Strategic Planning in the Small Business

Unit 2 HO 2-5 (continued)

Table 2-12 Return on Total Assets

Nqt Income from Operations

Average Total Assets

Year 4 Year 3 Year 2

Year 1

79,400 78,900 31,100 35,200

(247,800 + 260,500) 2 (209,500 + 247,800) - 2 (178,800 + 209,500) + 2 178,800

31.2% 34.5% 16% 19.6%

seemed to do much to improve ratios and performance for this

company.

Drawing Strategic Conclusions

As noted frequently above, conclusions

are more difficult to

draw than financial ratios are to compute. In assessing the firm's

financial state, ratios and statement comparisons must be used

as tools to guide planners in their decisions. However, the own­

er's knowledge and

awareness of the business may be necessary

to either temper or augment

what the measures project. Good

sense and perspective must be used in conjunction with the

objective figures and computations.

A strategic orientation should pervade the

entire financial

analysis. For example, a low current ratio suggests that the

firm

has trouble paying its bills. The significance is that any sub­

stantial change in strategy

that will be a net use of funds may

cause the firnm's liquidity position to become ever worse. It

might dictate that long term capital must be secured to un­

derwrite the strategy as well as clean up the current liquidity

problem. Similarly, the leverage ratios may suggest strong or

weak positions in regard to debt versus capital, but they also

may dictate which financial strategy may be necessary if ex­

pansion is to occur.

In summary, then, three financial resource evaluations must

be made. First, an evaluation

of the overallfinancialperformance

of the business should be determined.

As noted above, a num­

72 PartOne The Analysis Phase

215