Is a business plan sufficient to start a business? In my experience, and possibly in case of most entrepreneurs, not making a plan to manage your personal finances is a mistake. So before you take the plunge and are still contemplating leaving your job, consider creating your Personal Financial Plan (PFP).
The PFP helps in two ways:
- helps identify the potential income gap when your salary stops crediting
- helps list out the potential sources of cash in your personal balance sheet, should the need arise for your business or emergencies
Creating your PFP is essential for effective financial planning and ensuring a smooth transition from employment to entrepreneurship. You can follow the given steps to create one:
Step 1. Evaluate Your Current Income – leave out your salary
– To compute your income gap, start by assessing your current income. This includes your interest you are getting from your savings, all dividends you receive from your investments, rent you may be receiving from any property you may own, etc.
– Make sure to consider any deductions or taxes that are taken out. So it is best to look at your bank statements for the most accurate number because most credits are done net of tax-deducted-at-source.
– Since we are evaluating your financial plan for when you resign from your job, please ensure that you leave out your salary and any related income from your job, like bonuses and commissions.
Step 2. List down your current expenses
– It is best to look at 2-3 months bank statements and credit card statements to make a comprehensive list of your monthly expenses.
– To make the list comprehensive, start from the house you live in. If you are paying rent or EMI on it, compute related utilities (electricity, water, kitchen gas, etc.), then add all EMI’s you are paying (car, any other home appliances, etc.), add groceries, domestic help salaries, mobile bills, cable / internet bills, etc.
– Then expenses outside the house like fuel purchases, dining out, health club memberships, etc.
– Important to recall your once-a-year expenses too. Like holidays, personal travel (maybe to hometown), annual insurance / investment payments, etc.
Steps 3 & 4 list down the adjustments you could consider making to your personal finances.
Step 3. Account for Changes in Expenses due to leaving the job
– Commuting costs may go down or disappear entirely
– You may not need to update your formal wardrobe anymore
Step 4. Account for new expenses that will arise because you have left your job
– Health insurance premiums may change if you’re no longer covered by an employer-sponsored plan.
– I recommend adding a term insurance plan to safeguard your family
Steps 5 & 6 list down the possible action points that could help improve your PFP.
Step 5. List down and account for the discretionary expenses that you could have to stop because you do not have a salary anymore
– Take a relook for SIPs and monthly investment plans
– Holidays & eating-out
– Moving to a house with lower-rent
Step 6. List down your assets that you could potentially liquidate if the need arises
– This step helps you list out potential sources of cash for starting your business or any emergencies that may befall
– Start with your financial investment portfolio of stocks, FD’s and other investments you may have
– Then estimate your other investments, like any properties you may have purchased
– Also look at luxuries that you may not liquidate right away, but possibly could. Things like expensive car, jewellery, etc.
– Sometimes these assets are linked to liabilities / cash outflows that could be stopped by liquidating them
Mind you, we are only computing your personal finances and are not talking about the business plan yet. PFP will give you a monthly deficit that you need to account for when making your business plan. Not creating a PFP could put a strain on your business plan! So, plan and prepare!
Good luck!
