Vertical analysis breaks down your financial statements line-by-line to give you a clear picture of the day-to-day activity on your company accounts. It uses a base figure for comparison and works out each transaction recorded in your books as a percentage of that figure. This helps you compare transactions to one another while also understanding each transaction in relation to the bigger picture, rather than simply in isolation. Vertical analysis in accounting is sometimes used in conjunction with horizontal analysis to get a broader view of your company accounts.
Find out a little more about vertical analysis in accounting, including horizontal analysis vs. vertical analysis, with our comprehensive article.
How do you apply vertical analysis in accounting?
You can apply the information you gather through a vertical analysis of your financial documents by comparing particular accounting periods to each other. This helps you get a better idea of general trends in your accounts and any growth or decline that may have occurred over set periods of time.
You can also use vertical analysis to identify business processes with exceptionally high costs or returns and use this to make decisions about the direction in which you choose to take your business in the future. Ultimately, the way in which you apply a vertical analysis of your accounts to your business will depend on your organisational goals and targets.
Horizontal analysis vs. vertical analysis
Unsurprisingly, vertical analysis is often contrasted with horizontal analysis. As we’ve already established, vertical analysis involves working through your finance sheet line-by-line in order to compare your entries to one base figure. Horizontal analysis also involves the utilisation of a base figure, but this is typically formed by grouping entries over a single accounting period – often a year – and comparing other periods or years to that number by formulating the relevant percentage. This helps you easily recognise changes in your organisation over time and view any significant profits or losses.
How do you calculate vertical analysis of a balance sheet?
The vertical analysis equation is a very straightforward percentage formula – you simply divide each line item by your base figure and multiple the result by 100. Of course, to employ the vertical analysis equation, you need to identify your base figure. On a balance sheet, you are likely to find that this base figure is your organisation’s total assets or liabilities, depending on what you’re trying to measure. Different financial documents will have different relevant base figures.
How do you do a vertical analysis of an income statement?
A vertical analysis of an income statement should follow the same process as for a balance sheet, employing the same percentage formula. While you will need to work through each line item as above, you will likely find that your base figure varies depending on the document you’re working with. On an income statement, the base figure is typically your total number of sales. It’s usually calculated in dollar value, although you can also use “number of units.”
What is the purpose of a vertical analysis?
A vertical analysis is one way to make sense of your company’s finances, and you can use it to make decisions about the direction you take your business in. Identifying your base figure gives you a bottom line for comparison, and comparing each line item to this figure can help you identify any potential areas of weakness or strength. This can be paired with horizontal analysis to help you recognise trends and maximise profits through efficient, data-based strategies.
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