A warm welcome to all entrepreneurs and budding entrepreneurs once again!
In one of my recent blogs entitled Top 6 tips regarding financial intelligence for an entrepreneur I explained some things about financial intelligence. I also stated that phrases such as financial literacy, knowledge of numbers, the language of business, etc. were sometimes used by people to mean financial intelligence. I also had the audacity to say that there was absolutely no way you could run a successful and sustainable enterprise without financial intelligence. I was very prepared to defend this position had there been any challenge. I’m still ready by the way, just in case someone is preparing to shoot down this point.
Additionally, I indicated that an entrepreneur who is financially intelligent knows for example how to properly price his/her products and services, the difference between capital (CAPEX) and operational expenditures (OPEX), budgeting and budget variances, the difference between profit and cash, what financial statements are and what they mean, key indicators of business health and growth, how to make profits in an enterprise, how to minimize business losses, how to manage business in a sustainable way, how to steer clear of legal and statutory problems, how to invest wisely and maximize return on investment, and so on and so on.
So, today I would like to build a bit on this foundation. Are you with me? I would like to take a look at some of the above situations one by one, and possibly throw more light on certain aspects for the sake of people who need that extra push. Candidly, you don’t need to be a certified accountant or financial analyst to be financially intelligent. Do you? The tips that we are sharing over this blog platform, which I’m sure is one of the best entrepreneurship resources, or rather one of the best blogs on entrepreneurship, are very handy. So, what are the additional tips regarding financial intelligence for an entrepreneur?
Let’s proceed now.
- Pricing decisions. You need financial intelligence to price right, and even in times when you decide to ignore the logical pricing approach, you need to know how sustainable that approach is and what you intend to achieve from it. Even in situations where you use marginal costing and pricing, and other unique pricing methods, you have to understand what it takes. Pricing involves understanding of costs and the market. You need to price your way into profitability and sustainable business. You need to know direct and indirect costs, including variable and fixed costs (overheads). My article entitled What Key Things Must An Entrepreneur Know About Business Profitability has some information about direct and indirect costs. In the business world most entrepreneurs do their pricing even without an accountant, so you need to be financially intelligent. Otherwise you will price your business out of existence! Will you have anybody to blame? Absolutely not!
- Expenditure decisions. When it comes to spending money, some entrepreneurs love spending. As long as there is business money on the bank account they will spend until they drop. Financial intelligence is vital to ensure that you spend right and spend at the appropriate time. Spending money is not evil per se but what you are spending on matters. We have capital expenditures (CAPEX) and operational expenditures (OPEX). Both of these natures of expenditure and expenses need to be rationalized. Now, I hope you know that expenditure is different from expense! I won’t be dragged now into differentiating these two, as I covered this in one of my previous blogs. Possibly I will revisit it another time. Heard about cost control? Yes – you need financial intelligence to control your costs and do business that makes sense financially or economically.
- Budgetary control function. Now about the budget, there are some complicated definitions of budgets that can make you think you have never read books at all in this earth. We will not go into that. Budgets are simply financial and operational plans done in monetary terms. It is a forecast of what you intend to do. Without financial intelligence you would probably have no clue about budgeting, and how to control your budget, yet this is very important to enable you run your enterprise profitably and sustainably. Tell me what happens when you planned to spend USD 50,000 in a year on your staffing costs, and then you end up with USD 95,000. What effect does this have on your profit and cash flow? Come on, you need to understand the implications of these numbers arising from decisions you make. You are in business. Ok? How can you tell that you are overspending on a particular overhead, and take corrective action in time before some auditor proudly tells you this at the end of the year? Isn’t that a very lazy approach to running your business? You need financial intelligence to get it right.
- Understanding cash and profits. Entrepreneur, you need financial intelligence to understand that your profit does not automatically translate into cash. Sometimes I smile within my heart when I hear an entrepreneur say he made so much profit but cannot see the cash in the bank account. The two can never be the same. If you understand audited financial statements, then you can simply go to the statement of cash flows to try and decode the relationship between the two. Issues that cause variance include non-cash expenses such as depreciation of fixed assets. While you charge this to your profit and loss statement, you don’t spend cash on this. You might also have used your profit in buying some assets. Your profit might also be in increased receivables because you have not collected them, or it could be partly used in procuring more stocks or inventories, or in settling creditors or paying back loans and bank overdrafts etc. Are we still together? These are areas where some entrepreneurs have totally no clue, and worse of all, some are not interested in understanding these things. You need financial intelligence to decode this. Isn’t this true?
- Financial statements. I talked about financial statements in my point above regarding understanding why the profit you made in a given period cannot be equal to the increase in your cash and bank balances. My dear entrepreneur, you need to know and understand financial statements. The basic ones include income statement, alternatively called profit and loss statement, or operating statement. This basically matches your income or revenue earned in a given period, with the expenses incurred, and shows you whether you have made profit (surplus/gain) or not (loss/deficit). This must be done on an accrual basis – in other words – considering income earned and received or not received, and expenses incurred whether paid for or not. Another one is the balance sheet. This is alternatively called the statement of financial position, or statement of affairs. This basically summaries your assets (current and non-current) and your liabilities (current and non-current) at a given date. It shows your financial position in terms of strengths or weaknesses. Resources must equal sources. This reminds me of several times I got so serious to construct my personal balance sheet! You can do this. I mean personal, not business. Then we have the cash flow statement I mentioned above. Now, these financial statements have lots of things to analyse in them, and draw conclusions that can guide business decision making. If you are clueless, you can’t even understand them, leave alone analyzing them and using them to guide your business decisions. Can you see why financial intelligence is critical to an entrepreneur? I leave that to you!
