Build a contingency fund - Any potential entrepreneur’s biggest worry is that things may not work out in the start-up venture. A contingency fund is an emergency fund, which should be atleast 12 months of your expenses to handle the uncertainty involved. This cushion should be in liquid investments, so that you can use it in any emergency. However, remember that this is just a buffer you have built for yourself for a contingency. You should not use it to meet your expenses when things are fine.
Prepare well in advance - As you will not get a monthly pay-check when you leave your job to start a venture, you must be financially prepared before you take this step. You must assess your personal assets, liabilities and cash flow position and plan prudentially for both short term as well as long term goals.
Cut down your liabilities as much as you can - It is recommended to pay off most of your debt before you leave your job. Paying off high interest debt like personal loans and credit card outstanding will help you have a better cash flow position. Although paying off a home loan may be difficult due to the size and tenure of the loan, you should try to part-prepay this loan whenever possible, by using windfalls, year-end bonuses and tax refunds sensibly. Low debt on your books helps you pull through the initial lean period of business much easier than if you have many liabilities.
Have your basic investments in place - You should have a health mix of investments in the form of mutual funds, fixed deposits, insurance, gold and other equity/debt instruments before you leave your job. Although there are cases of entrepreneurs starting with no cash buffer or investments, it is highly risky to do so, as you may be left with no savings if your venture fails.
Keep a tab on your expenses - Low income and high expenses are usual characteristics of any start-up in the initial months. In this scenario, you must be prudent with your personal expenses, along with cutting down business expenses, wherever possible. Management of personal expenses becomes easier if your spouse is also working as this income can be used to meet regular expenses.
Plan your proposed venture’s affairs - In addition to planning your personal finances, you must plan the finances of your proposed business also carefully. Drawing up projected cash flows, income statements and balance sheet is important to help you understand critical parameters of your business and plan accordingly. You should make it a habit to record all the financial transactions of your business in an organized manner - either in a simple excel sheet or by using a software. This includes recording your income streams, expenses and savings. Having an ordered financial database helps you plan your business financials. Planning your business’ finances is very important as your personal finances are directly linked to your start-up’s numbers.
Planning done well-in-advance when you leave your job and start your own venture helps you worry less about your personal financial situation, and focus more on starting and running your venture. #gettingyourich