Back to the on-screen lesson ·
A strategy decision compares options on profit, cash and risk against the owner's goal, chooses the best option the business can fund, checks it in the low scenario, and fixes a review point in advance.
Paper packet. Every task here also exists on screen, where it is checked automatically; answers written on paper are not assessed by Nydus. When you are back at a device, enter your answers there.
You will work out which options a business can fund, choose the best fundable one, set a review point, check the choice in the low scenario, find how long it takes to earn back its cash, and fill in a café's decision sheet.
This course built a set of tools: position and advantage, goals and forecasts, sensitivity and scenarios, decision break-even, opportunity and sunk cost, constraints, growth cash, growth choices, quality, standards, risk, insurance, records, security, tools and continuity. A real decision uses several at once. This lesson takes one decision from the owner's goal to a written review point.
| Term | What it means |
|---|---|
| Strategy decision | A choice about the business's direction that is costly to reverse. |
| Fundable | An option the business has the cash to carry until it pays. |
| Low scenario | The figures if things go worse than expected, such as 20 percent fewer sales. |
| Review point | A result, fixed in advance, that would change the decision. |
| Payback | The months of added profit it takes to earn back the cash an option needed. |
Northside Repairs' owner wants more income without working more hours. Her constraint is capacity: customers wait a week. Three options:
$$\text{choice} = \text{the most profit among the options the cash can fund}$$
She has 3,000 dollars she can set aside. The workshop cannot be funded, so it is out, however large its profit. The apprentice is fundable and relieves the constraint; the price rise can come too, since it needs no cash and a line means demand to spare. Her decision: the apprentice now, a small price rise alongside, the workshop reconsidered in a year. Every figure here rests on stated assumptions about volume, price and cost. It says what follows if those assumptions hold; it is not a prediction, and it is not advice about what any real business should do.
Another way: table
Northside Repairs' options, with 3,000 of cash.
| Option | Profit a month | Cash needed | Fundable? |
|---|---|---|---|
| Second workshop | 600 | 5,000 | No |
| Apprentice | 400 | 1,500 | Yes |
| Price rise | 250 | 0 | Yes |
Another way: steps
Start from the goal and the constraint. The goal says what the decision is for: more income, fewer hours, a business to sell. The constraint says which options can help at all: if capacity binds, marketing adds nothing; if demand binds, more capacity adds nothing.
Put each option on the same footing. The change in monthly profit, and the cash it needs before it pays — the growth cash plan's low point. Add what each risks: the assumption that could be wrong, and what it would cost.
Rule out what cannot be funded. An option whose low point is below the cash available, plus the buffer the business keeps, is out, however large its profit. Of those left, take the one that adds the most, or combine options that do not compete for the same cash or constraint.
Test it. Work the choice in the low scenario. Ask what could stop it, and check the continuity plan covers it.
Check each figure by sense: an option cannot be chosen if its cash need is larger than the cash set aside, and a review point must be a figure the owner will actually be able to measure.
A strategy decision is made on expected figures, but the business has to survive the figures it actually gets. Work the chosen option again with sales 20 percent lower, or costs 10 percent higher, whichever is the likelier miss. If the apprentice was expected to bring 50 extra repairs a month and brings 40, he adds 40 × 25 − 1,000 = 0: no gain, but no loss either, and the business pays its bills. If the low scenario leaves a loss the business cannot carry, the option needs a smaller start, more cash set aside, or a different choice.
Check what could stop it, too. If the owner is ill while training the apprentice, who keeps the workshop running? A decision that depends on one person staying well should say so, and the continuity plan should cover it.
A strategy decision is made on assumptions, so it should say in advance what would show the assumptions wrong. For the apprentice: he costs 1,000 a month, and each extra repair contributes 25, so he needs 40 extra repairs a month to pay. The note reads: 'Review after three months. Below 40 extra repairs a month, cut to part-time or stop.'
Written now, that point is judged on the figures. Decided later, the sunk training time and the owner's hopes would lean on it: three months of effort make it very hard to admit an apprentice is not paying. The review point is the decision's break-even, measured by the records the business already keeps — the job log shows the extra repairs each month.
