1 00:00:00,640 --> 00:00:07,450 In this section, we will look at two types of analysis that we do on profit and loss statement to bring 2 00:00:07,450 --> 00:00:10,450 out insight from the BNL statement. 3 00:00:12,420 --> 00:00:14,340 First is called vertical analysis. 4 00:00:15,940 --> 00:00:21,670 So if you have seen a profit and loss statement, you would know that it shows the total revenue that 5 00:00:21,670 --> 00:00:28,660 you earned, minus all the expenses till you get net profit value from that business. 6 00:00:30,910 --> 00:00:35,970 But in a profit and loss statement, all these values are shown in absolute terms. 7 00:00:37,750 --> 00:00:42,910 That is, if you made one hundred thousand dollars as a revenue, it will be shown as one hundred thousand 8 00:00:42,910 --> 00:00:43,390 dollars. 9 00:00:45,380 --> 00:00:51,590 However, when we want to get inside, we sometimes want to see the contribution of different types 10 00:00:51,590 --> 00:00:54,050 of expenses in percentage terms. 11 00:00:56,070 --> 00:01:03,060 So if I want to know what are my top expenses and how much of these expenses are contributing to the 12 00:01:03,060 --> 00:01:10,740 total expense, I would want to find percentage of all expenses with the total revenue. 13 00:01:13,070 --> 00:01:15,290 That is the concept behind vertical analysis. 14 00:01:17,010 --> 00:01:24,780 In vertical analysis, we simply divide all the expenses with the total revenue earned and we get it 15 00:01:24,780 --> 00:01:26,310 in terms of percentage. 16 00:01:29,050 --> 00:01:37,000 When we have the percentages, we can easily see what are the major expenses and which are those expenses 17 00:01:37,000 --> 00:01:43,810 on which we should focus so that we can reduce our costs and hence increase our profits. 18 00:01:46,270 --> 00:01:53,980 For example, if you see two expenses, one is utilities, which is taking up 33 percent of your total 19 00:01:53,980 --> 00:01:54,430 revenue. 20 00:01:55,390 --> 00:02:02,200 And one is advertising, which is taking only five percent of your total revenue, then it makes more 21 00:02:02,200 --> 00:02:09,880 sense to focus on the utilities expenses and try to reduce it because there is more opportunity to reduce 22 00:02:10,210 --> 00:02:14,560 costs there and hence increase more profit eventually. 23 00:02:17,010 --> 00:02:20,400 So this simple analysis is called vertical analysis. 24 00:02:21,700 --> 00:02:28,530 This is usually done on a panel of a single year, but it can also be done on multiple years. 25 00:02:30,820 --> 00:02:34,030 The other type of analysis is horizontal analysis. 26 00:02:35,040 --> 00:02:41,460 In horizontal analysis, we compared the change in the expenses over two time periods. 27 00:02:42,500 --> 00:02:50,600 So we take personal statements of two consecutive years and we see which expense has increased by what 28 00:02:50,600 --> 00:02:54,360 percentage and which expense has decreased by what percentage. 29 00:02:55,790 --> 00:02:59,060 So we do not find percentage with the total revenue. 30 00:02:59,900 --> 00:03:06,440 We find the percentage change with respect to the last value of that particular expense item or revenue 31 00:03:06,440 --> 00:03:06,770 item. 32 00:03:08,940 --> 00:03:16,350 This type of analysis tells us what went well, that is where did we increase our revenues and where 33 00:03:16,350 --> 00:03:19,560 did we reduce our expenses and what went wrong? 34 00:03:19,770 --> 00:03:23,550 That is which all expense increased and by how much? 35 00:03:26,610 --> 00:03:34,050 You can also use horizontal analysis to compare if any particular kind of activity produced the desired 36 00:03:34,050 --> 00:03:34,530 result. 37 00:03:35,490 --> 00:03:42,180 For example, if you increase your marketing expense in the hopes of increasing your total revenue, 38 00:03:42,510 --> 00:03:48,960 but in your personal statement, you'll notice that the marketing expense has increased, but the total 39 00:03:48,960 --> 00:03:51,560 revenue has not increased proportionately. 40 00:03:51,990 --> 00:03:58,250 So you may deduce that the marketing effort may not be in the right direction. 41 00:04:00,030 --> 00:04:04,980 So let us see how to implement horizontal and vertical analysis in our software to.