Self-em­ployed must keep 12 months’ ex­penses

DNA (Daily News & Analysis) Mumbai Edition - - FRONT PAGE -

Ir­re­spec­tive of the pro­fes­sion you are in, it is ab­so­lutely es­sen­tial to keep your cash flows in check. In or­der to suc­cess­fully do this, you need to have a good un­der­stand­ing of your in­flows and out­flows. This is par­tic­u­larly im­por­tant if you don’t have a fixed in­come or ir­reg­u­lar in­come, as seen in the case of self­em­ployed in­di­vid­u­als.

Self-em­ployed peo­ple have ir­reg­u­lar cash in­flow de­pend­ing on the busi­ness they do in a par­tic­u­lar month. How­ever, un­like their in­flows, their out­flows (pay­ment of loans such as a car, house, etc, in­sur­ance pre­mium) are fixed. Hence, it is cru­cial for self-em­ployed in­di­vid­u­als to have a solid base for con­tin­gen­cies. As a contin­gency, it is nec­es­sary to main­tain at least 12 months of ex­penses. These sav­ings can be in dif­fer­ent forms; sav­ing ac­counts, fixed de­posits, liq­uid as­sets, and float­ing rate funds. This contin­gency fund can be re­duced to around 4 months, de­pend­ing on the sta­bil­ity of the busi­ness.

In the course of a busi­ness, one has good and bad months, with good months be­ing the ones that gen­er­ate more rev­enue. By keep­ing track of the busi­ness and rev­enue cy­cle, one can fall back on the rev­enue gen­er­ated dur­ing the good months and save them as fixed de­posits or float­ing rate funds for any emer­gency. It can also be used for any im­me­di­ate re­quire­ments such as buying new equip­ment or a se­cu­rity de­posit for new of­fice space if re­quired. Ad­di­tion­ally, en­trepreneur­s should try and pay them­selves a fixed salary ev­ery month and keep their busi­ness and per­sonal ac­count sep­a­rate. Main­tain­ing sep­a­rate ac­counts will pro­vide in­sight into cur­rent busi­ness ex­penses, prof­itabil­ity and give a clear pic­ture of what’s hap­pen­ing with the busi­ness.

Manag­ing debts is another key area of con­cern. With un­ex­pected ex­penses crop­ping up, manag­ing debts has be­come a cru­cial part of manag­ing cash flows. One can use the debts to cre­ate as­sets to boost rev­enues and in­crease pro­duc­tiv­ity rather than on things that will not add value. For ex­am­ple, for a doc­tor, it would be more im­por­tant to have the best equip­ment and in­stru­ments in place rather than spend­ing lakhs on in­te­rior dec­o­ra­tion. Ad­di­tion­ally, debts can be used wisely by opt­ing for low-in­ter­est loans and over­drafts on Fixed De­posits, Mu­tual Funds, Stocks or Loan against prop­erty. Also, when us­ing credit cards, it is ad­vis­able to pay the full due amount or at least pay more than the min­i­mum re­quired amount.

After all of the above is taken care of and be­fore set­ting up the contin­gency fund, trans­fer risks to an in­sur­ance com­pany i.e. buy med­i­cal, dis­abil­ity, life, as­set (car, home, of­fice, and equip­ment) and pro­fes­sional li­a­bil­ity in­sur­ances. With­out this key leg, one might end up ex­pos­ing them­selves, their ven­ture and their fam­ily to big risks. Once all these are bases cov­ered, it is ad­vis­able to cre­ate a fi­nan­cial plan based on the fam­ily’s need, re­tire­ment needs, and fi­nan­cial goals. Lastly, seeking a pro­fes­sional help can go a long way.

The writer is the founder of Hap­py­ness Fac­tory

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