Options that do not compete for the same cash or the same constraint can be combined. The price rise needs no cash and works on demand; the apprentice needs cash and works on capacity. Together they add 650 a month, and the price rise's profit helps rebuild the cash the apprentice used.
Options that do compete are sequenced. The second workshop may be the right step in a year, once the apprentice has paid back his training cash and the savings have grown. Payback — the cash an option needed divided by the profit it adds each month — says when that might be.
A good strategy decision is not the one with the biggest number. It is the best option the business can fund, that fits the owner's goal and the constraint, with its risks known, its low scenario survivable, and its review point set. It is written down in a page: the goal, the options and their figures, the choice, the low scenario, the review point and the date to look again. That page is what turns a hunch into a decision the owner can check, explain to a lender or partner, and change on evidence rather than on mood.
Most strategy decisions go wrong in a small number of familiar ways, and each has appeared somewhere in this course.
The first is deciding from the feature, not the figure: the second site feels like success, the new machine feels like progress, and the arithmetic is done afterward to justify it. Working the change in monthly profit for every option before any is favored guards against this.
The second is forgetting the cash. An option that pays handsomely in a year can empty the account in its third month. The growth cash plan's low point, set against the cash available and the buffer, rules such options out or sends them back for a smaller start.
The third is ignoring the constraint. Spending on anything other than the constraint adds cost and no sales. A business with a waiting list does not need marketing; a business with empty tables does not need a second oven.
The fourth is the sunk cost. Once money and months have gone into a choice, it becomes very hard to stop it, however clearly the figures say it is not working. The review point, written before the first dollar is spent, is the defense.
The fifth is the owner's own goal. A choice that adds profit but takes the evenings and weekends the owner wanted to keep is the wrong choice for that owner, however good its numbers. Starting from the written goal keeps the decision honest about what it is for.
Checking a decision against these five before committing takes a few minutes, and it catches most of the mistakes that cost small businesses the most.
A small brewery in Asheville, North Carolina, was selling out of its best beer every weekend. The owners listed three options. A second, larger fermenting tank would add about 2,200 dollars of profit a month but needed 45,000 of cash for the tank and installation. Canning the beer for local shops, using a mobile canning service, would add about 1,300 a month and needed 8,000 for cans, labels and the first runs. Raising the taproom price by a dollar a pint would add about 900 a month and needed nothing. They had 15,000 they could set aside.
The tank was out: it could not be funded without a loan the owners did not want. Canning was fundable and would reach new customers; the price rise could run alongside, since a line at the bar meant demand to spare. They checked the low scenario — shops ordering 30 percent less than expected — and canning still covered its costs. They wrote the review point down: at least 150 cases a month to shops by the fourth month, or stop the canning runs.
Canning reached 180 cases by month four. Together with the price rise, the two steps added about 2,200 a month, and the 8,000 was earned back in about four months. A year later, with cash rebuilt and demand proven in the shops, the owners bought the larger tank.
Many advisers to small businesses ask owners to write a strategy decision on a single page: goal, options, figures, choice, risks and review date. It is short enough to write in an evening and clear enough to show a lender or a partner.
Choose the option with the biggest profit. Only if the business can fund it.
Decide now, review when it feels right. Fix the review point in advance.
One tool settles it. A strategy decision uses several.
The decision is final. It is the best choice on today's figures, to be reviewed.
The expected figures are enough. Check that the business survives the low scenario.
List the options.
$\text{van } +500, \ 3400; \text{ machine } +90, \ 0$
Profit a month and cash needed.
Set the cash against each need.
$2000 < 3400$
The van cannot be funded.
Take the fundable option.
$\text{the coffee machine}$
It needs nothing up front.
Set its review point.
$180 \div 0.9 = 200$
Coffees a month to cover its 180 lease.
Date the review.
$\text{after the first month}$
Written down now.
Rule out the workshop.
$5000 > 3000$
It cannot be funded.
Take the best fundable option.
$400 > 250$
The apprentice.
Add the price rise alongside.
$400 + 250 = 650$
Different constraint, no cash.
Set the review point.
$1000 \div 25 = 40$
Extra repairs a month.
Check the low scenario.
$50 \times 0.8 \times 25 - 1000 = 0$
No gain, no loss.
Find the training cash's payback.
