Today, there is no dearth of professions. With newer career avenues opening up, the number of self-employed persons is on the rise. While traditionally, professions like that of doctors and lawyers have largely comprised of self-employed personnel, today, people from varied professions are preferring to become business owners themselves. However, one major issue that arises due to this decision to be self-employed is that of irregular cash flow.
Simply put, no matter whether an individual is self-employed, what their profession actually is, or his/her position in a company, it is up to the individual to have tight control over their cash flow. Thus, getting a handle on one’s cash inflows and outflows is imperative for all.
1. Cash outflows, such as home loans, car loans and insurance premiums are generally fixed in nature. The problem with uneven or low cash flows arises when there is an irregularity in the inflow of cash. Thus, creating a solid base for contingencies is very important for the self-employed or those involved in seasonal businesses. The ideal state would be to have around 4-6 months’ worth of personal expenses in the form of savings account or liquid mutual funds. This figure can be whittled down to as low as 4 months based on the stability of one’s business and its cash flow. For building up a base for contingencies on the business end, ensure that at least 4 months’ worth of expenses are saved in liquid assets.
2. Based on your experience, estimate the revenue you can expect in a month, on an average. Have a clear vision of what the best months for your business are and save the surplus revenue made in these months in liquid funds. You can fall back on these funds in case of any contingency. The money can be used to make any immediate payment for new equipment or to submit a deposit for additional office space, in case the business grows, and extra space is needed. If possible, pay yourself a fixed salary per month. Keep personal and business expenses separate as this will give you an insight on current business expenses, profitability and what’s new with the business.
3. Cash flow also seems to be in jeopardy with unexpected expenses creeping up continuously. As such, managing debt becomes extremely difficult. The ideal thing to do would be to use debt to create assets and boost your revenues and productivity, rather than chasing things that won’t really add any value to your business. Take the example of any doctor. For them, having the newest, up-to-date equipment is way more important than having top-of-the-line interiors and feeling pinched for money.
4. Make wise use of debt (first from family and then institutions) and start opting for overdrafts on any fixed deposits, mutual funds, stocks or property (loan against property). These normally can be available at a low interest rate as compared to personal loans. When utilising credit cards, pay the due in full each month. At the very least, pay more than the minimum required each month.
5. One you somewhat have a grip on the above or before you begin to accumulate any contingency funds, make sure to transfer all possible risks such as health, disability, death (financial liability) and property to an insurance company. Basically, purchases insurances for needs related to medical emergencies, disability, life, assets (car, home, office equipment) and any other professional liability. In the absence of this key leg, you, your family and your business venture might be exposed to a large risk.
6. When this plan for your future is set, look into your family’s needs and your own retirement. Use your financial goals as a base to create a portfolio of assets with exposure to varied asset classes such as debt, equity, real estate and gold.
Being a business owner, while being utterly rewarding, has the capacity to be extremely stressful, with the umpteen day to day challenges. A qualified financial planner can help make this sort of a stressful situation easier. The financial planner would work with you on your unique situation, objectives and help you create a comprehensive financial plan to ensure that all the above-mentioned issues are addressed in the best possible manner.
(By Amar Pandit, CFA, and Founder & Chief Happiness Officer at HappynessFactory.in)