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Financial do's and don'ts before you turn entrepreneur


Planning to turn entrepreneur? You have got to be prepared for a period of sporadic to zero income - a world apart from the comfortable space of monthly pay cheques. Financial planning will take care of the crucial transition period in which monthly credits to your bank account will stop. Here are some important dos before taking that long break.

1. Maintain a fund equivalent to the period for which you believe your business will not bring in positive cash flows. To do this you will have to make a budget and plan expenses on both the personal front as well as for your business. Only then can you define a time frame in which the business will start making enough to meet expenses. Add a margin of a few months' expenses to make it safer. If you are planning a break of say two years, you need to maintain at least two years worth of basic expenses in a liquid fund. A Systematic Withdrawal from this fund that will take care of the monthly bills.

2. Ensure you are covered for any medical contingency - An adequate medical insurance for self and family is a must. Add a critical illness cover for both self and spouse and dependants. This will ensure that should there be any unfortunate illness in the family, your business plans will not take a back seat.

3. Pay off all outstanding loans - When you are on your way to taking risks and being your own boss, you would not want to be saddled with loans .In times where cash flows are uncertain, paying loan EMIs can be quite a strain .It is highly recommended that all loans, including home loans be repaid before taking the plunge.

4. Have written contracts when entering into partnerships - For wannabe entrepreneurs the easiest way to lose money in a new venture is get into a partnership and not have a written contract with partners. For example if you take a bank loan all the parties are jointly and severally liable for the loan. Should your partner, for whatever reasons be unable to repay his/her share in the loan you are liable to pay full installment. Similarly should the business unfortunately wind up, the distribution of assets becomes an issue .If you are entering into business with friends or family members, it is highly recommended that the terms of partnership are clearly laid out right in the beginning .

5. Buy insurance to cover business assets - One of biggest mistakes new entrepreneurs make is not taking adequate insurance for business assets like premises, inventory, etc. One stroke of bad luck can bring a young business down for good. Protect your business assets from all foreseeable risks like fire, burglary, floods etc with insurance.

6. Lastly be frugal - You have opted for the road less traveled. It needs making a few sacrifices for bigger gains latter. Being frugal in the initial period would mean, not buying the fancy car you wanted, or buying expensive equipment, or spending on office interiors until your business breaks even and starts making money. Do not make decisions that will wipe out all your savings or leave you with huge debt.

A little planning will help smoothen the transition period from employee to employer. The same holds true even if you are simply taking a sabbatical from work, or taking a course to further upgrade your skills.

Comments

  1. NavinJune 14, 2011 at 2:32 AM

    I know its not much of a financial thing, but it also makes sense to start a business, especially your first one, in a partnership. It shares out the risk and investment, and can give you a well rounded picture.

    Nice article, Kavita....

    ~Navin

    ReplyDelete

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