Vertical Analysis

Vertical analysis is a method in business intelligence that allows companies to understand their financial statements in a unique way. Imagine you’re looking at a tall skyscraper—that’s your company’s balance sheet or income statement. Now, instead of looking at the numbers in terms of dollars or units, vertical analysis has you look at each number as a percentage of a base figure on that “skyscraper.” For income statements, this base is often net sales, and for balance sheets, it could be total assets.

What vertical analysis does is give everyone a common scale to compare different items. Say your company’s cost of goods sold is $40,000, and your net sales are $100,000. With vertical analysis, you’d say the cost of goods sold is 40% of net sales. This makes it easy to compare your business’s costs to other companies, no matter their size. It’s like turning the floors of our skyscraper into percentages, so you know exactly how much space each part takes up, and you can compare it to other buildings.

Using vertical analysis can help business owners and managers spot trends and make sure that costs or expenses aren’t eating up too much of their sales over time. It’s a tool that helps keep the financial health of the business in check, by providing a clear picture of how each section of the financial statements relates to the big picture, year after year. This way, if one floor of our skyscraper starts taking up more space than it should, you’ll know it’s time to take a closer look and figure out why.