Understanding the financial educational needs of entrepreneurs: a survey of entrepreneurs and financial advisors.

Anderson, Robin ; Envick, Brooke R. ; Roth, Greg 等

ABSTRACT

Finance is a crucial topic for nascent entrepreneurs to study, as appropriate financial planning and management are essential for survival and success. The current study addresses 30 finance topics commonly taught in university courses. Both practicing entrepreneurs and various types of financial advisors evaluated each topic regarding its level of importance for inclusion in entrepreneurial finance courses. All 30 topics were considered at least "fairly important" for inclusion by both groups. However, some important differences did emerge between the two groups. Entrepreneurs felt six of the topics are significantly more important than did the financial advisors. Financial advisors felt only one topic, forecasting and financial statements, to be significantly more important than did entrepreneurs.

INTRODUCTION

There has been a striking increase in the level of interest in entrepreneurship. A strong indicator of such interest is the unprecedented rise in the rate of new business formation. According to Stevenson (1999), the number of annual new business incorporations doubled from about 300,000 to over 600,000. This is mirrored by an explosive growth in the amount of capital committed to venture capital firms in the United States. Due to this dramatic upsurge in entrepreneurial activity, business schools across the nation are devoting more and more attention to the discipline of entrepreneurship. The Top 50 Entrepreneur-Oriented Universities, according to Success Magazine (2001), includes such names as Babson, DePaul, Cornell, MIT, Stanford, Columbia, to name a few.

As the number of entrepreneurship education programs has increased, so too has the number of business schools offering specialized courses in entrepreneurial finance. In recent years, a small number of new entrepreneurial finance texts have been published to support this nascent market. The increased attention paid to entrepreneurial finance appears justified, given the academic evidence that strong finance skills increase an entrepreneur's chances of business success (see, e.g., Ball and Shank, 1995, Envick, 1999, Gresham and Franklin, 1996, and Hood and Young, 1993). However, there is significant diversity in the topics covered by the existing entrepreneurial finance texts and no studies have investigated exactly which finance skills are most important for entrepreneurial success. The purpose of this study is to gather evidence on which finance topics should be taught to entrepreneurship students, according to entrepreneurs and their financial advisors.

LITERATURE REVIEW

A large number of academic studies have investigated ways to improve introductory corporate finance courses and finance curriculum in general. Mindful of the limited amount of material that can be covered in one course or in one academic major, some earlier researchers focused on identifying the most important finance topics. For example, Cooley and Heck (1996) surveyed finance professors to identify which topics were viewed as most important to teach in introductory (corporate) finance courses. McWilliams and Pantalone (1994) surveyed financial executives of large corporations to identify important courses to offer to finance majors.

Related studies emphasized the differing perspectives of academics, practitioners, and students. DeMong, Pettit and Campsey (1979) surveyed financial executives and academicians to learn the differing perceptions of what skills finance majors most need. Graham and Krueger (1996) compared the opinions of chief financial officers and finance students regarding the importance of various skills to finance majors. Hall and Williams (2001) compared the views of chief financial officers and finance students regarding the importance of financial and non-financial objectives. Perhaps one of the more interesting studies was Gup (1994), who asked finance professors and chief executive officers (at mostly larger corporations) to identify the most important topics to teach in an introductory finance course. The responses from finance professors indicated that the following topics, listed from most to least important, are the seven most important: (1) present value, (2) capital budgeting, (3) the capital asset pricing model, (4) capital structure, (5) valuation, (6) accounting topics, and (7) cost of capital. The responses from CEOs indicated that the most important topics, in order, are: (1) present value, (2) accounting topics, (3) capital structure, (4) capital budgeting, (5) cost of capital, and (6) the capital asset pricing model. (Valuation did not make the CEOs' top seven list and only six topics were reported for CEOs.) Gup's results suggest that CEOs placed a higher value than did finance professors on accounting topics and cost of capital. CEOs placed a lower value on valuation and the capital asset pricing model.

