Horizontal, Vertical, and Ratio Analysis

Horizontal, Vertical, and Ratio Analysis

ACC281: Accounting Concepts for Healthcare Professionals

Date: Sept. 9, 2019

In this paper, I would like to review the three different methods of analysis we have learned in this week’s course work reading. The three methods are Horizontal, Vertical, and Ratio analysis. I will also be providing a brief scenario of how one of these methods can relate to a real-life situation in healthcare. I hope from this paper you will be able to identify and understand what each analysis is, what it is used for, and good examples of how it can relate in real life.

When you think of the word horizontal you think of the horizon. In Horizontal analysis you work in that direction, using two different periods or points in time to the next. Horizontal analysis can be used on both balance sheets as well as on the Income statement to determine a change in percent. That change can be an increase or decrease and helps you better analysis the increase and a decrease in finances in big or little companies. Due to the Horizontal Analysis using a base period as the constant you can get what the percent of increase or decrease was in the finances and that helps review the change without the size having an impact. The formula for a Horizontal analysis consists of the money change from the base year and the analysis year, then the change difference divided by the base amount. This helps give the percentage of change.

For Vertical Analysis you also can use the balance sheet or income statement to reach your percentage. However the difference between the Horizontal and Vertical is that you are looking at only 1 year when completing a Vertical Analysis vs a Horizontal again is two years, which one is the base year. With Vertical analysis, you want to select the Cost of goods divided by the sale to get the percentage of change. The vertical analysis does also require you to select a base, but a bae category vs base year for the horizontal. The categories commonly used are total assets. This analysis is also a great tool to use to see what the cost going into operations and goods to a company is and what the revenue is. It also uses percentage, which means the size of the organization won’t give a larger number thus causing smaller companies to always appear as if they are doing worse. Instead, a percentage review helps put everyone on the same page and allows to better analyze an organization.

The next analysis we will discuss is Ratio Analysis. This consists of many different categories coming together to be monitored and tracked. These categories usually consist of Liquidity measures, debt services, turn over, and profitability. With monitoring, these categories managers and executives are better able to identify any types of issues within the organization early on. It is always good to be able to spot issues before they cause a big downward ripple in the company. When looking at these categories the analysis is looking to make sure that the ROA (Return of Assets) and ROE (Return of Equity), Account Turn over (making sure payments are being received on accounts receivable), Inventory and supply turnover (insuring enough supplies are needed to keep the facility stocked, but avoiding overstocking and discarding expired goods), the company’s ability to meet long term debts, and finally their ability to meet short term goals. Once all of this information is viewed the analyst can make a good decision on if there are concerns that can be estimated for the future. If a company is always overstocked they are losing revenue, which ultimately is not a good sign for any company.

For my example, I will use two ambulatory clinics. Let’s say that I am wanting to use the Vertical Analysis on my two clinics, Clinic 1 and Clinic 2 to see if they are both being successful. Clinic one is a smaller clinic in a rural area and clinic 2 is large in a convent location. Clinic one has a Cost of Supplies of 300,000 and total revenue of 600,000 and clinic 2 has the Cost of Supplies being 700,000 and Total Revenue of 1,100,000. When we look at the formula for Vertical Analysis we know we have to divide the Cost of Good by the Total Revenue. So 300,000 divided by 600,000 would give us 0.5, which would convert to 50%. Giving us a total revenue of 50% for Clinic 1. Then clinic 2 would be 700,000 divided by 1,100,000 to equal .64 giving us 64%. We can see that clinic 1 had total revenue of 50 for this year and clinic 2 a total revenue of 64%.

In conclusion. I hope that I was able to provide a good understanding of the difference between horizontal, vertical, and ratio analysis. With the main points being that the Horizontal analysis requires two years and a base year to analyze. The Vertical reviewing one year, but still needing a base Category. Finally, the Ratio Analysis which analyzes multiple categories to try and identify any immediate issues that can be addressed or identify any issues be might be able to see as long term.

References:

Epstein, L. & Schneider, A., (2014). Accounting for health care professionals [Electronic version]. Retrieved from https://content.ashford.edu/