Horizontal Analysis (Everything you need to know)

Have you ever wondered what horizontal and vertical analysis is? If you are studying finance, business, or anything related to microeconomics then this article is for you. This article will explain the financial concept of horizontal analysis, give some examples of horizontal analysis, and explain the difference between a horizontal and a vertical analysis.

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What is horizontal analysis?

Horizontal analysis is a type of financial analysis that looks at a company's performance from one year to another. It can be used to evaluate how well a company has performed in relation to its competitors, or it can be used to see how well it has performed over time as a whole.

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What is an example of horizontal analysis?

One horizontal analysis example in financial accounting is when you are analysing a company's income statement and balance sheet. When conducting horizontal analysis of an income statement, you would analyse how revenue from different sources has changed over time or how the balance sheet shows different types of assets and liabilities.

Horizontal analysis can also be used to compare similar assets or businesses to determine the best method for maximising profit. For example, a company with two different warehouses could compare the costs of each warehouse and determine which one earns a greater profit per square foot.

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How do you calculate a horizontal analysis?

The horizontal analysis is a way to look at your company's financial statements and see how they compare to each other. It involves looking at the income statement and balance sheet, as well as other factors like the cash flow statement.

To calculate a horizontal analysis, you can use the following horizontal analysis formula:

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Horizontal Analysis(%)= (Amount in Comparison Year - Amount in Base Year / Amount in Base Year) x 100  

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1. Look at your company's income statement for the last 12 months (or however long you want to go back in time).
2. Find the total sales amount, gross profit margin, operating expenses, and net income for each month or quarter.
3. Calculate the average gross profit margin percentage by dividing your total gross profit by your total sales amount from Step 1. This will give you an idea of how much money you make on each sale and how many sales must be made in order for you to break even on those sales costs.
4.  Calculate the average net income (or loss) per month by dividing your total net income by the number of months in which it was recorded (again, going back 12 months or more if necessary).

This gives you an idea of how much money was made during that period of time on average per month or quarter depending on what time frame is relevant for your particular business model.

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What is the difference between horizontal and vertical analysis?

Horizontal analysis is a way to look at the information in your financial statements and compare it to the previous period. It's like looking at a table, where each row represents one period of time, and each column represents another.

A vertical analysis is a way to take apart an item on your balance sheet or income statement and look at the individual pieces that make up that item. For example, if you're looking at your cash flow statement, you might want to know how much of your total revenue came from individual sources like sales and services.

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Conclusion

Horizontal analysis accounting is a method used to understand business performance for a specific period more clearly, and it can be applied at different levels like at the end of each month or at the end of each quarter. It helps in comparing the profits and losses during the periods and ascertaining whether there are any changes over a longer period of time.

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