00:00an overview of financial statement analysis there are two main categories of analysis there is
00:04accounting analysis which is the purpose of it is to find accounting errors and then there is
00:10financial or managerial analysis which is the purpose of which is to help make business decisions
00:16so with accounting analysis the most common type is going to be month over month analysis which we
00:21call horizontal analysis the reason why we're calling it horizontal is because we're going
00:26horizontally from left to right comparing a period to the next and looking at the change and the change
00:32percentage and commenting on these changing and trying to figure out if there are accounting
00:38errors because this is the whole purpose of this thing is to find accounting errors right and then
00:44the second category is going to be financial or managerial analysis which breaks down to three
00:49types and the purpose of all of them is to help make business decisions right so these are going to
00:55be
00:55more strategic in nature so the first one is going to be actual to budget where we'll be going through
01:00the actual results and comparing it to the budget and looking at the change and commenting and pretty
01:06much this analysis will drive what kind of changes we need to make to future for example spending to
01:12figure out the best way to run the company more efficiently this is actual to budget the second one
01:18is going to be vertical analysis so vertical is as opposed to horizontal so remember here we said
01:24horizontal we're looking left to right well with vertical we're going top to bottom right and the
01:31reason is that we're measuring line items on say the income statement as a percentage of one of the line
01:38items on the income statement most commonly you're measuring expenses uh to the revenue as a percentage
01:45right so we'll go through that as an example in a minute this is vertical analysis and then the third
01:50is
01:50going to be ratio analysis which means that you're comparing two financial figures on your financial
01:56statements to each other and getting the result as a percentage or a ratio the most common example
02:02here for example is current ratio current ratio looks at the ratio between your current assets and
02:08current liabilities to figure out whether the company has sufficient funding to meet its short-term
02:14obligations so we're going to go ahead and go through an example of what you said we have four types
02:18of
02:18analyses that i perform as a corporate controller one is an accounting analysis and then three of them
02:24are going to be financial or managerial analyses right and if you stick around till the end i'm going to
02:29tell you exactly out of these four which are the most commonly used types of analyses that are must have
02:35for any corporate controller all right so let's take a look at the first one and how i set up
02:40my analysis
02:41in excel for my month over month comparison for a horizontal accounting analysis all right so this is
02:48my setup in excel and this is for a business called spa booker and spa booker it's important to understand
02:53what kind of business they're in for you to understand how to analyze the income statement
02:57so spa booker is a platform an online marketplace that connects the consumer on one end and then the
03:03spas on the other end where the consumer can go in the mobile app and set up an appointment for
03:09a
03:09spot treatment income statement uh for three months for january february and march right and i like to
03:15have three months periods where i'm comparing march to february but then i like to have january also as
03:22further context so for example you know if i see that my revenue went up by 22 percent in platform
03:28fee
03:29between march and february i also had like to have january in here so that i can have further context
03:35into what happened in january and then i can see the story of how the revenue is developing month
03:40over month right so i layer in my results for the three months right and then i have the change
03:47from
03:47the most two recent month march to february and then a change in terms of percentage right and then i
03:55have here my comment column where i'm where i'm providing my commentary and remember the whole purpose
04:00of this whole analysis here is to find accounting mistakes right so you're not so much or necessarily
04:06defending these numbers uh you are trying to objectively analyze the numbers and find accounting
04:12mistakes and if you find an accounting mistake then you just got to go and fix it right nothing
04:16bad here is that you finding accounting errors that could happen during the month in close and then
04:22going back to fix them all right so in the commentary i like to have a threshold for analysis so
04:27for
04:28example here i say that comment is required for changes over 10 percent and this is something you
04:33can decide in your company with your team with your leadership uh figure out speak to your cfo your
04:38controller figure out what is the threshold that is going to be worth your time investigating right
04:43because you don't want to be spending time investigating five dollars or ten dollars right you
04:47want to be going over the big guys right um so figure out the threshold and some companies i've seen
04:52that being two percent maybe five percent um in some companies where it's a smaller company it's ten
04:57percent just figure it out the percentage that makes sense and then go over the commentary over
05:02the variances that are over this percentage so in this case here we set up ten percent and also i
05:07like
05:07to layer in my headcount information so headcount information is going to help me um it's going to help
05:13drive the changes that i see in payroll or some of the other cost account that are associated with
05:18headcount so for example uh january headcount was 26 it went up to 32 it went up to 38 um
05:26you know
05:26the change month over month is six which is 19 so pretty much i should expect that my payroll costs
05:32are going to be moving in the same direction but if i see them moving in a different direction then
05:36i'm going to be stopping here and saying wait a minute you know does it make sense for payroll to
05:40be changing in a much bigger or smaller difference than my headcount information so when i begin
05:47analyzing the income statement account by account so i begin with the first line on the revenue which
05:52is platform fees and i can see that went up by 22 percent right so my commentary on this is
05:59to review
05:59the sales by customer report for reasonableness and then provide the commentary that i reviewed it
06:06and ask the question so for example when we look at this tab here that we set up for sales
06:11by customer
06:12i can see the trend line on how my by account my revenue is going up month over month right
06:20so my
06:20commentary is going to be that i asked the question uh looked at the detail by customer and asked the
06:25question uh within the sales team and figure out if it's reasonable for revenue to go up by that
06:30percentage right and generally revenue should go up month over months right if you see it going down
06:36then it's a sign of trouble overall uh but in this case here it is trending correctly and going up
06:41month over month and as i continue to go through the income statement i'm going to start going through
06:45some of the cost of sales item and the first one is going to be a server cost and a
06:51server cost in
06:51this case is with aws or amazon web services and as you might imagine any business that relies on web
06:58traffic such as spot booker as revenue goes up you also should expect that your uh server costs
07:04should start going up as well so we see here that uh the web cost or the web hosting cost
07:10went up by
07:10seven percent right and uh we'll say here that this is in line with change in revenue even though we
07:17see
07:17change of revenue is 17 percent uh the increase here is seven percent which is good because you want your
07:23revenue change to outpace your cost right and that makes sense and now as we go down uh through the
07:29statement we'll see some items such as the salaries and benefits to customer support
07:34and you'll see that all of these accounts went up by 20 percent month over month so this is an
07:39increase of 20 percent and this is why it's helpful to have the headcount information trending up here
07:44so that i can see for example the headcount went up by 19 percent right and the payrolls costs went
07:51up
07:51by 20 percent so it's in line right uh but remember the whole reason for this analysis here is for
07:57you to
07:58find mistakes right so if this trending here is not 20 percent say it's 30 percent or 40 percent
08:04then you that means something is wrong right so okay so this here is a good number to see 20
08:10percent
08:10correlates to the 19 percent right if it's not correlating you have to go back and figure out if
08:15there is a mistake in the way you booked payroll right uh so i'm going to comment here and say
08:19that
08:20increase is in line with increase in headcount and you pretty much go through the rest of the income
08:25statement and look at the increases that are over 10 percent and provide commentary on the change
08:31month over month and again you're not defending but rather trying to find if there is an accounting
