Lesson in personal finance for an entrepreneur

Written by R Vaithianathan | Updated: Apr 8 2013, 14:52pm hrs
MoneyManagement of capital is critical to keep business running. (Reuters)
Prosperity and success, along with a sense of freedom and independence, are what many entrepreneurs envision when they start their own business. However, along with a vision, there are many other elements that go in making a business successful. One of these elements is capital, the money needed to start, operate, and grow a business. The management of capital becomes a critical element of an entrepreneurs life, both from the context of their business as well as for their own personal finances. There are several aspects of personal finance that the entrepreneur will have to keep in mind.

Raising Capital

There are several ways for an entrepreneur to raise funds for various businesses needs i.e. capital expenditure for setting up initial infrastructure and working capital for day to day business needs.

There are a host of options available both for his business as well as from his personal capacity, ranging from term loans and unsecured loans (business and personal) to loans against property/home equity. Loans against property come with a lower interest rate than other comparable loan products, and thus make an attractive option for a new entrepreneur. Unsecured loans are easier to obtain as they can be taken without collateral. However, as they are riskier from a lenders perspective, they attract a higher rate of interest.

Managing Capital

Once the business grows, an entrepreneur must take extra care to manage his funds, specifically separating the funds for personal and business use. Tracking and recording of expenses should also be done with this in mind. Poor management of funds at this stage, like an excessive use of credit cards, may have a long-term effect in terms of strain on the business. Another area, in this regard, that an entrepreneur needs to specially look out for is the insurance that is needed to cover his business.

Choosing the right kind of insurance for the business is critical and should be a clear separation from the personal insurance used to cover himself.

Managing Wealth

When the business has suitably grown in size, the aspect of managing the wealth created will come into focus. An entrepreneur should make himself aware of the various options available to him for investing his surplus funds, from re-investing them into the business itself to parking them in short and long term investment products.

Decisions involving investing business surplus funds will have similar aspects to personal investment planning decisions i.e. diversification of portfolio, time horizon for different goals, tax efficiency, etc. If the growth of business has been robust and consistent, some well-planned investments in real estate can give good returns in the long term. Similarly, investments into preference shares, of good companies, can pay good dividends, which are tax-free in the hands of the investor.

Managing Tax

For a budding entrepreneur, managing the tax aspects of his new business as well as his own income tax liabilities are of high importance. Active management of this aspect right from the start will help himself as well as his business be tax efficient, and understanding the difference between each ones tax treatment will go a long way in achieving this. It will help to get a well qualified tax-advisor on board from the beginning to help familiarise with various norms, practices and alternatives in this area.

The author is Managing Director, Tata Capital Housing Finance Ltd.