Starting your own business? Take these financial precautions before quitting your job

Manish’s family will be used to certain expenses given their current lifestyle. As a household moves to a higher income bracket, what is seen as discretionary spending by a simple household, may become essential. This may include salaries of support staff, entertainment and socialising, vacations, among others. So, Manish should first make a realistic estimate of these expenses. He should then ensure that he has deployed an adequate corpus to fund his family’s expenses to insulate them from the volatilities of his new enterprise. This corpus should be able to fund three years of expenses after taking inflation into account.

Second, Manish should be careful about how his enterprise is structured and funded. Setting up an entity, such as a private limited company, will be able to protect him better in the event of a lawsuit. He should keep his contribution limited and in phases so that he is not desperate when the early uncertainties of a new business hit him. He can begin with a small capital and seek funding as he builds the business to allow for early mistakes and modifications. A first generation entrepreneur has to allow the business idea to grow without demanding too much funding, too early. The business needs to demonstrate its sustainability to be able to get funding. Efficient use of capital is required when the pockets are not too deep.

Third, Manish should ensure that he separates and insulates his business from family assets. Pledging personal assets, providing personal guarantees, deploying personal capital in business, involving spouse as a dormant partner are all business practices that reduce the distinction between home and business. These practices are convenient, but create problems in the long run for a professionally managed business. Insurance can be an important part of Manish’s business risk protection plan as it can take care of an untoward incident in business, insulating it from personal loss. Manish should create and build his business as a distinct entity, whose success can reward him and, therefore, his family too.

Content courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.