Sometime back, while addressing a group of women entrepreneurs on personal finance, I asked them about how they manage their personal monies. I was taken aback on hearing that most of them leave it to the husband. This surprised me, as it is with their personal money that they started off their venture and now they are so consumed by their business that they have left the money management to someone else. Most of them, however, wanted to know how they could improve their business finances. But if you are not managing your personal finances yourself, you are most probably not managing your finance aspect of your business either.
It is a well-known fact that most women entrepreneurs do not actively look at loans when they start off, since they feel they would not get one due to lack of prerequisites that lending institutions have. And they start their business using their savings. Generally, women entrepreneurs are averse to taking debt as they find the rates too high and fear loosing control. All the more reason why women entrepreneurs must have their personal finances in order.
The common challenge faced by smaller businesses is that of payment cycles not matching the payouts to be made for salaries and expenses such as rent. Entrepreneurs who are running businesses with 5-20 people typically pay salaries to the staff and take care of regular monthly business expenses first, and pay themselves only on need basis or once there is enough cash. Here, too, the amount may not be fixed. Hence, if there is a short-term requirement in the business, they bring in money from their personal savings, and vice-versa.
The other issue is that of demarcation between business and personal expenses. Owners of smaller businesses tend to mix their expenses, which from an accounting perspective is not recommended. The seriousness of keeping business and personal finance separate is, however, present in all businesses that are set up as private limited companies. This could also be due to the stringent company laws that these companies are subject to.
Most women entrepreneurs I spoke with are not comfortable with investing their excess cash in anything but fixed deposits, as they do not want to take any risk on the surplus generated by the business. This is understandable, given the reliance on cash flows to run the business.
Given the dependance on personal savings, especially in the early stages of starting a business, would it then not be imperative to manage personal finances as well like a business?
Here are a couple of things a woman entrepreneur can do before she starts the entrepreneurial journey.
*Be involved in managing family finances. Just because you are under pressure because of the new venture, you cannot not be involved in taking care of your personal wealth.
* Get finances in order and check the impact of moving funds from family finances to business. Are there loans that can be partially paid before starting a venture?
* Check if you have the right amount of life and medical insurance. When women move on from jobs to starting businesses, they tend to forget about insuring themselves. It goes without saying that these covers are indispensible.
* As nothing is certain in a business, having an emergency fund that can be used for contingencies is absolutely essential. Many times, contingency funds get used to lend to the business for short-term needs; this is not advisable.
* Remember that irrespective of the stage of your business, retirement planning is crucial and you cannot divert these savings to your business. Again, one must not stop investing towards one’s financial goals, especially retirement, due to the unpredictability of business.
If the business doesn’t work out, one needs to still be financially independent to carry on and, hence, having personal finance in order is vital.
* Pay yourself a regular salary and invest that amount towards your goals.
* Keep business and personal expenses separate. At some stage, if you are looking for funding, lenders will view this favourably. Having a separate personal and business bank account is essential for sole proprietors. Having a business identity separate from personal identity will also indicate a more professional attitude.
* It is a good idea to invest surplus cash into liquid funds as these give better post-tax returns compared to traditional investments, and the extra income could be used to tide over the leaner months.
Finally, I always believe that every woman must have a ‘me’ fund, a fund where you invest every month and which can be used the way you want to and when you want to. So, all women entrepreneurs, while you are busy with the business, move a part of the salary towards the ‘me’ fund because the thing that drives you and keeps you going may change over the years.
As James Yorke said, “The most successful people are those who are good at Plan B."
Mrin Agarwal, financial educator; founder director, Finsafe India Pvt. Ltd; and co-founder, Womantra