Tips To Prepare Your Financial Outlook Before Starting A Business
If you have almost unlimited cash or assets, or plan on staying in your day job, this article may not be applicable to you. But if you belong to the more than 99 percent of the population who have lesser means and aspire to be a full-time entrepreneur, then what you read here may be beneficial if you are planning to start a business for the first time.
Before embarking on a perilous but potentially rewarding venture, it is of prime importance to first study your financial situation and know how to brace yourself for the coming challenges.
Determine your appetite for risk. No matter how prepared or capable you are, there is no guarantee that a business will succeed. Still, this is not an all or nothing situation. Some businesses are riskier than others. Most critical is to know in advance how much you are prepared to lose. This is especially true if you have dependents.
Convert your risky investments to cash. Running a business is risky enough without the added exposure to other risks. Cash may have the lowest return but it is the most useful asset in an emergency. While some assets are almost as liquid as cash, there are major differences. Foremost is the possibility that their value will be greatly reduced due to various reasons like an economic crisis. Many people treat shares of stocks like cash because they are easily liquidated. You may be counting on a million pesos worth of shares as your emergency buffer but a stock market crash or bad stock picks may cut their value in half.
Set up credit lines. See if you can secure a standby credit line from a bank. Even if you do not yet need the funds now, there is always the chance that your business may need cash in the future. It takes time to obtain loans from banks and while other lenders are usually faster in approving loans, it is almost certain that the interest rates would be higher.
Get adequate life and health insurance. Insurance is one of the benefits that you forego when you pursue self-employment. Due to this, it is prudent to get sufficient coverage on your own. Make sure the insurance coverage is sufficient for your needs.
Create a budget that will accommodate your entrepreneurial status. This is critical. Budget to spend, at most, only half of your profits if this is possible. You can afford to spend a higher percentage of your salary because it is likely to remain the same month after month. The major difference between a job and a business is the unpredictability of cash flows. Business profits are highly unpredictable. Due to this nature, a larger portion of income must be saved to offset future losses or reductions in profit.
Match the term of your loans to your needs. For financing needs that are more than one year, it would be appropriate to get a loan whose repayment is, at least, as long as when you would be able to pay it. This would minimize the risk of cash flow problems that will occur if you are unable to get a new loan.
Start small. Even if you have enough capital to start large, it is usually best to start at a smaller scale. There is a steep learning curve in launching any business even if you are quite familiar with the industry. Being an employee or even a manager of a business is a far different experience from being its owner. Going full blast at once may bring about overwhelming problems. Besides this, most businesses need far more capital than expected. Try to find the smallest scale where it is still possible to make a profit.
Have a reserve fund. It is a fact of life that despite all your efforts, your business may not do well initially. In this situation, many people would consider going back to the job market. However, this may be difficult for those already of a certain age. Also, by now, you probably already learned more about your current business than any college course could teach you. It would be a wise move to have a reserve fund programmed to carry over your operations through temporary hardships.
Becoming an entrepreneur requires an overhaul of your financial outlook. You must be prepared to manage your finances more prudently as you only have yourself to rely on. Success in business relies less on your gut instincts and more on careful planning.
*Originally published by the Manila Bulletin. C-4, Sunday, March 3, 2013. Written by Ruben Anlacan, Jr. (President, BusinessCoach, Inc.) All rights reserved. May not be reproduced or copied without express written permission of the copyright holders.