Why Microentrepreneurs need a Financial Perspective.

Published by Jack Foley, DoLearnFinance.com on 30-sep-2021


It seems obvious that common sense combined with simple financial modelling would avoid many start up struggles by:

  • Identifying potentially viable business models and
  • Pivoting or killing bad business ideas at the bench-test stage to preserve the promotors’ energies for another venture with better prospects.

So it is almost an article of faith in HEIs and enterprise development organisations that entrepreneurs produce financial projections to assess the prospects of their business plans.

And alongside countless tutor-led finance courses there are modern technologies and supports such as the financial modules in the e-learning platform on www.difme.eu providing free access to the knowledge and tools needed to design commercially viable start-up business models and understand how to make financially-smart business decisions.

Yet despite all these supports and encouragements, many nascent entrepreneurs are happy to jump into business without seriously stress testing the financial viability of their business model. Even when they must produce projections for funding or for “marks” on a course they make only token efforts to understand what they mean and how they are inextricably linked to the targets promised in their business plan.

This situation has not arisen by accident: if you are a teacher, trainer, banker or adviser working with start-ups and microentrepreneurs you may be part of the problem!

In this brief article we will:

  • Identify the aspects of financial skills that are relevant to microentrepreneurs
  • Look at how well microentrepreneurs are served by trainers and educators
  • Examine how key influencers - state agencies and banks affect attitudes to financial skills
  • Imagine how the MSE sector would appear were all players took their roles more seriously.

The Financial Perspective – The financials skills relevant to microentrepreneurs

Microentrepreneurs don’t need to know double entry bookkeeping but they must have an unambiguous grasp of:

  1. What projected Profit and Loss Account, Balance Sheet and Cash flow projections say about their business model
  2. How tactics/decisions about prices, scaling, costs, investment in fixed assets, and the scale and sources of funding shape the profitability and sustainability of their business.
  3. Adaptable business strategies to create mixes of the above tactics to define successful business models.

Finance is the language of business; its terms communicate complex business situations effectively and financial statements are nothing less than the scorecards of business.

The lockstep relationship between business and finance

Business and finance are not separate activities but work in lockstep. The idea of making significant decisions (much less constructing a business model) without examining the resultant financial statements makes no sense. Simply working back from the financial statements to their real-world determinants as in Table 1 below shows the Gordian Knot that links business and finance.

Table 1: The Financial Perspective Algorithm

Financial Statements & Goals


Core Questions


Goal to increase

Selling Prices

Sales Volume

Can I gain volume and/or higher selling prices through:

·          Focusing on “winners” and marginalising “losers” in my product/service range

·          Redesigning products/services and developing new ones

·          Developing new markets

·          Expanding current markets

·          Smarter promotion and advertising

·          Improved sales control systems to reduce unnecessary discounting, unrecorded sales etc.


Cost of Sales (Materials)

Goal to reduce

Purchase Prices


Can I reduce my cost of sales/materials by:

·          Eliminating or reducing materials by redesigning Products/Services

·          Substituting cheaper materials which still maintain required quality standards

·          Finding better suppliers

·          Negotiating better prices and discounts

·          Purchases Control Systems to avoid overpayments.


Goal to reduce



Can I reduce my labour costs by:

·          Negotiating Wage/Salary cuts

·          Better planning to avoid idle time

·          Improving work Practices and Methods

·          Designing or acquiring Tools/Technology to increase productivity



Goal to reduce


Purchase Prices


Can I reduce my overheads by:

·          Using other suppliers

·          Making changes in the workplace and work practices to reduce insurance ratings

·          Encouraging more “cost aware” work practices

·          Targeting “Volatile” items e.g. travel expenses and phone bills.

·          Maintaining internal controls to ensure expenses don’t creep up.



Secure the right amount and don’t over-borrow


Long Term Loans


Have I:

·          Stress tested my plans and projections to ensure that I have enough capital to meet predictable outcomes

·          The right growth/safety balance between owners’ v. borrowed funds


Current Liabilities

Be smart and fair


Short term loans/overdrafts

Have I:

·          Agreed fair and sustainable credit terms with suppliers

·          Identified short term peaks in my cash requirements and arranged facilities 


Fixed Assets


Judged by the sales and/or profit they generate



Do I:

·          Have an effective process to measure the cost/benefits of asset acquisition

·          Hire rather than buy when I cannot be certain of the long-term benefit delivered by the asset

·          Avoid vanity buys that are likely to turn into “White Elephants”


Current Assets


Minimise within prudent SLAs

Inventory (Stock)


Cash and equivalents


Do I have systems and procedures to:

·          Ensure that stock levels are as low as possible but responsive to prudent customer service levels and impending changes in prices and delivery conditions

·          Collect cash from debtors on time

·          Plan and monitor cash flow to maintain adequate cash balances and utilise surpluses


Converting the financial perspective into a simulator to stress test start-up business models

Modern computer technology makes it easy to create dynamic software models to game the components illustrated in Figure 1 and fine-tune business models to give business ideas the best possible chance of surviving and thriving.

Good models will clearly separate lockstep relationships from assumptions.

Lockstep relationships

These are hard wired relationships coded into the programme and link the metrics in the business model (prices, costs, scale, funding, and capital investment) to the values in the financial statements.

For example, an increase in selling prices (all else remaining the same) will cause the sales figure in the Profit & Loss account to increase in direct proportion and all other connected values (debtors, cash, profit and so on) will change in lockstep.

Business Assumptions

Business assumptions relate to uncertainties such as the impact a change in one driver will have on another e.g. how much the numbers sold (sales volume) would change in response to a higher price. This is the stuff of “What-if?” exploration and down to the judgement of entrepreneurs and their advisers.

Figure A is a snapshot from an application which connects a high-level business model to its financial statements. The metrics in the business model (column one) are user-determined and automatically generate those in the three financial columns. To appreciate the financial perspective consider two situations:

  1. One where the three columns to the right of the business model column were completely blanked out i.e. the situation where microentrepreneurs ignore the financial perspective
  2. Against...
  3. One where microentrepreneurs can see and use the information in the three financial columns to create a rapid feedback loop to fine tune their business model and rapidly embed financially smart decision-making as an ingrained skill.

Figure A - Linking business and financial models