News on short-term and medium-term planning

How is your liquidity developing?

In view of the present heightened uncertainty caused by the currently unforeseeable effects of the COVID-19 crisis, business plans are of extraordinary importance. This applies both to the "regular" business plan and certainly also to the short-term to medium-term liquidity plan of a company. In particular in critical phases, company directors are required to permanently assess the effects the crisis causes on the current liquidity situation in order to take appropriate (counter-) measures if necessary.

Does your business plan take the current situation into account?

It is highly probable that the business plan prepared before the start of the COVID-19 crisis does not longer reflect the current expectations of companies and their shareholders in relation to the (at least short- to medium-term) future development. In fact, it is of utmost importance - particularly in times of a crisis - not only to keep any general economic / social developments and especially the effects they may have on the company's development "in mind", but also to reflect these effects in the financial reporting / business plan.

Can your business plan model accommodate different scenarios?

Fully integrated financial models or operating models including scenario functions are particularly appropriate for this purpose. Such models enable companies to simulate a broad variety of assumptions for key value drivers. Imaginable value drivers, to name just a few, are the future market volume, the company's market shares, price and quantity structure of the products as well as gross profit margins or contribution margins, complemented by specific effects such as the introduction of short-time work or delayed payments by customers.

Once the financial model has been developed, the effects of different assumptions regarding these variables in the annual, quarterly or monthly net assets, financial position (including liquidity) and results of operations of the company can be directly mapped using a scenario switch. Possible fields of application for this are e.g. the assessment of impacts of different revenue and cost scenarios on capacity utilisation, liquidity development, the development of financial covenants or in equity. This transparency helps to identify the possible need for measures and to integrate their potential implementation directly into the financial model. Appropriately structured financial models increase transparency regarding the impact of the COVID-19 crisis on the company's financial key ratios, to precisely identify any losses which may be attributable to the COVID-19 crisis and separate them from the "normal" development of the business activities, or to question or substantiate the company's ability to service debt in various scenarios.

Does your financial model show your short-term financing needs?

In complementing corporate planning, which is usually rather designed for the medium term or long term, a financial model may be required that also covers short-term liquidity planning and control on a daily basis, if necessary (up to a 13-week period). Also for this purpose it should be possible to show various scenarios for important value drivers from short-term revenue recognition to the payment behaviour of customers and necessary tax payments, including any suspensions or effects of short-time work, if any. In any case, appropriate models can help to increase transparency, to improve the steering of a company, and to generate more reliable financial information, e.g. for internal (such as management) and external (such as financing partners) stakeholders (Read our article on financial support). Where such models are in place already, a model review performed by an independent third party may help to generate a higher level of confidence in this important model for the relevant stakeholders.

Practice note

We shall be pleased to assist you with the preparation of a pragmatic planning model (including scenario considerations) which is adapted to your specific situation. Alternatively, we can thoroughly examine your existing model and help to optimise it, if necessary.