While some research has identified important topics to teach finance students in specialized areas (e.g., Phillips, 1997, surveyed corporate treasurers to see what skills are most needed in this specific profession), no published studies (to our knowledge) have identified the most important finance topics for entrepreneurs. Because entrepreneurial finance is an emerging "sub-discipline," empirical evidence on entrepreneurs' special needs could be helpful to those structuring courses or writing texts for this area of finance.

The current study furthers the process of identifying appropriate content for entrepreneurship curriculum by focusing specifically on the topic of finance. Thirty topics are included and can be seen in Tables 1 and 2. The authors recognize that all 30 topics are important, however we believe it is essential to uncover which topics are most important to include in entrepreneurial finance courses.

METHODOLOGY

A nonprofit business organization, which primarily focuses upon promoting entrepreneurial activities, was utilized as the target pool for participants. This organization consists of entrepreneurs and financial advisors to entrepreneurs, among other types of members. Nine hundred and thirty five participants were targeted, which is the entire listing of members the authors believed to own and operate their own businesses or are financial advisors. Two hundred and fifty-six surveys were returned, resulting in a 27.4% return rate. Of the returned surveys, 195 were usable (76%). Of the 195, 103 were entrepreneurs and 92 were financial advisors. The most common reason a survey was not usable was because the respondent did not fit into either category, entrepreneur or financial advisor (79%). Other reasons include the survey being done incorrectly (only 3%) and the survey being returned because of an incorrect contact person or address (18%).

The survey asked participants to rate the importance of each finance topic on a 7-point Likert scale (1 = not important at all; 2 = slightly important; 3 = fairly important; 4 = moderately important; 5 = very important; 6 = extremely important; 7 = absolutely essential). The opinions of entrepreneurs were used because of their experience in dealing with the finance function of operating a business. Financial advisors were used because finance is their area of specialization and because these particular advisors provide services to entrepreneurs. The subcategories of financial advisors include venture capitalists (10), bankers-lenders (26), investment bankers (7), angels (8), accountants/CPAs (24), personal financial advisors (9), and other (8).

Mean scores were used to rank the finance topics from most important to least important according to each group. The data was also analyzed using ANOVAs to determine if significant differences exist between the opinions of entrepreneurs and financial advisors for each of the topics.

RESULTS

Table 1 reports the mean score rankings of all 30 finance topics according to entrepreneurs. All topics received mean scores higher than 3, which implies all topics are considered at least fairly important. The highest ranked topic is "cash management and projecting cash flows", with a mean of 6.505. The lowest ranked topic is "portfolio theory", with a mean of 3.549.

Table 2 reports the mean score rankings according to the financial advisors. Like the scores given by entrepreneurs, all topics received mean scores higher than 3, implying all are at least fairly important to consider. The highest ranked topic, according to financial advisors, is "forecasting and financial statements", with a mean score of 6.500. The lowest ranked topic is "detailed analysis of debt contracts", with a mean score of 3.230.

As one can see by comparing Tables 1 and 2, the opinions of entrepreneurs and financial advisors are similar, however, there are some significant differences that must be addressed. Table 3 summarizes significant statistical differences found between the mean scores of entrepreneurs when compared with the mean scores of financial advisors. Only those topics where significant differences were found are reported. There are seven, six of which entrepreneurs found significantly more important and one that financial advisors found significantly more important.

CONCLUSIONS

The evidence from this study suggests that most of the thirty finance topics identified are important for entrepreneurs. Entrepreneurs rated twenty-three of the thirty topics as at least "moderately important" for entrepreneurial success. Financial advisors to entrepreneurs rated twenty-two topics as at least moderately important. Although entrepreneurs and financial advisors rated certain finance topics significantly differently, these two groups also showed remarkable agreement regarding the most important finance topics. Financial advisors valued "forecasting and financial statements" more highly than did entrepreneurs, but both groups viewed this topic as important. For many of the financial advisors surveyed, such as accountants, producing financial statements is their primary service. Perhaps it is not surprising that they ranked this skill highly.

