Understanding the financial educational needs of entrepreneurs: a survey of entrepreneurs and financial advisors.
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.
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, and 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 & Shank, 1995; Envick, 1999; Gresham & Franklin, 1996; Hood & 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.
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.
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.
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.
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.
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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 the 6.020 1.081 entrepreneur Overview of the major business financing sources and 5.745 1.096 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 Selecting 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 and 5.598 1.156 methods Receivables management 5.598 1.130 The relationship between outside investors and the 5.575 1.235 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 Ent. FA F Finance Topic Mean Mean value p value Forecasting and financial 6.194 6.500 2.009 .0035 ** statements The relationship between 6.020 5.575 6.973 .0090 ** outside investors and the entrepreneur Selecting the form of business 5.301 4.826 5.796 .0170 * Small business profiles 4.912 4.291 6.289 .0130 * Agency theory 4.485 3.879 8.724 .0035 ** Options and option pricing theory 4.107 3.659 4.143 .0423 * Detailed analysis of debt 3.706 3.230 5.642 .0185 * contracts * = significant @ .05 ** = significant @ .01
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|Author:||Anderson, Robin; Envick, Brooke R.; Roth, Greg|
|Publication:||Academy of Entrepreneurship Journal|
|Date:||Jan 1, 2003|
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