In general, to build a model, one needs to:
- Define the real-life conditions that would result in the need for a dynamic change in the operations, investments or financing of the business.
- Define the specific actions that would be taken in the some circumstances.
Generally speaking, the criteria that determine whether dynamic balancing is necessary are related to Balance Sheet items. Examples of criteria that could be considered to use include:
- Ensuring that the total cash balance is always positive, or is above some minimum threshold level (either in absolute terms or as a percentage of Sales, for example).
- Ensure that equity is always positive.
- For a business that is financed with both equity and debt, ensure that the ratio between these is held constant (or within some band of variation).
- If cumulated retained profits reach a threshold, a dividend (or extra dividend) will be distributed.
- … and so on.