The balance sheet is a snapshot of a moment in time depicting the financial health of a business. The traditional presentation is a formation that resembles a T bar. The left side is the summary of the company's assets. The right side itemizes liabilities and equity. The grand total of each column must be the same.

Assets, Liabilities, and Percentages

Anything the business owns that has a monetary value is an asset. Liabilities are the debts that a business incurs. Each debt payment reduces the amount owed and increases the portion of outright ownership. It is easy to transform a balance sheet into a comparative statement allowing for vertical analysis. Another easy transformation is the profit-and-loss (i.e., income) statement. The resulting "common size financial statement" is great for vertical analysis because it contains the comparative percentages. For a good graphic of this concept, click the link in the Resources section below.

Left Column Vertical Analysis

If you add one more column to each side of the balance sheet, this report will quickly show the business owner whether the business is ripe for product enhancement, or if cash-reserve retention is more prudent. The third column is a list that reflects the percentage of the total for each asset. Because the list goes from top to bottom (vertical), a vertical analysis using percentages gives a snapshot from a different perspective, and the information can easily portray the financial health of a business. The most valuable asset in any enterprise is cash. It is the most liquid of all assets. Some of the other assets that appear in the left column are accounts receivables, notes receivables, land, buildings, office equipment, machinery, and vehicles. Most of these depreciate over time, and the value column will change--especially if a sale occurs, or the owner purchases a new asset. Add all the asset values and enter the total at the bottom of this column.

Right Column Vertical Analysis

Apply the same process to the right side listing of liabilities and owner's equity. Liabilities are debts that the business owes to others, such as vendors or banks. Debts include accounts payable, notes payable, accrued payroll and withholding, total current liabilities, long-term liabilities, mortgage note payable, owner equity, common stock, and retained earnings. Add all the amounts that appear next to the listing of liabilities. Enter the total at the bottom of this column. Make sure this total matches the amount at the bottom of the asset value column. Once again, this listing goes from top to bottom (vertical). Therefore, it lends itself to vertical analysis. Take each individual item amount and divide it by the total. The liability item becomes a percent of the grand total. The percentages of each vertical analysis column must equal 100 percent. Using these percentages alone allows a small business to compare its financial health to that of a large business or a business model without revealing the exact figures. Use of a percentage levels the field and allows effective application of these comparatives.

Source:

Business Definition for Vertical Analysis

Vertical Analysis

Balance Sheets

Resource:

Vertical Analysis of a Balance Sheet