New balance sheet for managing liquidity and growth.

The story is well known. A company faces growing demand for its product and, to meet the demand, increases both inventory and plant capacity. But as working capital goes to fund the growth, the company's cash reserves dwindle to nearly nothing and the company is then at risk unless prospective sales materialize. One reason this story is so familiar, the author of this article asserts, is that most traditional accounting methods don't allow managers directly to compare physical with financial assets or to relate growth to liquidity. The author describes a new approach in which inventory is treated as a physical, not a financial, asset and in which cash and equivalents are combined with receivables and other current assets. Through a number of cases, he shows how looking at the data this way allows managers to identify growth rates in which liquidity can be sustained, get useful estimates of the external financing necessary to fund growth, determine whether costs of inflation are being accounted for, and make strategic decisions based on a company's growth and liquidity position. [ABSTRACT FROM AUTHOR]