You're staring at a dense financial model at the end of the month. You see revenue grew by two million dollars last quarter, so you naturally expect a corresponding bump in profit. Instead, your bottom line stays completely flat. You dig through rows of raw numbers to find the cause.
Then, you try a different approach.
You divide every expense by total revenue, and the real story jumps right off the screen. You instantly see your marketing spend increased from 10% of revenue to 15%. You stop firefighting and start leading the strategy.
That's vertical analysis in action. Finance teams spend a ton of time building models and reports, but raw numbers hide the patterns that matter. Vertical analysis lets you see what's happening fast by turning each line item into a simple percentage of a base figure. On your income statement, you use revenue. On your balance sheet, you use total assets.
This approach brings business relationships and resource allocation into focus. You spot margin compression early and see exactly which departments scale well. You also gain a reliable way to compare your costs to peers of any size.
This guide explains vertical analysis and shows you how to apply it thoughtfully. We also show you how to put this method right into your financial model using Runway. Runway gives model owners and scrappy finance teams the power to run simulations, build scenarios, and handle cross-team planning without vendor bottlenecks.
Defining vertical analysis
Vertical analysis expresses every line item on a financial statement as a percentage of a base figure from the same statement.
Vertical analysis percentage = (individual line item / base figure) × 100
On an income statement, the base is usually total revenue. For a balance sheet, it’s total assets. On cash flow statements, it’s total cash receipts or total revenue, depending on your focus.
This creates a common-size financial statement. You turn a $500K hosting bill into “5% of revenue.” A $2M sales and marketing spend? “20% of revenue.” Viewing your data this way helps you track your cost structure over time, see how you stack up against your budget, and benchmark against other companies, whether they’re one-tenth or ten times your size.
When you look at an income statement this way, you see the impact of every margin layer: gross margin, operating margin, EBITDA margin, and net margin. On the balance sheet, vertical analysis shows exactly how you allocate capital across working capital, fixed assets, and intangible assets, and how you finance it with debt, deferred revenue, and equity. The proportions tell the story.
Why it's important and how it can be used
Vertical analysis uncovers the patterns the dollar amounts hide. A $200K jump in engineering spend looks huge until you see it dropped from 28% to 25% of revenue because revenue grew faster. A $1M gross profit might seem solid, but vertical analysis may reveal it's only 45% of revenue when you're aiming for 75%.
Finance teams use vertical analysis to answer real questions about resource allocation:
- Are we spending more on sales and marketing, compared to revenue, than we did last quarter?
- Is our gross margin improving as we scale, or are we seeing margin compression?
- How does our cost structure compare to benchmarks for similar companies?
- Which departments gain efficiency as we grow? Which take up a bigger share of revenue?
- Are we on track to hit our target operating margin by year-end?
With vertical analysis, you give investors and the board clear context. If operating expenses grew 40% year-over-year, that might worry people. But if operating expenses fell from 110% to 95% of revenue, you show real leverage, even with rising costs.
Vertical analysis clarifies your trade-offs. If you're deciding between putting more resources into product or sales, you can quickly see that engineering makes up 25% of revenue (over your 20% target), while sales sits at 30% (below your 35% target). That points you to the smartest next move.
For fundraising or due diligence, vertical analysis offers clean, quick insight into your unit economics and cost structure. Investors spot if your margins line up with their expectations and if your spend fits your growth strategy. Dive deeper on how to interpret your P&L for these discussions.
Methodology and approaches
Vertical analysis works at different levels depending on what you want to know. You can analyze big categories, zoom into specific line items, or use data from different financial statements as the base.
Common-size income statement approach
This is the classic method. Show every income statement line item as a percentage of total revenue. Revenue is 100%. Everything else (cost of goods sold, operating expenses, taxes, net income) becomes a slice of that 100%.
This view lets you see exactly where every dollar goes. Want a snapshot? Gross margin at 72%, sales and marketing at 35%, engineering at 22%, G&A at 12%, net income at 3%. These percentages let you track your structure across time, budgets, and peer companies, regardless of revenue size.
Common-size balance sheet approach
Here, express every asset, liability, and equity line as a percentage of total assets. For example, cash could be 45% of total assets, accounts receivable 15%, fixed assets 10%. On the other side, deferred revenue could be 20% of total assets, accounts payable 8%, long-term debt 5%, stockholders’ equity 67%.
You instantly see how you allocate capital, and how you finance it. A high cash percentage signals liquidity. High deferred revenue shows strong forward visibility. A high fixed asset ratio might mean a capital-intensive model.
