All start-ups begin with a vision, but it takes a lot more to build a business into a successful enterprise. Throughout the journey there will be moments of excitement when your product is well received and also moments of sadness when things don’t go as planned. However, in parallel what’s going on is your ‘Life’ and all the events which are part of this life. You’ll need dedication and discipline to create or incubate an idea that has economic value. And despite your best effort, your venture may fail.
So what can you do best to deal with this situation? When you plan to start up your own venture, your personal finance situation should be completely in your control. Below mentioned are few tips you may want to consider before you take a plunge into your own venture:
1. Start early. We have seen entrepreneurs who start early have less responsibilities and less opportunity cost of leaving a job. I am not at all saying that don’t think of your own venture at later stages of life, but a young person is psychologically better prepared to manage personal finance situation. So plan and start early in your journey as an entrepreneur.
2. Develop a business plan and projections. A good idea alone isn’t a business, and having a plan can help you make aware of capital requirement. If capital needs to be funded by your own sources, you must consider the impact of this funding on your personal finance.
3. Second income. If your spouse is working, it will be of immense help to you. Your spouse’s income can very well take care of running expenses of the house. Also if things don’t go as planned, you have something to fall on.
4. Forecast a detailed level of 3 years of expenses. This will help you determine what the financial gaps are and what should be the right time of stepping into your own venture. Creating a budget and sticking to it is very important in a start up.
5. Have few years of expenses in the bank. Make sure you have sufficient savings in your bank account that can help you provide cushion in case financial emergency arises. If you are going to be an entrepreneur, I’d recommend setting aside closer to 1 year of cash in savings that you can fall back on if you need it. Bad things happen, customers don’t always pay on time and you need to make sure you have money set aside to keep you afloat during the tough times.
6. Keep your Fixed Expenses Low. In the early stages of starting a business, it is smart to keep your fixed expenses as low as possible. Don’t buy an office, rent it. Initially you may also want to avoid taking on any loan to buy a home. Given your unpredictable level of earning in a startup, it may be a good idea to just avoid these expenses all together.
7. Try it out, while you are in your job. If you are not financially prepared to take the leap into entrepreneurship, don’t quit your job until you are ready. There is no reason in the world to give up your income when you can work on your project on the side until you have traction. This will help you in two ways, to improve the product through customer feedback and initiate the revenue stream quickly. Or else give you a realistic idea whether leaving your job is worth it. Remember, there is a tremendous benefit to starting small and testing the market so you can learn how your product or services will be received. It’s important to have the discipline not to overextend yourself by trying to grow too quickly. Tap into your available resources and learn from the experience of seasoned entrepreneurs who have walked the path before you.
Prepare for the worst, hope for the best is the key message for all the wannabe entrepreneurs.
Ankur Kapur, CFA (USA)
Email: ankur@finqa.in.