Horizontal and Vertical Analysis Details

Vertical or Common Size AnalysisA vertical analysis shows you the relationships among components of one financial statement, measured as percentages. On your balance sheet, each asset is shown as a percentage of total assets; each liability or equity item is shown as a percentage of total liabilities and equity. On your statement of profit and loss, each line item is shown as a percentage of net sales.

A Vertical Analysis ExampleJafar's Colorful Kites Statement of Profit and Loss for the Year Ended Dec. 31, 2011 AmountPercentSales $ 18,000100.00 %Cost of Goods Sold 7,000 38.89 %Gross Profit $ 11,000 61.11 %Selling ExpensesAdvertising $ 500 2.78 %Commissions 750 4.17 %Delivery Fees 1,200 6.67 %Salaries 5,000 27.78 %Total Selling Expenses $ 7,450 41.39 %General & Administrative ExpensesInsurance $ 800 4.44 %Rent 1,200 6.67 %Depreciation 200 1.11 %Utilities 400 2.22 %Total General & AdministrativeExpenses $ 2,600 14.44 %Net Profit $ 950 5.28 %

A Vertical Analysis ExampleJafar's Colorful Kites Balance Sheet December 31, 2011AssetsCurrent Assets: Amount Percent Cash $ 600 14.12 %Inventory 2,000 47.06 %Prepaid Insurance 250 5.88 %Total Current Assets $ 2,850 67.06 %Fixed Assets:Office Equipment $ 1,800 42.35 %Less: Accumulated Depreciation (400) (9.41) %Total Fixed Assets $ 1,400 32.94 %Total Assets $ 4,250 100.00 %

A Vertical Analysis ExampleJafar's Colorful Kites Balance Sheet December 31, 2011

Liabilities & Owner's EquityCurrent Liabilities:Accounts Payable $ 1,80042.35 %Taxes Payable 50011.76 %Total Liabilities $ 2,30054.12 %Owner's Equity $ 1,95045.88 %Total Liabilities & Owner's Equity $ 4,250 100.00 %

InterpretationIn the statement of profit and loss, Jafar's gross profit is sizable, at 61 percent. The selling expenses, though, are eating up a huge chunk of the revenues, even more than product costs; that could be an area in which to cut back. General operating expenses take up a reasonable percentage of sales, leaving Jafar with about a 5 percent bottom-line profit.As for the company's balance sheet, inventory makes up the lion's share of his current assets, which could translate into cash-flow problems down the line. Also, his company is financed with more debt than equity. That's not uncommon for new businesses, but all of this debt is current, which could suck up all the current assets of the company.

Horizontal or Indexed AnalysisA horizontal analysis provides you with a way to compare your numbers from one period to the next, using financial statements from at least two distinct periods. Each line item has an entry in a current period column and a prior period column. Those two entries are compared to show both the peso difference and percentage change between the two periods.

A Horizontal Analysis ExampleJafar's Statement of Profit and Loss for the Years Ended 12/31/2010 and 12/31/2011 2011 Amount 2010 AmountChange in Dollars Percent ChangeSales $ 18,000 $ 15,000 $ 3,000 20.00 %Cost of Goods Sold 7,000 6,000 $ 1,000 16.67 %Gross Profit $ 11,000 $ 9,000 $ 2,000 22.22 %Selling ExpensesAdvertising $ 500 $ 200 $ 300 150.00 %Commissions 750 400 $ 350 87.50 %Delivery Fees 1,200 720 $ 480 66.67 %Salaries 5,000 5,000 $ - 0.00 %Total Selling Expenses $ 7,450 $ 6,320 $ 1,130 17.88 %General Administrative ExpensesInsurance $ 800 $ 800 $ - 0.00 %Rent 1,200 1,200 $ - 0.00 %Depreciation 200 200 $ - 0.00 %Utilities 400 280 $ 120 42.86 %Total General & AdministrativeExpenses $ 2,600 $ 2,480 $ 120 4.84 %Net Profit $ 950 $ 200 $ 750375.00 %

InterpretationFirst, Jafar's sales went up by about 17 percent, while his product costs went up by only around 14 percent. That helps add to his profitability on both sides increased revenues and decreased costs. Most of his selling expenses increased as well, but that seems to have contributed to additional sales without increasing as much as sales did. Jafar was also able to keep most of his general operating expenses under control, leading to much greater profits in 2011 than the company saw the prior year.