Horizontal and vertical analysis of the balance sheet: how can you see the change behind the figures?
Putting two years of balance sheets side by side is not enough: you need to calculate growth rates and shares. Two simple statistical methods, using a bakery as an example.
NAS No. 1 requires comparative information for the previous period to be presented in the financial statements. So the balance sheet always has two columns: the previous period and the current period. There are two very simple statistical methods for drawing useful conclusions from these two columns.
Key points
- Horizontal analysis: shows how much each item has changed compared with the previous period, in soum and in per cent
- Formula: growth rate = (current period − previous period) ÷ previous period × 100%
- Vertical analysis: shows what percentage of total assets (or total liabilities and equity) each item represents
- Formula: share = item ÷ total × 100%
- Horizontal analysis answers the question "what is growing fast?", and vertical analysis answers "how has the structure changed?"
- Compare the growth of balance sheet items with the growth of sales revenue: an item growing much faster than revenue needs attention
- For the comparison to be meaningful, the items must be classified in the same way in both periods
Example: the "Nurli Non" bakery
Assets, in millions of soum, hypothetical. Sales revenue over this period grew from 1 000 to 1 150, that is, by 15%.
| Item | Previous year | Current year | Change | Growth rate | Share: previous | Share: current |
|---|---|---|---|---|---|---|
| Long-term assets | 420 | 480 | +60 | +14.3% | 60.0% | 53.3% |
| Inventories | 90 | 150 | +60 | +66.7% | 12.9% | 16.7% |
| Receivables | 110 | 200 | +90 | +81.8% | 15.7% | 22.2% |
| Cash | 80 | 70 | −10 | −12.5% | 11.4% | 7.8% |
| Total assets | 700 | 900 | +200 | +28.6% | 100% | 100% |
What can be seen? Revenue grew by 15%, but receivables by 81.8%. Customers (shops and cafés) take the bread but pay much later than before. The share of receivables rose from 15.7% to 22.2%, while the share of cash fell from 11.4% to 7.8%. The bakery owner's first step: review the payment terms with the shops.
Test yourself
5 questions on this topic: pick an option or reveal the answer.
The balance sheet shows total assets of 500 mln soum, of which current assets are 200 mln soum. What is the share of current assets in total assets (structure indicator)?
A tea shop calculated the linear correlation coefficient between advertising spending and weekly sales: r = 0.9. What share of the variation in sales does the coefficient of determination (r²) explain as linked to advertising?
Daily deliveries of four couriers: 3, 5, 7, 9 (mean 6, variance 5 when calculated by dividing by n). The next day each courier delivered exactly 5 more: 8, 10, 12, 14. How do the mean and the variance change?
At a pharmacy, the share of card payments was 40% last month and reached 50% this month. What is the correct way to express this change?
A fruit shop bought apples on two days: 120 000 soums' worth each day. On the first day a kilo cost 6 000 soums, on the second day 4 000 soums. What was the average price of one kilo of apples bought over the two days?
Answered: 0 / 50 of 5 correct
All tests →See also
Sources
- NAS No. 1 "Presentation of Financial Statements and Accounting Policies", paragraphs 25, 56 and 60 · comparative information for the previous period in the financial statements; the balance sheet makes it possible to understand the financial position and financial structure; balance sheet items help in analysing the financial position
- Example, amounts and calculations · prepared by the author, hypothetical