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Are you ready to be an entrepreneur?

Last updated on: October 23, 2012 08:40 IST

Are you ready to be an entrepreneur?

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Breaking out of the employee mould, where you are assured of a monthly salary, is not easy. It adds to stress and risk. If you have dependents such as a wife and children, you will need to go through the financial planning for the venture over and over again, to ensure no unpleasant surprises.

Simple things like waiting for a fixed deposit to mature to pay your child's school fees can be frustrating and de-motivating.

The good news: These risks can be reduced to a large extent by sound financial planning. In an entrepreneurial venture, motivation is a key element.

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Photographs: Reuters
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Here are some questions you need to ask yourself before starting your venture.

Basic checklist
What is the liquidity cover you need?
Since it is both for your personal and business needs, you need to have a health insurance cover or provide for it. Then, insure for income from other investments which will serve as a buffer. 
If your spouse is not working, you will need additional funds
What will be Plan B, if the business does not generate profits as anticipated?
Have a plan on whether you will go for a loan or equity financing. In the latter case, you have some idea about the possible sources, such as relatives or family in the case of a small venture or angel investors. The latter choice should be weighed carefully because any equity investor will seek a return on investment after some time. Give clarity to the investor.
What should be the scale of the business?
Very important, as large-scale ones need more time, financial buffer, insurance and so on. And, the returns might come only come after a long while. Smaller business could start generating cash earlier. Remember, changing course is possible but more difficult and you have already spent a lot of time.
What are your liquid/financial assets? Are they loan-worthy?
Liquidity through selling your assets should be a last resort. Before considering it, check whether these can be pledged to borrow
money for short periods. This might be a good idea to tide over any liquidity crisis and still keep holding on to the assets. But don't overuse this facility.

Photographs: Uttam Ghosh/Rediff.com
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The first psychological setback will come when you won't get the comfort of a monthly pay cheque. To tackle that, set aside some money in a liquid mutual fund account, with a systematic withdrawal facility, to draw a sum to cover all your monthly expenses.

If having any other income in form of interest, rentals, income of spouse, etc, then the withdrawal from the liquid fund should be adjusted downward to that extent.

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The trick is to ensure you have enough every month to tackle every eventuality. Still, you cannot afford to have too much surplus. A simple way of ensuring this: Have a monthly withdrawal system from the liquid fund.

It helps cover the expenses and on the psychological front, the monthly SMS from your bank that some amount has been credited to your bank account is relieving.

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Photographs: Pawan Kumar/Reuters
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BUDGET BEFORE YOU START YOUR OWN BUSINESS
HOUSEHOLD EXPENSES (PER ANNUM) Rs  6,00,000
YOUR NETWORTH 
(Exclusive of house, capital investment)
Rs  34,50,000
   Liquid component  Rs  16,35,000
CURRENT INCOME FROM ASSETS
   Interest income (PER ANNUM) Rs  24,000
   Dividend income (EXPECTED PER ANNUM) Rs  15,000
POTENTIAL CASH FLOW FROM ASSETS  Rs  20,86,000
SPOUSE'S INCOME (NET OF TAX PER ANNUM) Rs  2,88,000
OUTSTANDING LOANS (for personal purposes)  Rs  32,00,000
   Loan servicing cash flow - EMI Rs  36,041
INVESTMENT REQUIRED IN BUSINESS Rs  25,00,000
   Amt to be set aside for capital investment Rs  10,00,000
   Amt to meet monthly business exp Rs  55,000
MONTHLY CASH FLOW (SALES PER MONTH)  Rs  20,000
LOANS (for business purpose) Rs  15,00,000
   Loan servicing cash flow - int payable a month 

Rs  13,750

MEDICAL INSURANCE/REQUIREMENT  Rs  5,00,000
   Current health cover  Rs  3,00,000
   Gap  Rs  2,00,000
REQUIREMENT FOR CONTINGENCY FUND
(3 mths expenses + gap in health insurance -
spouse's income - interest income)
Rs  3,24,000
MONTHLY CASH FLOW 
(Spouse's income + int income - household exp - business exp + business income - home loan EMI - int payment on business loan)
Rs  1,08,791
(BUSINESS TO BE PROFITABLE IN 1 YEAR)
AVAILABLE LIQUIDITY   Rs  13,11,000
LIQUIDITY CAN COVER FOR 12.05 months
LAST RESORT FUND AVAILABLE   Rs  20,86,000
ADDITIONAL INCOME BUFFER   Rs  15,000
LAST RESORT FUND + LIQUIDITY CAN COVER  

31.23 months


Photographs: Uttam Ghosh/Rediff.com
Tags: SPOUSE , LOANS , EMI

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