We tell you how to manage your money, mistakes that you should avoid, and get you advise not just from experts, but also from entrepreneurs who have been on this journey
If you are used to the salaried life, breaking out as an entrepreneur may seem challenging. Yes, there will be setbacks and compromises, but getting money management right is essential. We tell you how to manage your money, mistakes that you should avoid, and get you advise not just from experts, but also from entrepreneurs who have been on this journey.
Getting your cash flow in order when you are starting up
Aniruddha Fansalkar, 38, had made it a point to start taking a salary home right from the initial months of launching his own venture. Way back in 2014 when he set up Monjin, an artificial intelligence driven human resources firm that brings recruiters across sectors and those seeking jobs onto a digital platform, Fansalkar knew there was a lot riding on him. Fansalkar was used to a regular—albeit decent—salary income from his previous employers such as IBM and Accenture. Married and with a kid, who is five years old now, he also knew the importance of keeping the home fires burning. Yet, at the same time, Monjin had to be attended to since those were his early days.
Fansalkar dug in. From cutting down his personal expenses—avoiding buying gadgets not really required, postponing holidays—to making use of his contingency plan that he had put in place during his salaried days to raise the initial capital for business, he learnt how to balance the two households. “Our own business ventures and employees also become our family. Promoters have to take care of both these families," says Fansalkar.
This underlines the importance of keeping two money boxes and the need to keep the two always separate.
Cash is king
As the first few years in setting up and running your venture is expected to not generate any revenues, have a financial plan in place before you leave your job. “Keep in mind the daily cash flows for your household expenses; plan for 12-18 months’ worth of expenses," says Surya Bhatia, managing partner of Asset Managers.
In addition, Bhatia says that it’s equally important to ensure that your daily and working capital requirements of your work are maintained. Bad cash planning, he reminds us, can ensure that even if the business makes profits in future, high borrowing costs can balloon into something that’s hard to manage, in future.
Ankita Sheth, co-founder of Vista Rooms, understood the importance of maintaining office expenses, right from the start. Having been an entrepreneur first, followed by a stint at Oyo Rooms, Sheth was an experienced entrepreneur. She was also fond of travel, which led to work at Oyo Rooms—a start-up founded in 2013—and then start her own venture called Vista Rooms in April 2005. Vista Rooms enters into a management contract with hotels across India, runs them and gets exclusive rights to sell them. Sheth and her co-founders agreed to forgo their salaries for the first few months. From making overnight journeys to towns to do recce of hotels they wanted to tie up with to avoid incurring lodging costs to taking same allowances as the rest of her staff, Sheth cut corners. “My co-founders and I started taking salaries only 7-8 months ago," says Fansalkar. Vista Rooms turned profitable in mid-2018.
The intermingling of money boxes can sometimes cross limits if the venture doesn’t turn profitable within a few years-
The question is can you pump in your home money into your business if the need arises? Shyam Sunder, managing director, PeakAlpha Investment Services Pvt. Ltd, says that the reverse of flow of money is a larger possibility. “There is a crying need for money felt more in the house than in your business venture," says Sunder. He advises to have a clear paper trail as to where the money goes and what the money is to be used for.
Separate money boxes helps get funding
Experts say that venture capital firms and angel investors prefer to fund start-ups that are set up as private limited companies.
Any other structure though beneficial from a tax perspective or easier to form and run, would not work, says Mitul Mehta, partner at Constellation Blu, a firm that advises investors and early stage start-ups.
A private limited company entails that the liability of the firm is limited and the money boxes—both personal as well as that of the firm—are kept separate. This works well for the founder as well as the investor. Mehta says that the investors get a right to nominate one of their own on the board of directors at the start-up entity and other such rights that ensure control over share transfers and perpetual life of the entity. This happens only if the firm is a private limited company.
“It is definitely helpful to keep the two money boxes—personal and professional—separate. The private limited entity is a separate legal entity. For the founder, it also works because it helps in creating wealth, perpetual succession and then the entity's liability is limited. In case of a liquidity crisis, the personal wealth cannot be touched," says, Mehta
Both Sheth and Fansalkar admit it is easier if the spouse is earning a regular income as well. During early days of Vista Rooms, Sheth says she got financial help from her husband who earns a salary income. This also helped her decision to not draw a salary in the first two years as her husband pretty much ran the house.
Fansalkar, too, has a working spouse; his wife earns a salary income. “Her income contributed significantly to run the household. Even though I drew a modest salary, it wasn’t obviously much in the initial years," he says.
Be realistic: Know when to cut your losses
The intermingling of money boxes can sometimes cross limits if the venture doesn’t turn profitable within a few years. Financial planners we spoke to caution that people should be realistic when they run a start-up as to its viability.
Anup Bansal, managing director, Mitraz Financial Services says, “Continuing your business for too long when it doesn’t make money is akin to taking too much risk. In that case, ideally, we should start thinking of an exit plan."
Apart from pumping in money beyond your expectations, Sunder says that another danger of not cutting short your losses entails that you lose years that could work against you when you do decide to come back to a salaried income. “The employment opportunities are very different when you are, say, 40 than when you turn, say 50."