I call this “Bare Bones Financial Strategy.” The reason behind my discussion is to emphasize the essential elements of the Financial Strategy related to own startup after quitting job. One can change the business/professional strategy over a period of time through reviews after s/he quits job. You need to prepare Financial Strategy before quitting your job. This is a real life article & in continuation of my previous article “Quitting Job & starting Venture or Business? Get your Startup Plan first.”
“Don’t start a company unless it’s an obsession and something you love. If you have an exit strategy, it’s not an obsession.” –Mark Cuban
Mr. Rishav Chatterjee (45) name changed, NRI preyed upon to quit his job & start his own venture. Bare Bones Financial Strategy comes after Detailed Financial Plan. There are too many manifesting & concealed unparallel domains. In my earlier article I mentioned that he has been searching for answers regarding the feasibility of being an entrepreneur after quitting his current job. He wants to contemplate both the scenarios before leaping. What if he continues the current job? What are the consequences after leaving job and starting own venture? In both the scenarios, he can hardly change his future needs. He may not change his goal posts. He will have to sacrifice his stable income and future employment benefits etc. Can he postpone or ignore daughter’s future provision or own retirement and all other future needs? The obvious answer is “No”. Neither he can avoid these commitments, nor can he postpone them. Being a Financial Planner, before we go for Feasibility Study, we need to consider Opportunity Cost. He has to take the risk to accomplish his aspirations/predetermined business goal. I adjudicated to write detailed Financial Plan for him and Mr. Chatterjee could apprehend his current & future financial cachet. There are abounding compasses to focus on. But, the central focus is on ‘Financial Cushion’ & ‘Bare Bones Budget’ during volatile phases which can last for long. I have to cogitate the current net worth, cash flow, risk taking capacity, educational background, skill, attitude, number of potential dependents, future family commitments, health etc., these are vital personal factors. Apart from personal factors, macroeconomic factors are equally important.
Both Mr.Rishav Chatterjee & Mrs. Srabani Chatterjee actualized the detailed Financial Plan which is an evaluation of their current and future financial state. They assisted me by providing their detailed unique qualitative & quantitative inputs. Qualitative inputs played a vital role in preparation of the Plan since I had to understand his philosophy and his inner most desires which are driving him to take the call of quitting job and starting new venture.
Immediately after I finished his detailed Financial Plan, I began to write the pre Start-up Business Plan, which may be christened as “Bare Bones Financial Strategy.” Bare Bones Financial Strategy gives you a direction & keeps you on track. It helps you to project both costs and cash flows.
Here’s a checklist to be followed before you quit job & enter into new venture or you find suitable business opportunity
- Market research,
- Feasibility study,
- Net worth,
- Cash flow,
- Bare bones budget,
- Startup capital,
- Contingency planning,
- Insurance planning,
- Debt planning,
- Evolve a supportable Income,
- Onus of personal finance, etc.
Carefully prepared Financial Strategy is essential to the success of your business. You should review and revise your plans as an ongoing business activity.
- Market research
Mr. Chatterjee has to assign someone to do the research work. It’s almost like buying a house. He has to understand product/service demand & supply, price, industry condition, etc. SWOT analysis is of utmost importance.
- Feasibility study
It helps him to organize the necessary details to let the business work for him. Feasibility study is systematic, detail & complete study of any project.
- Net worth
What he owns minus what he owes. Therefore, net worth is also one of the measuring instruments of financial atmospheric pressure. Further one has to consider the nature of assets personal or investment. Here investment assets overweigh personal assets.
- Cash flow
Cash flow statement provides company’s detail financial performance. One can understand a company’s aptitude to cover expenses and capital expenditures. One must review business cash flow regularly.
When company’s liquid assets are increasing it is termed as positive cash flow. While you’re with positive cash flow can reinvest the cash & on the other hand negative doesn’t allow you. Cash flow & net worth is almost like a barometer. It’s an indicator of quality of cash flow & asset class. You understand your current & projected profit & loss from cash flow.
- Bare Bones Budget
Bare Bones Budget means when one is struggling to get rid of debt trap or where there’s massive income volatility or both. A bare bones budget is a powerful tool to prudently manage your money.
These are projected income & expenditure statements. If income is less than expenditure, it’s a deficit budget. In that case you have to take costly loans. Budget plays a vital role during this phase. You must maintain Primary & Secondary Bank Accounts and expense records. Your emergency fund gives you cushion while your income drops below the income bench mark.