Departmental cost structure approach
Use vertical analysis within operating expenses to track how your team investments shift as you grow. Turn each department's spend (0engineering, sales, G&A, customer success) into a share of total revenue.
You’ll spot which teams are becoming more efficient, and which start to take up more of your revenue. If sales and marketing drops from 45% to 35% while engineering stays steady at 20%, you’re making real gains. If G&A grows from 10% to 15% for no clear reason, it’s time to dig in.
Gross margin decomposition approach
Break cost of goods sold down into pieces (hosting, infrastructure, customer support, software, payment processing) and show each as a percent of revenue. You’ll quickly see which costs scale well and which don’t.
Drop hosting from 8% to 5% of revenue? That's a big win. Customer support jumps from 10% to 15% of revenue? Time to check your process and automation. Decomposition paints a cost structure map, not just a big margin number.
Unit economics vertical analysis approach
Show CAC, average revenue per account, gross margin per customer, and contribution margin as percentages of LTV or revenue per unit. This gives you a normalized view of per-customer profit.
If CAC is 30% of LTV, gross margin per customer is 75% of ARPA, and contribution margin is 45% of ARPA, you see exactly where you stand. This approach works especially well for SaaS companies tracking cohorts or pricing tiers.
Cash flow vertical analysis approach
Turn each cash flow in and out (operating activities, capex, financing) into a percentage of total cash receipts or revenue. This shows how you generate and use cash, not just what accrual accounting says.
You might see operating cash flow at 15% of revenue, capex at 3%, and financing activities at 5%. This approach gives you another lens, focusing on the real cash movement.
Key components and considerations
To get vertical analysis right, it's all about being deliberate and consistent every time.
Selecting the appropriate base figure
Pick the right base for each statement. Use total revenue for the income statement. For the balance sheet, use total assets. Cash flow needs total cash receipts or revenue. Be consistent every period so you can compare apples to apples.
Define your base up front. If you switch between gross and net revenue, or use different bases on the balance sheet, you lose comparability. Stick with one definition and document it.
Deciding the level of granularity
Decide how deep to go. You can look at just the big categories, like cost of goods sold and operating expenses, or get granular and break down every detail, such as hosting, sales commissions, or rent. Granularity adds insight, but needs solid accounting data.
Board reports may only need the big picture. For internal optimization, go detailed. Build analysis at the deepest level your data supports, then roll it up for your audience.
Normalizing for non-recurring items
Watch out for one-off items. Things like litigation, restructuring, or big fees can warp your cost picture. Exclude or separately call out these items so they don’t hide real patterns.
For example, if you had a $500K legal expense in Q2 and G&A jumps from 12% to 17% of revenue, flag it. That’s a single spike, not a fundamental cost jump.
Handling revenue mix changes
Add new revenue streams, like professional services, and watch your structure shift. Services usually have lower margins, so the blended gross margin might drop, even if your subscription business is strong.
Solve this by segmenting vertical analysis for each revenue type. Show subscription at 80% gross margin, services at 40%, then the combined number. That way, you see the real source of change.
Accounting for stage-of-company effects
If you’re earlier in your journey, expect sales and marketing to be a bigger slice of revenue than larger companies. Comparing your 50% sales and marketing spend to a 25% benchmark misses important context.
Stick to stage-appropriate benchmarks. Compare against peers with similar revenue, growth, and maturity. Your context matters.
Applying vertical analysis to budget and forecast
Don’t limit vertical analysis to actuals. Use it for budgets and forecasts too. Express planned spend as a percent of projected revenue. This helps you spot if your future cost structure matches your goals.
If your sales and marketing budget is 40% of revenue for Q1, but your model says it should be 30%, you know where to focus. Apply vertical analysis to plans as well as results. This connects directly to variance analysis.
Treating stock-based compensation consistently
Stock-based compensation can swing your metrics, especially if equity is a big part of your program. Decide from the start, are you including it or not? Be open about your approach.
Many teams report both GAAP (with SBC) and non-GAAP (without SBC) vertical analysis. That gives your audience a full picture and removes confusion.
Performing GAAP and non-GAAP analysis separately
If you use adjusted metrics, run vertical analysis on both a GAAP and non-GAAP basis. This keeps everyone on the same page, no matter which version they’re using to measure profitability.
Tracking & leveraging vertical analysis in your financial model
Vertical analysis isn't just about monthly reporting. It’s a dynamic tool you can bake right into your workflows.
