In my last 4 years of practice several entrepreneurs have signed me up for financial planning process. Some did the process with me before embarking on their journey of being own their own and some happened to do the process after quitting their cushy jobs and during their journey to entrepreneurial success. I must say that India is becoming a huge market for start ups and SMEs. Entrepreneurship has risen leaps and bounds. The 40+ age group seems to be gearing up for their second innings of their career, choosing the product/services, environment and organizational set up that they believe will enable to achieve their purpose and mission. Some common lessons emerged while I was advising these entrepreneur clients.
Most business owners often use their personal savings or money borrowed from friends and family to fund their startup. This exposes them to risks that occur due to financial instability. The intent of this section is not to discourage you in pursuing your dreams but to help you achieve them with an approach that does not put you and your family at financial risks. Here are some tips for entrepreneurs to keep their financial life in control while they are going through the grind.
- Separate your business finance from your personal finance
As young entrepreneurs, we tend to make this blunder. Because most of us use our own money to fund the startup, we fail to see the need to separate our business account from our personal one. Although it does not appear as a big issue but it can mess up your business and your personal life if things don’t work-out as planned.
When you separate your business funds from your personal funds it makes it easier for you to manage both sides of your life without compromising one for the other. Doing this not only helps your business gain more credibility but also helps create a sense of legitimacy for your brand. Managing your taxes, bills and other payments become easy and more organized when you have separate accounts. In case you want to sell your business or file for bankruptcy at a later stage, it helps to have a separate financial entity for your business.
- Prepare yourself for the dry season
Irregular income is a common scenario for entrepreneurs and one should always have some extra cash to take care of expenses. Irregular incomes make it difficult to manage day-to-day activities and puts undue pressure on the business owner.
Spending less than what you earn and saving a decent amount every month is a good way to prepare for any contingency in the future. One should build a contingency fund to support household expenses for up to 6 months at least. Keeping contingency fund takes the pressure off entrepreneurs and helps them maintain the focus on success of their venture. Other sources of income must also be evaluated. If your spouse can contribute to monthly income, have him/her do so to keep the household stable. If any pre-owned real estate asset can generate rental income for you, you must avail the opportunity.
- Don’t forget the real rate of return
Any money that goes as an investment should come back to you with a rate of return that is positive. How do we determine that the rate of return is positive? It’s simple. If your rate of return is more than the sum total of inflation, taxes and transaction costs incurred on an annualized basis, then your money is working for you. Evaluate your investment in business vis-à-vis investment in equity funds, debt funds, fixed income assets or any other asset class. It’s good to pursue a passion in life but do it after you have set your financial portfolio to create dividends, interest income, rent or growth in asset value to support you during the turbulence of your entrepreneurial journey. Don’t ignore diversification. Keep a simple comparison chart of rate of return in your business versus other assets – equity, real estate and/or fixed income. Maintain the balance.
- Plan Ahead
Entrepreneurs are visionaries. Not just because of their business ideas but also because the successful ones think ahead of time and are always prepared for it. A smart entrepreneur would never put his long term goals behind his short term ones.
Getting into an entrepreneurial journey does not mean you stop planning for future events like retirement, insurance, family goals, fitness and health goals. These are important goals that will only show their worth when you need them the most. Planning for them is pivotal. It takes time to build a corpus that will help you realize your goals. Keeping a protection (insurance) to deal with the unforeseen events of death and/or hospitalization will prevent erosion of your wealth. Have a plan in place.
- Take professional help
Getting involved in a new business can make you really busy and in this hustle-bustle you can sometimes make the wrong choices that can put you at risk of financial instability. With all the other important decisions that you have to make as a new business owner, handling personal finance can often take the backseat.
Financial planning requires a lot of dedicated time. Successful entrepreneurs always spare sometime periodically to review their personal and business assets and liabilities. They do take expert advice to make their money work better for them. Right from tax benefits to diversifying assets for better future, a financial expert can lay out a well thought-out financial plan to help you reach your goals. Having an advisor on-board will only make your entrepreneurial venture a smooth and steady ride.