Can you foresee the amount of income you will be able to generate from own business/profession before you quit your job? Your business or professional income is comparatively volatile than your salary income. Keeping in mind this statement, you have to follow budget. It should be based on your basic needs and not your wants. In your expense list you can notice that you have both fixed & variable expenses. You have to control the second one judiciously as it pinches your pocket due to uncontrolled spending habits.
Before you dive to business/profession by quitting your job consult with your family members. The journey might be more volatile – income & expense both. You need your family support. You need to know whether they’ll be able to adjust accordingly.
Few families maintain the “envelope system budget” to control their spending habits. They break down their expenses in different envelopes. They never overspend. We can follow the system by maintaining primary & secondary account in bank. Earlier there was no credit card/ debit card. Now we don’t want to carry too much of cash. For both record keeping & carrying facilities with safety, cards are user-friendly. Budget helps you to comprehend the numbers. While you put rationale, you can think beyond numbers.
How to organize your bare bones budget & self-employment earning and give shape to your Financial Strategy?
Bare bones budget means budget to meet bare necessity expenses. On the basis of basic necessities, you can define how much income you need to meet ends. In initial phase income may be a hurdle for a starter.
If you’re conservative about your new business/profession, your budget should be restricted to basic needs for first few months/years (depending upon nature of business & cash flow). You must project your income growth and review your Financial Plan with action accordingly.
In bare bones budget you have to consider both family & business expenses. In both the head you find fixed & variable components. Balance your income & expense.
- Startup Corpus
First you have to cogitate the following costs:
- Office space
- Office setup & maintenance expenses
- Staff expenses
- Family/Personal expenses
- Insurance premium
- Loan servicing
- Personal investment
- Other family responsibilities/unplanned expenses etc.
You have to allow for Total startup expenses, family expenses & unplanned expenses & also you can keep a cushion for few months to few years.
- Contingency Fund
You have to have contingency funds for short term income volatility, medical expenses, total & permanent disablement due to accident or illness, monetary help to parents or nearest relatives etc. More the income volatility, more the contingency fund required.
- Insurance planning
Insurance means protection from probability of loss. Adequate insurance coverage helps to indemnification of financial losses except life insurance. As life insurance is non-indemnity insurance as none can place a value of replacement on a person’s life. While you start your own show, take adequate insurance coverage including liability insurance coverage. Some risks are neither manageable nor avoidable. It’s better to transfer the risk to insurer by paying minimum premium. Consider adequate life coverage, disablement coverage (permanent-partial/total & temporary-partial/total), and liability insurance.
Therefore, management of risk may be risk avoidance, risk reduction, risk retention or risk transfer- it’s on you.
- Debt planning
Better to pay off your loan before you start your business/profession. While you’re planning for own setup, paying down debt can be critical step. If you’re overloaded with debt, it’ll hit your cash flow. It’s wise to plan than to manage your debt. If you try to mange, it’ll be like debt trap. You cannot get rid of it.
- Evolve a supportable Income
Depending on your expense budget you can understand your income target. You may keep an additional/alternative source of income to combat income swing and unload your stress.
- Onus of personal finance
Besides Startup Planning, personal Financial Planning is also indispensable. Both are not substitute to each other but complementary to each other. Personal financial planning deals with insurance planning, investment planning, retirement planning, child’s education, higher education & marriage planning, tax planning & estate planning etc.
No one likes to lose money but to gain. In any business/profession the income curve never moves upward at a stretch. Income swings are inevitable in any business/profession. Your unplanned costs and other lacunae may throw you out of gear. But regular review with correct plan will help you to see the light at the end of tunnel.
The most important steps while developing a Financial Strategy during this phase
- Actualize decent Emergency Fund
- Restrict to Bare Bones Budget
- Provision for decent financial provision during swings in income & expenditure
- Enroot a Sustainable Income
- Focus on Self-Employment Earnings
- Get adequate life & general insurance
- Don’t neglect your retirement age & corpus
- Financial provision for children
- Succession planning & tax planning etc.
Startup always has been hard in spite of the fact that you give your best. Don’t be discouraged by your failures during initial stages. If you have clear vision and patience, you’ll surely be successful. Plan before you leap. Therefore, hire professionals who’ll guide you through and help you visualize blurred aspects of personal finance.
Introspection empowers us to be free from all negativity. We can move from negativity to positive direction without confusion. We ignore our purpose of life & follow others. People are too busy to introspect. Introspection accomplish us to dig into our mind, we can observe it very closely like in a mirror. If our vision & mission is clear we can do “impossible” things. I also experience from the journey of life.
Thus, I hope those who are thinking to quit job & to start own business plans at first. All the best!
“A calm sea does not make a skilled sailor.” – Anonymous