For the purpose of this paper, the selected business is Haltom’s Pharmacy. This is one of the most successful pharmacies in Asia and Africa. Nevertheless, the firm has been faced with turbulent times, enduring periods of crisis. For instance, recently, the company was unable to pay its stakeholders due to a loss. It solved such a short-term crisis by taking up a bank loan. The business has also been faced with a long-term crisis. As such, it is often claimed that its assets are not sufficient to cover what the shareholders have invested. Thus, according to commentators, if the business succumbs to a specified force, there is a possibility that the business might find it difficult to settle the investor dues. Therefore, over several years, there have been an urge to the company to build its asset base.
For the above scenarios, a GAP limit could be set. For the case of the short-term crisis, the business could set up a limit concerning what the shareholders get in terms of their value. The company could state a specified level of revenue that ought to be shared among the stakeholders. The rest should be placed on income reserves (Doumpos & Zopounidis, 2014). The purpose of these reserves should be to cater for the short-term crisis. As such, where the company fails to meet the specified stakeholders’ demands, the revenue in the reserve should be used to avoid a crisis.
For the long term crisis, it is important that the company reduces the level of liabilities and instead, establish an increased asset base. What this means is that the company should set a GAP limit for the liabilities while eliminating any restriction associated with assets. Putting a limit on the liabilities necessarily means driving costs down (Asongu, 2015). With the level of assets high, the company will not have any difficulties in meeting any financial demands. It will be in a better position to record growing profitability and as a result, maximized shareholder’s value will be secured.
Gap management refers to the administration of assets along with liabilities with the aim of ensuring that increases in the rate of interest on borrowed finances are counterbalanced by an equivalent increase in the income derived from those investments that earn interests. There are several GAP management strategies. However, each strategy fit a specified scenario. For the short term scenario as identified previously in this text, the GAP strategy is to desist from taking a debt to offset the shareholder demands where it is found out that the company’s profitability is insufficient (Doumpos & Zopounidis, 2014). What the company should do is to set a reserve. Any extra income that is coming from the investments should be deposited in this reserve. As it has been mentioned, where such a short term crisis, the reserve should be used for offsetting purposes.
However, the company must be informed that the process of depositing in the reserve should be habitual. As such, it has to be a continuous process even though a short-term crisis does not seem to occur. If the company builds a vast reserve, it is in a better position to meet even more complex short term crisis (Asongu, 2015). For the long run, as defined, the company should strive to cut on its liabilities. It has to eliminate some of the unnecessary cost items. The cuts should be used to improve the asset base. Such a GAP management strategy is integral as it not only secures the ability of the entity to meet all long-term demands but it also provides rapport in the event that a short-term crisis is experienced (Doumpos & Zopounidis, 2014).
- Asongu, S. A. (2015). Finance and growth: New evidence from Meta-analysis. Managerial Finance, 41(6), 615-639.
- Doumpos, M., & Zopounidis, C. (2014). Multicriteria Analysis in Finance. London, UK: Springer.
