Planning to quit job to start a business? Here're some money moves for you

Besides having funds to run the business, it is essential to secure the family as well

The transformation from salaried employee to entrepreneur is often a welcome idea. But before jumping onto the start-up bandwagon, you need to plan your finances quite carefully. And it becomes much more critical when you have family and children. 

Most importantly, there needs to be a realisation that it might be a long time before you can earn good money. “Most people do not reach the income they were drawing while leaving even after five years. This needs to be kept in mind. In most cases, the business brings in rewards after very many years,” says Suresh Sadagopan, founder, Ladder7 Financial Advisors. What is important is to follow a few money moves before quitting your job.

Prepare a financial plan: You should start with having a definite financial plan for the first few years. “Having a proper plan will give you a perspective on aspects like how much of capital you can invest, critical family needs that may come up, risks you can take, backup income, and most importantly, the time you can give yourself if things don’t go right,” says Anil Rego, founder and CEO, Right Horizons.

This includes having a realistic business plan with details of initial investment, and the money you need to put in every month or quarter until the business starts generating cash. Always keep your business expense estimates on the higher side so that you aren’t taken by surprise. Keep the business expenses to the minimum initially. Add resources only when cash flow starts coming in.

Have sufficient liquidity: Once you have your financial plan in place, you must set aside adequate liquidity for your expenses and emergency needs. Sadagopan advises that one must have enough cash to provide for two years of expenses. “Keep a liquidity margin of two years of expenses, including equated monthly instalments to be paid. This should also include goals coming within this period,” he says. And before starting the venture, ensure your liabilities are minimum since there won’t be a paycheck for quite some time. 

Purchase adequate insurance: Buy a health insurance policy with a decent sum insured for your entire family. You should also buy a large enough insurance cover, preferably a term policy, to cover your family in case of any mishap that leads to your untimely demise. “The life cover must be purchased before you quit your job. After that, getting a good cover may not be possible,” Sadagopan warns.

Diversify assets: At the time of quitting your job, take a hard look at your assets and have the right mix that could provide liquidity, safety and returns. If you have made too many investments in assets that are illiquid, such as real estate, you need to diversify into more assets that can get you money at short notice. “De-risk your portfolio by reducing concentration on a few asset classes or even a few stocks,” says Rego.

Separate business and personal money: It is advisable not to mix your personal finances with business finances. Ideally, keep them separate and have different budgeting and accounting for each of them.

Also, as Sadagopan points out, your decision to quit your job and starting on your own should not be based on erroneous thinking such as getting the right work-life balance. “When one starts a business, one’s entire times goes into managing it. There are no set hours, no holidays and no leaves. If someone wants work-life balance, holidays and other facilities, being employed may not be exactly bad,” he says.

‘We should have invested more in financial instruments’

Shikhar Srivastava, Founder- Ascope Advertising, Co- Founder- Digiscope Networks

Started agency in December, 2014 after being employed for three years

What prompted you to become an entrepreneur?

SI was working as an account director with a reputed advertising agency in Delhi. I felt the branding scenario was changing rapidly, and if we offer a flexible, ethical work culture with a reasonable price tag, we could do well in the long run.

How did you organise your finances during the transition phase?

First and foremost, we had to arrange for funds for the basic set-up, create a road map for running expenses and the future. Honestly, it was a major challenge, and we had to risk personal assets and savings to manage compulsory expenses. We took unsecured loans at hefty interest rates, which hampered us in the long run. But those were the only rescue options at that point of time. At a personal level, I opted for term insurance of Rs 1 crore for some financial cushion, in case of an accident or other casualties. However, we didn’t have any contingency fund planned. Only a paltry sum of Rs 1 lakh was there, which I had got from my provident fund. 

Could you have done things better? 

Looking back, yes.  Five years ago, we were only dependent on savings, and despite having funds, we didn’t utilise them properly. Instead, we should have allocated the money in different channels, opted for investment in markets or mutual funds for better returns and some financial security as well.