Vertical Analysis (Everything you need to know)

July 12, 2022

Vertical Analysis (Everything you need to know)

Vertical analysis is a financial statement analysis technique that compares each line item on a statement to a specific percentage of the total amount for that category.

This type of analysis can be used to identify trends and areas of improvement on a company's financial statements. In this blog post, we will discuss the definition of vertical analysis, provide some examples of vertical analysis accounting, how to do a vertical analysis, and explore its usefulness in business.

How does vertical analysis work?

Vertical analysis is a way to compare each line item on a financial statement to some percentage of the total for that category. For example, let's say we are looking at a company's income statement. The first line item might be sales revenue, which totaled $100,000 last year.

If we wanted to do a vertical analysis of this line item, we would compare it to the total revenue for the year. In this case, sales revenue would be equal to 100% of total revenue. We can then do the same comparison for each line item on the income statement.

Let's say the cost of goods sold was $60,000. This would be equal to 60% of total revenue.

Gross profit would be $40,000, or 40% of total revenue.

From there, we can continue this analysis for each line item on the income statement.

vertical analysis formula

Vertical Analysis formula = Individual Item / Base Amount *100

What is vertical analysis and horizontal analysis?

As mentioned, vertical analysis is a financial statement analysis technique that shows each line item on a company's income statement as a percentage of total revenue. In other words, it allows us to see how each line item contributes to total revenue.

Horizontal analysis, on the other hand, compares financial information for different periods of time. This helps us identify trends and see how a company is performing over time.

Now that we know the definitions of vertical and horizontal analysis, let's take a look at some examples.

How do you calculate vertical analysis?

To calculate vertical analysis, you will need to know the total revenue figure for the income statement.

Once you have that number, you can divide each line item by total revenue and multiply by 100 to get a percentage.

For example, let's say that ABC Company has total revenue of $100,000 for the year.

Their cost of goods sold (COGS) is $40,000.

To calculate the percentage of COGS to total revenue, we would divide $40,000 by $100,000 and multiply by 100.

This gives us a result of 40%.

We can do this for each line item on the income statement to get a better understanding of where the company is making and spending its money.

Why is it called a vertical analysis?

The name comes from the way the information is presented. If you were to draw it out, it would look like a vertical line with each line item as a point on that line. This type of analysis can be very helpful in understanding a company's financials.

Vertical vs horizontal analysis

While vertical analysis focuses on line items as a percentage of total revenue or total assets, horizontal analysis looks at changes in line items from one period to the next.

For example, if we looked at the income statement from 2018 to 2019, we would see how each line item changed from one year to the next. This can be helpful in identifying trends within a company. Both vertical and horizontal analysis can be helpful in different ways. It really depends on what you are trying to understand about a company's financials.

If you want to get an overview of a company's financials, vertical analysis is a great place to start. But if you want to see how a company is performing over time, horizontal analysis is the way to go.

Both types of analysis have their own set of pros and cons, so it's important to understand both before making any decisions. When used correctly, vertical and horizontal analysis can be powerful tools for understanding a company's financials.

What is an example of vertical analysis?

An example of vertical analysis would be if you took a company's total revenue and divided it by the number of products they sell. This would give you an idea of how much each product contributes to the company's overall revenue.

You can also use vertical analysis to compare different companies in the same industry. For example, if you want to see which company is more efficient, you could look at their operating expenses as a percentage of total revenue. The company with the lower percentage would be more efficient.

Using LiveFlow to do vertical analysis

LiveFlow can pull in data from multiple sources and automatically update your financials, so you can always have the most up-to-date information. Plus, LiveFlow's flexible reports make it easy to see different aspects of your business at a glance.

For example, you can create a report that shows operating expenses as a percentage of total revenue for each department. This would let you quickly see which departments are most efficient.

To get started with vertical analysis in LiveFlow, all you need to do is connect your data sources and build your reports. Book a demo with us today to see how easy it is to get started.

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