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Planning for Survival and Sustainability Developing Strategies: Financial Issues Assessing the Firm’s Financial Position ard Chapter 4
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Two Critical Questions: 1. How Well Are We Actually Doing Now? 2. What Does Our Future Hold If No New Strategies Are Undertaken?
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Signs of Funding the Present at the Expense of the Future Declining Profitability Declining Productivity Inefficient Use of Cash Decline in Competitive Strength Decline in # of Strategic Experiments Decline in Reinvestment in Marketing, Equipment, Research & Training Declining Market Value of Company Declining Market Share
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ROI: Return on Investment Real Profitability Productivity Real Value Added Sustainable Growth Rate Barometers of Current Decay Operating Income Net Assets
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Barometers of Future Problems Ownership Returns Versus Business Investment Family Business Annuity Assumption: Money spent on the business will ensure a brighter future and money invested outside the business will erode its prospects! (Ward)
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Ownership Returns Versus Business Investment Should be no more than 33 – 50% of operating income. Family salaries and perquisites as a % of the total sum available for future business opportunities (net income before taxes). salaries and perquisites net income before taxes
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Family Business Annuity Note the approximate worth of BIZ on open market. ($2M) Consider this the “endowment.” How dependent is the family for its current standard of living? Note rate of return the family could earn if $2M were invested in stock, etc. (10% ?) Withdrawing more than that devalues the BIZ.
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More Barometers of Problems Low Debt to Equity Ratio (Debt-is-good!) Capital Budget less than the cash savings from the depreciation expense (ideal 1.5 – 2 times annual depreciation) Depreciation of Fixed Assets (more than half is below average.) Strategic Experiments Underway.
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Assessing Future Prospects Is Your Market Share Sizeable & Increasing? How are Competitors Doing? Have you Gained or Lost Accounts? Is your company participating in the fastest growing market segments? Are your customers and Suppliers Growing?
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