Horizontal analysis is a type of trend analysis that compares both percent and amount changes from one year to another. This type of analysis is performed on both the income statement and the balance sheet to allow detection of trends and to identify performance issues. The analysis itself can be very useful, especially if more than two years are included. However, caution must be taken not to draw conclusion on this analysis itself, as it can mislead without any context. It is always important to have both company background information, and the aid of other analyses such as ratios to help form a complete picture. Income Statement
From the income statement one of the most visible changes is both strength and a weakness. The jump in Net Sales from FY6 to FY7 (up 33%) is very substantial indicating a growth year for the company and a very positive result. Net sales are also a source of weakness when we look at the substantial drop in sales from FY7 to FY8, where a 15% reduction took place. Normally this may be cause for alarm and should mandate some immediate action. According to management, because their product is dependent on professional riders obtaining sponsors, the downturned economy has cause several sponsors to stop funding riders, and thus affected sales. This in itself could indicate that there isn't enough diversification in the company's revenue sources. Although a niche industry obtains most of its profit from its specialization, it should not depend on it as a sole source of revenue. The company is also dependent on its innovation and market leadership to maintain brand value, so special attention must be given to R&D and advertising funding. A strengthin this section is that COGS has been moving in proportion to sales. Although there is a small margin of difference between the raise/fall of sales versus COGS (1.5% from FY6 to FY7 and .5% from FY7 to FY8) the proportions do indicate that the projections being made in purchasing are accurate. However, that gap is also an opportunity to increase profit by reducing COGS. Selling Expenses:
A strength that can be observed here is that the company increased advertising from FY6 to FY7 by 37.5%. This is especially positive because the product depends on visibility and brand name recognition by professional riders. There are a few weaknesses in this section as well, mostly from FY7 to FY8. First, there was a decrease in both advertising of 16.3 percent. As stated in the previous paragraph, one of the company's main assets is its brand, which represents innovation and quality professional bicycles. However, a brand name must be supported by advertising. Sales are almost always affected by reduction in advertising. Without it new customers won't know about the company's products, and existing customers won't know about innovations and new products. We recommend that advertising funding be increased in support of sales. Another potential weakness is the inactivity in the Website Creation and Maintenance section. This may indicate that the company's website is not being used as an active marketing and sales asset. In today's market, the website can help the company to diversify its revenue streams and seek out new business opportunities that can help combat sales declines from its niche market. We recommend increasing this allotment in support of sales and to help the company mitigate the risk related to niche market sales. A strength of this area is that most accounts fluctuated up and down in proportion to the fluctuation of net sales. This indicates that there is good control in selling expenses. 2
General and Administrative Expenses:
This is by far the most significant source of concern in the Income Statement. A significant weakness of this area is the rise in expenses of 20.4 percent from FY6 to FY7, and then another rise of 1.2 percent from FY7 to FY8. The latter is especially concerning because it took place during a low...
Please join StudyMode to read the full document