What’s Your Business Strategy?

20131019-135520.jpgTo often the word strategic is cheapen by applying it to everything. If everything is strategic then nothing is. In Tom Horam ‘s book “the One Page Business Plan” he states that

“Strategies should set the direction for your Philosophy, Values and Methodology for building and managing your business.”

Most things that business leaders call strategy are really just a business owners focus for the moment. Here are three check points to determine if a decision is strategic.

  1. Does the decision line up with your business objectives? Objectives are the major business items that support your mission and vision.
  2. If the issues doesn’t directly align with one of your business objectives then you should not label it “strategic”

  3. Will the implementation of this decision increase the business growth in some way?
  4. A strategic decision should grow your business in some way. It could be that it will slow down revenue loss or gain you new customers. Nonetheless you should have the potential for growth.

  5. finally, can you measure the result of the strategic item?
  6. If you can’t measure it then it’s not really important and if it’s not important then why bother.

These are just a few check points you can use as a litmus test to determine if something is really strategic. Remember many things are urgent but, that doesn’t make them strategic.

Finance From A-Z: Capital Budgeting

Term: Capital Budgeting

The process of determining the amount of money to set aside for the purchase of fixed assets and long-term projects – this includes determining which are worthwhile by comparing the investments choices using some type of project evaluation method like discounted cash flows, Return On Investment (ROI), payback period and  internal rates of return (IRR).

What Does This Mean To Me:
Often capital budgeting is thought to be a large business activity vs. a small business one. That is because large businesses can have multiple projects that need to be evaluated and determined which are the best investments. However, it is just as important, if not more important, for small businesses to plan how each excess dollar is spent.

The small business challenge is identifying enough viable projects to choose from so extensive analysis is justifiable.  Contrary to what some business consultants recommend, I encourage small business owners to do more analysis – not less. My logic is that the smaller you are the less margin for error you have and there is less profit to cover up your mistakes.

Capital Budgeting Process:

Here is one exercise I use for capital budgeting. I work with an owner or management team and lead them through a six step process.

  1. First, we prepare a Cash Flow Budget for the up coming year. It includes forecasting revenue and operating expenses. This  includes interest and principle payments on loans.
  2. Next, we determine if there are any cash flow short falls. If so, identify the recovery source.
  3. Now, w e identify potential Fixed Asset purchases or Projects that cost  greater than $500. These are items or projects that will help grow the business in some way and have been deemed “strategic”. These projects are ordered by spending amounts and then weighted by qualitative factors like: impact on business objectives or customer relation impact. The weighting is usually on a scale of 1 – 5.
  4. Then we look at the top 20% of the items or up to 80% of projected excess funds and these are the projects we evaluate.
  5. Next, we conduct the evaluation. The evaluation methods vary. It could be discounted cash flows, ROI or IRR. However, I always encourage that some type of time value of money methodology is used.
  6. Finally, We then select our capital spending items. Depending on actual available cash and the current business environment, we execute on the capital budget.

This process assumes that there is a financial performance review process in place and the company has documented goals – but that’s a whole other discussion.

Click on this link for a cash flow budget spreadsheet to get you started. But remember the tool is only as good as the plan to use it and the quality of the execution.

Manch Kersee
JR Dexter, Inc. – “Business Decision Support”