Wannabe entrepreneurs likely to ignore important financial warnings

Wannabe entrepreneurs are highly likely to ignore poor financial performances in order to pursue their dream, according to new research by emlyon business school and ESC Clermont Business School. The researchers found that in the early stages, new entrepreneurs are so blinded by their dreams of becoming successful, they believe entrepreneurial spirit can get them out of a difficult situation.

They add that common myths about entrepreneurs, such as not making a profit early on, enduring poor financial results, or that entrepreneurs all go through hardship at the beginning, mean that entrepreneurs ignore early warning signs of poor performance and potential failure.

These findings come from research conducted by François-Regis Puyou, Professor of Accounting & Corporate Finance at emlyon business school, and his colleague Maxence Postaire, Professor of Management Control at ESC Clermont Business School.

The researchers investigated how accounting forecasts contribute to the emotions of entrepreneurs in financial reporting meetings, and whether they invoked hope or anxiety into these start-up founders. In order to do so, they completed an immersive research project within a business incubator for eight months. The incubator offered workspaces and consulting projects to entrepreneurs, and the researchers sat in in all forecast reporting meetings, in order to gage the entrepreneur’s reactions to forecasting, as well as the steps they took afterwards.

The study revealed that poor accounting performances reported in these meetings invoked feelings of anxiety for entrepreneurs and their wider teams. However, they often ignored these very clear warning signs of failure, and carried on pursuing their projects despite a very small likelihood they could turn performance around. Entrepreneurs used tactics to overcome disappointing performance such as redoubling their efforts, boosting sales forecasts relying on unrealistic new service developments, and willingly enduring economic hardship (i.e. not being paid) for the time deemed necessary for the company to grow profitable.

The entrepreneurs believed that this was embodying ‘entrepreneurial spirit’, however their overoptimism is only delaying the inevitable failure of the business, and is not connecting the dots between consistent poor performance and business failure.

“Though many successful entrepreneurs tell stories about the struggles of early-day entrepreneurship and how they turned things around, it is important to remember that accounting figures are more black or white than just an anecdote from someone successful. Reporting gives a good insight into the performance of a company, and should not be ignored. Entrepreneurs should not let hope or spirit cloud their judgement when it comes to performance and the production of forecasts” says Professor Puyou.

The researchers say that entrepreneurs must be more objective when it comes to their accounting reports. It is important for them to stay as level-headed as possible and not continue to pursue something that is clearly likely to fail. One way the researchers suggest doing so is ensuring that the entrepreneurial team is as diverse as possible, so that entrepreneurs have opposing voices, as well as more reasonable and sensible points of view in the organisation.