Passion is not enough
You also have to know the basics of money to succeed as an entrepreneur
It’s the greatest time in history to be an entrepreneur and the word is out. More people are creators than ever before and for millennials, nothing is cooler than to hold a founder/CEO title. Twenty years ago claiming you were an entrepreneur simply meant you were virtually unemployable. Today it’s the common buzzword for a dynamic, risk taking, problem-solving human being. There are multiple governmental agencies, consulting firms, TV shows, blogs, websites, institutions and a myriad of self-proclaimed experts supporting this trend. Almost all of them use the same cliché: to be successful all you need is passion and persistence. That’s not enough.
I spend my weeks assessing small to medium-sized businesses of all types and I can say without hesitation that most companies of that size are in serious trouble. They are hanging on by a thread. In the province of Quebec for instance, the removal of generous tax break programs would wipe out an estimated 50% of the digital businesses. Grants, high risk loans and the abundance of unwise capital have also aided in keeping these entities alive without any likelihood of future success. The engine is grossly ineffective but because gas continues to be replenished the proverbial car just keeps sputtering along.
So what’s the problem? There are many but I will address only one: The lack of financial acumen. For the most part the founders of these companies have no capacity to calculate margin, read financial statements or understand cash flow. The financial basics that are required in business are vastly missing at the Ikea tables of this generation. Most founders we assess passionately (and seemingly without end) evangelize their offering and their own capacities. Yet when asked about financial results, I almost always get short, unstructured answers which lead vaguely to sales numbers. Most investor presentation decks have no financial numbers whatsoever. When we begin our diligence, it’s never anywhere like they discussed. Rarely is there any comprehension about cash needs, margins, lending ratios or even any idea how the company produces profits.
Founders usually don’t hire financial expertise early on due to cashflow limitations (perceived or real). This leads to poor planning regarding pricing, terms and inflows. Rarely do we see a plan that deals with a pricing strategy, cost assessment, cash allocation or even competitive comparisons. It’s all about the product/service and the players involved.
The CEOs can fake it until seed funding, government grants and initial credit facilities run out. Then the problem is so encapsulating that nothing else gets done and the business spirals into serious trouble. Tensions rise and partnerships strain under the pressure of financial demands. Untrained and inexperienced in handling issues of this nature, founders often make decisions that worsen their situation like paying an outstanding unsecured lender with funds that were needed for payroll the next day. This is becoming one of the greatest threats to the economy and virtually no one is speaking about it.
I now believe that you should not be allowed to register a business (or at least one that would receive liquidity), without taking a basic finance course. I’m not talking MBA level here. Just something that would teach you about reading a balance sheet and creating a cash flow table. It would increase understanding you about priorities and the need for key financial indicators. Business is still business. You have to sell something to someone and make a profit in order to grow and sell more. There are exceptions to this (like strict research and focused innovation) but still, knowing how to deal with costs and plan out cash is critical in every commercial exchange.
It’s never too late. I encourage entrepreneurs we assess to immediately enrol in an executive or continuing class at a local college or university. Even a one-day session will add a tremendous amount of value. Read everything you can online and watch YouTube videos. We push founders to also hire part-time experienced CFOs who can advise and support. Often they accept some equity or options in exchange for their time and expertise if money is unavailable to pay them. There are ways to get it done but it’s very difficult to move forward if the leader is unwilling to improve in this area. Most lenders or investors will avoid the company until the books are clean, well understood and a plan is put forward. Even if the results are challenging there is a possibility of funding if the knowledge is obvious.
I wish I would known more about accounting as a young entrepreneurs in my early 20s. I would have saved lots of time, energy and money. I should have skipped the time spent on yet another self-help book for a class on how to be a better financial leader. That’s the experience sharing I give to others now. Invest time and money getting better acquainted in this area. It’s not as complex or intimidating as it appears.
Add that passion and persistence everyone talks about and now you can’t go wrong.
