Strategic planning and the importance of proper capitalization

Successful companies go through a variety of business cycles. Unfortunately, many in leadership positions don’t plan for those stages and aren’t properly capitalized when a transition occurs.

“Without a thoughtful five-year plan that’s updated annually to address shifts and changes in business cycles, companies often don’t have enough capital to compete effectively as they grow,” says Jim Altman, middle market Pennsylvania Regional Executive at Huntington Bank.

He says companies may find that in order to compete more effectively, they need to broaden or diversify their capabilities through an acquisition or expansion because they find they either need to create efficiencies or can’t do it alone.

“Companies that don’t do strategic planning and think about their capital needs through the process might find they aren’t properly capitalized for a crucial next step.”

Smart Business spoke with Altman about the importance of matching a financial plan to a company’s strategic plan.

In what areas should capitalization factor in to the discussion as companies go through strategic planning exercises?

Every year, as a company reviews its strategic five-year plan to make updates, it should challenge itself with the question: Do we have enough capital to execute the plan? Consider whether enough capital is available or could be obtained to acquire a business or sell a piece of the company’s existing business, or to invest equipment to be more competitive. If not, how will the company endeavor to get the capital it needs? That might mean more than just bank financing. It could mean equity, subordinated debt or retention of profits.

Put on paper a financial plan that supports the strategic plan. In essence, monetize the strategic plan so the company can be sure it has a plan to obtain the capital to grow or be more competitive. Many companies don’t do this and it can often be too late before they recognize they can’t finance their plan in time to execute.

Who is important to get involved in these strategic planning discussions as the topic of capitalization is brought up?

Many companies don’t leverage the resources of their banker, CPA or lawyer. They all have insight and advice on how to make a plan come to life. But if they’re not involved in the plan, they’re ineffective in providing advice.

All of these advisers, as well as the company CFO or treasurer, should be in same room with leadership brainstorming. Early conversations can touch on strategic priorities and plans to execute them to broaden thinking. This creates a dynamic environment in which ideas come together to provide the right advice to make a strategic plan work.

When strategic planning is through, what should companies know about their capitalization?

Companies should know the options that are available to improve or meet their capitalization requirements. That could mean seeking bank debt, raising capital from different sources, their own profits or subordinated debt. They should have explored their options and the associated risks of each, and know their costs.

Companies don’t want to be in a position to suboptimize because they didn’t plan far enough in advance to execute their capital choices. They could end up having to give up control or choose a costly option because they didn’t plan effectively.

While it’s impossible to plan for every scenario because there’s so much uncertainty, companies should plan for what they can control and update that plan annually to reflect changes in the market. It’s important to know the execution risk, the availability of capital and the timeline necessary to acquire that capital.

Leadership should utilize as much internal and external resources as possible rather than relying solely on their own insights and knowledge, which could be limited. A combination of inside and outside partners is powerful. Plan early, update regularly and get the right people involved in the planning process.

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Jim Altman

Middle Market Pennsylvania Regional Executive
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412.227.6114

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