Own the heart and you’ll fix for the head in SME financial decision making

Recently I came across an interesting piece of research out of Mexico that sought to uncover the impact of financial decisions and strategy on small business competitiveness.

While the authors acknowledge weaknesses around financial data collection – a large degree of raw inputs are qualitative and survey based – the results tend to skew towards a conclusion most of us would readily come by anecdotally;

  • Companies that efficiently manage their short-term assets and liabilities are more competitive (when competitiveness is measured as time in market)
  • SMEs show little to no alignment between business strategies and financial decision making

Financial decision-making is a wide-ranging topic, but can generally be considered as being comprised of three core building blocks: working capital needs, funding options and then investment decisions. Helping a business owner make better financial decisions, especially around working capital, should be the primary concern, as according to the study (and general business wisdom) this is what leads to operational longevity.

We all know small business owners typically lack the sophisticated financial analysis techniques commonplace in larger businesses that support good decision-making on working capital allocation. Which means up until now, the obvious technology led approach to solve for this has been to somehow distil these techniques into accounting platform add-ons and apps, which automate cash flow predictions and forecasting.

And while they’re good at shining a light on the business’s cash flow problem, most tools lack the confidence and intelligence to equip them with the teeth required to make a recommendation on what decision to make next. They’re like a bridge you can only cross if you’re willing to pay an additional advisory toll.

Many of these platforms still require heavy lifting on the part of the business owner from a ‘background theory’ perspective. Which to me means there is still something relatively inelegant from a product perspective when it comes to solving for improved decision-making using these crash-course models.

Instead, could we achieve the same outcome – better decisions – by solving for other decision-making weaknesses that are indirectly related? Theory is only one part of making great decisions. Emotions play a large role as well.

A growing body of research in the behavioural sciences field suggests a number of emotional states negatively affect our decision-making ability. Financial decisions are not exclusively impacted, but they do have far reaching ramifications if we get them wrong.

So if we were to attack poor financial decision making at a micro level, by helping to create positive decision making emotional states, could we impact macro level decisions like the ones mentioned earlier? Almost certainly. Behavioural science tactics could be the path of least resistance to creating systemic changes to an SMEs financial decision making patterns.

Whether we like to admit it or not, as humans we are programmable. Not only do we have an inbuilt survival manual hard coded into our DNA, but our behaviour can also be modified by external nudges. It can be adapted to the extent that our core programming can be significantly changed – even late into our adult life. Emerging research into adult brain plasticity is proving old dogs can in fact learn new tricks.

I don’t have an answer (yet) as to how this could be realised in practical terms for SMEs, but it’s heartening to see a number of startups in the personal finance space starting to take a behavioural framework approach to core product design. The Common Cents Lab at the Center for Advance Hindsight lists a number that are worth checking out.

Most of us are familiar with our heart interrupting our head when it comes to making decisions in our personal lives. So why would it be any different in business? To put it another way, ‘Most of our mistakes, the big ones at least, are the result of allowing emotion to overrule logic. We knew the right choice but didn’t obey.’ Fix for that and maybe you’ll solve for the far bigger and messier problem in the end anyway. I’m all for the fastest and simplest way to achieve the best outcome, and, something tells me small business owners are as well.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.

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