Issues in Strategic Financial Management03/09/2022 0 By indiafreenotes
Strategic planning is the process of a small-business owner setting goals for the upcoming year and beyond, and determining how to allocate the financial and human resources of his company to achieve the goals. His strategic choices balance the company’s need for current profitability with the need to invest in the company’s future growth. A company’s current financial difficulties may make strategic planning more difficult.
Lack of Capital
Companies with ambitious long-range growth plans may require outside capital to fund these expansion plans. Companies that do not have a history of profitability or are very early stage companies may find it difficult to qualify for debt capital from financial institutions. Many small businesses find it difficult to obtain equity capital from venture capital firms or angel investors, because equity investors look for companies with the potential for extremely rapid growth. A lack of capital can prevent the small-business owner from being able to implement his strategic plan on the scale he had hoped.
Unstable Cash Flow
A company that has unpredictable cash flow may not have funds available to execute the chosen strategies at the time the owner had set in the strategic plan. She may have to delay implementation of one or more strategies. Some business owners become so focused on solving short-term financial challenges including paying bills that they neglect the strategic planning function altogether. The company goes from crisis to crisis without a solid plan for the future.
Debt Service Too High
Companies that borrow money to fund expansion can find themselves in a cash crunch if revenues do not grow as anticipated. Meeting the obligations to pay the principal and interest on the debt can consume much of the company’s available cash. In a worst case, the company may have to modify the strategic plan and not fund the marketing or business development strategies the owner chose.
Low or Declining Gross Margin
A small business can experience periods when the costs of doing business are rising and pressuring the company’s gross margin. Raw materials prices, for example, might soar due to shortages or extremely high demand. The small-business owner then faces the difficult choice of raising her own prices, which can cause her to lose customers. The alternative is to accept declining profits, which may cause the company’s cash flow to be insufficient to fund the strategic plan.
A company that finds itself in a situation where it is losing money every month has a serious strategic dilemma. To grow revenues and get back to profitability, the owner needs to draw up a plan with strategies to spur this growth. But these strategies require expenditures of funds that the company may not have. The business owner may have to lay off employees to cut personnel costs and get back to the breakeven point. This can lead to a situation where there are not sufficient human resources to implement the strategic plan — or the workload for the staff will be so heavy that they are not able to execute the strategies effectively.
A company that is being sued or may be in the near future has difficulty creating a strategic plan because of the uncertainty that litigation causes. The company may have to pay significant legal fees or even damages, which reduces the cash available to fund the growth strategies in the plan. Another negative effect of litigation is that the owner’s time and attention can be drawn away from working on strategies to continue to grow the business.