14.11: Common-Size Analysis of Financial Statements
Learning Outcomes
- Perform a common-size analysis on a financial statement
Common size financial statements look at the relationship among financial statement accounts at a given point in time. This type of analysis is called vertical analysis, in contrast to the horizontal analysis we did in the previous section, which looked over time.
So, we will look at financial statement accounts as a percentage of sales here. This is a helpful means to determine if a company is remaining efficient in expenditures as related to sales. We will again take a look at these same two quarters for Simply Yoga, noting that we will now be looking at how each expense line compares, as a percentage to the sales.
| This Quarter | Last Quarter | This Quarter | Last Quarter | |
|---|---|---|---|---|
| Classes Taken | 640 | 650 | ||
| Revenue ($14/class) | $8,960.00 | $8,190.00 | 100% | 100% |
| Expenses | ||||
| Wages and Salaries | $4,480.00 | $4,550.00 | 50.00% | 55.56% |
| Yoga Supplies | $420.00 | $355.00 | 4.69% | 4.33% |
| Utilities | $500.00 | $500.00 | 5.58% | 6.11% |
| Rent | $500.00 | $500.00 | 5.58% | 6.11% |
| Insurance | $100.00 | $100.00 | 1.12% | 1.22% |
| Other Expense | $380.00 | $325.00 | 4.24% | 3.97% |
| Total Expense | $6,380.00 | $6,330.00 | 71.21% | 77.29% |
| Net Operating Income | $2,580.00 | $1,860 | 29% | 23% |
So now we can see how, for example, wages compared as a percentage of sales for the two quarters we are reviewing. Note, that the quarter we had the promotion going on, our wages were a higher percentage of sales. We can also note that our net operating income in this quarter is 6% higher than in the previous quarter. This is a good thing! As we move forward, continuing to add quarters to this review will help us to see trends we would not see looking simple at budget to actual, no matter which budget we used.
In the case above, we can notice improvements in efficiency, and we may also notice areas needing improvement. An example is the increase in yoga supplies as a percentage of sales in this quarter. This would require a conversation with the studio manager, or any other employees responsible for purchasing supplies. This may be as simple as needing to replace some worn-out equipment, which might be a one-time blip of an increase. But what if it is due to supplies going missing due to theft? Then we would need to search further, to discover ways to keep this from happening.
Since we are paying $7 per class to our instructors, with a $14 per class fee, the wages should be 50% of classes attended as they are in this quarter. Remember, we asked the manager last quarter why our sales was lower on more classes? This common-size statement brings the same question to us, in a different way. With wages being a higher percentage of sales than they should, this is something that should be examined.
Each type of analysis has it benefits and limitations. So bringing in a variety of formats to review helps managers see the bigger picture, and help to improve profitability and operations of the company.
Practice Questions