If you have embarked on your journey to build your own business, then it is a major financial change that you have signed up for. Unlike, the salaried employee, the investments of an entrepreneur should align with the type of cash flows available and there are additional risk factors that need to be taken into consideration to build a comprehensive wealth management strategy.
1. Strategy 1: Ascertaining the approach
Wealth management is a holistic approach that should begin with a thorough assessment of the investor’s risk profile. The investment portfolio should be designed keeping in mind other risk factors like the possibility of incurring business losses, existing liabilities and the extent of personal liability towards the default of business. Investments are typically regulated, pre-determined commitments which are typically fixed over the tenure. For a budding entrepreneur, the cash flows may not be regular, the funds generated from the business may often be ploughed back into the business, hence there may be requirements of intermittent withdrawals from their investment portfolio to sustain the business.
2. Strategy 2: Hedging your life and health risk
If you are an entrepreneur, you will have to look at an appropriate life cover and health cover (including your family) to ensure that any unforeseen events are appropriately hedged. The cover should ensure that the financial milestones are met even in the unfortunate eventuality of yourself. The criticality of health cover is evident from the current pandemic, ensure that you avail a competent policy for yourself and your family.
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3. Strategy 3: Demarcate your investments and business accounts
Entrepreneurs are so attached to their business, that they often make the cardinal mistake of withdrawing from investments earmarked for financial goals and ploughing them into the business. There has to be clarity in your wealth management strategy such that you do not have to worry about meeting your financial goals in the future. For the business, you will have to look at periodically raising funds from other sources to grow it to the next level. Before you expand, you must establish a strong financial foothold of the business to ensure that it becomes self-sustainable and builds enough credibility to be able to raise funds from other external sources.
4. Strategy 4: Keep your emergency funds ready
Typically, a salaried person is often advised to hold about 6 – 12 months of funds in the bank account for unforeseen emergencies including job loss or temporary loss of pay. For a budding entrepreneur, it is important to hold funds ranging from 2 -3 years in his bank account to enable sustenance of household expenses, during the phase when the business is just initiated. It is almost imprudent and illogical to expect the business to be up on its feet and be self-sustaining and generate stable cash flow from the beginning. Depending on the type of business, it could take a minimum of 12 months to many years. Typically, one establishes that the business has become stable only after it has weathered through multiple macro-economic scenarios, a 3 – 5 year horizon is considered appropriate to establish the business’s financial stability. A proper backup plan to sustain emergencies, household expenses and pre-determined cash flows should be elaborately established as part of the wealth management practice in this case.
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5. Strategy 5: Seek professional help on managing liabilities
The setting up of the business entity should be done in such a manner that the personal liability is of the lowest capacity. A limited liability partnership or a company is often considered a separate entity and in the event of liquidation, personal assets are not come within the purview to settle the claims pertaining to the business. You can also consider creating a separate account to better enable professional management.
6. Strategy 6: Maintain a healthy credit score
Businesses are set up with borrowed money from banks, if you maintain a healthy credit score by paying your debts, credit card bills on time, you will be able to negotiate competitive terms on your loan.
It is apparent that for a budding entrepreneur, the wealth management exercise needs to be handled differently as compared to that of the other individuals. You can take the help of professionals at TATA Capital Wealth to build a comprehensive and suitable wealth portfolio.
22 February 2022
4 mins read
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