$1500 \div 650 \approx 2.3$
Months, with both steps.
State the goal and constraint.
$\text{more income; her throwing time binds}$
Goal and constraint first.
List the options.
$\text{wholesale } +800, \ 3400; \text{ price } +1000, \ 0$
Profit a month and cash needed.
Set the cash against each need.
$2000 < 3400$
Wholesale cannot be funded yet.
Find the price rise's limit.
$5 \times 300 \div 25 = 60$
Mugs she can lose before it stops paying.
Set the review point.
$\text{sales down more than } 40 \text{ mugs}$
Well inside the limit.
Plan the next step.
$3400 \div 1000 = 3.4$
Months of the rise's profit to fund wholesale.
Write the page.
$\text{goal, figures, choice, review date}$
A decision she can check.
Set the cash against each need.
$2500 < 6000$
A second van cannot be funded; a booking tool needs 300.
Take the fundable option.
$\text{the booking tool, } +200 \text{ a month}$
It relieves the owner's time.
Find its payback.
Northside Repairs can grow three ways. A second workshop would add $600$ dollars of profit a month but needs $5000$ dollars of cash before it pays. An apprentice would add $400$ a month and needs $1500$ to cover wages while he learns. A price rise would add $250$ a month and needs no cash. The owner can set aside $4850$ dollars. For each option, fill in 1 if the cash set aside can fund it and 0 if it cannot.
| Fundable (1 yes, 0 no) | |
|---|---|
| Second workshop | |
| Apprentice | |
| Price rise |
Complete the worked solution: Northside Repairs' apprentice costs $1100$ dollars a month. Each extra repair contributes $25$ dollars, and the owner expects $60$ extra repairs a month once he is trained. Set the review point and the expected gain.
Divide the monthly cost by the contribution.
$1100 \div 25 =$ x
Extra repairs a month to break even.
Multiply the expected repairs by the contribution.
$60 \times 25 =$ c
Contribution at the expected volume.
Subtract the monthly cost.
$(\text{contribution}) - 1100 =$ g
The expected gain a month.
Write the review point.
$\text{review after three months}$
Against the break-even repairs.
Say what would change the decision.
$\text{below break-even: part-time or stop}$
Decided now, not later.
Northside Repairs can grow three ways. A second workshop would add $600$ dollars of profit a month but needs $5000$ dollars of cash before it pays. An apprentice would add $400$ a month and needs $1500$ to cover wages while he learns. A price rise would add $250$ a month and needs no cash. The owner can set aside $6050$ dollars. Which option should the owner choose on these figures?
Northside Repairs' apprentice costs $800$ dollars a month, and each extra repair contributes $25$ dollars. The owner expects $45$ extra repairs a month, but the low scenario has 20 percent fewer. What does the apprentice add a month in the low scenario, in dollars? Write a fall with a minus sign.
Answer:
Maya's wholesale range needs $1400$ dollars of cash before it pays, and adds $200$ dollars of profit a month once it does. How many months of that profit does it take to earn back the cash?
Answer:
A café in Milwaukee can set aside 4,000 dollars. A second café would add 1,500 dollars of profit a month but needs 20,000 of cash; an espresso cart at a farmers' market would add $600$ a month and needs $3600$; a price rise would add $300$ a month and needs no cash. The cart costs $1300$ dollars a month to run, and each coffee sold there contributes 2 dollars. Fill in the working sheet.
| Amount | |
|---|---|
| Profit a month from the best fundable option | |
| With the price rise alongside | |
| Months to earn back the cart's cash | |
| Review point, coffees a month |
Lesson test: one question per skill, one attempt each, no hints. Your answers are checked when you submit.
Northside Repairs takes on the apprentice, who costs $1100$ dollars a month. Each extra repair contributes $25$ dollars, and the owner expects $61$ extra repairs a month once he is trained. Complete the review note. Write a fall with a minus sign.
Review after three months: the apprentice needs x extra repairs a month to pay, and at the expected volume adds g dollars a month.
You can take a strategy decision from goal to review point. Tell someone why the option with the biggest profit is not always the right one. This completes the business sequence.
17. Your turn: Bright Home Cleaning, step 3
$300 \div 200 = 1.5$
Months.