows that the amount of cash at the end of 2018 is 141% of the amount it was at the end of 2014. By doing the same analysis for each item on the balance sheet and income statement, one can see how each item has changed in relationship to the other items. If your analysis reveals unusual trends or variances, take the time to investigate these changes. For example, a significant increase in your accounts receivable balance and a noticeable decrease in cash can signal difficulty in collecting payments from your customers.

Analyzing Vertical Percentages for Liabilities and Equity

The cash flow statement tracks the inflows and outflows of cash in a company during a given period. It categorizes cash flows into operating activities, investing activities, and financing activities. The cash flow statement is vital in assessing a company’s ability to generate cash and its cash management practices. The income statement, also known as the profit and loss statement, reveals a company’s revenues, expenses, and net income over a specific period.

Expert Templates For You

Vertical analysis is a key tool for FP&A leaders to better understand and evaluate financial statements. It helps in making smarter, strategic decisions by offering a clear view of a company’s financial situation. This approach is vital for planning and guiding a company’s financial future in a straightforward way. A vertical analysis is also the most effective way to compare a company’s financial statement to industry averages. Using actual dollar amounts would be ineffective when analyzing an entire industry, but the common-sized percentages of the vertical analysis solve that problem and make industry comparison possible.

Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets. Common-size financial statements often incorporate comparative financial statements that include columns comparing each line item to a previously reported period. Normally, if you were comparing retail or manufacturing companies, you would be more interested in profits from operations, since that is the core business function. This analysis might lead you back to more a horizontal analysis of Schneider and Jonick in order to determine why so much income is being generated from the sale of investments. One of the major benefits of vertical analysis is that it makes it simple to report to and communicate with stakeholders. A ratio-based approach makes it easy to provide a clear picture of financial health, with very little need for background information or detailed notes.

Emma’s 70-person geographically distributed accounting team improved internal controls and streamlined the audit thanks to FloQast. Once we divide each balance sheet item by the “Total Assets” of $500 million, we are left with the following table. For example, some minor adjustments could be to remove the “Revenue (% Revenue)” line item since it is not necessary and offers no practical insights.

Common-size statements include only the percentages that appear in either a horizontal or vertical analysis. They often are used to compare one company to another or to compare a company to other standards, such as industry averages. It can be used in the same way, identifying whether the current balance matches the strategy of the business, vertical analysis of balance sheet as well as looking at multiple years to identify trends and anomalies. For example, it can be an easy way to track how much of the balance sheet is held in illiquid assets, or to assess how the debt structure has been changing over time. The company’s sales have grown over this time period, but net income is down sharply in year three.