how to perform a horizontal analysis
a horizontal analysis is performed by following the three primary steps to perform a horizontal analysis you must first gather financial information of a single entity across periods of time most horizontal analysis entail pulling quarterly or annual financial statements though specific account balances can be pulled if you re looking for a specific type of analysis be mindful that the gaps between each financial statement are consistent you can choose whatever interval month over month year over year etc but each iterative financial statement should be equal distance away regarding when it was issued compared to other bits of financial information with the financial information in hand it s time to decide how to analyze the information there are several primary comparison methods first a direction comparison simply looks at the results from one period and comparing it to another for example the total company wide revenue last quarter might have been 75 million while the total company wide revenue this quarter might be 85 million this type of comparison is most often used to spot high level easily identifiable differences second a variance analysis determines not only the dollar amount but the direction of change for a given general ledger account as opposed to simply identifying the difference between two numbers variance analysis strives to determine the company s financial health by identifying directional changes frequency of directions or how each financial result compared against an internal target i e a budget last a horizontal analysis can encompass calculating percentage changes from one period to the next as a company grows it often becomes more difficult to sustain the same rate of growth even if the company grows in pure dollar size this percentage method is most useful when identifying changes over a longer period of time where there may be significant deviations from the base period to the current period with different bits of calculated information now embedded into the financial statements it s time to analyze the results the identification of trends and patterns is driven by asking specific guided questions for example upper management may ask how well did each geographical region manage cogs over the past four quarters this type of question guides itself to selecting certain horizontal analysis methods and specific trends or patterns to seek out horizontal analysis vs vertical analysisthe primary difference between vertical analysis and horizontal analysis is that vertical analysis is focused on the relationships between the numbers in a single reporting period or one moment in time vertical analysis is also known as common size financial statement analysis for example the vertical analysis of an income statement results in every income statement amount being restated as a percent of net sales if a company s net sales were 2 million they will be presented as 100 2 million divided by 2 million if the cost of goods sold amount is 1 million it will be presented as 50 1 million divided by sales of 2 million on the other hand horizontal analysis looks at amounts from the financial statements over a horizon of many years horizontal analysis is also referred to as trend analysis assume that the base year for analysis is three years earlier all of the amounts on the balance sheets and the income statements for analysis will be expressed as a percentage of the base year amounts the amounts from three years earlier are presented as 100 or simply 100 the amounts from the most recent years will be divided by the base year amounts for instance if a most recent year amount was three times as large as the base year the most recent year will be presented as 300 this type of analysis reveals trends in line items such as cost of goods sold used to look at line by line account balance changes for specific accounting periodscompares prior accounting period findings with a more current set of findings