Horizontal Analysis Formula + Calculator

These percentages are considered common-size because they make businesses within industry comparable by taking out fluctuations for size. It is typical for an income statement to use revenue (or sales) as the comparison line item. This means revenue will be set at 100% and all other line items within the income statement will represent a percentage of revenue. Choosing appropriate base amounts and comparing vertical analysis percentages over time lets you analyze changes in the financial structure and performance of a company. This allows you to see how each account on the balance sheet and income statement has increased or decreased in dollar terms over the periods analyzed.

• Another option is to simply add as many years as would fit on the screen without presenting a variance, allowing you to monitor overall changes by account over time.
• For example, if salaries expense as a percentage of total expenses increases over several years, it indicates that salaries are making up a greater portion of total costs.
• Remember to choose companies with similar characteristics for useful comparisons.
• You should be a financial analyst to perform horizontal or vertical analysis of financial statements.
• Horizontal analysis is the evaluation of an organization’s financial performance over many reporting periods.

Luckily, there are two straightforward analysis techniques—horizontal and vertical—that provide clarity on financial performance when applied properly. In the final section, we’ll perform a horizontal analysis on our company’s historical balance sheet. We’ll start by inputting our historical income statement and balance sheet into an Excel spreadsheet.

Understanding Vertical Analysis Results

Vertical analysis is more useful for benchmarking against industry averages and identifying outliers in period-specific financial data. Vertical analysis looks at financial data as a percentage of a key benchmark figure within the same reporting period. This reveals the proportional contribution of each account and how the financial structure changes over time. To better understand the scale of change over time, horizontal analysis also looks at percentage changes relative to the base year.

This allows for easy comparison across companies of different sizes or comparison of a company’s performance over multiple periods. A manager, on the other hand, is concerned with the day-to-day operations of the company, so he uses this evaluation technique to pinpoint areas for improvement. For instance, a manager which of these are the same as horizontal analysis? might compare cost of goods sold and profit margin over a two or three-year span to see how efficient the company is becoming. This comparison of income statements will give the manager not only a benchmark for future performance; it will also help him understand what needs to be changed in the future.

Horizontal Analysis on Balance Sheet Example

Now that you know how to calculate percentage change, you can read about all the steps involved in horizontal analysis in the next section. Such analysis provides valuable insights into why any of these line items rose or fell sharply or markedly in year 2, compared to year 1. For example, net income could fall sharply in year 2, despite a rise in sales, due to a marked rise in the cost of goods sold, marketing expenses, administrative expenses, and/or depreciation expenses. The first step to performing a horizontal analysis is to calculate the net difference — in dollar terms ($) — between the comparable periods.

Together, they provide comprehensive insights into both a company’s directional progress and proportional financial makeup. Using both methods strategically can facilitate smarter and more informed business decisions. For example, if salaries expense as a percentage of total expenses increases over several years, it indicates that salaries are making up a greater portion of total costs.