Corporate planning: not to be neglected - Mazars - Germany

As the economic situation noticeably recovers, the worry lines start to disappear from many entrepreneurs’ brows. Challenges for successful management - including corporate planning and corporate management - have increased distinctly.

In many enterprises planning and reporting processes are insufficient and do not allow for flexible and quick reactions to changes. Often only the result of operations is planned in sub-systems while an integrated planning of net assets and financial position is neglected. Thus, inconsistencies in the planning remain undiscovered for a long time causing a lack of transparency and additional work concerning adjustments and subsequent consistency checks. If such a plan has already been communicated externally, the company could face the threat of a loss of confidence which, once lost, is difficult to restore.

The planning should also undergo sensitivity analyses that test its consistency with regard to variations of major planning assumptions (price evolution, currency fluctuations, sales volumes, growth, etc.). Additionally a range of results including “best case” and “worst case” scenarios should be indicated. This procedure supports the entrepreneur’s risk management, giving him the opportunity to react more quickly to changes of determining factors and to promptly take adequate managerial decisions.

The organization and structuring of an appropriate planning and reporting system is undisputedly complex and binds personnel and financial resources. However, experience shows that these resources tend to be at their scarcest when the demand for and necessity of a high performing controlling system is at its highest.

In this context, it will prove insufficient to only concentrate on securing liquidity through adequate credit lines. The preparation of strategic managerial decisions in connection with (early) business succession or with the sale of the enterprise or of shares will also prove difficult since no reliable results can be obtained without solid planning systems.

In the context of a business succession, the shares that will be transferred have to be valued for inheritance tax purposes. If the capitalized earnings method does not apply, the income has to be determined pursuant to IDW Standard S 1 which requires an integrated budget. Foresighted planning of a business succession is recommended particularly to ensure the tax exemption pursuant to Section 13b German Inheritance Tax Act. Through tax optimization procedures, assets qualified as non-operative with a harmful effect from an inheritance tax point of view may still be reduced to an unharmful level in time.

In a situation of over-indebtedness, the existence of an adequate planning and reporting system is indispensable for the management as the obligation to file for bankruptcy can be averted through the presentation of a positive going concern forecast. In the light of the managers’ personal liability under criminal and civil law, we recommend to thoroughly prepare this going concern forecast – consisting of a sustainable finance and revenue plan as well as a budgeted balance sheet and profit and loss statement – according to economic criteria and in particular to carefully document the assumptions underlying this planning.

All these are many reasons in favour of a careful examination of the current status of your company’s planning and reporting systems with regard to the complex requirements of them.