The most important finance skills for entrepreneurs: differing views among finance professionals.

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

ABSTRACT

Finance is commonly viewed as one of the most important topics for entrepreneurs to understand to ensure their survival and success. This study addresses 10 finance topics commonly taught in university courses. Each topic was evaluated by financial advisors on its level of importance for inclusion in entrepreneurial finance courses. The financial advisors include accountants/CPAs, bankers (lenders), investment bankers, venture capitalists, angels, personal financial advisors, and "others." The financial advisors considered all 10 topics to be at least "very important." However, some important differences did emerge among the various types of financial advisors on the topics of financing sources and methods, the relationship between outside investors and the entrepreneur, and the time value of money.

INTRODUCTION

Entrepreneurial finance is a relatively new subdivision within the discipline of finance and researchers have only begun surveying finance professionals as to which finance skills are most important for entrepreneurs. In this study, we compare the perceptions of different groups of finance professionals who advise entrepreneurs. These groups include venture capitalists, bankers, investment bankers, angels, accountants/CPAs, personal financial advisors, and others. Each group was asked to comment on the importance of ten finance skills for entrepreneurial success (see Table 2 for a list of these topics). Our results suggest that there is reasonable agreement among finance professionals, although some significant differences are observed. In general, these differences support the view that finance professionals place a higher value on the skills most closely related to their specific professions within the larger field of finance.

LITERATURE REVIEW

Several prior studies have surveyed financial professors to learn what topics are most important to cover in finance courses. For example, Cooley and Heck (1996) surveyed finance professors to investigate the perceived importance of various topics that might be covered in an introductory finance course. These researchers asked respondents to rank topics on the degree of importance and course coverage. Cooley and Heck found that time value of money, capital budgeting, risk and return, security valuation, and cost of capital were the introductory finance course topics viewed as most important by academics. Mergers and bankruptcy, leasing, inventory management, international finance, and receivables management were viewed as least important by finance professors. Other researchers have surveyed finance professors to identify what topics are most important to cover in specialized finance courses. Gardner and Mills (1990) and Granger and Aby (1977) gathered data on the financial institutions and the investments subdivisions, respectively.

An alternative approach taken by some researchers is to gather data on the perceptions of finance practitioners, or of finance practitioners and academics (see Graham & Krueger, 1996; Gup, 1994; DeMong, Pettit & Campsey, 1979). McWilliams and Pantalone (1994) surveyed top financial executives (mostly vice presidents of finance, chief financial officers, treasurers, or controllers) of large corporations to identify what skills these professionals believed were most important for finance majors. Respondents were asked to rank specialized finance courses in the major subdivisions according to their importance. McWilliams and Pantalone found that a majority of large-firm financial executives believed that working capital management, capital budgeting, and financial institutions should be required courses for finance majors. At a time when courses in entrepreneurial finance were becoming much more popular, these respondents placed a very low priority on the specialized course "small business finance." Perhaps this is not surprising, given that the respondents all had successful careers in arge corporations.

Only recently have researchers begun to consider the importance of various topics in the entrepreneurial finance subdivision. Anderson, Envick, and Roth (2001) surveyed entrepreneurs and financial advisors to entrepreneurs to examine the perceived importance of different finance skills for entrepreneurial success. Their evidence suggests that entrepreneurs and financial advisors are in general agreement regarding the seven most important skills; however, entrepreneurs placed a higher value on the "behavioral" topics in finance. Anderson, Envick, and Roth argued that entrepreneurs likely experience challenges in their relations with other firm stakeholders, e.g., outside investors. Such challenges could cause entrepreneurs to rank behavioral or human-relation topics more highly.

Although some initial research has investigated the perceived importance of different entrepreneurial finance topics, we are aware of no study that compares the views of different types of finance professionals. Venture capitalists, bankers, investment bankers, business angels, accountants, and personal financial planners provide distinctly different functions. Because different professions within finance contract with and relate to entrepreneurs in very different ways, these professional groups could have different views on which finance topics are most important for entrepreneurial success.

METHODOLOGY

A nonprofit business organization, which primarily focuses upon promoting entrepreneurial activities, was utilized as the target pool for participants. This organization consists not only of financial advisors, but entrepreneurs, management and marketing consultants, among other types of members. We targeted 186 participants, which is the entire listing of members we believed to be financial advisors. Ninety-two surveys were returned, resulting in an outstanding 49.5% return rate. See Table 1 for demographic information regarding the participants.

The topics included were chosen from a previous study conducted by Anderson, Envick, and Roth (2001), which asked both entrepreneurs and financial advisors to rank thirty finance topics according to their importance for entrepreneurs. The current study focuses on the ten topics deemed most important in the aforementioned study. 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). Mean scores were used to rank the finance topics from most important to least important according to each group. The data were also analyzed using ANOVAs to determine if significant differences exist among the seven groups.

