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Starting your own business can be a challenge. But it offers freedom to pursue your dreams. This is what attracts entrepreneurs who give up cushy jobs to venture out on their own. No longer is one worried about not getting the salary on the first day of the month or losing out on the paid leaves and other benefits. You are your own master.
But while focusing on the business plan, marketing and other attributes of business is essential, it's equally important to pay attention to a few basic things related to your personal finances to make your entrepreneurial journey a successful one.
1. Maintain a contingency fund: It takes at least three years to really settle down in business during which one should be prepared for irregular cash flows. 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 25,000 per month, then you need to keep aside Rs 3 lakh 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, which can put further strain on your financial situation.
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 hospitalisation.
Many entrepreneurs give up and go back to their jobs just because they did not plan for the long rough road by providing an emergency fund and do not have 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.
2. Maintain separate personal & business accounts: In most individually-run businesses, 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 cash flows 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.
3. Review your insurance cover: It is 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.
4. 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 per cent 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 provident fund benefits, which most likely proved to be a savior during retirement. As a business owner, you need 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 cash flows 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.
The writer is Chief Planner, Proficient Financial Planners
