There are two types of analysis that you may choose to use in a business: Horizontal and Vertical.

The most
common, and simplest, being Horizontal Analysis.

Horizontal Analysis
This method of analysis is simply comparing the same item in a company's financial statements from two or more
comparable periods, and then calculating the difference. For instance, you may choose to compare the current month
with the previous month, or with the same month last year. Another common horizontal comparison is to compare this
year's year-to-date versus the same period last year.

For example, let's imagine that your business had $531,275 in sales in the current year and $552,715 in sales the
previous year. The reduction in sales would be $21,440. That was easy. Now, management would want to know
"WHY". That's the analysis and that's our job.

Once you understand the reason for the change in sales, you'll want to tackle Cost of Sales - then Expenses.
Sometimes an increase or decrease in one account will explain the same or opposite impact in another account. For
instance, an increase in Advertising Expense may be the reason for a complimentary increase in Sales (at least that's
management's hope).

Even understanding the change in Balance Sheet Accounts can be valuable to the owner. For instance, what's
happening to Inventory, or to Accounts Receivable? An increase in either of these two accounts can have the same
impact to the Cash Account as the purchase of a piece of equipment, and may result in a cash-poor company.

Vertical Analysis
This type of analysis illustrates the relationship of certain components compared to the whole, or the financial stability
of a company. There are several different types of ratios or indexes that may help us determine where the company
currently stands in relationship to where it wants to go.

The most common form of Vertical Analysis is using percentages to show one account's relationship to another. For
instance, often times we will include a column on the Income Statement showing each Cost and Expense, and the
resulting Gross Profit and Net Income as a percentage of total Revenue. From this analysis we can determine how
many pennies of each revenue dollar actually results in profit. This way we can compare one company's results with
those of another, even though the size of the companies may vary significantly. If our company is profiting 10 cents
for every sales dollar, and another company is getting only 4 cents it may indicate we're being more efficient.