Entrepreneurs Require Demystification Of Financial Management
Lack of financial management is often cited as the main reason for business failure. Formal accounting techniques and reports fail the entrepreneur, as these procedures are too rigid and too slow to respond to events, and historical accounting methods often do not reflect the current activities of the business. This article discusses the need to bridge the gap between accounting practices and entrepreneurship.
Past Data and InformationIn a growing entrepreneurial business, the shape of the business changes too quickly to be captured by the consultant or visiting professional accountant. In most cases, the professionally produced management reports represent the past, that is, ‘what has already happened’, and not ‘what are we doing now’. Entrepreneurs need to have control of their own destiny and should therefore not have to delegate financial management of their business to outsiders. Nor should they need to be accountants.
Progressive diversification within growing entrepreneurial firms brings about differentiation, professional divisions of labour, utilising individual skills and knowledge to achieve specific targets within specialist areas. It is, therefore, usually a specialist within the firm who manages financial information, yet finance is the output of all activities within a business. Financial management becomes the realm of the accountant(s) whether inside or outside the company, rather than becoming embraced within the management of the business.
DemystificationFinancial management has come to represent collecting the required information, collating it in a structured manner, and then historically reporting on the ‘results’ of the business operations for that specific period – the past. This simply engenders a belief in the ‘magic of finance’, the mystique of the numbers, and generates a disbelief that they relate in any way to the real activities of the business. Yet, all of the financial figures used by professionals are generated by the decisions of the managers in the company. It is their day-to-day actions that create the very results they no longer understand when presented to them by the professional accountant. The non-financial managers simply opt out and concentrate on managing their area of the company, making decisions without reference to their financial implications. It is no surprise therefore that a lack of financial management skills is often cited as the main reason for business failure.
A demystification of financial management is necessary and more importantly the creation of a direct relationship between the actions of managers and the financial information they receive. This is paramount to their understanding of business performance and their ability to act accordingly when results indicate opportunity or danger. If standard financial information is presented poorly or at best inappropriately it may not be used by the entrepreneur. It builds up the barrier between the entrepreneur and the accountant perpetuating the myth of irrelevance of finance to the entrepreneur. There must be a better way to present this vital information to portray the events of the past, the activities of the present and the possibilities of the future.
ConclusionFor a growing entrepreneurial company, the entrepreneur is often the driving force, the strategist, the manager, and the sole person responsible for the finances of the business. If this is a sole trader, then the finances may be simple, but the addition of say one employee can suddenly multiply the difficulties many-fold. Yet the level of the entrepreneur’s financial management understanding is often difficult to gauge. The entrepreneur does not want to be an accountant. They see no need to understand standard accounting reports and they certainly do not need to be able to produce standard accounting reports. Thus there is a growing need to improve the financial management practices in small entrepreneurial firms so that it better suits and enhances entrepreneurial behaviour.
This article has been extracted and modified from Snaith, W. & Walker, J. (2000). Dynamic financial management for the entrepreneur: A breakthrough in financial management techniques for Growing SMEs. "Proceedings of the 45th International Council for Small Business (ICSB) Conference, Brisbane, Australia. June 7-10, 2000."
George Tanewski is Research Fellow in the AXA Australia Family Business Research Unit at Monash University. Dr Tanewski writes extensively on family business issues and also sits on the board of a prominent Melbourne family business. For further information please contact George Tanewski on 61-3-9903-2388 or george.tanewski@buseco.monash.edu.au
First published: 3 September 2001.
Last updated: 6 October 2005.