International BusinessLook before starting out on your own
Have a buffer, start small and then scale up.
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Before starting out on his own, Amit Trivedi had gone through all worst-case scenarios for his new venture. The 40-year-old entrepreneur was quitting his cushy job as a vice-president with Franklin Templeton to start a venture for training financial intermediaries. But six months into his new venture, he faced his worst nightmare.
The global economic meltdown, which hit the economy around October last year, brought his business to a halt. “That’s one period I wouldn"t like to go through again,” said Trivedi, who started preparing for his venture in 2005 and started off only after three years of meticulous planning.
For an entrepreneur, most of the times, things don’t pan out as planned. “No matter how much a person is prepared for business challenges, he has to face the unexpected, especially during the initial period,” said the head of a venture fund.
Controlling business environment and predicting problems may not be in the hands of an entrepreneur, but he needs to chart out a plan to take care of contingencies.
Monthly expenses
Entrepreneurs, especially those quitting their jobs, need to create a buffer to take care of their monthly expenses. The best would be to have another source of income. This could be rent from property, interest income or another job that ensures a regular cash flow. But if this is not possible and he still wants to take the plunge, he should see to it that he has a corpus to meet his personal expenditure. That"s what a former executive of an IT company, who recently started his consultancy firm, did.
He created a corpus to cover one-year household expenses. This money was put in a liquid fund. Every month, a fixed sum is transferred to his bank account, just like his pay cheque, through a systematic withdrawal plan.
He sold his market-related investments and used the money as a contingency fund for his business. The debt-equity allocation was altered from 50:50 to 90:10.
Loans and liquidity
Financial planners suggest that before starting out, a person should have minimum personal liability. This means he should clear as much loans as possible. Equated monthly instalments for big borrowings, such as a home loan, can be clubbed while creating a monthly expense corpus. At the same time, he needs to arrange funds for the business and banks don’t easily lend to start-ups. “That"s why a person should make arrangements for loan while employed. Banks willingly lend to the salaried,” said Trivedi. He suggested one should create an overdraft against an asset, such as a property. This money can be used to meet temporary shortfalls.
Personal vs business
The biggest challenge for entrepreneurs is to separate personal and business finances and be disciplined enough to stick to it. Entrepreneurs need to look at the money in the business as belonging to the business, not to them. If both are mixed, it becomes difficult to keep track of the actual net profit or loss from the business. But, as a business owner, you also need to be bankable. This relationship is essential to grow business. “On paper, the entrepreneur should keep growing his income from business.
And, this money should flow back into the business in some form – personal loan, for example,” said Jay Gupta, the founder of retail venture — The Loot. Gupta, 33, is a first-generation entrepreneur who is one of the pioneers of the discount store concept in the country.
Build as you grow
Entrepreneurs, financial planners and venture capitalists — all of them said that the mantra for someone starting up should be to begin small and have a scalable plan. So, one can look at a modest number of employees, offices and so on.
“The headcount should be kept low and existing employees should multi-task,” said Sandeep Nerlekar, managing director and chief executive officer, Warmond Trustees and Executors. Nerlekar, 36, started his venture last year with six people and one office. Today, he has four offices and 60 employees.Similarly, Gupta said that before investing any money on creating fresh infrastructure, entrepreneurs should first ensure a steady revenue stream.
Investments vs expenses
Entrepreneurs tend to see expenses as investment. For instance, opting for a prime office location or spending money to build a swanky office is needless unless the business demands it. Similarly, unnecessary costs can be cut by giving attention to small things such as selecting between a personal computer and a laptop. Every financial decision needs to weigh the investment and expense situation. Investments are something that the business cannot do without, whereas extra expenses should best be avoided.