What Is Horizontal Analysis of Financial Statements?

Horizontal analysis is a method that compares financial results across two or more periods to show how performance has changed. It highlights whether certain items are rising, falling, or staying stable. 

This helps teams prepare for internal meetings, budget reviews, and year end discussions with clearer insights.

So if you’re a little confused on what this term means, stick around as you will learn what horizontal analysis means, how to calculate it, and how to use it in everyday accounting.

What Is Horizontal Analysis in Simple Terms?

Horizontal analysis compares financial numbers from one period to another to reveal trends.

It is commonly used during:

• Monthly closing
• Budget season
• Yearly reviews.

Finance and management teams place figures from different periods side by side to see whether the business is moving in the right direction.

Example (Revenue)

This tells you revenue grew by RM150,000, pretty straightforward right?

How Does Horizontal Analysis Work?

It works by calculating the difference between periods and turning that difference into a percentage.

There are two types of changes:

• Absolute change: the difference in ringgit
• Percentage change: the growth or decline rate

Teams often use it during internal reviews because it simplifies performance discussion and helps explain numbers to non finance colleagues.

It becomes most accurate when the chart of accounts stays consistent across the years.

What Is the Formula for Horizontal Analysis?

There are two formulas used in horizontal analysis.

Absolute Change: Current Year minus Previous Year

Percentage Change: (Current Year minus Previous Year) divided by Previous Year, multiplied by 100

Example:

Revenue change = RM1,150,000 – RM1,000,000 = RM 150,000

Percentage change = RM150,000 ÷ RM1,000,000 x 100 = 15% Growth

How to Perform Horizontal Analysis?

Horizontal analysis becomes much clearer when you break the process into simple steps. 

Each step helps you organise the numbers, calculate changes, and understand the rationale behind the movement.

Step 1: Gather the Financial Statements You Want to Compare

Collect the same statements from different periods so your comparison is accurate.

Start by preparing the income statements or balance sheets for the periods you plan to review. The format must be consistent because it allows you to compare items line by line without confusion.

Most teams use monthly, quarterly, or yearly financials, depending on internal reporting needs.

This is different from cash flow statements which we have a whole blog on, so check it out!

Step 2: Place Each Period Side by Side

Set the statements next to each other so movements are easy to spot.

We recommend creating a simple table that lines up the same items across periods on Excel. This layout allows you to see patterns immediately.

Side by side placement also helps managers understand figures quickly without going through multiple pages.

Step 3: Calculate the Absolute and Percentage Change

Find the difference between the periods and convert it into a percentage.

For quick recap:

• Absolute change tells you the ringgit movement.
• Percentage change tells you the growth or drop rate.

Both measurements help reveal trends that are not obvious from raw numbers alone.

Step 4: Identify Positive and Negative Shifts

Highlight which categories improved and which ones need attention.

Look at line items that jumped or declined. For example, sales may rise while transport or administrative costs increase faster.

Marking these shifts helps you understand whether the business is becoming more efficient or facing new pressure.

Step 5: Discuss the Impact with Your Team or Management

Share the findings so everyone understands what the numbers mean.

Use the results to guide internal decisions. 

• If costs rise faster than income, the team may review operations. 
• If revenue grows steadily, this supports planning for expansion or investment.

Horizontal analysis helps align everyone in the same direction during meetings.

Example (Three Year View)

Note: Net profit would also reflect items such as cost of sales, interest, and tax. 

This simple table shows a clear financial direction. Revenue and profit are improving, but expenses are rising as well. 

With these numbers placed side by side, it becomes easier to discuss what is working well and what may require further review.

When Should You Use Horizontal Analysis?

Use horizontal analysis whenever you need to understand how results have shifted over time.

Ideal moments include:

• Monthly closing or quarterly reports
• Annual budgeting and forecasting
• Board or management presentations
• Identifying long term patterns in sales or expenses

What Are the Benefits of Horizontal Analysis?

Horizontal analysis helps teams understand performance more clearly, especially to non-financial savvy teams.

Advantages include:

• Easy to compute
• Helps identify positive and negative patterns
• Useful for observing whether expenses grow faster than sales
• Helpful during cash flow discussions and decision making

That being said, it’s not perfect.

What Are the Limitations of Horizontal Analysis?

Horizontal analysis can be misleading if the data is not consistent.

Common limitations:

• Accounting policy changes may distort comparisons
• One time events can skew results
• Inconsistent chart of accounts between years
• Inflation effects on long term comparison.

