Integrated financial planning is indispensable for companies, says Jendrik Voss. It brings together all of a company's planning components and thus links the income statement, the balance sheet and the cash flow statement.
"The current liquidity bottleneck came as a complete surprise, because it came out of the blue in the months that are traditionally our strongest in terms of sales." A statement like this always makes entrepreneurs, shareholders and financiers wonder. And even a well-managed company can get into a crisis. But there is one essential point in which it differs from a badly managed one: It can actively address the emergency, because the crisis did not come from nowhere. With rolling integrated financial planning, well-managed companies can still slip into a crisis - due to external influences, for example - but they can recognize its timing and extent at an early stage.
By merging profit and loss, balance sheet and liquidity planning into a closed system, companies are able to define countermeasures even before the crisis sets in. Stakeholders can be informed in good time so that they do not have to act under maximum time pressure. An information head start of this kind is frequently the decisive factor, for increasing current account lines in time, for example. The most conscientious P&L planning alone cannot always protect a company from liquidity bottlenecks; integrated planning can do this much better. P&L and balance sheet are best planned together - which also leads to a better understanding of the business model.
Small and medium-sized enterprises (SMEs) often react with the argument that they have neither the time nor the resources for integrated financial planning. They delegate planning away from the P&L to tax consultancies or auditing firms and create friction losses: But auditors check historical values, tax consultants optimize taxes and neither of them provides ex ante business management advice. A study by the Deloitte Mittelstandsinstitut and the University of Bamberg concluded that strategic corporate management and financial planning are too often two different pairs of shoes and found that: "medium-sized companies in particular are giving away enormous potential in this area.”
Lack of time and resources must never lead to wrong decisions
Corporate decisions based purely on earnings planning can lead to serious liquidity crises. "Cash is king" should therefore always be an entrepreneurial guiding principle. With P&L planning alone, cash development can only ever be forecast in a rudimentary way, if at all. Only balance sheet planning and the resulting indirect cash flow planning allow a precise view of liquidity development. This planning is still subject to a degree of uncertainty, but it also creates more certainty. An increase in inventory, for example, usually needs to be pre-financed. It is not possible to tell from a P&L plan whether this is possible.
Protect yourself from wrong decisions and recognize potentials, penetrate all the facts for your planning on every different level and avoid a cash drain by installing integrated planning. This approach also gives companies a holistic view of their business model. Everyone involved in planning will be able to see at once what impact the business has on earnings and liquidity, meaning almost automatically that they will have to deal with more than just partial plans in the future. By this means each person involved here learns about the key interdependencies between the income statement and the balance sheet.
Once an integrated financial model has been set up, various simulations, such as changes in sales revenues, can be easily incorporated and all other parameters change almost automatically. Not infrequently, this quickly leads to profound questions that are not prioritized in the operational business, but are important for holistic planning and ultimately the overall success of a company: What does the value chain of my company look like? How high is the vertical range of my manufacturing? How do my advance payments made and received change over time? How are the equity ratio and other balance sheet ratios developing, also in terms of agreements with credit institutions?
Many expenses can be tapped from historical data. When planning sales, however, it quickly becomes clear that a pure P&L view, for example, is too one-dimensional. If companies plan sales and variable expenses (materials, purchased services), calculating gross profit alone is not enough. If companies plan inventory changes, they must also immediately address production and inventory planning. If seasonal products are to be produced in advance, it quickly becomes clear whether sufficient cash is available for this or if payment targets need to be optimized (cash conversion cycle). This in turn also influences the structure of receivables and/or liabilities in the balance sheet.
Companies must pay attention to a variety of planning interrelationships
Apart from these classic links between the P&L and the balance sheet, there are many other links that companies must take into account. The build-up of warranty provisions, higher maintenance costs or (replacement) investments in fixed assets always change the balance sheet total and usually also the liquid funds. Intensive planning does not stop at the P&L: Many planning premises must also be incorporated into the balance sheet and thus into indirect cash flow planning. Integrated planning of this kind sharpens understanding of the business model and creates detailed knowledge. This enables companies to stand out from the competition even in times of crisis, because they can quickly take appropriate measures - even outside the income statement.
Companies thus not only plan sales targets, gross profit margins or net income, but they can also determine capital requirements - and even down to type, amount and timing. In external communication with financiers, the ability to service capital can thus be credibly demonstrated. As a result, confidence in the company and its management grows among all stakeholders. Entrepreneurs can thus claim for themselves and their company what the Nuremberg Chamber of Industry and Commerce recently put in plain text: "Integrated financial planning: Everything fits together [...] Only in this way can a transparent set of figures be created that provides a good basis for entrepreneurial decisions."
So don't shy away from the initial extra effort of integrated financial planning! It takes time to bring together operational sub-plans and provide those involved with an overview. It is all about a pragmatic approach that is logically structured in itself, focused on the core business and adjusted to all dependencies. You will neither create unnecessary complexity nor need to have paragraph knowledge. The integration of income and cash accounting provides a completely new overview of your company.
What questions are you concerned about in the area of integrated financial planning? We support you in facing these new requirements - with proven planning tools and effective implementation support. Please contact me. I look forward to hearing from you.