Financial model structure and assumptions
Build vertical analysis straight into your model. Set your budget assumptions as target percentages of revenue, gross margin 75%, sales and marketing 35%, engineering 20%. This keeps your focus on the structure, not just the numbers.
Your model should update these percentages automatically as assumptions change. Adjust revenue, and your expense ratios update instantly. Now you know if your plan stays on track as things shift.
Margin analysis and improvement tracking
Use vertical analysis to follow your margin performance over time. Plot key margins as a percentage of revenue across quarters. Drill into which costs are getting better or worse relative to your top line.
If gross margin went up from 68% to 73% over six months, dig into why. Maybe hosting costs dropped from 12% to 8% of revenue, or your mix shifted. Vertical analysis shows which levers move the needle.
Cost structure optimization
Vertical analysis shines a light on areas for improvement. If G&A is 18% of revenue, but best-in-class teams run at 12%, you know where to act.
Set department targets using the data. Share clear percentages with department heads for each key milestone. This makes sure everyone’s working toward the same structural goals. For more check out operational efficiency metrics.
Budget variance analysis
Compare actual vertical analysis numbers to your budgeted ratios. If you aimed for sales and marketing at 35% of revenue but hit 40%, it’s time to investigate. Did revenue underperform, did spending run high, or both?
Vertical analysis highlights real structural gaps from plan, not just dollar variances. Maybe engineering’s over budget, but as a percent of revenue, it’s actually right on target.
Peer and competitive benchmarking
Benchmarking gets easier with vertical analysis. Grab common-size income statements from comparables or industry reports and line them up next to yours.
See if your gross margin, sales efficiency, and R&D investment are where they should be. Use these insights to decide where to invest or trim.
Investor and board reporting
Include vertical analysis in every board packet. Share the common-size income statement next to your absolute numbers so investors and board members instantly see if your cost structure matches your strategy.
Highlight trends, gross margin growing from 70% to 75%, operating expenses falling from 120% to 100% of revenue. This proves you’re building leverage and improving your core metrics.
Operating leverage measurement
Watch operating leverage through vertical analysis. When operating expenses grow slower than revenue, their share drops. This is your path to profitability.
If total operating expenses go from 110% to 100% to 90% of revenue across quarters, you’re scaling well. If they don’t budge, it’s time to revisit your plan.
Scenario planning and sensitivity analysis
Use vertical analysis in your scenario models. Model high-growth and conservative cases, then compare each cost structure as a percentage of revenue.
This shows the impact of strategy changes. In a growth scenario, sales and marketing might be 45% of revenue. In a profitability scenario, it could be 25%. Now, you see trade-offs clearly.
Burn rate and runway estimation
Project your burn rate using vertical analysis. If operating expenses are 120% of revenue and you’re growing 10% monthly, you can quickly see when you’ll drop below 100% of revenue and hit break-even.
This ties directly to how long your runway lasts. Lowering sales and marketing from 40% to 35% of revenue could extend your runway by more months than you might expect.
Audit and due diligence readiness
Prepare vertical analysis for due diligence. Investors and acquirers ask for common-size statements to understand your structure and margins. With vertical analysis ready in your model, you save time and show you’re buttoned up.
Benchmarks, rules of thumb, and common pitfalls
Vertical analysis works best when you check your numbers against the right benchmarks and stay clear of common traps.
SaaS gross margin benchmarks
The best SaaS companies reach gross margins of 75%-85% of revenue. Earlier-stage SaaS can aim for at least 50%; mature businesses should see 70%-80%.
If you’re past your early days and running under 70%, look closely at pricing, cost drivers, or revenue mix for answers.
Operating expense benchmarks
High-growth SaaS usually spends 100%-140% of revenue on operating expenses up front, but that should decline to 70%-90% as the company matures and leverages scale.
- Sales and marketing: 30%-50% of revenue during high growth, dropping to 20%-30% when growth slows
- R&D: 20%-30% of revenue while investing in product, dropping as revenue scales
- G&A: 8%-15% of revenue, aim for the lower end as you grow
Rule of 40 as a vertical analysis benchmark
The "Rule of 40" says your growth rate plus profit margin should add up to at least 40%. This links growth with your profit margins, both visible in vertical analysis.
For example, growing 50% year-over-year? You can run at a -10% operating margin and still meet the rule. If your growth slows to 20%, you’ll need a 20% operating margin.
Operating leverage indicators
When you achieve leverage, your expenses grow slower than revenue. Each cost category drops as a percent of revenue, even when dollars go up. That’s progress.
