The budget has been submitted, the planning is dry and the business year begins in an orderly fashion. This statement is not very correct in normal business years and even less so in times of crisis. In times of crisis, it becomes apparent how robust and reliable the systems and processes are set up and whether risk management can formulate and implement suitable measures to avert economic damage.
In these times, the available flexibility offers a counterbalance to risk. What does this mean for corporate planning and what tasks does planning take on in times of crisis? Here it makes sense to first look at the purpose and objective of corporate planning in general. A major purpose of corporate planning is to create transparency about the resources that are available. The point is to ensure that the resources available today are used in the best possible way in order to secure the continued existence and growth of the company.
Available resources are usually associated with the representation of the cost side, which can be planned well. Machines, buildings, employees are essential inputs here, which are planned as fixed or variable costs. Less plannable and usually a vague approximation is the planning of revenues, sales, which are offset against all cost items in order to measure the economic success. Business planning here ranges from simple updating of actual figures based on deterministic assumptions to driver-based simulation models based on quantitative methods.
Planning the revenue side in the form of sales is much more difficult in a credible transparent form. A part of future sales is that of the sales already contractually assured, which can be planned easily. In addition, there are then sales in the process of contract and conclusion initiation, which are also still highly likely to occur. However, the majority of sales is then already a mere estimate without any relevant probability of occurrence.
Many sales plans are pure estimates, which are often based on the assumption of past developments, updated with the experience of the persons planning. Many estimates are no longer accurate after only a few days due to changed external factors and must be corrected. It has been shown that even mathematical simulation methods reach the limits of their informative value when exogenous factors change. This is because the model on which the simulation is based is, by its nature, a defined framework with selected parameters within which the simulation moves. The meaningfulness is therefore strongly dependent on the chosen model and thus also on the too basic assumptions about drivers and their interrelationships. If an essential driver has been forgotten during the modelling or the calibration of the dependencies has been insufficiently carried out due to a lack of information, the meaningfulness is very limited. I want to express that planning of sales and market developments always remains an estimate that can occur with a certain probability.
How can a technical planning process, which is implemented in a software system, be of assistance here? By allowing a high degree of flexibility and agility in the software and the planning processes modeled in it. In the context of planning systems, flexibility means that the system enables parameters and settings to be changed quickly. Agility, on the other hand, means that this can be managed on a short time scale. It is important that the technically based planning process still has a low model error rate. This means that when parameters are changed and assumptions are supplemented, the model's calculations remain consistent and complete. If the balance sheet was open before, it should also open in a new scenario. If the liquidity report works before the scenario, it should also work afterwards. A flexible system is therefore characterized by the fact that it enables the user to use his expertise to change assumptions and data relevant to planning on a very short time scale without the entire model becoming inconsistent. This can be, for example, the addition of a cost item, the failure of a payment, the merging of cost units or the input of measures to test their effectiveness on the P&L in advance in scenarios.
In this respect, suppliers of planning systems often even differ considerably in terms of the flexibility of changes and model extensions. What takes a few hours for one provider (e.g. entering a new reporting dimension) can take several days for another provider. Valuable time, which is often not available during these days. Urgent questions such as how to ensure production next week, which plant will go into short-time work, which goods can I divert and where best to go, are in some industries better answered today than tomorrow. So when selecting and setting up planning processes and systems, look out for flexibility, which, as a counterbalance to the risks that arise in the planning process, can help to test alternative courses of action in advance and make the best possible decision.
I mentioned at the beginning that risks reveal what we have built on. This can also be seen in personal plans and life plans, which lose security and control. This crisis shows what is really important in life and which relationship carries and thus gives confidence and hope. In this sense planning is good, but by no means everything that counts!
Johannes Hehr has been working as Director Sales at CoPlanner Software und Consulting Gmbh since April 2020. For ten years he has been involved in the technical conception and establishment of software for quantitative risk models - most recently at pmOne AG. His main focus is to create technical implementations from business requirements.