For many of us, a significant part of our net-worth is tied up in our business, which is also possibly our main source of income. Let us discuss how to manage our personal financial risks
As business owners and entrepreneurs, we can have very unique financial planning challenges. For many of us, a significant part of our net-worth is tied up in our business, which is also possibly our main source of income. Let us discuss how to manage our personal financial risks.
Global and local economic conditions are putting strain on our personal finances. As entrepreneurs, we have to maintain a careful and difficult balance to manage our business expenses so that we can generate enough profit to build a sustainable business, and at the same time, we also have to keep a close eye on our personal finances and steer clear of debt.
Maintaining a healthy credit record for business owners and entrepreneurs is more than just managing debts. It is also about avoiding taking on too much liabilities which can create significant strain on our personal and business finances. We can stay out of debt by not overspending and planning long term business projects carefully. Keep a clean credit record by avoid defaulting on payments. Negotiate with our banks and financing institutions when need arises. This will make it easier to borrow money when we are ready to expand our business.
It is of the utmost importance to stay clear of overwhelming debt. Here are 2 ways to ensure that happens.
1. Do our homework
Before applying for a loan, make sure we weigh all of our other options. Consider whether we will be able to repay a loan. If we are even just questioning whether we can pay back a loan, look for other options, such as crowdfunding, startup incubators, business accelerators or government grants.
I would suggest we answer the following questions prior to applying for a loan:
Is the loan the bank is giving us the right loan for our purpose?
How will this loan affect our cash flow and budget significantly?
Does this loan require substantial collateral?
Once we have done all of our research, and have found an acceptable loan we are confident we can pay back, it is time to make our budget.
2. Make a budget and stick to it
Developing a strategy on how to pay back our loan is extremely vital, as is figuring out how much we can spend from month to month. This is when a budget comes into play.
We can follow the following 5-Step Plan to creating a Balanced Budget.
Step 1: Tally our income sources. Figure out how much money we are bringing in each month.
Step 2: Determine fixed costs. Know which recurring bills we have each month.
Step 3: Include variable expenses. Do not forget to include items that may fluctuate each month.
Step 4: Predict one-time spends. While some expenses are unexpected, like replacing a damaged laptop, set aside money for one-time expenses, like hiring a copywriter from Fiverr to write our press release.
Step 5: Pull it all together. Once we have completed the previous four steps, we can then create our budget.
Plan For Inevitable Rainy Days
Since many of us, as entrepreneurs have to deal with irregular income at times, it is important to carefully budget our personal finances to make sure that we have enough savings to draw from in the leaner months. We need to be aware of our essential expenses like housing, utilities, insurance, transport and food. Add up these critical expenses and put aside enough savings to cover at least 3 to 6 months of our expenses.
Retirement and Risk Planning
Do not forget, we should still be saving for our retirement and insurance. Even on a fluctuating income, we should aim for a small bit of savings each month. All business owners should have a separate exit strategy for retirement, extended illness and untimely death, particularly those of us that have a specific skill and knowledge that our business relies on. Do consider having a keyman insurance, funded by our business so that there will be financial resources to tide over any unforeseen circumstances. Do our succession planning as early as possible.
Be realistic about the value of our company. Business owners often have an inflated view of what their business is worth, which often impacts on the marketability of the business. Do not rely on on our business as our only retirement plan. Diversify our personal investments away from our business to reduce this over-reliance.
We should try to contribute regularly to our CPF for retirement and medical insurance purposes. While the CPF contributions can reduce our cash-on-hands, it make strategic sense in our financial planning as a business owner. CPF contributions attract relatively high saving interests (i.e. at least 2.5%pa in CPFOA and 4%pa in CPFSA, MediSave etc). With sufficient CPF savings, we can also consider investing our CPF savings into long-term investments to have a higher yield for our retirement.
Besides CPF MediShield Life, we should have adequate life insurance to take care of our untimely demise, critical illnesses and permanent disabilities. Term insurance, due to their affordable premiums can be considered. Having these protection will ensure our families, which dependant of our business income, be take care of in unforeseen circumstances. This is a responsible way to ensure we do not put our families at financial risks whenever possible.
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