Financial Planning Tips for Self-Employed / Business Persons
The idea of working just for you and becoming self-employed lures many persons. But before taking the plunge one should be very much clear about his personal and business goals. Self-employed persons are more concerned about their business rather than personal finances. Your Income swings in business should not hit your personal life. And also your personal financial issues should not hit your business performance. Remember the old saying that “If you are prepared to handle the downside, then you are in much better position to plan for upside.” One should understand that the business goals should always support personal ones and thus keep in mind some basic steps so that you can manage your finances well and do well in both fields.
1. First things first. You should not enter into any business if you are already in personal debt like car loan, personal loan etc., no matter how profitable your venture to be. Clear off your loans first.
2. Create a corpus of at least 6 months of business expenses,and then only one should plan to start any new venture. Emergency fund of 6 months of business expenses is a must for all kind of businesses –new or old. One should understand that when you are working on your own, you are not going to receive regular paychecks. When you jumpstart your career as a self-employed, you may see some months of good inflow and for some months you may not be having enough cash to pay even your telephone bills. To ensure that you don’t run out of cash, include your dry months into your financial plans
3. Try to work like an employee and withdraw a fixed salary from business funds. This will inculcate discipline in you and also help in accumulating funds in business account which you may use for further expansion. As far as possible keep your business plan and cash flow separate from that of personal. Because when you really need the additional funds, there is a good chance your balance sheet won’t look as good as when you did not need the money. I have seen many times that just to fulfil personal desires, people withdraw extra money from businesses and when they feel the crunch in some months they withdraw out of personal savings. This has become a habit for many. But in the long run this will prove costly to both the business and your personal financial Plan.
4. While working on his own one should realise that he or she is no longer entitled to any employee benefits, so one should be covered by all kinds of insurances like life, health etc. with adequate sum assured. Also keep his/her family adequately insured so that any emergency in family should not bother business finances.
5. Even retirement planning should not be avoided. Though many business persons feel that as they don’t have any specific age to retire, they will keep on working till they can. But you will agree with me saying that at the age of 70 you will not be as effective as today and also who knows about the future health condition. Do you think people like Narayan Murthy or Ratan Tata needed to retire? When Ratan Tata was asked to postpone his retirement getting due in 2012, he replied “I don’t want to change my deadline I set for my retirement. There are lots of sacrifices, one has to make in terms of personal life. I wanted my life back. I want to enjoy the things that I wanted to do.”You also have your own life. Accept it or not, you will have to retire someday, so better be prepared.
6. Do ethical tax planning. Take your tax issues seriously, as you can save on lot of tax payments by making claims on business expenses. But many people misuse this provision by showing fake expenses or not disclosing complete income and thus evading their tax liability. One should always work ethically and do proper tax planning by making use of various deductions and exemptions to reduce the tax burden. Good Income tax file will help you in many ways going forward in your business like in taking loans, giving guarantees etc.
7. Understand the difference between accountant and advisor.Every professional has its own area of expertise and one cannot be expert in all the fields. Where your Chartered accountant can help you in areas of management accounting, corporate laws, audit and accounting etc. there a Financial Planner can guide you on risk management, Investment planning etc. Neither a Chartered accountant can advise you on Financial Planning nor can a financial planner help you with Audit and accounting. As this is your business, so you should be aware of as to what to ask and to whom. It is better to hire different professionals for different work and ask right questions to right person to get right answer.
You have to be honest with yourself. If you’re uncertain income flow bothers you and keeps you awake at night and also you are unable to handle the pressure then there’s nothing wrong in getting back to a job to get a steady pay check. But, if you choose self-employment, do so with a plan that allows you to spread the wealth you’ve made when you need it most.