Financial Planning basics before you venture into business.
Over the last few years we are witnessing a surge in the number of people venturing on their own or keen to start their own business. There does not seem to be a dearth in business ideas and with a lot of new businesses working successfully, many are encouraged to follow suit. No longer is one worried about not getting the salary credit on the first day of the month or losing out on the paid leaves and other benefits. While focusing on the business plan, marketing and other attributes of business is essential, it’s equally important to pay attention on a few basic things related to your personal finances to make your entrepreneurial journey a successful one.
- Maintain a contingency fund: Many would agree that it takes at least 3 years to really settle down in business during which one gets accustomed to irregular cashflows. There could be times when paying your staff salary would be difficult, forget paying yourself. Before you plunge into business, it’s advisable to create a contingency fund which can be a back up during the initial tough days of your enterprise. Keep aside at least a year’s expenses in liquid form, for example if your family’s monthly expense is Rs. 25000 per month, then you need to keep aside Rs. 3 lakhs either in liquid funds or sweep –in accounts provided by select banks. Depending on the capital intensiveness of the business a separate provision needs to be done for your business too which can take care of your working capital. This will avoid getting into short or long term debt thereby straining your financial situation further. If you have ailing parents without any formal medical cover, then the contingency fund needs to be bigger to factor in the medical costs associated with any likely hospitalization. Many entrepreneurs give up and go back to their jobs just because they haven’t planned for the long rough road ahead by providing an emergency fund and have no other resources to depend on. Having a working spouse helps in providing the financial support to the family when business income has not yet started.
- Maintain separate accounts for personal & business: It has been generally observed that in most businesses run by an individual, there is a tendency to ignore the personal accounts and more focus is given to increasing the business equity. This typically happens in proprietary businesses. Start paying yourself a salary once your cashflows get streamlined and invest a part of it for your family’s financial goals, which you need to set before you plunge into business. Let the power of compounding start working earlier which will help in meeting your financial goals in a time bound manner.
- Review your insurance cover: It’s advisable to assess your insurance cover requirements initially and also do so on a regular basis and cover yourself well not only in terms of your life insurance and accident cover but also towards your health. You are no longer covered by the health insurance that your erstwhile employer provided you. In most cases, in the absence of health insurance, serious health ailments can put a great strain on the finances even pushing entrepreneurs into debt. Low cost term insurance is best suited to cover your life insurance needs while depending on your age, even health insurance is affordable. Your contingency fund should consider the insurance premium payments too.
- Do not ignore investments: Entrepreneurs are sometimes so busy building their businesses that they ignore their personal investments. Due to paucity of time, money either keeps accumulating in the savings account fetching pathetic 4% returns which are further taxed, or most of the money ends up in savings oriented insurance policies which are purchased without understanding the product. As an employee you were entitled to even provident fund benefits which most likely proved to be a savior during retirement. As a business owner, one needs to plan your own resources for your retirement and therefore need to create a long term investment plan for retirement too. Most entrepreneurs delay their retirement planning stating that they will work as long as they are fit since they are no more bound by the job related mandatory retirement age. But most fail to understand that with changing times, by the time you reach your normal retirement age, your business can also become irrelevant or face turbulences which can make it redundant. Once your cashflows improve, draw an investment plan with the help of your advisor in line with your financial goals and start investing accordingly.
Finally spend some quality time with your family. Let the biggest advantage of being an entrepreneur be that you get to spend quality time with your family. Otherwise being an employee was better; at least you were entitled to paid holidays in the weekends to be with the family.
Article written by: Steven Fernandes.
Certified Financial Planner
Chief Planner – Proficient Financial Planners