- Indicators of business health and growth. There are numerous indicators to business health and growth. Of course, on the surface, if you see increasing customers, revenue, profit, cash and bank balances, etc. you can easily think your enterprise is growing. When you look deeper however with financial intelligence, not everything might be as good as you think. Increased revenue does not always translate into increased profits. Increase revenue might even be triggered by inflation, or currency devaluation effect. I guess you know that in some parts of the world today we still have inflation of 100% ++. I’m not joking. I’m very serious. Do your research and find out. Increased cash balances might mean you have idle money in the business, or it could even result from moneys you have borrowed and could be paying high interest on it for no good reason. It might also mean that you are simply not paying your creditors and other liabilities in time. Without financial intelligence you may be clueless regarding these issues. So, Mr. Entrepreneur, better style up!
- Operating a business profitably and minimizing losses. Do you know the Break Even Point (BEP) in your enterprise? I mean, the point where totals costs equal total revenue and hence nil profit. Do you know that you must operate beyond your BEP point to be profitable? How about managing your costs? Can you control your costs to enable you make profits? Do you know approaches you can use to minimize losses in your business? Do you understand your risk profile? Are you insured? Talking about insurance, today we still have some entrepreneurs who think that insurance is a waste of money? What a misplacement of thoughts? They still think that they are simply making insurance companies rich for nothing, because they could take years without realizing incidences that can make them claim. Financial intelligence is very good my dear entrepreneur. If you want to be financially unintelligent, and ignore all the pieces of advice that I’m giving you, it’s all up to you. The good thing is that you will cry alone when you take a big loss! Ok? I will not share losses with you! You can call me if you have profits to share though. He he he
- Sustainable business. The businesses that you see today, that have lasted for decades and centuries, and operate in a sustainable way, all use financial intelligence. If the owners do not have sufficient financial intelligence, they make sure they employ financially intelligent managers and accountants. They are ‘built to last’. I love this phrase built to last. To me it simply embodies seriousness and focus, sustainability, long-term mindset, service to humanity etc. It even means a lot more if there is positive social impact and with care of the beautiful environment that God gave human beings. If you run a profitable business, innovate responsibly, conserve and protect the environment, use sustainable supply chains, etc. then you could be my friend. I think you need to be financially intelligent, socially and environmentally sensitive and a responsible business to comply with these. If you are making zillions of profits at the cost of the environment and society, you don’t impress me. Period!
- Avoiding legal and statutory pitfalls. My dear entrepreneur, I would like to advise you that an understanding of the laws, regulations, risks management etc. are part of financial intelligence and can very much help you steer your business clear of legal and statutory pitfalls. Do you understand me? Beyond cash and loss related issues – resulting into bankruptcy – another common thing that easily brings businesses to their knees are legal and statutory issues. An example is when you think that paying taxes and other statutory compliance issues is a waste of time and money. Or ignoring government regulation in that business sector or industry is as simple as drinking water. Or you simply sign contracts for business very ignorantly without understanding the implications and covering your back for unseen eventualities. I can’t stop you if you have extra moneys to give to lawyers following hundreds of court cases for you. I can’t stop you if you blindly sign some silly contract that makes you forfeit 50% of your entire business if you default on something. Can I? It’s your choice. My point is this: Be intelligent! Be smart! Avoid regrets!
- Investing wisely and maximizing return on investments. Now, I’m going to say something dangerous here. Isn’t entrepreneurship basically about making money? Isn’t profit a main driver for entrepreneurs? Forget about all the grammar of meeting needs, serving society, corporate social responsibility etc. Profit (read money) is a major driver for entrepreneurship. Profit comes from making the right investments, managing the investments well, and pushing for higher returns on your investments. Now, tell me if you can do this without financial intelligence. How can you understand investment terminologies such as internal rate of return (IRR), payback period (PBP), net present value (NPV), return on notional capital (RONC) if you lack financial intelligence? Do you need an answer from me on this?
Candidly, I think I’ve written too much today. I don’t intend to bore you with an extremely long article and make you skip my next post. I need you to keep coming back to my blog. So I’ve got to be wise and for this reason I’m going to stop here for today.
As I close, permit me to remind you that the above are not exhaustive. Nevertheless, they are very good examples and reasons why an entrepreneur requires financial intelligence. These are indeed good tips regarding financial intelligence for an entrepreneur. Don’t ignore these by the way. I pretty much know that some CEO’s will laugh at this because they know they can easily engage accountants who will take care of all these financial nonsense blah blah blah! Better take care! You might chance on an opaque accountant who will successfully lead all of you into a deep pit. I repeat. Take note, and beware!
I wish you a terrifically good week ahead.
The Wise Entrepreneur