The Indian start-up cosmos is littered with stars who have built great businesses be it in e-commerce, data science, handsets, and education, among others. Behind the billion-dollar valuations and splashy headlines, the sobering fact is that these businesses are run by individuals with not just a great vision, but razor-sharp execution capabilities. The biggest asset of a start-up is not the funding it attracts or the profit it generates, but the entrepreneur at the driving-wheel of a business that meets an unmet need. If you are thinking of starting up, we assume that you have homed in on a large enough market, the timing of the opportunity, sustainable business model and tied up the resources to start sailing. All this probably is going to be enough for your business, but not for you.
Here are 5 key financial tips for the entrepreneur in you.
Just like your start-up needs money to stay afloat, at an individual level you too need money to support your family and take care of your current financial obligations. Unless you are one of those lucky ones who have zero debt and negligible recurring expenses, the average entrepreneur will require cash to take care of the family. Most start-ups do not start generating profit right from the word go. Hence, depending on your business to financially support is a wrong move. Instead, we suggest you have a corpus of 12-15 months of monthly expenses that your family and recurring liabilities need. These expenses will add up to a finite number. Multiply this by 12-15 times (months) and secure that money before you start. If you do not have this cushion, as the leader of your start-up you will be dragged down by personal financial worries. Your fledgling start-up will require your undivided attention to succeed.
Setting up a start-up is a stressful job. You will be tight-fisted, but turning an entrepreneur doesn't give you a bullet-proof vest. Medical exigencies can strike you and your family, without any warning. If you have dependents, take low-cost term life insurance. In an unfortunate situation, you die, your husband/wife or family members will get the sum assured. Today, somebody in their thirties can get Rs 1 crore term insurance for Rs 30-40 a day. As the leader of your family, it is your utmost of duty to secure them first. A life insurance is the cheapest way to get that financial guarantee in case you meet an unfortunate end. There may be various reasons that you as an entrepreneur may neglect taking an adequate life insurance plan. There is nothing wrong in establishing protection for your family. A life cover will give entrepreneurs peace of mind that their loved ones are covered.
Health insurance too is extremely important for a family. Given that medical costs are rising by 15-18% every year, paying for a full-fledged surgery or week-long hospitalization at any good hospital/nursing home can set you back by a few lakhs. In times of rising healthcare costs, a sudden illness or injury can leave you financially devastated, especially if you have put in quite a bit of your savings in the start-up. With a health policy, you can be in control of making medical treatment expenses more manageable, thus ensuring quality health and happiness for your family. Since you will be leaving your job at some point in time, any pre-existing corporate health insurance policy will not cover you. Buy an individual floater cover for your family that covers all types of risks adequately. In case your spouse or any other family member gets a corporate cover, do evaluate the need to have an enhanced cover.
Once you have kept adequate savings, secured life insurance, and health cover, it is time to do some serious heavy-lifting for the start-up. However, it may happen that the initial requirements of running your business may be more than your present resources. Working capital, expenses for statutory approvals, office and employee costs may require a tad more. This means you will need some sort of an external funding to pump oxygen into your dream business. The easy way out may be to take a business loan or start-up loan, but taking debt at such an early stage is sure to stifle growth. Smart entrepreneurs should not let their start-up shoulder financial debt unless it is absolutely necessary. Try to utilize incremental disposable savings and family pool for initial funding. For family members who assist you with financial resources, try to offer them a small equity stake. In case you are taking a loan from family, make sure that the repayment starts after a 2-3 year moratorium and loan interest rates are less than the market. In exchange for the moratorium, offer a minute equity stake. Any other professional investor will take a much bigger bite, while business loans will come at almost personal loan rates --- both options should be avoided as much possible.
Many entrepreneurs spend a lot of money on office infrastructure and employee salaries. This is a cardinal mistake because your business will need doses of capital for many business functions, especially at the starting stage. You could avoid 70%-80% of expenses by working from home and hiring employees on survival salary plus equity stock options. The smart way is to spend money on the things that translate into more sales or leads for your business. Most first-time entrepreneurs make these mistakes. Another area that one should be wary of is excessive spends to keep the moral high of employees. Frequent parties in office and time-out together cannot happen without somebody footing those bills. In the desire to keep costs at a bare minimum, do not become Uncle Scrooge. Try to spend on areas, If the main source of your customer acquisition is your website, then you should spend money on content marketing, sales deck etc. If you ascertain that most of your customers are offline, it would be more prudent to spend money on printed materials like sales brochures.