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Does the Small Business Need a Strategy?

Guest post by: Floyd Talbot

Article Overview: Is strategic planning for large businesses only which has the resources to perform it? Not in the least. A business, regardless of size, which does not engage in strategic planning gives up a valuable tool for growing the business and answering the question, "Where do you want to grow tomorrow?"

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Does the Small Business Need a Strategy?

Quite often when the words strategic planning surface, the first type of business that comes to mind is a large one. "Strategic" seems to carry the ring of "large." Large businesses have to strategize because they have a large amount of resources that amounts to hundreds of millions of dollars. They also have big competitors to worry about like Burger King and McDonalds. Furthermore, our government is large and must think long range because little gets done in the short term. Government budgets encompass 5-10 years. They have to because government has to plan for all the taxpayer revenues it must allocate to a large organization consisting of numerous departments.

Our government often uses the term associated with warfare and the military such as the Strategic Arms Limitation Treaty (SALT). Such treaties take time and resources to implement with other nations. Therefore, according to this framework strategic has to do with big organizations. Consequently, smaller organizations do not have sufficient resources or capital with which to strategize.

Myths of Strategic Planning and Why it is a Low Priority

Allow me to explode several myths about strategy and the small business and quite often the reason(s) small businesses do not engage in strategy. First, if small businesses did not prepare strategy, there would be very few businesses that would. The small business environment makes up nearly 90% of the U.S. economy, and a large portion of those businesses have 20 or fewer employees.

According to the Small Business Administration, the standard setter for small business size, the small business in the manufacturing or mining industries consists of less than 500 employees. The wholesale trade industry SBA standard is fewer than 100 employees. The small business in the retail sector generates less than $6 million annually.

Specialty trade small business contractors have less than $11.5 million in annual revenues while the rule for the heavy construction industry is less than $28 million. About 90% of all U.S. businesses fall in these categories. That leaves about 10% of businesses classed as large national or multi-national businesses.

Second, businesses depending on inventories or equipment must account for the application of a large amount of working capital. Their success depends on being able to define their markets, competition, and results and the resources to confront them. Looking backwards through the financial statements for determining performance is not a sufficient gauge for success.

A backward look does not account for standards and expectations. Performance then becomes guesswork and a moving target. That is, performance expectations are in the mind of the business manager and not explicitly stated throughout the organization for clearly communicating performance criteria. Besides, a backward look at performance always begins with a forward look. Before even beginning, startup businesses must assess where they will be headed.

Third, attempts to budget by assigning thresholds to revenue and expense line items limit the business' forward look. It leaves out a host of issues that cater to successful movement into markets. It also focuses primarily on the income statement and its bottom line as a measure of success. A large portion of criteria are neglected such as price-performance, credit assumptions, capitalization, market penetration, customer clarification, and so on.

Often the budgeting process neglects a strategic focus but simply regards the targeted numbers without having some substance to support them except perhaps past performance. However, past performance may not always be a gauge for the future.

Why is Strategic Planning Ignored?

So then, why is strategic planning not engaged in by a large number of small businesses? First, managing a business has top priority for small business owners. Business management for them means engaging their customer and being involved in daily business activities or overseeing them. If owners do not tend to day to day management, no one else will, and the business will falter. Implied in this theory is that left to others, the business may be mismanaged. Consequently, little time is left for engaging in forward looking strategy.

Second, the business owner's skill set is normally in a technical area, and he or she thrives in that strength. Products and services to meet market demand take top priority. As long as revenues continue higher, the motivation to plan is relegated to a lower rung on the management ladder. Strategic planning becomes an afterthought and often does not surface until a crisis occurs.

Third, the budgeting process serves as a planning model. Many business managers I have encountered have a revenue goal in mind and set that up as a target to hit in the upcoming year. Expenses are then derived from historical records and are set up as a ratio of the targeted revenue numbers. For example, if the organization wants to grow its staffing to meet expected operations demands due to anticipated sales efforts, it may rely on prior costs of staffing and project from that.

However, there are numerous gaps in such projections missed as a result of a lack of strategic planning. For example, employee tax rates could have changed and various insurances supporting staffing could be modified. Just assuming a factor may result in under estimating expected costs. Therefore, as time moves forward actual operating expenses for staffing could exceed expectations and cause a surprising jolt to the bottom line.

Additionally, during the budgeting process alone capital equipment purchases are often arrived at based on need and inventory of assets rather than as revenue generators or the elements of a larger capital plan. Sadly, a large number of small businesses do not even engage in a budget process. Budgeting without purpose becomes a hit and miss proposition. Strategic planning adds purpose to the numbers and makes the budget process much more purposeful and realistic.

The Long Term Versus the Short Term

Business failures are very high during the first five years after startup. According to the Small Business Administration, 60% of new businesses fail before the five year mark. One of the primary reasons cited is poor planning. Strategic planning helps businesses thrive, grow, and become successful. It looks beyond the daily management of the organization for answering the question, "Where do you want to grow tomorrow?"

This statement focuses on the long term, beyond the month, quarter, and first year. Strategy aligns the organization with a vision to be fulfilled, a mission to encompass, long term results guided by clear and measurable objectives to reach and be realized. Strategy prepares for challenges, seeks opportunity, measures strengths, and faces realistic threats to the existence of the business.

A short term focus does not and cannot do this, because tending to daily business matters places strategy in the background until it becomes a blur. This occurs until the next crisis surfaces that leads to fire fighting and solutions seeking and finally some cleansing of the organization for a fresh start. This continues until bleeding again occurs.

The economy and markets wait for no business to jump in and swim its waters. There are no life guards or bailouts for most small businesses to prop them up against the next tidal wave that wash many out to the seas of bankruptcy. Strategic planning stands as a bulwark against the forthcoming economic tidal waves that seek to drown small business owners and their businesses. It is business on purpose that approaches the markets with proactive confidence based on knowledge. Knowledge matters. Strategic planning charts the path of knowledge for executing business successfully.

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Article Tags: budgeting, economy, markets, revenues, strategic planning
Referred by: http://www.Andrew-Rogerson.com

About the Author: Floyd Talbot
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I am a business owner who specializes in providing accounting and business planning services for helping businesses grow revenues, reduce expenses, and get their businesses funded. AFB Business Solutions not only prepares a thorough business plan but takes the business through preliminary steps for insuring that the owner has a comprehensive understanding of business strengths, weaknesses, positioning, and management. Then we coach the requestor for pitching the lender.

This adds up to a greater degree of success! Accounting services are core to successful business management. We help the business not only in the accounting function and practices but also in understanding and interpreting the financial statements and for measuring business decisions. Past, present, and future - each time segment requires accounting, planning, and strategy.

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