A common theme from other significant differences revolves around the "behavioral" topics in finance. In general, entrepreneurs rated behavioral topics more highly than did financial advisors. For example, "the relation between outside investors and the entrepreneur" was deemed to be a more important topic by entrepreneurs. This finding may suggest that many entrepreneurs have had important conflicts with outside investors regarding the management and control of a new venture. Naturally, such conflicts would lead entrepreneurs to value this topic highly. Similarly, "agency theory," which focuses on the conflicts between owners and managers, was valued more highly by entrepreneurs. Entrepreneurs also valued "selecting the form of business" more highly than did financial advisors. Because the form of the business (i.e., sole proprietorship, partnership, limited partnership, corporation, etc.) drastically affects how power is shared and decisions are made in a new venture, the first-hand experience of entrepreneurs seems to lead them to value this topic more highly. Finally, entrepreneurs gave higher ratings to "small business profiles," "options and option pricing theory," and "detailed analysis of debt contracts."

Notwithstanding these statistically significant differences, entrepreneurs and financial advisors displayed a surprising consensus regarding the seven most important finance topics. Although the exact rankings within the top seven topics differed for entrepreneurs and financial advisors, these two groups agreed that the seven most important entrepreneurial finance topics are: (1) cash management and projecting cash flows; (2) forecasting and financial statements; (3) financial statement and financial ratio analysis; (4) the relationship between outside investors and the entrepreneur; (5) overview of major business financing sources and methods; (6) receivables management; and (7) time value of money.

As noted, Gup (1994) reports on the most important introductory finance course topics, according to CEOs and finance professors. His respondents and the respondents from this study agree that present value (time value of money) is important and that accounting topics (which include topics (2) and (3) above) are important. However, respondents from the two studies do not agree on the importance of the other four most important topics. In particular, cash management and projecting cash flows appears to be much more important to entrepreneurs than to CEOs of larger corporations. Entrepreneurs likely value this skill because forecasting cash shortfalls is particularly difficult for new ventures and because new ventures have a more difficult time raising cash quickly to meet unexpected shortfalls. Overall, the evidence suggests that the topics previously identified as most important for introductory finance courses are not the most important topics for entrepreneurial finance courses. The evidence from this study should prove helpful to those prioritizing finance topics for entrepreneurship students.

REFERENCES

Ball, R. W. and M. D. Shank (1995). Understanding the educational needs of small business owners. The Entrepreneurial Executive, 1, 25-35.

Cooley, P. L. and J. L. Heck (1996). Establishing benchmarks for teaching the undergraduate introductory course in financial management. Journal of Financial Education, 22, 1-10.

DeMong, R. F., L. C. Pettit, and B. J. Campsey (1979). Finance curriculum for the future: perceptions of practitioners versus academicians. Journal of Financial Education, 5, 45-48

Envick, B. R. (1999). Entrepreneurship programs versus traditional business programs: understanding different needs. Journal of Entrepreneurship Education, 2, 2-10.

Graham, L. and T. M. Krueger (1996). What does a graduate need?: conflicts in CFO and student opinions. Financial Practice and Education, 6, 60-67.

Gresham, A. B. and G. M. Franklin (1996). Does a traditional business education prepare students for a career in small business: a study of perceived differences. Proceedings of the Academy of Entrepreneurship, 12-16.

Gup, B. E. (1994). The five most important finance concepts: a summary. Financial Practice and Education, 4, 106-109. Hall, P. L. and T. G. Williams (2001). Finance students and finance executives: values and priorities. Journal of Financial Education, 27, 50-63.

Hood, J. and J. Young (1993). Entrepreneurship's requisite areas of development: a survey of top executives in successful entrepreneurial firms. Journal of Business Venturing 8, 115-131.

McWilliams, V. B. and C. C. Pantalone (1994). Structuring the finance curriculum: a survey. Financial Practice and Education, 4, 37-46.

Phillips, A. L. (1997). Treasury management: job responsibilities, curricular development, and research opportunities. Financial Management, 26, 69-81.

Stevenson, H. H. (1999). New Business Ventures and the Entrepreneur. Irwin-McGraw Hill.

Success Magazine. (2001). The top 50 entrepreneurial business schools. February/March.

