Starting your own business? Take these financial precautions before quitting your job

economictimes.indiatimes.com:

Manish is keen to become an entrepreneur. He has worked for 25 years and has held senior management positions in large companies. He holds a large portfolio of assets, including real estate, equity, mutual funds and bonds. He is fairly confident that his business idea will scale up. His two children are currently pursuing their graduation. He is confident of funding their higher education with his savings and educational loans. What precautions should Manish take before quitting his job?

Manish’s family will be used to certain expenses given their current lifestyle.

As a household moves to a higher income bracket, what is seen as discretionary spending by a simple household, may become essential. This may include salaries of support staff, entertainment and socialising, vacations, among others. So, Manish should first make a realistic estimate of these expenses.

He should then ensure that he has deployed an adequate corpus to fund his family’s expenses to insulate them from the volatilities of his new enterprise. This corpus should be able to fund three years of expenses after taking inflation into account.

Second, Manish should be careful about how his enterprise is structured and funded. Setting up an entity, such as a private limited company, will be able to protect him better in the event of a lawsuit.

He should keep his contribution limited and in phases so that he is not desperate when the early uncertainties of a new business hit him. He can begin with a small capital and seek funding as he builds the business to allow for early mistakes and modifications. A first generation entrepreneur has to allow the business idea to grow without demanding too much funding, too early.