What are the best tips for vertical analysis of profit and loss statement?

vertical analysis of profit and loss statement is an effective way to compare various statements by rendering all items in the statement as a percentage of sales. In this way, the company administration can compare the statement not only with the performance of previous years, but also with its competitors on the market. It is important that those who perform vertical analysis of the profit and loss statement focus on percentage, not raw numbers. They should also look for major percentage changes from previous years or from their opponents to find out what areas of business require improvement.

The profit and loss statement is a financial document required from most businesses that show the net income obtained in a certain period of time, which is usually one year. The statement accumulates all expenses and then deducts them from all income obtained during the year. Analysis of this statement is an important part of a business process for companies that want to improve what they have done in the past. Performing a vertical analysis of a profit and loss statementIt has many advantages.

Perhaps the most important part of the vertical analysis of the profit and loss is to bring net sales to the top of the statement and have all the percentage derived. As an example, imagine that the company's net sales per year is $ 100,000 (USD) in the same year, the cost of the goods sold is $ 60,000. This means that the costs of the goods sold are 60 percent of net sales and that the percentage should be stated in addition to the costs of the goods sold. Similarly, the percentages should be for interest, taxes, administrative and operating expenses.

With all these percentage on the spot, vertical analysis of profit statement and loss by simple comparisons between relevant statements. These statements used to compare CAN what cojá from society in recent years, allowing it to see areas of improvement and fighting. In addition, the company should compare the percentages with those companiesTMI that is on the same market and are direct competitors.

Finding areas of significant differences is one of the goals of the vertical analysis of the profit and loss statement. Financial managers should look for why one item is not in line with other statements. As an example, a company that has average operating expenditures that are 10 percent of net sales in recent years should apply if this number suddenly pops up to 20 percent in the studied year. This information can help companies to explore areas where things can be done more efficiently and thus improve the lower limit.