Why Entrepreneurs Should Be Financially Literate?
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We are in the age of start-ups, and hundreds of new ventures open almost every day. The Indian start-up market is one of the largest and the fastest growing markets at present. With many new ventures emerging, the scope of the market seems promising. As per Nasscom’s start-up 2017 (released in November 2017), around 1,000 start-ups were added to the Indian market in 2016-17 strengthening the country’s position as the third largest startup ecosystem across the world, amidst intensifying competition from countries like UK and Israel.
On one hand, these numbers are a clear indication of the Indian market flourishing with more business opportunities, and new avenues becoming increasingly prominent, while on the other hand, it also means a tighter competition and race to be in the top tier of the business world. Many small and big investors in recent times have entered the Indian markets and are seen looking at Indian start-ups like never before.
Owing to the recent reforms in the country like the implementation of GST and focus on Start-up India campaign, the Indian market has definitely become conducive to businesses. However, the hit ratio of start-ups making it big is still comparatively low. Start-ups big and small have begun to feel withdrawal pangs; Snapdeal, LocalBanya, GrocShop, TinyOwl are just a few examples of startups which began with immense optimism but have now closed shop.
There are various reasons for these new start-ups failing - no market need, running out of funds, no or impractical business models, unable to withstand competition, lack of funds and resources, unskilled workforce, incorrect forecasts, mismanagement of finances - but sound financial capability and poor planning emerged as the top cited reasons across all sectors.
Most of the financial capability of today’s entrepreneurs is likely to originate either from past trial and error or from their experiences of entrepreneurship in the family.
Literacy v/s Capability
It is crucial to plan your finances in a systematic manner and build a sustainable business model. Laying down realistic short-term and long-term goals, and working dedicatedly towards them not only gives a sense of accomplishment but also helps in goal clarity. Sound business planning with professional advisers is the key element of the support programmes that can be offered. As the markets evolve, most entrepreneurs forget that they have to embrace those changes and function accordingly. Understanding the difference between financial literacy and financial capability then becomes paramount for entrepreneurs.
One of the right things to do is to treat the capital respectfull and deploy it where there is a better chance to create huge value. ACCA conducted a study on the importance of financial education for entrepreneurs, and suggested the following seven recommendations while starting out on their own:
1. Give equal weightage to financial inclusion and limit the social cost of failing businesses
2. Review and support research into the informal and implicit sources of entrepreneurial education; segment the self-employed population according to how they have acquired their financial capability, not simply how capable they are or feel
3. Develop ‘just-in-time’ interventions that focus on the truly ‘teachable’ moments when entrepreneurs lay out their plans for their businesses; not the ‘reachable’ moments when they realize they need a loan
4. Abandon rigid curricula for such interventions; let entrepreneurs and professional advisers work backward from real business plans to determine what knowledge is needed and what rules of thumb or performance indicators are most appropriate
5. Set aside sufficient human and material resources for just-in-time interventions and develop realistic objectives that do not undermine their mission
6. In particular, overcome the obsession with access to external finance in general and bank loans in particular. Focus instead on access to appropriate finance – formal, informal, internal or external – at the right moments.
7. In providing financial education, make the most of small businesses’ most trusted financial advisers: professional accountants. Do not underestimate how embedded they are in poorer communities or how well they can relate to informal enterprises
As researchers have repeatedly stressed in the past, financial capability is not a substitute for appropriate financial regulation, or professionally run and innovative financial institutions. Even so, it can complement all the above to produce better outcomes. While donning many hats, it is crucial for entrepreneurs to realize that finance function should be given equal importance.
As long as interventions are evidence-based, well designed and well resourced, the financial education agenda is as valid and as relevant to entrepreneurs as ever.