The Finance Bogeyman
Mike asks a really simple question: why is it that finance is always the entrepreneurial weak spot, the bit that go-getters hate? Perhaps it’s fear, perhaps it’s because money demands discipline, not exuberance. Either way, the finance bogeyman needs taming. Here’s how to do it.
Some people are amazed that the Beermat series of books should include “Finance on a Beermat” – weren’t you bored to death? – but they’re wrong to be. Working with two experienced finance directors, we learnt a huge amount that we should have known ages ago but only half-understood. It was fun, interesting and slightly shaming. We ought to have known more of this stuff!
Many entrepreneurs are afraid of finance. Heroic in most areas of life, they turn to jelly in the face of a balance sheet. They then compound the danger of this by not having a finance cornerstone – as if the best way to keep the finance bogeyman at bay is to ignore it and hope it will go away, rather than get an expert ghostbuster on your side. We are shocked how many businesses muddle along, seeing their accountants at best a few times a year, at worst once a year. This really isn’t sufficient: entrepreneurs need financial information fortnightly. Your bookkeeper, armed with an accounting package, may be able to provide this, but will he or she be able to explain it to you? And, to be honest, will you listen? A finance cornerstone will be better at drawing out the implications of the latest figures landing on your desk, and you’ll pay more attention to them if they’re on your board.
Many businesses get into trouble by having poor relationships with their capital providers. We’re not here to idealize banks, but to point out that many entrepreneurs handle their banks badly, for example by springing surprises on them, then wonder why the banks get ratty. Finance cornerstones are the right people, and actually the only people, to handle this relationship. Their value here is huge – and will get even bigger once you start talking to business angels.
Finance cornerstones are also the best people to deal with other external professionals, such as lawyers and consultants. They speak a similar language, while at the same time keeping a close eye on the large bills these people can charge. The latter is all part of another key finance cornerstone role, that of watching costs, especially fixed costs, which creep up in good times and then crucify a small business if a downturn appears.
The best finance cornerstones can become ‘foils’ to entrepreneurs. If you look at many famous entrepreneurs, you see behind them a finance expert, a quiet person who does not seek the limelight. The classic example of this is Gordon White, who was for many years the financial brains behind Hanson Trust. Hanson took all the limelight, but it was White’s financial skill that made the company so successful. The foil’s main job is to keep the entrepreneur focused on the tasks in hand, but he or she also helps the entrepreneur think through new ideas, to see if they really might work, and, of course, keeps them up to date with accurate, correctly interpreted information about current ventures.
Some readers may object that it’s fine for Lord Hanson to have employed such a person – ‘but I run a small business, and can’t afford such a helpmate’. Objection overruled! Part-time finance directors are now easy to get hold of. There are many very able individuals who have worked in both SMEs and big companies at senior levels, who like doing this kind of work – it gives them freedom, interest and a decent remuneration. Ask around your network, or approach one of the growing band of businesses specializing in providing such people. Contact us if you want a recommendation.
The wise entrepreneur should face down their fear of finance. The topic is too important. Get a finance cornerstone and, most important of all, listen to them.
Or why not go further? Make sure that everyone in your team masters the basics of finance. Do they all understand the difference between (and the consequences of) fixed and variable cost, cashflow and profit, overdraft, loan or equity funding? That way you’ll soon conquer any fear of finance, and may even get interested in the subject. It has worked like a charm for us.