How Does Horizontal Analysis Compare to Vertical Analysis?

Horizontal analysis helps you compare one period with another to see how the numbers changed.

Vertical analysis helps you understand how each item fits within a single period, almost like looking at the proportions inside one financial snapshot.

The two sound confusing, and they can be! But the idea is simple once you see the difference.

Both methods answer different questions, which is why finance teams often use them together.

• Horizontal analysis tells you whether something went up or down.
• Vertical analysis tells you how much space that item takes up inside the overall statement.

Many teams use both because one method explains direction, while the other explains proportion. Together, they create a clearer financial picture.

Imagine these numbers for 2023 and 2024:

Now look at how each method answers a different question.

What Horizontal Analysis Tells You

Horizontal analysis checks whether the number went up or down over time.

Using the revenue above:

• 2023 revenue: RM1,000,000
• 2024 revenue: RM1,200,000

Horizontal analysis answer: Revenue increased by RM200,000 or 20% growth.

This method focuses on change from one year to the next.

What Vertical Analysis Tells You

Vertical analysis checks how big an item is compared with the total inside the same year.

Using 2024:

• Total income: RM1,200,000
• Operating expenses: RM600,000

Vertical analysis answer: Operating expenses make up 50% of the year’s income.

This method focuses on proportion within the same period.

How Should You Interpret Horizontal Analysis Results?

Focus on patterns, not single numbers. The goal is to understand what the trend means and how the business should respond.

If Revenue Is Increasing

The business is growing, but you must check if profit is growing at the same pace.

What to do:

• Review whether profit margin is holding steady
• Consider whether marketing or sales strategies should be expanded
• Explore capacity expansion if demand continues to rise
• Check whether rising revenue is seasonal or consistent

When it may signal expansion:

• Revenue increases for at least two or three periods
• Profit grows at a stable or faster rate
• Cash flow remains healthy
• Operational capacity is reaching its limit

If Revenue Is Increasing but Profit Is Flat

Sales are improving but costs are eating into gains.

What to do:

• Investigate which expenses grew faster
• Review pricing strategy
• Check for inefficiencies in production, staffing, or overhead
• Look at customer discounts or promotions that reduce margins

This often points to rising operational cost pressure.

If Costs Are Rising Faster Than Revenue

The business may be leaking efficiency.

What to do:

• Identify which cost categories caused the jump
• Review utility, transport, overtime, or courier price changes
• Adjust spending controls or renegotiate vendor contracts
• Review headcount planning, overtime usage, or process bottlenecks

When it signals an operational cost cut:

• Costs rise for two or more periods
• Margin shrinks even when revenue grows
• Cash flow tightens
• Expenses show sudden or unexplained spikes

If Both Revenue and Costs Are Rising at the Same Pace

The business is growing, but not necessarily becoming more profitable.

What to do:

• Evaluate productivity levels
• Check if customer acquisition costs increased
• Review sales mix to identify low margin items
• Improve process efficiency so profit grows faster than revenue

This is a common problem in scaling companies.

If Revenue Is Declining

 Loss of demand, market slowdown, or weak marketing activity.

What to do:

• Review sales channels and marketing performance
• Check for product issues, service issues, or competitor impact
• Strengthen customer retention efforts
• Adjust budgeting to avoid overspending in slower months

If Results Improve Consistently Over Several Years

Stable growth and good financial discipline.

What to do:

• Strengthen long term planning
• Consider new investments or market expansion
• Review opportunities for automation or scaling
• Identify the key drivers behind consistent growth

This is a strong signal of a healthy business.

Should You Use Excel or Software for Horizontal Analysis?

Most teams use Excel because it is simple and accessible.

Excel allows you to:

• Place periods side by side
• Apply formulas
• Highlight increases or decreases

Accounting software becomes useful when the organisation has multiple subsidiaries, many reporting periods, or a need for automated consolidation.

Using Horizontal Analysis to Guide Better Decisions

Horizontal analysis helps us understand not just what changed, but why it changed. When we compare financial results across different periods, patterns become clearer, and decisions become easier. 

If we want clearer reports, stronger financial control, and guidance that supports long term stability, getting professional support makes a real difference.

At Accounting.my, we turn raw financial data into reports that managers can actually use, whether the focus is growth, cost control, or long term planning. 

With proper bookkeeping, timely reporting, and structured analysis, we make sure your financial decisions are backed by accurate information. 

Plan smartly, execute sharply with data you can count on. Who knows? Perhaps your dreams of IPO and expansion are not that far off.