Robin Anderson, University of Portland

Brooke R. Envick, St. Mary's University

Greg Roth, University of Portland

Table 1: Entrepreneurs' Mean Score Ranking of Finance Topics

Finance Topic Mean SD

Top One-Third

Cash management and projecting cash flows 6.505 .839
Forecasting and financial statements 6.194 1.076
Financial statement and financial ratio analysis 6.049 1.175
The relationship between outside investors and 6.020 1.081
 the entrepreneur
Overview of the major business financing sources 5.745 1.096
 and methods
Receivables management 5.563 1.288
Time value of money 5.505 1.385
Personal finance and the entrepreneur 5.461 1.539
Project evaluation approaches 5.456 1.219
Selec0ting the form of business 5.301 1.335

Middle One-Third

Capital structure theory and liability management 5.294 1.240
Inventory management 5.097 1.411
Placing a value on a closely held or private firm 5.069 1.154
Harvesting the investment 5.050 1.366
Small business profiles 4.912 1.387
Hybrid business financing methods 4.863 1.428
Financial markets and institutions 4.825 1.438
Popular finance and accounting software 4.784 1.520
Lease versus buy decisions 4.534 1.305
Mergers and acquisitions 4.485 1.236
Agency theory 4.485 1.376

Bottom One-Third

Debt contracts 4.382 1.422
Options and option pricing theory 4.107 1.614
Valuing stocks and bonds 3.835 1.245
Efficient capital markets hypothesis 3.762 1.365
Detailed analysis of debt contracts 3.706 1.519
International finance 3.621 1.299
Dividend policy 3.598 1.402
Bankruptcy, liquidation, and reorganization 3.573 1.325
Portfolio theory 3.549 1.533

Table 2: Financial Advisors' Mean Score Ranking of Finance Topics

Finance Topic Mean SD

Top One-Third

Forecasting and financial statements 6.500 .763
Cash management and projecting cash flows 6.489 .734
Financial statement and financial ratio analysis 6.261 .875
Overview of the major business financing sources 5.598 1.156
 and methods
Receivables management 5.598 1.130
The relationship between outside investors and 5.575 1.235
 the entrepreneur
Time value of money 5.457 1.362
Inventory management 5.396 1.273
Project evaluation approaches 5.374 1.235
Capital structure theory and liability management 5.356 1.285

Middle One-Third

Personal finance and the entrepreneur 5.102 1.494
Placing a value on a closely held or private firm 4.977 1.446
Financial markets and institutions 4.879 1.444
Selecting the form of business 4.826 1.419
Harvesting the investment 4.804 1.549
Hybrid business financing methods 4.651 1.317
Popular finance and accounting software 4.568 1.560
Small business profiles 4.391 1.466
Debt contracts 4.379 1.383
Mergers and acquisitions 4.367 1.043

Bottom One-Third

Lease versus buy decisions 4.382 1.222
Valuing stocks and bonds 4.089 1.435
Agency theory 3.879 1.476
International finance 3.769 1.257
Options and option pricing theory 3.659 1.424
Bankruptcy, liquidation, and reorganization 3.626 1.217
Portfolio theory 3.500 1.537
Efficient capital markets hypothesis 3.483 1.470
Dividend policy 3.391 1.333
Detailed analysis of debt contracts 3.230 1.178

Table 3: Significant Differences Between Entrepreneur and
Financial Advisor Rankings

Finance Topic Ent. Mean FA Mean

Forecasting and financial statements 6.194 6.500
The relationship between outside 6.020 5.575
 investors and the entrepreneur
Selecting the form of business 5.301 4.826
Small business profiles 4.912 4.291
Agency theory 4.485 3.879
Options and option pricing theory 4.107 3.659
Detailed analysis of debt contracts 3.706 3.230

Finance Topic F-value p-value

Forecasting and financial statements 2.009 .0035 **
The relationship between outside 6.973 .0090 **
 investors and the entrepreneur
Selecting the form of business 5.796 .0170 *
Small business profiles 6.289 .0130 *
Agency theory 8.724 .0035 **
Options and option pricing theory 4.143 .0423 *
Detailed analysis of debt contracts 5.642 .0185 *

* = significant @ .05 ** = significant @ .01