Excel: For Finance and Accounting: The Definitive Guide by Van Der Post Hayden

Author:Van Der Post, Hayden
Language: eng
Format: epub
Published: 2023-10-04T00:00:00+00:00

Vertical & Horizontal Analysis

Principles and Applications - Foundational Insights for Robust Financial Analysis

Aiming to unravel the complex intricacies of your company's financial health? Welcome to the world of Vertical and Horizontal Analysis. These methods, when integrated with Excel's extensive capabilities, serve as powerful tools that distil complex financial data into digestible, insightful metrics for finance and accounting professionals.

1. The ABC's of Vertical and Horizontal Analysis

Vertical Analysis, often referred to as common size analysis, compares each item in the main statement as a percentage of a total. In an Income Statement, this base figure would usually be the Total Sales, whereas, in a Balance Sheet, it might be the Total Assets or Total Liabilities.

On the other hand, Horizontal Analysis (also known as Trend or Time Series Analysis) calculates the changes in incorporated items as a percentage over a period of time.

2. Spreadsheet Wizards: Excel for Vertical and Horizontal Analysis

Excel is uniquely designed to conduct both types of analysis. With its extensive range of mathematical formulas, you can compute percentage changes, interpreting financial data more effectively. Functions like "=(B2/A2)-1" can be used in horizontal analysis to find the periodic change, while "=(B2/ B$10)*100" can determine each item as a percentage of the total in vertical analysis.

3. Unlocking Data Insights: Applications of Vertical and Horizontal Analysis

These two techniques, although simple, can provide transformative insights. Vertical analysis allows for internal and external comparisons, showcasing the structure of costs, profit appropriation, and asset composition. Horizontal analysis, while revealing trends, provides insight into the company's growth and fluctuations over time.

4. Combining Vertical and Horizontal Analysis

Adding a third dimension to your analysis, combining both vertical and horizontal analysis can provide a more holistic view - a comprehensive diagnosis of your company's financial health. It gives us a clear narrative of our finances by showcasing different chapters of our financial story – where we allocate resources, how we generate profits, and the rate at which we've been growing or contracting.

5. Tips for Excel-based Analysis

In Excel, using separate columns for absolute values and their corresponding percentages can help analyze data more effectively. Conditional Formatting can also be a great tool to quickly identify patterns or abnormalities.

In conclusion, Vertical and Horizontal Analysis act as microscopes and telescopes into the financial galaxy, finding meaning among the stars and drawing patterns among the cosmos. So remember, when the financial tides seem tough to navigate, allow these analyses to be your beacon, as we delve deeper into their specific applications in the coming sections.

Income Statement Vertical Analysis - Unveiling Financial Strength through Relative Proportions

When we embark on a journey to dissect a company's Income Statement via Vertical Analysis, we essentially begin to view each line item relative to sales. Traditionally, all the data in the income statement are seen as absolute figures—whether it's sales, cost of goods sold, or net income. Vertical Analysis seeks to change that perspective. It transforms all the numbers into a percentage of sales, allowing stakeholders to view a company's figures in direct comparison to its revenue.

1. First Steps:

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