Selecting balance sheet growth drivers
Balance sheet growth drivers are not as straightforward as profit and loss drivers. While a profit and loss item is the sum of occurrences of that item within the period under review, a balance sheet item is made up of an opening balance, plus or minus movements in that item during the period, in order to arrive at a balance at a specific point in time, that is, the period end.
A wise man once said that revenue is vanity, profit is sanity, but cash is reality. We identify appropriate drivers for the balance sheet by considering cash flow.
Balance sheet items that drive cash flow are the elements of working capital—inventory, debtors, and creditors. An increase or decrease in these items has a direct effect on cash flow.
The following diagram shows this process:
Figure 6.4 – Elements of working capital
The working capital cycle consists of how quickly you turn over your stock, how quickly your debtors...
