As the students in the 2018 batch of the Asian Institute of Management (AIM) Master in Entrepreneurship (program) reach the end of term one, we have begun to think about shorter programs for entrepreneurs (or want-to-be entrepreneurs) who have specific needs.
There are many topics in the list but four are currently in the forefront: a crash course in finance for entrepreneurs; a boot camp for fledgling entrepreneurs; entrepreneurship in the digital era; and a program for entrepreneurs in the creative industries. As we tossed ideas around, I remembered a cheat sheet I prepared for the old Managing the Arts Program (MAP) for which I occasionally handled finance and self-mastery. Yes, I know, they seem completely at odds, a touchy-feely right-brained topic and a hard-nosed left-brained rational subject. In my defense, as one of our musical students once explained of his own predilection for multiplicity, I am a Gemini.
The self-mastery portion of the MAP was always interesting to teach. Artists, unlike most of the students we get at AIM, are at the opposite end of the brain orientation spectrum. Where our MBA students are rational linear thinkers, artists are out-of-the-box gestalt thinkers. They are rarely bothered by exercises meant to get them in touch with their emotions. For the most part, they live every day bathed in a chemical cocktail of emotions. The finance part? That was always a challenge. To be entirely fair, even number-crunching engineers can find accounting and finance a challenge–part of the reason is that accounting and finance have their own jargon.
No it’s not penance
Before I was asked to teach in the MAP, I was asked to guru (what we now call mentor) a section of our ME program. One of the subjects I found most interesting–and challenging–to teach was finance. There was, of course, simply the basic fact that finance is one of–and for many students, the most–challenging courses in a management program. What was really challenging was that in the entrepreneurship program we had to deal with extremes. Many successful entrepreneurs–translation, they manage profitable, growing businesses–are outliers. I was determined to find a way to make finance accessible. I figured a manager, especially an owner, who could not understand how his decisions affected financials could very easily destroy a firm.
Early on, I realized I had at three to four different types of people in my entrepreneur classes. First, I had accountants. They understood the jargon and I could speak to them in their native language of accounting. Note at this point that accounting is different from finance and even accountants have difficulty with the math of finance. Then, I had the economist (including one with a graduate degree in economics) types. These fellows responded to patterns and charts (which, after all, are just visual patterns). The scientist and engineers responded to formulas. The artists? They needed the drawings. I had entire lectures where I would explain a concept four ways, with strict instructions to listen only to the version meant for them. I actually once had an accountant confess that she felt she would be able to understand all versions. I had started off with the accountant version so that was easy. She said that the engineering version was alright but the economist version already made her head ache. When we got to the artist version, she said she had to close her eyes and stop listening.
When I began teaching finance in the MAP, one of the things I ended up doing was to write a short recap of key finance lessons for the MAP students. The coverage of finance for MAP was the bare essentials. This week, I am sharing one part of that cheat sheet.
Financial Planning– things to remember
You can never over-anticipate
The best way to prepare a forecast is to follow the pioneer’s packing rule. Throw in everything you think you will need, then throw in everything you think you will want, then think some more and throw in some more stuff that you may need if the worst happens or if the best happens”•and all things in between. AND THEN, start weeding out enough stuff so that your horses don’t die of the weight.
This really does not mean that you put everything in the budget. It just ensures you are able to analyze everything before you move forward.
No guarantees- Don’t count your chickens before they hatch!
Some of your forecasted revenues will be certain and some of them will be uncertain—seriously, some of them are downright iffy (you don’t put those in your budget).
Your expenses will be the same.
What you want in a budget is that your “certain” revenues are enough to cover “certai” expenses. Essentially, you must be able to cover your fixed expenses from revenues that are sure.
All other expenses should be matched with possible sources of revenue. These expense budgets should only be accessible IF the matching revenue actually comes in. These are discretionary expenses and are contingent on availability of additional revenue. This way, you protect the firm’s ability to turn a profit. Of course, if the expense is a capital expenditure—an investment that will eventually pay for itself in the future—then you can use other sources of funds—such as debt or internal cash reserves. However, you must understand that capital expenditures will still affect your profitability in the form of amortization or depreciation.
Can’t depend on broad stroke assumptions!
In forecasting and planning, precision is everything.
You need to plan the details so they are implementable. This means you know who is going to do what, how and when. For example, you can’t just say revenues will increase 10 percent. You must explain all of the components of that growth. How much will come from price adjustments? How much will come from volume growth? How will that volume growth be achieved? Current products with more effective marketing? Current products with a geographic expansion? New products?
Next week, I will share the mnemonic I used to teach myself accounting—and the way I still teach accounting to entrepreneurs and creatives.
Readers can email Maya at integrations_manila@yahoo.com. Or visit her site at http://integrations.tumblr.com. For academic publications, Maya uses her full name, Maria Elena Baltazar Herrera.