- December 18, 2015
- Category: Financial Planning
Thinking of quitting your 9 to 5 job? Want to be your own boss? Starting a business is not easy. It is like your baby which needs care, nurturing and 100 per cent full time dedication and commitment. You need to think through a host of issues before starting your venture such as upfront investment, product/service offering, business model, distributor tie-ups, warehousing, merchandising, marketing, break-even, margins, etc. But before you start brainstorming on your business plan, you need to review your personal financial plan. You need to put your house in order first before you tread the rocky path of starting your business. The transition period requires owning up huge financial responsibility. You need to be prepared for facing the monetary challenges that lie ahead.
Here is a checklist on how to get your personal finances in shape before you take the plunge:
- Create a 3 year sustenance kitty: It could be a while before you start enjoying the fruits of your labor. Your business will take time to break-even and then start earning profit for you. This would imply no regular income, no salary to sustain for that period. Hence, create a 3 year survival fund for living expenses in advance before you quit job. You can work on your business plan by the side and also do you full time job for a while to save.
- Review your personal budget: Since your cash flows would be tight in the initial years of business, you would have to spend less as well. Determine your living expenses and prepare a budget. You may have to compromise on your lifestyle for a while and cut down on frivolous spending in the absence of a regular income stream. Assess your fixed and variable expenses. While your utility bills, insurance premiums, etc., would be constant, you can closely introspect your variable expenses and keep a tight leash on it. You may have to miss frequent eating out, short vacations, movies, etc. Getting into the savings mode before you start your business would create a reliable nest egg which would help later in the transition period.
- Create an alternate income stream: While you may have planned a sustenance kitty, a passive income stream would also be useful. It is possible your expenses may surpass your fund kitty over a period but your business would still be in the red. As a last resort, you would be compelled to dip into your savings which you may not want to touch. In such a scenario, an alternate income stream would be act as a safety net. It could be rental income or any other investment income. Your spouse’s earnings would also be helpful for a temporary period.
- Ensure to have adequate life and health insurance: At a time when your business would be testing the waters and would demand your 100 per cent focus, it is very crucial that you are prepared for any kind of financial emergencies. Any serious medical emergency in your family could prove to be a big blow to your entire savings. It could throw your finances out of gear and even disrupt your business plans. Hospitalisation costs are rising by the day due to rising healthcare inflation. Also, you would be losing the health insurance cover provided by your employer. It would be your responsibility to pay for any medical emergencies. It is thus prudent to have an independent health insurance cover which would be sufficient to cover you and your entire family. Also, ensure to have adequate life insurance which would cover your family’s living expenses, liabilities and your children’s goals.
- Prepay your personal loans and become debt-free: In the initial years when cash flows would be negative, you would not prefer any personal debt burden over your head. Hence, prepay your outstanding loans, be it credit card or home loan and become debt free before starting your enterprise. This would free up a lot of your cash flow and boost your savings. You will always feel comfortable with the float around and you can invest that into your business whenever additional capital is required.
- Do not compromise on essential goals: While your income will take a hit during the start-up period, do not ignore your important goals like children’s education and retirement. Aspirational goals like buying a bigger house, buying a car, foreign trips, etc., can wait. Since you would have quit your job, your investment in provident fund would stop. So it would be your personal responsibility to ensure that investments for your retirement kitty continue. Similarly, do not stop the investment contribution for your children’s education goals. Do not wait for your business to take off and then resume investing for these critical goals. When you create a sustenance kitty for living expenses for 3 years, take into account the investment contribution for these goals. So in the initial years, even when your business is low, the investments for these goals will continue out of your sustenance fund.
What if your business does not work?
Firstly, do not get into a business because you are bored with your job, do not like your boss or want to get away from the 9-5 routine. Start a business because you have an idea which you are very passionate about and are mentally prepared to go all out and make it a success.
Inspite of this, if your business idea does not work and you find yourself in a situation where you may have to go back to the job market, then you need to think of a Plan B too. Would you be prepared to go back to the job market? Are you willing to compromise on low pay? These are the critical questions you would have to address beforehand.
Starting a business can be a very tough and demanding experience. While the rewards are great if it works out, the initial journey usually is a struggling one. There may come a point where you may even doubt your own decisions. It is thus important to be financially prepared and work out your personal finances before you start your journey. Doing a handful of things right on the personal front will help you to survive the initial period of your start-up. It will enable you to pursue your dream, your passion with confidence and save you a lot of unnecessary stress.