This technique analyses the outcome of the magnitude of decisions made by the capital user aka the management over time.

As its name suggests, the Differential Balance Sheet (“DBS”) shows the changes (i.e. differential) in each item on a company’s balance sheet over two periods (usually years). 

This presentation form shows the magnitude and direction of changes in each balance sheet item. This is useful to help one focus on material changes (relative to the equity buffer), and prioritize the items based on the materiality-inconsistency matrix.

In the example provided below, the more material DBS current assets are highlighted in yellow (Cash, AR-Trade, and Allowance for Doubtful Accounts).

Spotlight on: Retained Earnings

The Income Statement is consolidated as a line item on the Balance Sheet, as Retained Earnings.

As a line item on the balance sheet, Retained Earnings also shows up on the DBS, as illustrated below (this is a simplified form, ignoring other comprehensive income and adjustments):

If all sales were to be collected in cash, and all expenses paid in cash, [a] and [b] would represent the overall cash flow of the company. However, in reality this is rarely the case, as sales are sometimes offered on credit and likewise for expenses.

For example, Sales not collected in cash creates an Account Receivable on the balance sheet. Accordingly, an increase in Accounts Receivable shown on the DBS means that less cash has been collected from Sales, which reduces the “cash inflow” under item (a).

Therefore, Differential Balance Sheet = Cash Flow

It follows that the changes in balance sheet items would “adjust” items [a] and [b] to show the cash flow of the company. Since the DBS shows changes in balance sheet items, including changes in Retained Earnings, the DBS shows the cash flow movement of the company.