Essential Financial Planning Before Starting a Business
While taking the plunge for a new venture, ideally your financial health should fuel more fire into your passion. My financial planning before starting a business began much before I was out of my full time job. It was a mentor who pointed out how difficult life could become.
The questions that I was trying to answer at that time were around my current monthly expenses — how much I could reduce them and how long I could sustain with my savings.
I am sharing some tools that I used to plan my monetary guard before taking the plunge.
Stalk Yourself – Document
When it comes to financial planning before starting a business, the first exercise that I would recommend is to keep a track of day-to-day expenses. The expenses could be as simple as cab rides, food, clothes, or donations. Also note your ATM withdrawals and digital transactions, including cash-backs.
Once you have information ready, categorize all expenses into ‘Necessary,’ ‘Luxury’, and ‘Avoid’. These tags are subjected to your own judgement – what is ‘Necessary’ for me could be ‘Luxury’ for you.
In my case, certain purchases during impromptu shopping sprees, which I hardly used afterwards, came under ‘Avoid’ category and buying expensive headphones came under ‘luxury’.
One easy way to categorize is to ask questions:
1. What would happen if this transaction were not done?
2. Was there a cheaper alternative to this?
3. Is it possible to not make this transaction again in a similar situation?
I would also encourage you to have another category tag — ‘Recurring’ and ‘One-time’. Your bills and daily commute expenses might come under ‘Recurring’. It is also useful to see if the recurring amount can be reduced by using discounted subscriptions schemes and passes.
The outcome of this exercise is also to understand that certain expenses can be avoided: a late fee for a broadband payment definitely sounds like something that can be easily avoided.
Remember, unconsciously we tend to have an idea about our spending patterns, but if you can keep track, write, or keep documenting, you will notice more common patterns. With multiple iterations, you should derive a number, indicating your monthly expenses — ‘monthly expenditure threshold’ and know your ‘saving threshold’.
Single Pane View – Expenses, Investments and Returns
While doing financial planning before starting a business, the second exercise is to know your full worth. Keep a master excel sheet with a tabulated data of all your money — different accounts, investments, shares, any RSUs, gratuity, and PF related numbers. This is also important for you to understand the financial survival time.
The idea of getting a holistic picture is to arrive at a number that you are okay to spend while working on your startup.
Consider that you have strong investments in place and a stable corpus of money apart from salary that is being credited to you every month, which is less than your expenses. You can survive for ample time. But if you have little or no money coming in for a long time, then you are using up your existing savings. Then, it is extremely important to get an amount from your total savings that you are okay to forfeit.
You might be extremely passionate about your idea, a ground breaking solution, and you are sure you are going to hit big-time success. But if that will drain you financially, then you need to understand what your drain threshold is, and how long will it take for you to reach it.
Don’t forget to include a buffer for unforeseen events, medical expenses, and an amount for inflation. If you see your drain threshold is beyond 3 years, then inflation must be factored in.
Pre-Startup Extra Fencing
There is one more dimension to financial planning before starting a business.
Being a salaried employee has benefits like a group insurance for the family, benefits of a printer at office, broadband and postpaid bills, luxury of discounts for travel, access to stationary, and a work system like a laptop.
The most obvious thing to remember is to have or find alternative for each item from your daily job that might be needed. Else, it is something to invest in.
I also recommend hiring or being in touch with a chartered accountant to help file future taxes.
You also need to start planning your start-up expenses, get a rough estimate of what your investment should be — include tentative expenses as small as buying a domain to salary expenses for a few resources.
Classify every expense as ‘onetime,’ ‘recurring’, or ‘variable’. Update this in your Expenses sheet and recalculate your drain threshold. Your drain threshold might change.
Chances are your expenses are not accurate, but this will give you an idea of your own personal burn rate.
Audit–the Startup Expenses Sheet More
When you have planned your expenses, have decided on your drain threshold and have all survival tactics in place, start maintaining another excel sheet for the idea that you are working on.
It’s sometimes difficult to segregate work and personal expenses. You could be traveling to meet a friend who could also help in lead generation.
Hence you should go about asking a few questions like:
1. If this task is not done then what would work get impacted more?
2. Is this really necessary for work at all?
3. Are there alternatives to doing this?
This may sound more algorithmic, but you will know for sure the amount of money, apart from time, that is being invested in your company.
While bootstrapping, some people find alternative jobs or solutions to meet the expenses. Ensure that this is well documented in the master sheet.
If you do a good job of financial planning before starting a business, it’ll show in business!
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