In this lecture, we will see how to perform horizontal analysis in Xin.
Horizontal analysis is used to identify change in our revenue and expenditure over time.
So here we have BNL, a statement of two years, 1891 and 1920.
For horizontal analysis, we divide the difference of each category by its initial amount.
So for change in sales revenue, we can ride equal to.
1920 value minus 1890 in value of sales revenue divided by the sales revenue of 1819, which is the
initial value of sales revenue.
So you can see that there is a 15 percent increase in our sales revenue from 1890 to 1920.
For horizontal analysis, we find this ratio for each of our PNL statement category.
We are not going to write individual formula for itself.
We will just drag this formula.
To automatically calculate all the values.
Now, let's check whether the formula we are using is correctly extended to other cells, so just select
the cells below and click on this formula where you will see that the formula seems right.
We are subtracting B6 from C6, which is OK, and then we are dividing this whole value by C6, which
is also right.
So we can extend this formula to other cells as well.
And it is error-free.
Oh, just delete this error message because the cells are empty.
Now, here, positive number means increase and negative number means decrease.
So from here, eighteen, nineteen to 1920, our sales revenue has increased by around 15 percent,
the cost of goods has increased by 35 percent.
And there is a dip in gross margin of around seven percent for expenses as well.
Our advertisement expense is increased by 75 percent.
Again, the major increase is in this other category of expenditure where the other expenditures are
increased by around 80 percent.
Now there is a dip in our net income before taxes.
That is around 38 percent dip in the net income before taxes.
And this dip in our net income resulted in around 60 percent dip in our net income.
So when you are doing horizontal analysis, you will be able to identify the factors which are impacting
your growth or dip in net income or net profit.
Here there is a rise in our sales revenue that means that our sales is going good and you can notice
that that is a very high increase in cost of goods sold, which means that probably the prices of raw
materials has increased.
Ordover Supply-Chain team is not negotiating well with the vendors or for raw material.
So there is a need to control this race, of course, toward.
Similarly, there is a huge rise in other expenses category, since this other category is not very
clear.
So we have to check what all categories are falling under this other category and we have to control
all those expenses.
There is also a significant rise in advertising expenditure.
We have increased our advertising expenditure by 75 percent, but this increase in advertisement is
not resulting in the sales revenue.
Our sales revenue is increasing at just 15 percent, but we have increased our advertising budget by
around 75 percent.
So by doing horizontal analysis, you will be able to identify all these red flags and it will help
you to detect improvement areas in your organization.