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Why personal finance advice is required for startup entrepreneurs

Separating personal and business finance.Tend to make higher income early in life; thus face this question sooner.Tend to have complicated instruments like stocks options and PE funding as part of their compensation.Believe they are rational which is actually a problem when it comes to money.

Friday August 04, 2017,

6 min Read

Why personal finance advice is required for start-up entrepreneurs

Startups are born out of inspired ideas, strong impulses which propel the entrepreneurs to throw it all into them and create something that they are proud of. A startup, as the name suggests, are the companies in the Nascent stage which are looking to gain market share.The entrepreneurs are looking for investors at this stage to fund their ideas. Financially, startups are generally in a fragile and delicate stage which will require constant milking from the investors and entrepreneurs until they reach a stage where they either start breaking even or start self-funding themselves out of their own profits.

Thus, personal financial planning becomes essential for such entrepreneurs as the risks associated with running a startup could lead to an impact on their personal financial health.

Here are some of the aspects which a young entrepreneur should consider while juggling the balance between his company and his personal finances:

1. Keeping Separate Company & Personal Finances: - This point is well recognized by all entrepreneurs but rarely followed. It’s extremely important to keep the company & personal operations separate as the future of the company must not be linked with the personal future of the entrepreneur as he might have a family and other responsibilities dependent on him. Emotions should not take over a good and reasonable financial sense. For the efforts put in by him, he could even look to draw a reasonable salary from the company so that there is an adequate balance maintained between his present and the future.

2. Education/Behavioral Coaching: -Our education system and universities teach us how to run our companies, but they are lacking when it comes to training an individual to manage his personal finances.Various factors to consider while planning the finances are - Sources of Incomes, Tax Implications, Return expectations, Expenses to be incurred now and in the future after adjusting for inflation, children’s future, retirement, etc. Making an entrepreneur aware of these points is important to the volatile startup environment around.Even if the company and the idea don’t work out, the above-mentioned aspects should be protected.Hence, it’s important to provide them with continuous education. Even while investing their surpluses, they must invest them in the funds and asset classes which are going to help them achieve their financial goals. Buying a hot cake stock or a high return-giving fund without adequate research by following newspapers, TV channels and peers could prove to be disastrous. Behavioral coaching is thus important to keep them focused towards their financial journey.

3. Concentrated Holding Risk: - As the classic saying goes “Don’t put all your eggs in one basket.” One of the main rules of investing is to manage your risks.A startup entrepreneur could be having almost 80-90 % of his entire net-worth invested in his company.It’s a dream for every entrepreneur to grow his business.But one should also look at the risk where he is only concentrated towards one company and there is no alternate source of income. Whatever they earn they invest in their company for their growth hence they have a concentrated portfolio.If a company makes losses they may also incur the loss.

Risk management is probably the most important part of the financial planning jigsaw. Even if the returns, goals, and investments are taken care of, no financial planning will work out in reality unless the risks are adequately managed. Risks can be in the form of the bankruptcy of the company, recession in the economy, medical emergency, etc. These realities and risks have a reasonable chance of occurring and they could derail the financial journey of the entrepreneur.Diversification is an important tool for risk management. The entrepreneur needs to have alternate sources of income and be invested in other asset classes (Mutual Funds, FDs, stocks, property, etc) which will help reduce his risks.

4. Reinvestment Risk:- Let’s consider a scenario; A 20-something old entrepreneur comes up with a path breaking idea, a revolutionary app and she pitches the same to some investors. The investors are impressed but they are demanding certain modifications to the app to come on board. She is not willing to make the changes as she had envisaged the future of the app in a different way. However, she is also interested to go abroad and pursue further studies. She thus decides to sell the same for Rs.150-200 Crore wherein she gives up the right and is free to pursue her dreams. 

Now, wWhat happens to that 200 crores that she has received from the sale.She intends to pursue her further studies and there are no other ideas or apps to invest in either. Just like an “Idle mind is devil’s workshop”, “Idle money is a splurging disaster waiting to happen “. Thus, in these situations, entrepreneurs face a reinvestment risk. A seasoned financial advisor makes all the difference in these situations as he could help entrepreneurs plan all the aspects of their life in financial terms.

5. Power of Compounding - “Compound interest is the eighth wonder of the world. He, who understands it, earns it; he who doesn't, pay’s it.” – Albert Einstein

To sum up, the lessons learned, ‘Regret of 5’ taught us to start investing early. ‘Magic of 20’ clearly shows the advantage of staying invested for a longer period of time. Hence it is very important to start to start investing early and stay invested for long term.

6. Conflict of Interest –It is very important to consult an Independent Financial Advisor/Planner to avoid conflict of interest. According to recent Gallup survey brokers and advisors are ranked very low due to its honesty and ethical standards, also professionals like stock brokers, etc are ranked low because of Conflict of Interest. It is important to consult independent fees only advisors for the same.

Conclusion: - “A startup may make an entrepreneur rich beyond his wildest dreams, but we have to make sure it does not make him poor beyond his worst nightmares. Disciplined investing, financial planning and consistent monitoring and review of portfolio will help the entrepreneur pursue his ideas with maximum passion and minimum stress “