If sales and marketing shrinks from 40% to 35% of revenue while spend climbs from $2M to $2.5M, you’re winning. Revenue outpaced cost.
Balance sheet benchmarks
- Deferred revenue often sits at 15%-30% of total assets in subscription businesses. Higher is better if you want revenue clarity.
- Cash as a percent of total assets hits 50%-80% right after funding, and then declines as you invest in growth.
Common pitfalls to avoid
- Looking at one period in isolation misses the trend. Compare over time to see the real patterns.
- Pick your base figure carefully. Switching between gross, net, or different balance sheet bases will throw off your benchmarks.
- Don’t stop with broad categories. Go deeper so you know what’s driving each trend.
- Use appropriate comparables. Early-stage and mature businesses shouldn’t benchmark against each other.
- Account for revenue mix changes. Lower margin business lines can shift your percentages fast.
- Remove or identify one-time items. They can hide what's really happening.
- Apply vertical analysis to forecasts and budgets, as well as actuals, to keep plans and reality aligned.
- Treat stock-based compensation the same way across periods and when benchmarking.
- Use vertical analysis on all key statements, not just the income statement. There’s more story to tell.
- Segment analysis if you have multiple business lines. Lumping different models together hides real insight.
- Make vertical analysis an input for decisions, not just a static report. Use it to shape budget, pricing, and headcount plans.
- Normalize for seasonality. Use annualized or trailing-twelve-month data for clarity if needed.
- Document your method and assumptions so new team members and partners see how you built the view.
How to perform vertical analysis in Runway
Runway helps you build vertical analysis right into your financial model and reporting. Here’s how you do it:
Step 1: Build or import your income statement
Start by making sure your P&L is set up in Runway. Connect your accounting data or set up your income statement with revenue, COGS, and operating expense lines. Follow the guide on building a P&L in Runway.
Step 2: Define your base figure
Create a formula for your base, typically total revenue. In Runway, use a calculated line item or reference a revenue total. Keep it the same for every period you’re reviewing.
Step 3: Create vertical analysis percentage columns
Add calculated columns for each line item you want to track. Divide each by your base figure and multiply by 100. In Runway, set this up directly in your income statement or a separate analysis view.
For example: (COGS / Total Revenue) * 100. Use the same approach across all your major line items.
Step 4: Configure your reporting view
Set up a page in Runway with both dollar values and percentages side by side. With both in view, stakeholders see trends in dollars and structure at once. Maybe revenue grew 30% quarter-over-quarter, but if sales and marketing’s percentage also went up, efficiency isn’t improving as much as it seems.
Step 5: Apply vertical analysis to budget and forecast
Use Runway’s scenario tools for actuals, budget, and forecast. Apply your vertical analysis formulas to every scenario. Now you can see your actual structure versus your plan in one place.
Set up budget vs. actuals analysis that shows dollar and percentage variances. This reveals which cost areas diverge the most from your targets.
Step 6: Build decomposition views
For deeper dives, create vertical analysis views by cost category. Build a gross margin table with each COGS component as a percent of revenue. Show departmental shares, such as engineering, sales, marketing, G&A, customer success, easily in a separate view.
Use Runway’s dimensional modeling to slice by department or cost center, giving you insight into every segment without duplicating work.
Step 7: Add benchmark comparisons
Show benchmark percentages for your segment and industry right in your analysis view. Now you see gaps at a glance. If sales and marketing is running at 45% and the benchmark is 35%, you see where to focus.
Step 8: Set up trend charts
Use Runway’s charting to plot key percentages over time, gross margin, operating expense ratio, and department shares. Trends reveal if you’re gaining leverage or seeing margin pressure.
Step 9: Integrate with scenario planning
Put vertical analysis in every scenario. See if your structure shifts between fast growth, conservative, or profitability-driven options. Make your trade-offs clear and help leadership choose the right plan.
Step 10: Automate reporting
Once vertical analysis lives in your model, it updates as soon as new data comes in. Your reports are always current, and there’s no need for manual Excel work. Board packets, investor updates, and dashboards all pull the latest metrics automatically.
Get started with vertical analysis in Runway
Vertical analysis changes how you understand your business. You see the patterns behind the numbers. You know exactly where your resources go, which teams scale well, and how your cost structure stacks up. When you integrate vertical analysis into your model, it becomes a living, decision-making tool, not just a once-a-month report.
Runway makes this easy. Build vertical analysis once and keep it current without extra work. Your numbers update automatically. Your scenarios highlight every trade-off. Your board reports always use the latest insight.
Ready to stop firefighting and start leading? Get started with Runway today.