CHAPTER 6 DYNAMICS AND GROWTH OF THE BUSINESS SYSTEM. In Chapter 2 we characterized the business system as a dynamic growth model and described in broad terms the interrelationship of decisions, financial yardsticks, and management policies used in the pursuit of shareholder value creation. | 9 27 01 11 13 AM Pagy- -191 CHAPTER 6 DYNAMICS AND GROWTH OF THE BUSINESS SYSTEM In Chapter 2 we characterized the business system as a dynamic growth model and described in broad terms the interrelationship of decisions financial yardsticks and management policies used in the pursuit of shareholder value creation. In the previous three chapters we dealt with several specific aspects of financial management the movement of cash through the system the evaluation of the financial results of the system and the projection of future financial requirements. We ended Chapter 5 with a broad description of financial modeling as a valuable assist in developing financial projections after demonstrating basic pro forma and cash budgeting processes as common tools for financial planning. Now we need to return to our systems concept and become more specific about how some of the system s internal characteristics and dimensions affect changes in the cash flow patterns that lead to shareholder value creation. There are two important subjects that so far we ve touched on only briefly but that are an integral part of understanding and modeling the business system namely leverage and the potential for growth. The reader will recall that financial leverage and the funding potential with which to support growth were represented in the financing sector of the business system diagram. We also recognized the interplay of fixed and variable costs in the operational sector. At the time we briefly indicated the trade-offs and choices that could be made by management in dealing with these areas. Now it s time to integrate these concepts into a more thorough financial planning discussion that deals with the operational and policy drivers underlying the pro forma statements and cash budgets covered in the previous chapter. We ll focus first on the concept of leverage the impact of fixed elements on overall results in two critical areas Operating leverage. Financial leverage. .
