InvestorQ : If I have just decided to branch out on my own with a start-up, are there any financial planning rules I need to follow to ensure that I do not put myself into any financial embarrassment later on?
manisha Kolvenkar made post

If I have just decided to branch out on my own with a start-up, are there any financial planning rules I need to follow to ensure that I do not put myself into any financial embarrassment later on?

Mahima Roy answered.
1 year ago

In the modern era, it can be quite enticing to branch out on y our own. It is in fact hard to resist the temptation of striking out on your own. It looks so easy. You come out with an idea, take it to a venture capitalist after building a base, get funding and then build your business. In reality, it is rarely that simple. Behind the talk about unicorns, eyeballs and venture funds, there is a stark truth that we tend to overlook. Nearly, 80-85% of start-ups go out of business due to lack of financial planning and bad cash flow management. This is more stark if you have bootstrapped your business.

The big challenge for any entrepreneur is that they need to manage this balance between business needs and running his family? The answer lies in prudent financial planning. Remember, your business will suck up a lot more cash than you can imagine. Here are some focus areas for planning your own finances if you are a start-up entrepreneur.

· It may sound tough but try and create a separate income stream for family expenses. If you are counting on savings, they hardly last you for too long. In the initial period you will most likely struggle to generate sales; forget about profits. Therefore, you must ensure that family expenses do not become a burden on business. As a starting point, set aside 1-year of household expenses of the family in safe and liquid investments. See if you can also take up part-time projects to help manage liquidity better.

· You never know when exigencies strike so take adequate insurance. This may look like an added expense, but is worth the trouble. Ensure that your life is insured through a low cost term policy and let all monthly expenses also be covered. Ideally, capitalize your annual expense 20 times to determine the size of your term cover. Take medical insurance for yourself and your family through economical floaters. Health costs must not interfere with your business.

· For a start up, there is nothing like hard cash. So, avoid the temptation of spending more on business than earnings. Target profits from the first year itself! That way, you don’t fall back upon your savings to fund your business venture. Put a lot of focus on cash collections and recoveries on time. Give discounts and incentives for early payments. Cash today is more valuable than cash tomorrow. A customer who pays on time is your most valuable customer.

· Be shameless about being a penny-pincher when budgeting. Some of the most successful companies that created wealth for shareholders have been hardcore penny pinchers. It is costs that are entirely in your control. People like Warren Buffett and Steve Jobs were hard core penny pinchers. Prefer to rent office and furniture and avoid splurging on fancy interiors. Be tight-fisted with respect to cost heads like stationery, electricity, consumables etc. These result in a lot of leakages. These can spiral out of control if you are not careful enough. Develop the habit of recording expenses and identify relevant and non-relevant expenses and curtail them.

· Being wary of debt is good because no start-up has every created wealth by running huge debts. Debt is a four-letter word, so stay away to the extent possible. When you start your venture, you tend to go aggressive in your early enthusiasm. In most cases, you will find that debt is available easily and that is the problem. You need to be cautious for a number of reasons. Firstly, early stage businesses tend to get debt at a higher cost. The servicing of the debt adds to your cash flow challenge. You effectively need to use your uncertain inflows to service certain outflows. You can also extend this argument to your personal debt. Taking a mortgage loan or a car loan can always wait till your business stabilizes. Credit cards can be enticing but you are paying 3% per month. Such costs are best avoided in the initial stages.

Prudent financial planning and cost management can go a long way in giving the business a much better chance of success. You must not miss out on that aspect.