The financial statements, also known as the balance sheet, the cash flow statement, are important statements that must be studied extensively to arrive at conclusions on the performance of the financial year current, as well as to help plan the budget for the next financial year.
Financial analysis is an aspect of the overall financial function of the business that involves examining historical data to obtain information on the current and future financial health of a company.
Advertisements
On the other hand, financial analysis can be applied in a wide variety of situations to provide business managers with the information they need to make critical decisions. The ability to understand financial data is essential for any business manager. Finance is the language of business.
Advertisements
Business goals and objectives are set in financial terms, as well as measured. Among the skills required to understand and manage a business is fluency in the language of finance: the ability to read and understand financial data, as well as present information in the form of reports financial
Within the types of financial analysis, there is the horizontal and vertical analysis. These are two main types of analysis methods used for this purpose.
Advertisements
In this article you will find:
What is a Horizontal Analysis?
The horizontal analysis analyzes a specific aspect of the business over different periods of time to compare.
Being an investor who is thinking of investing in a company, only a year-end balance sheet or a Statement of income it would not be enough to judge how a company is doing. It will take a couple of years to look at least to be sure. Better yet, if you can look at many years of balance sheets and income statements and compare them.
Advertisements
Through the horizontal analysis of the financial statements, you will be able to see two real data for consecutive years and thus be able to compare each and every one of the elements. And on that basis, being able to forecast the future and understand the trend.
An example of horizontal analysis- A horizontal comparison will look at a single factor, such as overhead, cost of goods sold, or sales over different time periods.
Advertisements
If you are comparing overhead for each quarter of the year or overhead for quarter 3 of 2019 with quarter 3 of 2018, then you are running a horizontal analysis. This provides an understanding of how certain elements of the financial worksheet have changed over time.
What is a Vertical Analysis?
A vertical analysis analyzes the comprehensive view of the financial worksheet for a specific time period. I would look at all the different factors - profit, cost of goods sold, overhead, sales, etc. - for a single quarter or year.
This provides a comprehensive view of the finances of the company as a whole for that time period. A vertical analysis will tell you how much money the company has made and spent in a certain period of time.
Vertical analysis can be used in an income statement, balance sheet or cash flow statementto understand the proportions of each individual item to the whole, understand the key trends that occur over time, compare various companies of different sizes or comparing a company's financial statements with the averages within its industry.
Using percentages to make these financial comparisons and analyzes makes the data you collect more meaningful and easier to understand.
Because the vertical analysis method uses percentages To represent each line item, you can proportionally compare the relative account balances of one company with those of another company or the average of the The company's industry, regardless of whether the total sales of the other company or the industry average are higher or lower than the company being analyzing.
Difference between horizontal and vertical financial analysis
The key difference between horizontal and vertical analysis is that horizontal analysis is a procedure in financial analysis in which the amounts in the financial statements over a certain period of time are compared line by line to make decisions related. Whereas, vertical analysis is the method of analysis of financial statements where each line item is listed as a percentage of another item.
In addition, the difference depends on the way the financial information is extracted in the financial statements for decision making. Horizontal analysis compares financial information over time by adopting a line-by-line method.
Vertical analysis focuses on making comparisons of ratios calculated using financial information. Both methods are carried out using the same financial statements, and both are equally important for making informed business decisions.
Both elements are useful to analyze the performance of a company. While any of the factors can be individually good or bad, a healthy company will have aspects positive for each of them, to show that earnings have improved over time and are currently positive.
