It is said that the entrepreneurial bug is infectious. Often, we hear success stories about friends and relatives who left their successful jobs to do things their way. And succeeded as well. In the late nineties, the dotcom boom saw a number of people floating their own companies. But few succeeded. So, even when things are not-so-conducive, many prefer not to wait for pink-slips or layoffs, but embrace entrepreneurship. The fear of failure has grown smaller than the willingness to do something big and achieve bigger things in life than spending long hours working for a big organisation.
This transition can happen when the individual is just 25, or turning 35, having crossed 50 or at any stage of the working life. Transition at any of these life stages is equally challenging and comes with its own opportunities and threats. As a small business owner, the individual initially is subject to a lot of challenges as he or she becomes accountable for all the big and even the smallest of things in the business. Employee relations, operations, maintenance, sales, marketing, accounts, finance are a few aspects that can be counted. However, before an individual takes the plunge into this challenging environment, it is crucial that he or she is financially prepared.
Follow these five broad steps that will help smoothen out the transition at least the personal finance part of the business owner’s life.
Setting up a transition fund
Just like an Emergency Fund, new business owners need to incorporate a Transition Fund in their personal financial plan. An amount equal to their average 12 month expenses like house rent or Equated Monthly Installments (EMI), utilities, food expenses, children's education expenses and personal lifestyle related expenses has to be set aside under this head.
Typically, these expenses (excluding the EMI) should be in the range of approximately Rs 40,000 to 50,000 for an average Indian urban household, which means the Transition Fund should be worth at least Rs 6 lakh. This fund can be demarcated from the existing investment base that the individual may already have.
Change the investment pattern
While setting up the Transition Fund is important, equally important is ensuring that the fund is made available in the form of liquid/non-volatile investments like bank fixed deposits or debt-based mutual funds. Also, if the individual has any on-going investment plans, the same needs to be stopped or at least tweaked to factor in easy accessibility. Equity or related risky investments can be given a back-seat even if the individual risk appetite is at its highest or even if experts are predicting 50 per cent sure-shot returns from equities.
| What should be done | How to do it | |
| Step 1 | Set up a transition fund | Should be at least for Rs 6 lakh and cover EMIs also |
| Step 2 | Alter investment strategies | Move to defensive investments like fixed deposits, debt mutual funds |
| Step 3 | Defer transition based on milestones | Events like marriage, birth of baby, new house come with their own tensions |
| Step 4 | Organise personal and business finances | Keep separate bank accounts, maintain household budgets, buy good health plans; continue saving for retirement |
| Step 5 | Be complaint | Team up with the right professional |
Avoid transition in special situations
As far as possible, an individual should avoid going on one’s own during special milestones in their life like marriage, birth of their baby or buying one’s own house. Apart from the financial side; transitioning requires a lot of emotional and mental strength too; which can get divided during these special occasions. Although it is difficult to defer starting out on one’s own once the intent develops; in the medium-term, however, it would be useful to let these occasions tide over. In cases where the idea is time-critical, ensure that the financial need for these milestones is included in the Transition Fund.
Organise personal and business finances
Starting on one’s own implies creating a business entity. Keeping a long-term professional approach in mind, it is important to maintain and keep records of income and expenses separate for business and personal. Do not mix-up business income with personal spending; maintaining a separate bank account for the business / professional purposes is ideal.
Generally, the record-keeping aspect is one of the most under looked one; as it has no bearing on the overall running of the business. However, for proper management, information systems and budgeting, it is required.
Similarly, special attention must be paid to the management of health care needs of self and family. Since there will be no medical cover provided by the employer, it is important to ensure that financial planning is not affected by negative health surprises.
At any life stage; the individual has to take steps to ensure that his/ her retirement plan has to be continued albeit some minor changes. In the initial stages of the business, it may not be right to think of the business as one’s retirement plan.
Take help to be compliant in financial details
It is also important to connect with a trusted professional who can help you with the transition. A new business brings along with a lot of compliances and obligations for the business owner. Lack of knowledge or time for these could result in big penalties for non-compliance, which adds up to the cost of running the business.
The author is a Certified Financial Planner
