00:00items on the income statement to one fixed item, such as revenue, most commonly done this way.
00:06And then looking at, you know, whether you are as a percentage of revenue, for example,
00:10you're trending up or down on these expenses. So let's take a look on the Excel file and how I
00:15set it up for this kind of analysis. All right. So for vertical income statement analysis,
00:20what I do is I layer in my income statement by account for three months. So I have here
00:24January, February and March. And then I create three columns here where I measure each line item
00:32as a percentage of revenue. So obviously revenue as a percentage of itself is 100%. But then as you go
00:39down the cost of sales accounts, for example, so server cost, right? When you look at it as a
00:44percentage of revenue, you're simply just dividing the server costs as a percentage of total revenue.
00:50And I gave you 21%, right? And what you want to see is that you want to see, for example,
00:55server costs, you want to see improvements, right? So this one here, that's why I highlighted in green,
01:00because I'm seeing a good trend line, right? You don't want to see this one going from like 20%,
01:0621% to 19, you know, to like 30%. You don't want that. That'll be something that you highlight in
01:12red.
01:13In this case here is actually a good trend where the percent, as a percentage of my server cost
01:18is going down as a percentage of revenue. Same thing here, I'm going to highlight the salaries
01:24to customer support, which is trending down as a percentage of revenue, which tells me that I'm
01:29able to support the growing revenue with less cost or, you know, maybe fixing my costs in terms of
01:36headcount for customer support, which is a good thing. So I want to highlight the success. And then also
01:41I want to highlight any kind of, you know, red flags. So for example, as I scroll down, you know,
01:46hotels, for example, the amount to spend as a percentage of revenue went up from 3% to 4%.
01:53And although it's not a big increase, it's just an example. I want to show you that's where you can
01:58see trend lines that are not trending in the right direction. And you want to highlight that
02:03and discuss it with your management to figure out where are the areas that you can improve in the
02:08business. And this is the whole purpose of this vertical analysis is to highlight the areas that needs
02:13improvement in the P&L. All right. So going back to the overview, we've covered three types of
02:18analyses and accounting analysis. And then we covered actual versus budget vertical analysis.
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