You have accurate financial statements, now what? Reviewing the reports, and taking action based off the findings is how you will continue to have a financially healthy landscaping business. Two common methods to analyze a company’s financial statements are: Vertical and horizontal analysis. We will take a look into both methods, and I will highlight why you should be doing this periodically throughout the year.
Vertical and horizontal analysis are simply the way in which a financial statement is read. These methods help to tell a story in how your landscaping business measures up. Lets start with Vertical Analysis!
Vertical analysis: this is the process of taking a single column in a financial statement and relating it to another item in the same report. For example, in an income statement, each line item may be shown as a percentage of revenue. These percentages can also be compared to industry averages, to show where your landscaping business stands. This can show you areas within your business to focus on more than others.
Horizontal analysis: this refers to the process of reading current financial data in comparison to previous reporting periods. This helps to highlight trends over time. For example, when viewing an income statement from July 2021 vs. July 2020 you may see that Revenue increased by 20%. This is great, but when reviewed further the overhead percentage increased by 24%. This highlights that overhead is increasing at a faster rate, and action must be taken to improve this trend.
It starts with accurate bookkeeping and accounting, and development of financial statements. Analyzing financial statements on a consistent basis can help you to catch problems early. Stay on top of your financials, use vertical and horizontal analysis to help you!