Horizontal analysis is one of the foremost techniques in financial management and analysis. It is very useful in calculating the growth of an item over a timeline that the analyst chooses.
Analysts rule supreme over financial assessment and helping to predict the projected growth of an item over a period of time, or abstracting data to show the current progress. He wields many tools to do this, horizontal and vertical analysis being two of them.
Understanding Horizontal Analysis
Quite simply, it is the financial statements of a company of successive years presented side-by-side. The goal is to compare the figures of the current period with that of the past period. This helps the company and its shareholders analyze their performance and find out areas of improvement.
Horizontal analysis is done for both income statements and balance sheets. The idea is the same. The figures for the different heads under the income statements and the balance sheets are placed side-by-side so that the reader can compare the two and understand how the company is doing. It also includes two more columns: the column denoting actual numerical change over two periods and another denoting percentage change over the two periods. The first column gives the difference between the past period and the current period, while the percentage column shows what percentage of the past figure is the figure denoting the change.
Horizontal analysis is an important part of financial statements and annual reports. It places the facts very simply in front of the shareholder and makes the job of analyzing the improvements or the lack of it very simple for the shareholder. It helps the shareholder understand the change and the percentage change. And if there is no improvement or, in fact, a reduction, then the board is compelled to explain the situation to the shareholder and what they intend to do in the future to fix it.
|Cost of Goods Sold||$36000||$31500||$4500||14.3%|
|Gross Margin||$16000||$16500||– $500||– 3%|
|Administrative Expenses||$5860||$6100||– $240||– 3.9%|
|Total Operating Expenses||$12860||$12600||$260||2.1%|
|Net Operating Income||$3140||$3900||– $760||– 19.5%|
Differences Between Vertical and Horizontal Analysis
The main difference is that while horizontal analysis compares the figures under different heads in the income statement and the balance sheet, vertical analysis represents each figure as a percentage of the total along with the change in both over the past year. So, in vertical analysis, the figures are not only compared to the past year, but they are also represented as a percentage of the total cost or total assets/liabilities as may be the case.
The formula is very simple. All you need to do is find the difference between the past and present figures by subtraction!