Small Business Financial Strategy – At first glance, it may seem like a daunting task to catalog small business challenges and growth patterns in a useful and systematic way for entrepreneurs. Small businesses vary greatly in size and growth potential. They are characterized by freedom of action, diverse organizational structures and diverse management styles.
However, upon closer inspection, it becomes clear that they experience common problems that arise at similar stages in their development. These commonalities can be codified into a framework that strengthens our understanding of the nature, characteristics, and problems of businesses that range from a two- or three-employee corner laundry to a $20 million a year computer software business. The company is growing at 40% per year.
Small Business Financial Strategy
For small business owners and managers, that understanding can help them assess current issues. For example, there is a need to hire and train second-level managers to upgrade existing computer systems or to keep pace with planned growth.
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It can help you anticipate key needs at various points. For example, excessive time commitments to owners during start-up, delegation and change of management roles as the company grows and becomes more complex.
The framework also provides a basis for assessing the business impact of current and proposed government regulations and policies. An example of this is the exclusion of dividends from double taxation. This can be very helpful for a profitable, mature, stable business like a funeral home, but not at all helpful for a new, fast-growing high-tech company. am.
Finally, the framework helps accountants and consultants diagnose problems and tailor solutions to small businesses. The problems of a 6-month-old 20-person company are rarely solved by advice based on the advice of a 30-year-old 100-person manufacturer. For the former, cash flow planning is paramount. In the latter case, strategic planning and budgeting are paramount to achieve coordination and operational control.
Over the years, various researchers have developed models for examining occupations (see Resource 1). Each uses business size as one dimension and the company’s maturity or stage of development as the other. While these frameworks are useful in many respects, they are not suitable for small businesses in at least three respects.
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First, they believe that the company must grow and will fail if it does not go through all stages of growth. Second, the model fails to capture important early stages in a company’s origins and development. Third, these frameworks primarily characterize company size in terms of annual revenue (although some mention number of employees) and other factors such as value added, number of locations, complexity of product line, product or production technology. change of
To develop a framework relevant to small and growing businesses, we used a combination of experience, literature search, and empirical research. The framework developed through this effort describes the five phases of development shown in Exhibit 2.
Each stage is characterized by indicators of size, variety and complexity and is described by five management elements: management style, organizational structure, formal system scope, key strategic objectives and owner involvement in the business. We explain each step in Exhibit 3 and explain each step in the description of this article.
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At this stage, the main problem for the business is to acquire customers and deliver the contracted product or service. The main questions are:
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Organization is simple. The boss handles everything and directly supervises the subordinates. Subordinates must have above-average abilities. Systems and formal plans are minimal or non-existent. The company’s strategy is simply to survive. owner
Business performs all vital functions and is the main provider of energy, direction and capital to relatives and friends.
Companies in the survival stage range from new start-ups to restaurants and retailers to cutting-edge manufacturers whose production or product quality has yet to stabilize. Many such companies fail to achieve sufficient customer acceptance or viable product potential. In this case, the owner closes the business when the start-up funds are exhausted, and if lucky, the business is sold at the asset value. (See endpoint 1 in Table 4). In some cases, owners leave after failing to accept the business’s demands for time, finances, and energy. Companies that remain in business become Tier 2 companies.
By reaching this stage, the business has proven itself to be a viable business entity. It has enough customers and satisfies them enough with a product or service to retain them. Thus, the main issue moves from mere existence to the relationship between income and expenditure. The main problems are:
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Organization is still straightforward. A company may have a limited number of employees under the supervision of a sales manager or general manager. None of them make major decisions independently, instead following the well-defined orders of their superiors.
System development is minimal. Official projections are cash projections at best. The main objective is still survival, and owners are still synonymous with business.
In the Survival stage, companies grow in size and profitability and can move to Stage III. Or, as many businesses do, it could remain in survival mode for some time, reaping some return on the time and capital invested (Endpoint 2 in Table 4), and eventually go out of business. “Mom and Pop” stores fall into this category, as do manufacturers who may not sell their products or processes as planned. Some of these marginal businesses eventually developed enough economic viability to sell, usually at a slight loss. Or it may fail completely and disappear from sight.
The decision facing owners at this stage is whether to leverage the company’s performance and provide a basis for alternative owner activity while keeping the company stable and profitable. So the key question is whether to use the company as a platform for growth (lower Tier III-G companies) or as a means to support owners when they leave the company in whole or in part. III-D. company. (See Exhibit 3.) Beneath the confusion may be a desire to maintain some of the status quo as a business, starting a new business, running for office, or simply pursuing hobbies and other outside interests.
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In the Success-Leave sub-stage, the company achieved true economic strength, had sufficient size and product market penetration to ensure economic success, and generated above-average revenues. A company can remain at this level indefinitely as long as environmental changes do not destroy its niche or ineffective management makes it less competitive.
Organizationally, the company has in many cases grown large enough to require functional managers to take over some of the work done by the owners. Managers must be competent, but not of the highest quality. Because their upside potential is limited by corporate goals. Cash is plentiful and the main concern is that avoiding cash outflows during good times harms the company’s ability to weather the inevitable tough times.
Also, the first specialist staff joins, typically a controller in the office and a production scheduler in the plant. It has basic financial, marketing and production systems in place. Planning, like operating budgets, supports functional delegation. Owners and, to a lesser extent, company managers are essentially overseeing strategies to maintain the status quo.
As a business matures, the business and its owners become increasingly separate, partly due to the owner’s activities and partly due to the presence of other managers. Many companies have a long way to go in the make-and-go sub-step. Some product market niches do not allow for development. This is the case with many small or medium-sized service businesses, slow-growing communities, and franchise owners with limited territories.
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Other owners choose exactly this route. If a company can continue to adapt to changing circumstances, it can survive, be sold or merged with a profit, or grow later (Endpoint 3 in Exhibit 4). For franchise owners, this last option requires purchasing another franchise.
If a company cannot adapt to changing conditions, as happened to many auto dealers in the late 1970s and early 1980s, it will shrink to a barely surviving company (Endpoint 4 of Exhibit 4), or it will change direction or fall back.
In the success-growth sub-stage, the owner consolidates the company and mobilizes resources for growth. The owners assume all risk in financing the development, taking cash and the company’s established borrowing capacity.
Critical tasks include ensuring that the core business remains profitable to outlast cash flow and developing managers who can meet the needs of growing businesses. This second feature requires managers to keep an eye on the company’s future, not its current state.
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You should also install your system with future requirements in mind. Operational planning is as much a sublevel of III-D as budgeting, but strategic planning is broader.
