Financial Understanding is Critical

Many entrepreneurs are working in the dark. They know that results are what count and yet they do not fully understand the relationship between the things they do daily and the bottom-line. This would appear to be crazy. Entrepreneurs need not become accountants – what a thought! However, there is surely a level of knowledge that will transform decision making and the return on investment. Financial awareness for entrepreneurs addresses an awareness of the the real forces behind the figures. For example: * what will the impact on forecasts be of competitor moves, changes in supplier terms, changes in the economy. * how can training be justified * what are the cost implications of a business plan based on high stock levels for quick delivery * how will profits be affected by investment in new plant The Figures Can Deceive Finance for entrepreneurs needs to extend beyond the profit and loss and balance sheet. To begin with, the profit and loss and balance sheet are history. Operating your organization on the basis of last period’s results is like looking backwards as you walk. Of greater importance is the fact that nowadays it is intangibles that drive results – skills, brand, relationships and knowledge. These crucial assets don't get a mention in the profit and loss and balance sheet and yet in most organizations they represent most of the value: Financial awareness for entrepreneurs should mirror the real world. New Approaches to Financial understanding for Entrepreneurs Real success demands a different view to that furnished by the financial statements alone. Thus entrepreneurs need to understand principles such as: * value management – this means looking beyond the short-term. Entrepreneurs are interested in their gain over several years, not just this year. With a knowledge of value management, entrepreneurs can decide to invest in culture, brand or relationships even when this leads to a reduction in this quarter's profits. * key performance indicators – common financial measurements track “symptoms” not “drivers”. For instance: a lowering of contribution margin tells you that you are making less on each sale but it does not tell you why. However, analysing “performance drivers” – for example, how quickly staff respond to customer emails – will point towards “causes”. This is the approach of the “Balanced Scorecard”. Financial understanding for entrepreneurs needs to bring together qualitative drivers and long-term financial results. Academic research confirms that entrepreneurs that are able to do this produce significantly better results over a five-year period than those that do not. * sensitivity models – entrepreneurs need to understand the comparative impact of actual inputs, such as an increasing stock levels or offering customer discounts. That means that they need to have answers to the “what-if” questions. Too many financial understanding for entrepreneurs courses focus on analysing financial statements. The ability to calculate twenty different ratios does not provide insight. For entrepreneurs to really learn they need to create a business model with inputs – costs of materials, sales activity, credit from suppliers – and outputs – cash flow, profit and loss and balance sheet. Entrepreneurs can then alter the inputs to reflect the type of actions they take on a daily basis and immediately see the results. Financial awareness for entrepreneurs training should not attempt to turn entrepreneurs into accountants; training should give entrepreneurs with realistic financial perspective and simple techniques that they can use to deliver maximum return on investment.