Decomposition Measures for Financial Analysis

Abstract

A major characteristic of all living organisms is homeostasis-an equilibrium maintained by a selfregulatory mechanism. When such an equilibriume.g., a human body temperature of 98.6 degrees-is disturbed, forces are set in motion to restore it. It has been suggested by organization theorists [4] and economists [2], that the behavior of business organizations can also be characterized by homeostasis in which optimal (equilibrium) relationships among the various inputs and outputs are determined and efforts are made to maintain them against disturbances. Thus, for any given level of activity, for example, there exist optimal relationships between labor and capital inputs, inventory and sales, cash and shortterm securities, debt and equity capital. The analogy between living organisms and that of business organizations is, however, incomplete since the latter's equilibrium input and output relationships can change over time. Such changes generally result from (a) planned changes by management, such as the increase in the ratio of short-term securities to

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