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Horizontal AnalysisTips for Doing Horizontal Analysis! Horizontal analysis is a method used to compare the financial performance for a business over two or more accounting periods, and for forecasting future performance. When is This Method of Analysis Used?Generally an analysis of the preceding year's financial statements is performed as a starting point for forecasting future performance. How is This Method of Analysis Used?In this type of analysis the individual items or groups of items on the two (or more) financial statements are placed side by side in columns. Because there is limited value in attempting to compare absolute dollar values, the difference between the each of the figures for the two years is calculated as a dollar figure. The dollar figure is then converted into a percentage using the earlier year as the base. An ExampleThe example below presents the analysis for 'Sample Company' for the financial years ending June 30 2006 and 2007.
A review of the percentage increases and decreases can reveal items that show a significant change between the two periods, and any important or unusual changes should be investigated further. The objective of the investigation is to determine the cause of the change and to work out if it represents a trend that is likely to continue in the future. Th analyst will also look at the relationships between the items. For example, although Sample Company's sales have increased by 7.7% in the second year, the operating profit before tax is down by 21.4%, largely due to increases in the cost of good sold (10.7%), selling expenses (28.8%) and financial expenses (9.6%). This business definitely has a problem! What's Next?When you are ready, you can move on to look at the other methods of analyzing your financial statements.
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