RESULTS

The means and standard deviations of all ten topics according to the seven groups of financial advisors are reported in Table 2. All topics received mean scores higher than five, which implies all topics are considered at least "very important." This high level of importance is due to the fact that the ten topics selected were ones previously identified as "very important" (see Anderson, Envick & Roth, 2001).

As one can see by reviewing Table 2, the opinions of the different financial advisors are similar. However, there are some significant differences that deserve mention. Table 3 summarizes significant statistical differences found between the mean scores of the financial advisors. Only those three topics where significant differences were found are reported. These topics include the "overview of major finance sources and methods," "the relationship between outside investors and the entrepreneur," and "the time value of money."

CONCLUSIONS

The evidence from this study suggests that financial advisors generally agree on the importance of different finance skills for entrepreneurs, but the advisors do disagree on the importance of three skills.

The significant differences observed suggest that financial advisors place a higher value on the skills that relate more closely to their own professions.

First, venture capitalists, investment bankers, and angels valued the topic "overview of major business financing sources and methods" more highly than did accountants. Obviously, venture capitalists, investment bankers, and angels provide financing to entrepreneurs and accountants do not. No doubt, these financiers often deal with "naive" entrepreneurs who do not understand what types of new ventures are best suited for the different sources of finance. Many new entrepreneurs do not understand that angels primarily finance extremely young, very risky ventures; investment bankers finance much more established ventures with proven track records; and venture capitalists finance large new ventures in between these two extremes. Many entrepreneurs also do not understand the nature of the contracts used by these three different providers of equity finance or the level of managerial involvement that the different types of financiers require. The authors have had conversations with venture capitalists that support this assertion. Venture capitalists report that often entrepreneurs, with good business plans, seek venture capital when another form of financing would be much more appropriate.

The second topic where significant differences were found is "the relationship between outside investors and the entrepreneur." In this case, three types of outside investors-venture capitalists, bankers, and angels-all ranked the topic more highly than did accountants. This finding likely reflects that these investors have dealt with entrepreneurs who did not understand the nature of the relationship between outside investors and the entrepreneur. Venture capitalists and bankers have reported in conversations with the authors that entrepreneurs are often surprised by the due diligence requirements or the managerial control requirements imposed by outside investors. Entrepreneurs often view contractual terms regarding these requirements as harsh or unfair. Personal financial advisors also viewed "the relationship between outside investors and the entrepreneur" as more important than did accountants. Personal financial advisors include financial consultants who advise entrepreneurs on the achievement of personal, financial goals. In contrast, accountants focus on accurately reporting the historical accounting income and the book value of assets. It seems natural that in their transactions with entrepreneurs, personal financial advisors would have more opportunity to consider the impact that outside investors (with managerial control rights) can have on the entrepreneur's goals.

The third topic where significant differences were found is "time value of money." Venture capitalists ranked this topic more highly than did bankers or professionals in the "other" category. Personal financial advisors ranked it more highly than did bankers, accountants, or professionals in the "other" category. Again, these differences can be explained by reference to the professional activities of these groups. The time value of money topic is concerned with the discounting process to find present value and the compounding process to find future value. Venture capitalists often discount a new venture's expected cash flows, using very high required rates of return, to estimate the firm's value (see Smith & Smith, 2000). Given this business valuation, the venture capitalist then can determine the amount she/he is willing to pay for a certain percentage of the new venture's equity. Venture capitalists describe their assumptions underlying this discounting process as a way of justifying the share price offered during negotiations with entrepreneurs. These negotiations are often critical to the success of a new venture, are much more likely to go smoothly, and are much more likely to benefit the entrepreneur when the entrepreneur is familiar with the time value of money.

Personal financial advisors assist entrepreneurs in planning for long-term financial goals, e.g. selling the business and retirement. The time value of money concepts, present value and future value, are essential to this planning process. In contrast, accountants emphasize the accurate reporting of historical income and book value, while bankers concentrate on determining the credit worthiness of potential borrowers. These activities do not rely as heavily on the time value of money as do the activities of venture capitalists and personal financial planners.

REFERENCES

Anderson, R., Envick, B. R. & Roth, G. (2001). Understanding the financial educational needs of entrepreneurs: A survey of entrepreneurs and financial advisors. Submitted to the Academy of Entrepreneurship Fall 2001 Conference and under review at the Academy of Entrepreneurship Journal.

Cooley, P. L. & 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 & B. J. Campsey. (1979). Finance curriculum for the future: perceptions of practitioners versus academicians. Journal of Financial Education, 5, 45-48.

Gardner, M. J. & D. L. Mills. (1990). Financial institutions management courses: a survey of current content and the outlook for the 1990s. Journal of Financial Education, 16, 1-4.

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

Granger, F. W. & C. D. Aby, Jr. (1977). A survey of introductory investments course design. Journal of Financial Education, 6, 7-13.

Gup, B. E. (1994). The five most important finance concepts: A summary. Financial Practice and Education, 4, 106-109.

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

Smith, R. L. & J. K. Smith. (2000). Entrepreneurial Finance, New York: John Wiley & Sons.

