Skip to main content

Common Size Balance Sheet: Definition, Analysis, Format and Example



Definition

Common size analysis, also referred as vertical analysis, is a tool that financial managers use to analyse financial statements. It evaluates financial statements by expressing each line item as a percentage of the base amount for that period. The analysis helps to understand the impact of each item in the financial statement and its contribution to the resulting figure.

The technique can be used to analyse the three primary financial statements, i.e., balance sheet, income statement and cash flow statement. In the balance sheet, the common base item to which other line items are expressed is total assets, while in the income statement, it is total revenues.

What is Common Size Balance Sheet Analysis?

The term “common size balance sheet” refers to the presentation of all the line items in a balance sheet in a separate column in the form of relative percentages of total assets, primarily. This technique is convenient for comparison of the number of assets, liabilities and equity among different companies, especially when they are used for an acquisition analysis.

It is convenient to build a common size balance sheet as it helps in building trend lines to discover the patterns over a specific period. In short, it is not just an upgraded variety of the balance sheet per se, but it also captures each single line item as a percentage of total assets, total liabilities and total equity besides the usual numeric value.

Format and Example

Let’s look at the common size vertical format balance sheet of Sundaram Pipes, Fittings and Motor Pumps.

As you can see that a common size balance has drawn comparisons between assets and liabilities and even called out the percentage of the base amount for that period. The analysis helps to understand the impact of each item in the financial statement and its contribution to the resulting figure.

Balance sheet format

Balance sheet format

As you can see that a common size balance has drawn comparisons between assets and liabilities and even called out the percentage of the base amount for that period. The analysis helps to understand the impact of each item in the financial statement and its contribution to the resulting figure.

Here are some of the advantages of Common Size Balance Sheet analysis

  • It aids the reader of the statement to understand clearly the ratio or percentage of each individual item in the statement as a percentage of total assets of the company
  • It aids a user to determine the trend related to the percentage share of each item on the asset side and percentage share of each item on the liability side
  • A financial user can also use it to compare the financial performances of different entities at a glance since each item is expressed in terms of percentage of total assets, and the user can determine any required ratio quite easily

Comments

Post a Comment

Popular posts from this blog

What are the Key Reports a Business Owner Must Track and Which is the Best Tool for it?

As a business owner, you must be already keeping a track of the overall financial health of the business. While you may hire an accountant for end-to-end tasks that will keep your books of accounts updated, it is imperative that as a business owner, you also go beyond the basic understanding of key financial reports to take your business to the next level. The three primary key aspects which would help you as a business owner to get a holistic view of your company’s books of accounts in sync with your business transactions are; Cash Stock and Taxation Cash What is the ultimate goal of any business? To have regular cash flow, right? So, where do we get these crucial insights about cash flow management in order to stay updated with your company’s finances from? Let’s take a look at how these cash flow reports will help you build your business and trigger long term, growth. Cash Flow Cash flow is the amount of money going in and out of your business. Healthy cash flow can help lead your b...
Post a Comment
Read more

Break Even Point: Definition, Formula, Example and Analysis

What is the Break-Even Point? A simple financial tool which helps you determine at what stage your company, or a new service or a product, will be profitable. To put simply, break-even point analysis will tell you the number of products or services a company should sell to cover its costs, particularly fixed costs. Break-even is a situation where you are neither making money nor losing money, but all your costs have been covered. Break-even analysis is useful in studying the relation between the variable cost, fixed cost and revenue. Generally, a company with low fixed costs will have a low break-even point of sale. For example, a company has a fixed cost of Rs.0 (zero) will automatically have broken even upon the first sale of its product. The purpose of the break-even analysis formula is to calculate the amount of sales that equates revenues to expenses and the amount of excess revenues, also known as profits, after the fixed and variable costs are met. The main thing to understand i...
Post a Comment
Read more

6 Tips for Efficient Cash Flow Management

By definition, cash flow refers to the amount of money flowing in and out of the business. The larger the time gap between cash outflow (payments to your supplier, employees, duties etc.) and cash inflow (receipts from your customers), the higher the risk it possesses to the business. These situations persist in every business and to smoothly manage such situations, you need cash flow management. In simple words, cash flow management largely implies managing frequency of payments and a whole lot of activities to encourage your customers to pay as fast as possible. Cash flow management involves a process of preparing cash flow statement, monitoring, analysing and optimizing such that business has enough cash cushion to run their business. In this article’ Tips to Efficient Cash Flow Management’, we are sharing you some of the best ways to manage optimum cash flow in your business. Here are 6 quick tips to manage your cash flow efficiently. Faster realisation of accounts receivables Acco...
Post a Comment
Read more