When you want to forecast financial performance for 2025, using vertical and horizontal analysis together offers a powerful approach that combines understanding your current cost structure with how your business has evolved over time. Both methods complement each other to give you a clearer picture of where your finances stand now and where they might head in the future.

Let’s start by breaking down what these two analyses are and how they work in tandem. Vertical analysis looks at each line item in your financial statements as a percentage of a base figure within the same period. For example, on an income statement, you might express all expenses as a percentage of total revenue. This helps you understand the proportion each expense or income source contributes to the overall picture. It’s especially useful for identifying if certain costs are too high relative to sales or how profit margins are structured[1][2][4].

On the other hand, horizontal analysis compares financial data over multiple periods, showing trends and changes over time. You might look at revenue growth, shifts in cost of goods sold (COGS), or operating expenses year over year or quarter over quarter. This analysis reveals whether key metrics are improving, stagnating, or deteriorating, helping you spot patterns that influence your future forecasts[2][5][7].

Here’s why combining them is key: vertical analysis provides the structure of your financials in a given year, telling you what percentage of revenue is eaten up by different expenses or how assets break down on your balance sheet. Horizontal analysis then layers the dimension of time on top, showing how those percentages and figures have shifted over months or years. Together, they give a dynamic, nuanced view of financial health and efficiency that neither method can provide alone[2].

Imagine you run a mid-sized manufacturing company. You perform vertical analysis on your 2024 income statement and find that your COGS is 60% of revenue, operating expenses are 25%, and net profit margin is 10%. This snapshot tells you where your dollars are going in 2024. Next, you do horizontal analysis comparing these percentages and absolute figures from 2020 to 2024. You notice that COGS as a percentage of revenue has been creeping up steadily from 55% in 2020 to 60% in 2024, and your net profit margin has squeezed down from 15% to 10%. This trend reveals rising costs that are eroding profits.

Armed with this combined insight, you can forecast 2025 with more confidence. You might project that if the COGS trend continues, your margins could shrink further unless you take action. This could lead to plans for negotiating supplier contracts, improving production efficiency, or adjusting pricing strategies. Without vertical analysis, you wouldn’t know the cost structure; without horizontal analysis, you’d miss the trend—together, they guide smarter decisions[2][6].

Here are some practical steps to use both analyses effectively in your 2025 forecasting:

1. Start with Clean Financial Statements
   Gather your most recent income statements and balance sheets for at least the past 3–5 years. Accuracy here is critical because all your analysis depends on reliable data.

2. Perform Vertical Analysis for Each Year
   Convert your financial statements into common-size statements. For the income statement, express every line item as a percentage of total revenue. For the balance sheet, express assets as a percentage of total assets, and liabilities/equity as a percentage of total liabilities and equity. This standardization allows you to compare proportions easily across years and even benchmark against competitors[1][3][4].

3. Conduct Horizontal Analysis Across Periods
   Calculate the percentage change in key financial items from year to year. Look at revenue growth rates, expense increases, profit margin shifts, and balance sheet changes. Pay special attention to trends that could impact 2025, such as rising operating expenses or declining cash reserves[5][7].

4. Combine Insights to Identify Drivers and Risks
   Use vertical analysis to understand cost structures and efficiency levels at each point in time. Use horizontal analysis to see which of these factors are improving or deteriorating. For example, if marketing expenses as a percentage of revenue are stable (vertical), but absolute marketing spend has doubled over 5 years (horizontal), you might assess whether that spend is driving enough revenue growth to justify itself[2][4].

5. Incorporate Industry Benchmarks and Context
   Vertical analysis is particularly helpful for benchmarking because it removes size differences. However, what’s normal for your industry matters. For example, a 25% COGS might be fine for a luxury retailer but not for a commodity business. Combining your internal trend analysis with industry norms sharpens your forecast accuracy[2].

6. Use FP&A Software to Automate and Visualize
   Financial Planning & Analysis (FP&A) tools can automate vertical and horizontal calculations, making it easier to update forecasts frequently and spot changes early. Siemens and other companies use such software to track costs and adapt budgets dynamically, an approach that’s especially useful in volatile markets[1][6].

7. Regularly Review and Adjust Forecasts
   Make vertical and horizontal analysis part of your monthly or quarterly financial reviews. Tracking cost trends and revenue shifts continuously allows you to catch weak spots early and adjust your 2025 projections based on the latest data[1][2].

Here’s a real-world example to illustrate the power of combining these analyses: Unilever in 2022 noticed through vertical analysis that their COGS was increasing as a percentage of revenue. Horizontal analysis showed this was a recent trend over several quarters. They responded by adjusting prices and cutting costs, which helped maintain margins. Without seeing both the proportion and trend, their response might have been delayed or misdirected[1].

For forecasting 2025, this means that when you see a certain expense category growing faster than revenue through horizontal analysis, vertical analysis tells you how big a slice of the revenue pie that expense is taking. For instance, if payroll costs rise from 30% to 40% of revenue, you know that labor costs are becoming a significant burden on profitability. Then you can model different scenarios for 2025 — perhaps hiring freezes, automation investments, or wage negotiations — and forecast their financial impact.

One practical tip: don’t get too bogged down in the numbers. Use these analyses as tools to tell the story of your business’s financial health and trajectory. Share insights with your team in simple terms, like “Our marketing is steady at 10% of sales, but sales have only grown 2% per year, so we need to rethink how we spend in 2025.” Making these analyses accessible encourages smarter decisions throughout your company.

In terms of statistics and trends, businesses that regularly use combined vertical and horizontal analysis for forecasting tend to have better budget accuracy and performance outcomes. According to a 2023 survey by the FP&A Board, companies integrating these analyses into quarterly reviews improved forecast accuracy by 15% on average and responded faster to market changes[1][6].

To wrap it up, using vertical and horizontal analysis together is like having both a snapshot and a time-lapse of your company’s financial health. Vertical analysis shows you the proportions in any given year, while horizontal analysis reveals how those proportions and figures change over time. When forecasting 2025, this combined insight helps you build realistic, actionable financial plans that anticipate risks, leverage strengths, and ultimately guide your business toward sustainable growth.