How can millennial ‘wantrepreneurs’ ensure steady stream of finances
For a sizable chunk of the millennial population, foraying into the world of entrepreneurship is the ultimate dream. While many are bitten by the start-bug, not all are fortunate enough to witness their dreams getting fulfilled. As opposed to the phenomenon of the mainstream media and pop culture elements painting the life of entrepreneurs in single-toned brush strokes of glamour and influence, the start-up life is not meant for faint-hearted. To put things into perspective, a report published by IBM Institute for Business Value and Oxford Economics in 2018 found that 90 percent Indian startups fail within the first five years.
For new entrepreneurs, efficient financial management can be a game changer for the fate of their businesses. According to a report compiled by the research firm International Data Corporation in 2015, 85 percent of small business owners almost 75 per cent of small businesses agreed that they needed to understand financial management, both from the point of view of investments and the associated areas of impact and 33 per cent of small business entrepreneurs took over three years to realise that business sustainability relies on efficient financial planning. While financial management of your business should be separate, your personal finances also need to be in good shape to avoid a trickle-down effect on your business. If you are planning to join the league of entrepreneurs soon or have recently started your own venture, then you need to be armed with a solid strategy for your finance, if you haven’t done that already.
The saying goes that the road to the top is lonely but according to Nitish Chauhan (name changed), who runs a highly successful B2B start-up, when a venture fails, there is a high chance that your loved ones may have to face the heat too. He narrates, “As you embark on the path of being self-employed, it is important to remember that your family, especially if they are dependent on you should be on board with your plans. They would be used to a particular lifestyle and as income increases, frivolous spending becomes essential expenses. So if have people dependent on you, you should have separate investments for them and their life goals and insurance as well, so that their lives are not wrecked if your venture fails. This is even more important for first-generation entrepreneurs.”
Chauhan also narrated that in the early days, many entrepreneurs commit the mistake of forgetting to draw the line between their own finances and that of the business. “Yes, your venture will feel like your own child but pledging personal assets, providing personal guarantees, using personal capital for the business can prove to be costly mistakes. It tarnishes your credibility as a business and also as a responsible member of the family.”
So what should one invest in? You can put a part of your earnings in equity mutual funds. This will ensure that you have a corpus (that is growing) separated from your business and it can take care of your personal financial goals for a long term. Equity funds can generate great return over longer duration and it is smart to put some of the earnings from your business into it.
Breaking up with debt
Siddharth Bhatia (name changed) who runs a mushroom spawn laboratory in Ranchi believes that his decision to quit his job and don the hat of an entrepreneur taught him an invaluable lesson about managing debt. He explains, “When you start a business, you will have to bear in mind that you will be responsible for the livelihoods of other people. Depending on how well your enterprise is funded and the prudence with which you have utilized capital, you will be in a better position to tackle the early uncertainties. And this is why it is extremely important to be completely debt-free before you make the switch. You cannot possibly keep the engine of your business running if you are struggling to pay off debts.”
Diversify your business and ensure self-care
By ensuring one’s financial security an entrepreneur can insulate themselves from potential trickle-down problems in their businesses. Kamlesh Tyagi (name changed), who tasted early success in the start-up life narrates, “Many entrepreneurs forget to take care of themselves. Once the business generates revenue, you should pay yourself a portion of proceeds. This is not to say that you should start drawing a salary without having a plan to pay your bills and employees but paying yourself will give you an accurate picture of your company’s profitability. It will also make it easier to demarcate between your finances and those of your venture.”
A change in consumer preferences, change in management, change in govt. rules and cut-throat competition can also wreck havoc on business’ health. Therefore, it becomes pertinent to have a diversified business enterprise. If one business is going through a low phase, the other can compensate for it. We completely understand that it is not easy to learn about a new business, assemble a team, invest capital and expect profits. However, there a much easier way to diversify your business!
When you are investing in equity based mutual funds, you are actually investing in a diverse group of renowned, well managed businesses. Thus, you can invest part of your earnings in equity funds and make the most of a diversified investment profile.
Allocating assets and contingency fund
Vikas Gupta, CEO at Omniscience Capital advocates building a solid contingency fund as the most essential step of preparedness before taking the plunge. He says, “For someone quitting their day job, they need to first look at their finances and determine that they have enough capital to, take care of their living expenses for next 6 months to 3+ years, depending on the kind of venture they are planning. Some ventures will start throwing higher income than their day job from day one. For others it will take 6 months to 3 years before the income stream from the venture is equal or better than their day job.”
Gupta also suggests envisaging a distinct plan for a situation where the business may require extra capital. “Entrepreneurs should see if their venture is going to require capital, then they should have adequate capital for that as well. Ideally, they shouldn’t have any liabilities, or if they do, then they should also prioritize servicing those. In this case, a mix of equity and debt allocation, probably via a mutual fund should be structured. Expenses which are likely to happen within the next 3 years will have to put in debt funds. Remaining can be allocated to equity as long as the investor is comfortable with the risks,” he says.
•For startup founders and entrepreneurs, it is important to create a diverse financial plan and invest part of your earnings in equity mutual funds. These investments would help you manage personal goals, diversify indirectly, and create capital for future use. Investing in equity mutual funds can play an excellent role in the growth and nurturing of your business.
•Do not underestimate the importance of tax savings and seek professional advice for tax planning.
•Entrepreneurs should see if their venture is going to require capital, then they should have adequate capital for that as well. In this case, a mix of equity and debt allocation, probably via a mutual fund should be structured.
•Do not early successes derail your budget. It is easy to fall into the trap of justifying unnecessary expenses and increasing dependence on credit when the business starts to generate healthy returns.