Reflection Two
As mentioned in the previous reflection, one way Rao explains being finance-smart, is to be capital smart. In this reflection, we learn to understand that before seeking capital, Rao says entrepreneurs need to develop capital-smart skills such as entrepreneurial accounting skills, controlled financing skills, and capital efficient launch skills.
Rao discusses, as an entrepreneur, one should know their numbers and their impact on the business and what they as an entrepreneur can do about them. Kimbrough (2023) also stresses financial literacy as an important skill for new entrepreneurs stating, “Building a solid financial foundation begins with knowing your financial situation. If you don’t know where you are financially, you can’t devise a plan to get where you want to be.”
Rao describes entrepreneurial accounting skills as having 6 levels of financial expertise:
Level One: Understanding Financial Statements
*monitor sales data daily
*review income and cash-flow statements weekly
*use monthly balance sheets
Level Two: Evaluating Impact of Assumptions (at startup, all assumptions are unproven)
*group assumptions based on impact; test major ones (Rao suggests that the most important ones are about sales and the cost to get sales.)
Level Three: Analyzing the Financial Impact of the Business Model
*first impact is to measure potential sales and cash flow
*second impact is to measure the amount of money needed to get to sales and cash flow
Level Four: Reducing Financial Needs with Capital Efficiency
*know how to grow with less
Level Five: Finding the Right Financing to Control
*seek alternative methods (beside VC) to finance growth until growth and leadership potential is evident
Level Six: Real-Time Tracking to Launch with Control
*discover what is important to your business and track it
In looking at controlled financing skills, Rao describes how financing skills can make an entrepreneur more competitive, help them obtain controllable resources, and reduce surprises. Finance-smart entrepreneurs use 5 primary skills:
- Skills to Avoid Losses (some examples: adjust strategies and operations, keep breaking even levels lower than tested sales, testing key strategies before investing large amounts)
- Skills to Reduce Working Capital Needs (some examples: make operations faster/more efficient to control inventory, sell direct to consumers, have customers pay in advance, use vendors as working capital sources—if no working capital, connect with corporate partner, test sales drivers to increase sales and pinpoint target market)
- Skills to Minimize Fixed Asset Needs (some examples: lease instead of own, rent equipment only when it needs to be utilized as opposed to buying)
- Skills to Grow with Positive Cash Flow (some examples: use real time management and financial skills to obtain high growth with positive cash flow)
- Skills to Find the Right Financing at Each Stage (early stages = high risk; going from early to late stages, risk goes down as potential is evident)
One quote that really stood out to me from Rao: “Reaching your goals while controlling your business may make you rich. Reaching without control can make other people rich.”
For capital efficient launch, Rao describes the following skills:
*skills to focus (keep track of all expenses and the return for each dollar)
*skills to make customers happier without capital (sell directly to customers so can monitor their satisfaction)
*skills to find the right sales driver (business should sell itself)
*skills to be a PR whiz (understand your target market and how to reach them)
*skills to grow at the right speed (competitor speed Rao explains is the most important of the speeds mentioned; Rao suggests to grow at least as fast as competitors until can surpass them)
*skills to price (one of the most important skills, yet one of the most difficult to master; view as what is the perceived value to the customer)
*skills to dominate emerging trends (Rao states this is the most important of the skills)
*skills to track business in real time (launch before running out of money)
*skills to adjust based on real feedback (launch, test, adjust)
One part of the capital efficient launch skills that really stood out to me was a description in this section of the book regarding Dick Shulze, the founder of Best Buy. Rao states that Shulze learned that competent and motivated salespeople who are happy with the company and can also make customers happy are key to exemplary performance when customer interaction is key. After learning this, Shulze worked to find these salespeople and even promoted them. Shulze described this strategy as his competitors focused on a business model, but he focused on his company’s culture and his people, which couldn’t be copied.
This speaks to me, as most of us have gone into businesses or experienced a workplace setting in which it felt like the employees hated their jobs and clients/customers were treated as numbers, not people. This type of setting makes me not want to go back. This is one aspect of my job that I truly appreciate. I feel that our culture, internally and externally to our clients, centers on respectful relationships amongst people which genuinely care about others. A company’s culture makes such a difference within a business and whatever that culture may be, it is projected out onto its client/customers. Hopefully it is a positive culture, leaving people the desire to come back. How has a company’s culture affected you?
Stay tuned to find out more in the next reflection on Finance Secrets of Billion-Dollar Entrepreneurs: Venture Finance without Venture Capital.
References:
Kimbrough, J. (2023). Financial Literacy is Essential for New Entrepreneurs to Build a Solid Foundation. Forbes Business Council, Forbes Media LLC. https://www.forbes.com/councils/forbesbusinesscouncil/2023/12/04/financial-literacy-is-essential-for-new-entrepreneurs-to-build-a-solid-foundation/
Rao, D. (2020). Finance Secrets of Billion-Dollar Entrepreneurs: Venture Finance without Venture Capital. FIU Business Press, Mango Publishing Group.