14/09/10

By James Nicholson-Smith, Business Development Director & Managing Principal, West Midlands Region, The FD Centre

How much financial expertise does an entrepreneur need to have? The 1 line answer is simple — “enough to manage his business and make effective decision”. However this answer is too vague to be of any use to someone who feels like they are flying blind in their business.

The below checklist identifies some of the key financial skills that an entrepreneur should have.

- The most important financial skill has to be a clear and accurate understanding of the costs and activities that make up the product or service that the business is selling. Failure to understand this, means that the risk of under-pricing the products/services and losing money or over-pricing and losing sales, is too great.

- Key performance indicators are an essential financial skill for entrepreneurs to understand. They do not need to know how to collect the data necessary for producing those KPIs every month, but they do need to know why that measure is critical to the overall performance of the business. Secondly and even more important, the entrepreneur needs to understand what factors influence those KPIs

- Entrepreneurs are generally very focused on profit and loss. However understanding how this translates into cash generation is often overlooked. However credit insurance companies and lenders to the business are only interested in this version of the financials. These are represented by the balance sheet and cashflow statement. The reason why many discussions between entrepreneurs and people assessing credit worthiness often fail to produce a result is because of this different “language” and perspective. Entrepreneurs need to understand enough about finance to explain movements in the balance sheet to their bank manager.

- As many strategic investments are capitalised, the cashflow implications are lost on an entrepreneur if these are funded from operational cashflows. This stems back to the profit and loss account focus. “I cannot understand it, we are making healthy profits but we have no cash -why?”

- Entrepreneurs generally judge others by their own standards. As a result they expect other members of the team to multi-task and to work on 3-4 projects at any one time as well as doing the day job of selling and delivering the products or services. They also tend to think that starting lots of projects at once means that all are completed quicker. The reality is that the risk of all of them never being completed rises significantly and as a result, the cashflow costs of unfinished projects, which fail to produce any return, then drags the business down.

Of course many entrepreneurs recognise that finance is not their core skill and recruit an FD to their management team. Some businesses consider themselves too small to warrant the appointment of a finance director and rely on a good financial controller.

With a rapid growth in the demand for these integrated finance skills, the availability of Part Time Finance Directors is an attractive option for many entrepreneurs.


To make sure you have the right team in place to manage your business, contact The FD Centre and ask for a free financial health check, carried out by an experienced Finance Director. If you are interested in finding out more please visit www.thefdcentre.co.uk

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