Building Projections from Common-Size Financial Statements
Discover past trends and relationships to project future performance.
Common-size financial analysis expresses financial statement amounts as percentages of a base amount. This simple conversion allows quick projections of future performance. It can also be used for detailed line-by-line analysis for accurate budgets. Common-size analysis is very useful for testing the accuracy of testing the accuracy of financial statements and budgets. In this video, I'll show two types of common-size analysis:
- Vertical Analysis: Vertical analysis is great for making quick and easy projections. You may want to use this for modeling and scenario analysis. You only need at least one year of a historical statement and a good estimate for one key line item. Everything is calculated from that.
- Horizontal Analysis: Horizontal analysis is better for detailed projections for each line item, like when building a budget. The assumption in vertical projections that relationships between line items remain stable may be incorrect. Each line item may have unique factors driving them. Those factors may be identified or reflected in historical horizontal analysis.