Financial Risk and the Entrepreneur

September 10, 2017 ENT650 – Adv. Entrepreneurial Finance, Entrepreneurship, Finance Comments (16) 235

ENT650 - WEEK 2

For many of us, the word “entrepreneur” conjures a vision of an individual working tirelessly to grow an idea into a business. This is certainly one type of entrepreneur, but there are other types of entrepreneurs, too. There are those who serve an entrepreneurial function in corporations, those who chose to buy a franchise, those who acquire established businesses, and those we mentioned earlier who start a business from nothing (Rogers, 2014). Each of these individuals is an entrepreneur, albeit with different skill sets and arguably a different level of tolerance for the financial risk in entrepreneurship. Understanding basic financial principles and the role these principles play in entrepreneurial ventures might help entrepreneurs balance their risk-reward tolerance when considering new opportunities.

Financial management is a valuable discipline for entrepreneurship, regardless of the entrepreneurial type. It is the single most useful toolset for mitigating business risk. Unfortunately, many entrepreneurs cite financial management as their weakest skill (Rogers, 2014). Why? It may be that some entrepreneurs see their strength as creating their venture’s product or service. In these situations, they may abdicate the responsibility of the venture’s finances. It is likely that the type of entrepreneurial activity factors into the value an entrepreneur places on the need to understand the underlying financial aspects of the venture.

Let’s look at each entrepreneurial type in a little more detail from the lowest to the highest financial risk related to entrepreneurial activity:

Corporate Entrepreneur

Corporate entrepreneurs, or intrapreneurs, are those who perform entrepreneurial functions within an organization. The work these individuals do can range from creating new lines of business and developing new opportunities from within an organization (as I did for the Boy Scouts of America’s National retail operations) to starting a separate venture with funding and direction from an organization. In both cases, the greatest challenge for the entrepreneur is walking the line between organizational culture and the entrepreneurial mindset needed to grow and develop the new venture (Gavin & Levesque, 2006). The business culture often does not allow for the level of out-of-the-box thinking necessary to get the new venture off the ground. While this approach might provide for the lowest financial risk for an entrepreneur, failure in this environment may well have different risks. The risk of an individual’s corporate social capital, the risk of advancement opportunities, or the risk of employment to name just a few.

Franchise Entrepreneur

Those entrepreneurs who purchase a franchise are buying into a system, methodology, customer base, and support network for starting and growing a business. The entrepreneur’s advantage in the purchase of a franchise is that theoretically all of the mistakes start ups make were identified and corrected in the franchisor’s concept development stage and therefore the business risk is minimized for the franchisee (Brown, 2012). Theoretically, the financial risk is lessened, too, if the franchisee follows the model. Although, demographic changes, cultural shifts, changes in consumer attitudes, or perhaps public-relations-related factors (think Jared of the Subway chain) not quickly addressed by the franchisor could significantly increase a franchisee’s financial risk. Still, the bulk of the financial risk is borne by individual franchisee’s business acumen, and that often falls outside the systems and models established by the franchisor.

Acquisition Entrepreneur

Many people become entrepreneurs through the acquisition or inheritance of an established company. Acquiring an existing company might provide some distinct advantages for an entrepreneur including, an established customer base, fixed working hours, and a revenue stream. Plus, the entrepreneur gains the flexibility of being self-employed and his or her success is dependent in large part on the ability to manage and grow the business (Ruback & Yudkoff, 2017). This approach can be appealing for those entrepreneurs who are skilled with business management and who want some flexibility and responsibility but lack the desire to build a business from scratch. Although there may be systems and processes in place, the financial risk is greater than that of a franchisee because there is no franchisor network or formalized “learning community” to whom the entrepreneur may turn for specific advice and direction. The financial risk is less than that of a start-up entrepreneur because the venture is already running and presumably profitable with positive cash flow.

Start-up Entrepreneur

The start-up entrepreneur builds a business from the ground up. He or she starts with an idea, creates a product or service, develops a framework for delivery, acquires and retains customers, and hopefully, builds a successful business over time. Unlike the corporate entrepreneur, the start-up entrepreneur does not have a financial backing and functional support of a corporation. Moreover, the start-up entrepreneur does not have the systems, processes, or support network of a franchisor, nor the benefits that come with acquiring an existing business. The start-up entrepreneur does not have the safety nets possessed by the other types of entrepreneurs, even with sufficient start-up capital. The financial risk, then, is greatest for a start-up entrepreneur.

Each type of entrepreneur encounters some level of financial risk. Risk management is an entrepreneur’s responsibility and understanding entrepreneurial finance is the key to minimizing that risk. Considering knowledge of entrepreneurial finance is so often the difference between success and failure, all entrepreneurs should devote themselves to understanding the key financial indicators for their particular business.  Regardless of the type of entrepreneur one may be, it is important to realize that successful entrepreneurs must have more than an excellent idea, the willingness to work hard, business experience, the financial backing of a corporation or the support of a franchise system.  Successful entrepreneurs must have a solid understanding of financial management and put that knowledge to use in business every day.

