Part IV: Ten principles for building strong vertical AI businesses Bessemer Venture Partners

This method proves more insightful than relying solely on generic financial ratios or industry benchmarks. While industry comparisons can be helpful, vertical analysis offers direct, context-specific insights without solely depending on external rules of thumb. Previously, Stefan served as the Corporate Controller for Kodiak Cakes, a private equity owned, leading consumer packaged food company, and as a Controller for Skullcandy, a multinational headphone CPG. Let’s walk through a detailed vertical analysis example to see these concepts in action using real income statement and balance sheet figures. Common-size financial statements often incorporate comparative financial statements that include columns comparing each line item to a previously reported period.

The main benefit of vertical analysis is that it helps businesses determine whether certain items consistently increase or decrease over time. Additionally, this fundamental analysis method helps businesses identify trends and patterns in their financial statements. These insights can then be used to make informed decisions regarding their financial strategy.

Discover the Power of Sourcetable for Vertical Analysis

Lastly, one can evaluate the structural composition of items from the company’s financial statements – for example of assets, liabilities, expenses etc. It is also beneficial to prepare a vertical analysis of the income statement for investors or any other stakeholders who are interested in the company’s performance. It is also essential for the management from the point of view of growth and performance analysis. They can understand whether the strategies and policies that they implement regarding sales, revenue, marketing, etc are really contributing to the betterment of business performance. So far, we’ve focused on using vertical analysis as a way to analyze income statements.

• However, these two types of expenses did not really rise substantially and only account for a relatively small proportion of revenue.
• This vertical analysis provides insights into the company’s financial structure and the proportion of financing coming from debt versus equity.
• After accounting for interest and taxes, the net income is 21% of the total revenue, providing a clear picture of the company’s profitability.
• By following these steps, Excel and a calculator, you can effectively perform vertical analysis, gaining deeper insights into financial documents.
• However, when reviewed against the overall revenue of the business, this line item has actually gone down slightly.
• Vertical analysis is a method of financial statement analysis in which each line item is shown as a percentage of the base figure.
• Over three years, you might notice salaries increasing from 31% to 42% of revenue.

Structural Composition

• Taking a look at this example, we can see how well it provides a snapshot of the business.
• They are essential for making informed decisions, evaluating profitability, and identifying areas that need improvement.
• Vertical AI founders and teams are uncovering a bounty of largely untapped opportunities, and with these opportunities come novel considerations, challenges, and risks that warrant founders’ attention.
• Here, the Total Revenue is considered 100%, and all other figures are expressed as a percentage of this total.
• Expressing the financial statements as percentages of total revenue or total assets allows easy comparison of the proportion of each item over time.

This method simplifies assessing company performance across different scales or periods. Brixx can facilitate both horizontal and vertical analyses, empowering users to gain a comprehensive understanding of their financial statements. With Brixx, businesses have access to powerful tools to help them in analyzing trends, setting benchmarks, and understanding their financial position in the context of their industry standards. The process involves selecting a base figure, typically total revenue, and converting every other item into a percentage of this base in companies. Vertical Analysis using Income Statements can thus provide insights into the company’s cost structure and profitability. A research conducted by the Indian Institute of Management (IIM) found that Indian companies using vertical analysis were better able to manage their operational costs.

To perform vertical analysis on a balance sheet, divide each line item by the total assets and multiply by 100 to convert these figures into percentages. Vertical analysis states financial statements in a comparable common-size format (i.e., percentage form). One of the advantages of common-size analysis is that it can be used for inter-company comparison of enterprises with different sizes because all items are expressed as a percentage of some common number. Vertical analysis (also known as common-size analysis) is a popular method of financial statement analysis that shows each item on a statement as a percentage of a base figure within the statement. This concept of expressing the line item or a particular category of the income statement in terms of or as a percentage of the base amount is a very useful financial analysis technique. This base amount, which in this case, is the sales or revenue, provides a very useful platform for comparison of each item on a year on year or quarterly analysis.

If you see that a company is spending a large percentage of its revenue on certain expenses, you can dig deeper to see if those expenses are justified or if there are opportunities to reduce costs. For one thing, it allows you to see how much of a company’s revenue is being spent on certain expenses. This can help you identify areas where there may be inefficiencies or where costs could be cut. A basic vertical analysis needs an individual statement for a reporting period but comparative statements may be prepared to how to compute vertical analysis enhance the usefulness of analysis. Here, analysts and FP&A teams can get a clear view of the company asset allocation, look at how liabilities compare to company assets, and review the equity structure of the business. Vertical analysis streamlines financial analysis, offering a clear and concise view of the most significant financial metrics.

Simplify Calculations with Sourcetable

In this table, you can easily observe that cost of goods sold has been increasing over the years while gross profit has been decreasing. This trend may warrant further investigation into potential cost-saving measures or pricing strategies to maintain profitability. Look for items with a significant percentage of Total Assets, as these could represent areas of vulnerability or strength. Read on to learn more about vertical analysis of a balance sheet, how to perform one, and some limitations and drawbacks of this analytical tool. The assets section is informative with regard to understanding which assets belonging to the company constitute the greatest percentage. So if we had multiple years of historical data, it is recommended to organize the percentage calculations into a single section on the far right or below the financials with the timing of the periods aligned.

By analyzing these trends over multiple periods, you can determine if there are any patterns that may be cause for concern or celebration. Transitioning into the next section about gathering the necessary financial statements, it is essential to have all the required documents before proceeding with vertical analysis. Vertical analysis enables trend analysis as it converts financial statement line items into percentages of a base figure. For example, expressing revenue as 100% and cost of goods sold as a percentage of revenue shows its trend over time. COGS was 60% of revenue in 2020, 55% in 2023, and 59% in 2022, You can see it dropped but then started rising again as a percent of revenue.

How does vertical analysis differ from horizontal analysis?

Vertical analysis’ origins are traced back to the late 1800s, when financial analysts began looking at trends in financial ratios over time. Vertical analysis of a balance sheet can be a powerful tool to understand your company’s performance or how two businesses compare. Try it with your next financial analysis and see if it provides useful insights or helps you track progress toward goals. Do you want to take your financial analysis skills to the next level and get more detailed insight into your financial statements? Learning how to perform a vertical balance sheet analysis can equip you with the skills to extract actionable insights into your company’s current financial health. A vertical analysis, also known as common-size analysis, is a method of financial statement analysis that shows each line item as a percentage of a base figure within the statement.

How to Calculate Vertical Analysis of the Balance Sheet

The process involves selecting a base figure, typically total assets for balance sheets, and converting every other item into a percentage of this base in companies. Vertical Analysis using the Balance Sheet can thus provide insights into the company’s operational efficiency. A research conducted by the Indian School of Business (ISB) found that Indian companies using vertical analysis were better able to manage their resources. Likewise, all the items in the balance sheet are stated as a percentage of the total assets. The opposite of the vertical analysis of financial statements is the Horizontal analysis always looks at the amount from the financial statement over the horizon of many years. The significance of vertical analysis accounting is well-established in businesses irrespective of their size or stature.

Step 3. Vertical Analysis of Balance Sheet

This conversion to percentages illustrates the importance of each item in relation to total sales. A vertical analysis of financial statements often reports the percentage of each line item to a total amount. Vertical analysis can be used to compare and identify trends within a company from year to year (intracompany) or between different companies (intercompany). Overall, vertical analysis is a powerful tool that can help you gain a better understanding of a company’s financial health.