Vertical Analysis

What Is Vertical Analysis?

Vertical analysis is a financial analysis tool used to evaluate the relative size of each item in a financial statement, expressed as a percentage of a base amount. For creators like podcasters, filmmakers, and designers, understanding vertical analysis accounting can provide valuable insights into how various income and expense categories contribute to their overall financial picture. This method allows creators to see the financial structure in a clear, simplified way.

Vertical Analysis Formula

The formula for vertical analysis involves dividing each line item in the financial statement by a base number and then multiplying the result by 100 to get a percentage. For instance, in an income statement, total revenue is often used as the base number. The formula for calculating the percentage of an expense would be:

Percentage of Expense=(Expense Amount / Total Revenue​)×100

This formula helps creators analyze how their expenses, such as production costs or software subscriptions, compare to their revenue.

How Vertical Analysis Works

Vertical analysis works by providing a relative comparison of financial figures, simplifying the process of identifying trends and financial strengths or weaknesses. For example, a musician might use vertical financial analysis to understand what portion of their income goes toward production costs, marketing, or studio fees. By breaking down financial data in this way, creators can gain a deeper understanding of their profitability and financial health.

Advantages of Vertical Analysis

• Easy Comparison: Vertical analysis allows creators to compare financial data over different periods or with industry standards, helping to identify areas for improvement.
• Simplified Financial Insights: This method distills complex financial data into easy-to-understand percentages, which is particularly useful for creators who may not be well-versed in accounting.
• Informed Decision-Making: With vertical analysis accounting, creators can make more informed decisions about where to allocate funds and how to manage their budgets.

Disadvantages of Vertical Analysis

• Lack of Context: While vertical analysis provides valuable insights into proportions, it doesn't offer full context regarding the underlying reasons behind certain financial trends.
• Limited Use: Vertical analysis is only helpful when comparing similar financial data, so it may not be as useful in some creative fields where revenue and expenses vary greatly.

Example of Vertical Analysis

Let’s consider a creator who wants to understand how their income is distributed. They look at their income statement for the year, where their total revenue is $50,000. Here's how they can apply vertical analysis:

• Production expenses: $10,000
• Marketing costs: $2,500
• Software subscriptions: $1,000

The vertical analysis formula would show the following:

• Production expenses: (10,000/50,000​)×100=20%
• Marketing costs: (2,500/50,000)×100=5%
• Software subscriptions: (1,000/50,000)×100=2%

This breakdown allows the writer to easily see how each expense category compares to their total revenue, helping them to identify areas for possible cost savings or investment.

Vertical analysis is an essential tool for creators who want to understand their financial position in a clear, straightforward way, and it's especially helpful when assessing different financial aspects of a business. By mastering how to do vertical analysis, creators can make more informed, strategic decisions about their financial future.