A solvency testing model building approach for business planning

Modern theories of business planning and management make use of model building approaches as a tool for analyzing and prognosticating the state and future of a firm. For this purpose the state of the firm is described by means of state variables, and future development by means of transition equations indicating the changes in the state variables. The model contains numerous parameters; some of them describe inside or outside conditions of the company and are beyond the control of management whereas other parameters depend on the decisions made by management, e.g. concerning sales efforts, pricing, etc. or, making use of the terminology of management theories or the game theory, on the business strategy approved. When the model has been built and the strategy chosen, it is possible to calculate the future development of the business on the basis of the preassumed conditions and assumptions.