 

References

Brown, P. (2012, September 19). Franchisees are Entrepreneurs. Retrieved September 09, 2017, from forbes.com: https://www.forbes.com/sites/actiontrumpseverything/2012/09/19/franchisees-are-entrepreneurs-let-the-debate-begin/#cb962052bf3e

Gavin, D. A., & Levesque, L. (2006, October). Meeting the Challenge of Corporate Entrepreneurship. Retrieved September 09, 2017, from hbr.org: https://hbr.org/2006/10/meeting-the-challenge-of-corporate-entrepreneurship

Rogers, S. (2014). Entrepreneurial Finance: Finance and Business Strategies for the Serious Entrepreneur (3rd ed.). New York: McGraw-Hill Education.

Ruback, R., & Yudkoff, R. (2017, January). Buying Your Way into Entrepreneurship. Retrieved September 09, 2017, from hbr.org: https://hbr.org/2017/01/buying-your-way-into-entrepreneurship

 

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Featured Image Source: Getty Images / TheMacx

David Harkins is a serial entrepreneur, which is a more professional way of saying he is still trying to figure out what he wants to be when he grows up.
When not working for himself, he has had a fulfilling career in marketing, advising both large and small companies including several in the Fortune 500 and many of America’s largest nonprofit organizations. In his spare time, he consults, speaks, writes, hikes, explores, and creates art. Although, not necessarily in that order. Connect with him on social media below:

16 Responses to :
Financial Risk and the Entrepreneur

  1. Austin Parker says:

    Hi David,

    Excellent thoughts. It seems as though intrapreneurs are often overlooked and forgotten about, but their role can be critical to the health of a corporation – especially during times of great change. Likewise, it seems that many companies do not recognize or nurture this behavior from their employees. They are told to think outside the box, yet never allowed to fully implement new solutions. All in all, it seems as though there is much room for growth in this respect.

    Great post,
    Austin

    1. Thank you, sir. Intraprenuers are indeed most valuable to an organization when given the room to do what they’re hired to do.

  2. Cole says:

    David,
    Great post – you are correct – each position needs to be organized – it creates balance. Educating and training, mentoring are very important – if one is to be remain successful.

    1. Thanks, Cole.

      Mentoring is the number one thing on my list. 🙂

  3. Margaret McAlister says:

    V ery good points David. When I had my mortgage company I was so busy handling loans that I hired a bookkeeper and accountant. That was the best thing that I did. You are so right financial management is crucial for success.

    1. Thanks, Margaret.

      It’s always good to know when we’re stretched a little too far, isn’t it? I am glad you were able to identify the need for a little help to keep your business on track.

  4. pawiseman1 says:

    I think you nailed it when you said business culture, sometimes, does not allow for out-of-the-box entrepreneurial thinking. This is a major issue inside a startup organization. Thinking you know everything, and have everything figured out already, sets you up for failure because innovation and curiosity no longer exist. Nice work!

    1. Thanks, Alex.

      I also think a good many entrepreneurs are guilty of assuming they know more than they do and being afraid to ask for help for fear of looking stupid. I’ve been there a time or two myself.

      “Fake it ’til you make it” can be a useful mantra for an entrepreneur, but you have to know where to draw the line. We call cannot know everything and assuming we do does, as you note, set us up for failure.

  5. David,

    Thanks for this great post. When we think of “Entrepreneur”, there are so many definitions. I like how you explained the variety of ways one could become an entrepreneur. Each role has different duties, pros and cons, you just have to figure out which role is best for you. Small business ownership is a wonderful idea, but there is so much involved that these types of posts can really help educate those people looking to start a business or join another organization.
    Thanks!
    Christina

    1. Thanks, Christina.

      Entrepreneurship comes in many forms, shapes, and sizes, doesn’t it? 🙂

  6. David,
    I like the breakdown of all the entrepreneurs and their responsibility towards financial management. I think it also opens up the idea of entrepreneurship in all of its forms. Some of us might not be able to be “an individual working tirelessly to grow an idea into a business”. Your post shows us there are multiple ways to be an entrepreneur and maybe balance one’s risk/reward tolerance.
    Cece

    1. There are indeed many forms of entrepreneurship. As you point out, finding a way to balance the risk and reward for an individual is what really matters.

  7. David,

    I am a big fan of simulation. Some programs are moving toward providing a simulation experience. I think that would be an excellent way to acquire the understanding that “knowledge of entrepreneurial finance is so often the difference between success and failure.” When presented in a textbook it is so dry and seems like just a bunch of numbers. But in a simulation, the request to follow cash flow on a daily basis would become real. Perhaps the Sims folks will take this on.

    1. I like simulation, too, when it makes sense. I used a simulation for running a coffee shop in an undergrad class. I kept running out of baked goods inventory because I was limited to delivery options of 3, 7, and 10 days. I either ordered too much and had spoilage, or too little and lost sales. What I would have done in real life would have been to have connected with a local bakery and created a just-in-time model so that my bakery needs would have met more effectively. When scenarios limit the options of real life, they’re useless as this simulation experience proved. I do agree that this assignment was quite valuable for considering the impact of assumptions on cash flow.

  8. Hello David,
    I knew of all these entrepreneur’s but always thought in the possibility of start up when thinking about this class or what I would do. It is so true that several type of entrepreneur’s can happen right down to being thrown into a business you might not have expected as an inheritance. I like blogs that give you food for thought.
    Thanks
    Mary

    1. Thanks so much, Mary.

      Like you, I’ve often thought of entrepreneurship as all or nothing venture. But, that’s not really true. Entrepreneurship can take many forms, can’t it?

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Financial Risk and the Entrepreneur

by David Harkins time to read: 4 min
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