Greg Roth, University of Portland

Brooke R. Envick, St. Mary's University

Robin Anderson, University of Portland

TABLE 1

Demographic Information on Participant Financial Advisors

By type: By financial advisor education:

Accountants/CPAs 24 High school 3
Bankers (lenders) 26 Trade school 0
Investment bankers 7 Bachelors 37
Venture capitalists 10 Masters 42
Angels 8 Doctorate 7
Personal Financial Advisors 9 Other 1
Other 8 Unknown 2
 92

By business age: By financial advisor age:

Infant (< 3 years) 15 Twenty-six to thirty-five 13
Young (3 to 7 years) 15 Thirty-six to forty-five 33
Mature (>7 years) 60 Forty-six to fifty-five 29
Unknown 2 Fifty-six to sixty-five 13
 Sixty-six and over 3
 Unknown 1

By business size: By gender:

Small (< 50 employees) 50 Female 10
Medium (50-250 employees) 13 Male 74
Large (> 250 employees) 25 Unknown 8
Unknown 4

TABLE 2

Means and Standard Deviations of Finance Topics
According to Financial Advisor Groups

 VC Bankers IB
 Mean Mean Mean
Finance Topic (SD) (SD) (SD)

Forecasting and financial 6.500 6.538 6.571
statements (0.707) (0.706) (0.787)

Cash Management and 6.300 6.269 6.571
projecting cash flows (0.823) (0.827) (0.787)

Financial statement and 6.200 6.269 6.286
financial ratio analysis (0.919) (0.827) (0.756)

Overview of major 5.900 5.522 6.333
business financing (0.994) (1.275) (0.816)
sources and methods

Receivables management 5.600 5.692 5.571
 (1.174) (1.123) (1.397)

The relationship between 5.900 5.696 5.333
outside investors and the (0.876) (1.146) (0.816)
entrepreneur

Time value of money 6.200 5.154 5.143
 (1.033) (1.461) (1.464)

Inventory management 5.200 5.462 5.571
 (1.229) (1.240) (1.397)

Project evaluation 5.500 5.423 5.571
approaches (1.650) (0.945) (1.618)

Capital structure theory 5.100 5.435 5.000
and liability management (1.287) (1.376) (1.414)

 Angels Acct. PFA
 Mean Mean Mean
Finance Topic (SD) (SD) (SD)

Forecasting and financial 6.250 6.625 6.333
statements (0.707) (0.711) (1.118)

Cash Management and 6.625 6.583 6.667
projecting cash flows (0.518) (0.654) (0.707)

Financial statement and 6.250 6.500 5.667
financial ratio analysis (0.463) (0.590) (1.732)

Overview of major 6.250 4.957 5.778
business financing (0.463) (1.147) (1.202)
sources and methods

Receivables management 5.000 5.583 5.778
 (0.756) (1.018) (1.394)

The relationship between 6.125 5.000 6.444
outside investors and the (1.356) (1.348) (0.726)
entrepreneur

Time value of money 5.500 5.417 6.444
 (0.926) (1.176) (0.882)

Inventory management 4.750 5.478 5.667
 (1.389) (1.310) (1.225)

Project evaluation 5.375 5.261 5.556
approaches (1.598) (1.137) (1.333)

Capital structure theory 5.500 5.478 4.889
and liability management (0.926) (1.275) (1.764)

 Other
 Mean
Finance Topic (SD)

Forecasting and financial 6.375
statements (0.913)

Cash Management and 6.750
projecting cash flows (0.707)

Financial statement and 6.250
financial ratio analysis (0.707)

Overview of major 5.875
business financing (0.991)
sources and methods

Receivables management 5.750
 (1.389)

The relationship between 5.125
outside investors and the (1.458)
entrepreneur

Time value of money 4.750
 (1.982)

Inventory management 5.375
 (1.408)

Project evaluation 5.000
approaches (1.309)

Capital structure theory 5.750
and liability management (0.707)

Note: Italicized topics indicate significant differences
exist. Refer to Table 3.

TABLE 3

Information Regarding Significant Differences
Among Financial Advisors

Overview of the major business financing sources and methods:

p = .0295 F = 2.486

Accountants/CPAs with: VC IB Angels Other

Means: 4.957 5.900 * 6.333 ** 6.250 * 5.875 *

The relationship between outside investors and the entrepreneur:

p = 0.333 F =- 2.423

Accountants/CPAs with: VC B-L Angels PFA

Means: 5.000 5.900 * 6.696 * 6.125 * 6.444 *
 *
Personal Financial
Advisors with: Other

Means: 6.444 5.125 *

Time Value of Money

P = 0.665 F = 2.060

Venture Capitalists
with: B-L Other

Mean: 6.200 5.154 * 4.750 *

Personal Financial
Advisors with: B-L Acct/C Other
 PA
Mean: 6.444 5.154 * 5.417 * 4.750 **

* = Significant @ .05

** = Significant @ .01