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Strategic Management Learning System

Use and abuse


- The Six Steps

You must have adequate funds to enable your business or SBU to begin operation, expand operations, or even to continue operations. Funds are needed for a variety of purposes, and they must come from somewhere. The fact that funds are needed is the simple part; where they come from is another matter altogether. Understanding this problem is just as critical for managers in

larger operations as well. Funds are finite - once used for one purpose, they cannot be used for another, and so projects must compete for a share of what is frequently a finite budget.

The purpose of this topic is to explain the various types of financing needed for different purposes by most small businesses or subgroups and to identify the different sources of these funds. Different types of funds come from different sources. You must know how much you need of each type before you can start looking for places to get it. Because there is a specialized vocabulary that bankers and other financing intermediaries use in talking about their profession and needs, a glossary is included of the more frequently encountered specialized terminology, simply because you must be familiar with these terms before you can talk intelligently with the suppliers of funds, or compete with the internal allocation of budget.

Analyzing your business or SBU needs for different kinds of financing and identifying the sources is seen as a six-step process. It provides you with an opportunity to objectively review your business operation and your business plans. It may help you realize that some of your ideas or desires are inherently infeasible or perhaps would be more productive if refocused.

By carefully analyzing your financing needs and expressing them in an objective way, you can avoid problems caused by inadequate capitalization, excessive debt, poor use of the powerful tool of credit (both trade and other debt), and panicky borrowing attempts which either fail or can make you fail. Good financial management follows from a clear understanding of how and why money takes different shapes and fills different purposes in your business. Good financial management leads to a better and more profitable business.


SMLS Workbook #CS-06, Financing ~ $12.95

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