Financial planning plays a key role in a successful business venture. Anil Rego, CEO and founder of Right Horizons, an advisory and wealth management firm, guides entrepreneurs on how to draw up a foolproof plan to save for a better tomorrow and sustain in the face of adversity
Every entrepreneur faces financial challenges. It also comes along with an opportunity to succeed, which one can embrace and thrive as entrepreneurs. For every person who is planning to become an entrepreneur, financial planning is like a roadmap. It not only helps to achieve personal financial goals but can also be integrated with one’s business to serve as a milestone and help in having a control over the financial operation.
Planning for future
One of the objectives of Financial Planning (FP) is to have a clearer vision with regards to one’s financial requirements/goals and the timeline associated with the need. A financial plan will also help an individual (especially an entrepreneur since cash flow in her case is uneven) to have a well-disciplined approach and plan for her, business and her family’s financial requirement. Financial planning will also help to create a surplus fund which can be dedicated specifically for needs like contingency fund and should not be used for any other reason.
For example: Let’s assume a short example of why financial planning is important and how can it be helpful by considering the following points. Pramila Iyer owns a boutique and has a 10-year-old son. When the son turns 16, she will need to spend on his higher education, the cost of which is A2 lakh today.
Thus you will see that financial planning not only gives a clear vision but also helps one understand how the need can be achieved. Ideally, one should have a financial plan in place before starting out a venture, as financial planning will even take care of the business uncertainties if planned and executed well. Contingency planning forms a part of financial planning, which will help to ease out the financial pressure during periods of irregular cash flow.
Handling irregular cash flow
Unlike in case of a salaried individual wherein monthly income is certain, businesses face a major challenge of having a regular cash flow. Regular cash flow not only gives clarity with regards to the availability of funds but also helps in better deployment through a disciplined approach. Regular cash flow is also helpful in taking care of working/operational expenses. In irregular cash flow, there is an impact on one’s finances as the requirement will have to be mapped by using funds kept aside for some other purpose. Thus, financial planning will help to create a fund for contingent expenses i.e. to meet unforeseen expenses like the one in case of irregular cash flow.
Managing debts/EMIs
Debt is an integral part of one’s financial life, especially when one starts a venture/business; and managing it in an efficient way is a challenge. It is advised to timely service the easy monthly installments (EMIs), however it becomes quite difficult to do so in case if one has an irregular income/cash flow. Thus it is recommended to have sufficient balance in one’s savings bank account as an additional corpus, which can be equivalent to two months of EMI as it will help to take care of EMI in those months where there has been no earning/cash flow. However, this fund should be used only in case of emergencies and to meet the specific need of debt requirement. One also needs to cover the loan which has been taken for business, as it needs to be serviced too and is a liability.
Using the right approach
Businesses often enjoy windfall gains, however, it is quite important that one adopts a cautious approach while spending this gain amount. It is recommended not to spend the entire amount of windfall gain. One should rather utilise a certain portion of the funds and invest the same in different avenues for purposes–liquidity, capital appreciation, etc. – which are linked to different needs and goals. It is highly recommended to save wisely and have control over your finances for a bright future.
