Financial matters of new entrepreneurs

If you plan to don the entrepreneurial hat,there are three things that you must do

Breakeven and your lifestyle

As common sense dictates,the basics of starting any new business involve creating a sound business plan first. While the business plan is important to guide you in terms of expectations from your new venture,it will also give you a realistic timeline in terms of when you can actually start making some money from your venture.

Being ambitious about your business is good but you need to remember that while you are trying to set up the company,you still have a lifestyle to support for your family and yourself,which requires a regular flow of money. Even if your family and you decide to take a hold back your expenses,you will still only be able to reduce the luxuries. Hence,before taking the plunge,do two things:

* Take an account of the minimum monthly expenses that you will incur.

* Estimate a realistic period of the company’s breakeven and add six months to this period.

Once you have both,you can calculate the amount you need to save during a period when you cannot draw any income from your venture. For example if you estimate the breakeven for your company to be two years from the day you start and your minimum monthly expenditure per month is R65,000,then you need to create a fund for R19,50,000 (2.5 years multiplied by R65,000).

Trusts to safeguard goals

If you plan to go solo with your new venture,chances are you may not form a private limited company and instead opt for a sole proprietorship. One important thing to remember if you establish either a sole proprietorship or a partnership firm is that you are exposing yourself to unlimited liabilities from the business. In the unfortunate eventuality of a claim/ loss,your personal assets too can be attached to repay it if the firm does not have sufficient funds.

It is advisable that you safeguard the interests of your family beforehand by creating trusts. A trust is generally created with a predefined purpose and the money parked in such structures can only be used for the intended purpose. If you are saving money to send your child abroad for further studies,it’s better to safeguard the investment in a trust. You can either create individual trusts for different goals or a common trust for all your goals. Hence,your family goals will be immune to business risks. A financial planner will be able to help you decide here.

Company’s balance sheet vs your balance sheet

This is a common mistake made by most entrepreneurs. Once you start a business you always think that the business’ income is your income,and the company’s balance sheet is equivalent to your balance sheet.

However,the two are different and you need to prepare both to know your financial vitality. The company’s balance sheet will reflect the position of your business whereas your personal balance sheet will detail your assets,liabilities etc. Of course your investments in the business will reflect in your personal balance sheet too.

A clear understanding of where you stand both personally and professionally will help you in effectively managing both your business and personal finances.

Turning entrepreneur is a dream for many people,and if you are lucky to be able to make the move,just remember to keep an eye out to maintain your personal financial health while wading through challenges to set up your dream venture.

Author is Founder & CEO,Freedom Financial Planners