How planning and capital budgeting improve SME performance

Abstract This paper focuses on the use of strategic planning among small and medium sized enterprises (SMEs) in the UK manufacturing sector. It analyses the relationship between the intensity of strategic planning, business objectives, perceived performance, changes in the business environment and the use of capital budgeting techniques. Capital budgeting is of particular interest as an area of investigation, and is one which has seldom featured in previous studies of strategic planning behaviour. These issues were investigated via a survey of UK manufacturing SMEs carried out in the winter of 1996/97. The key results suggest that SMEs incorporate a range of objectives into their strategic planning process, with profit improvement perceived to be the most important objective, followed by sales growth. SMEs engaged in detailed strategic planning are more likely to use formal capital budgeting techniques, including the net present value method, which is consistent with maximising the companys' value. Perceived profitability and success in achieving organisational objectives were positively associated with planning detail, suggesting that strategic planning is a key component improving performance. Planning detail was also associated with a significantly higher level of perceived change in the business environment.

[1]  IN DEFENCE OF BUSINESS PLANNING: WHY AND HOW IT STILL WORKS FOR SMALL FIRMS AND ‘CORPORATIONS OF SMALL BUSINESS UNITS’ , 1995 .

[2]  George A. Luffman.  Strategic management : an analytical introduction , 1996 .

[3]  Marc J. Dollinger,et al.  Environmental Boundary Spanning and Information Processing Effects on Organizational Performance , 1984 .

[4]  C. Jones,et al.  Investment Appraisal and Financial Decisions , 1991 .

[5]  Richard Pike,et al.  Corporate Finance and Investment: Decisions and Strategies , 1993 .

[6]  Tony McGuinness,et al.  The Economics of the Firm , 1987 .

[7]  Peter McKiernan,et al.  Strategic Planning and Financial Performance in UK SMEs: Does Formality Matter? , 1994 .

[8]  Pricing behaviour in UK manufacturing and service industries , 1987 .

[9]  Nick Wilson,et al.  Working Capital and Financial Management Practices in the Small Firm Sector , 1996 .

[10]  Bert Piëst.  Planning comprehensiveness and strategy in SME's , 1994 .

[11]  Tony Grundy.  Corporate strategy and financial decisions , 1992 .

[12]  S. Machin,et al.  Unions and the financial performance of british private sector establishments , 1990 .

[13]  D. Storey.  Understanding the small business sector , 1994 .

[14]  Richard Pike,et al.  Investment Decisions and Financial Strategy , 1986 .

[15]  John A. Pearce,et al.  The impact of formalized strategic planning on financial performance in small organizations , 1983 .

[16]  Alfred D. Chandler.  Strategy and Structure: Chapters in the History of the Industrial Enterprise , 1962 .

[17]  R. Whittington,et al.  Exploring Corporate Strategy: Text and Cases , 1989 .

[18]  David Deakins,et al.  Entrepreneurship and Small Firms , 1996 .

[19]  Scott S. Cowen,et al.  Strategic planning for increased profit in the small business , 1990 .

[20]  John N. Pearson,et al.  Planning and Financial Performance of Small, Mature Firms , 1986 .

[21]  Stefan Schaltegger,et al.  Developing a green business portfolio , 1995 .

[22]  D. Shipley.  PRICING OBJECTIVES IN BRITISH MANUFACTURING INDUSTRY , 1981 .

[23]  D. Slevin,et al.  Strategic management of small firms in hostile and benign environments , 1989 .