Gutsy in the pursuit of their entrepreneurial ambitions, entrepreneurs are notorious for ignoring some critical aspects of their personal finances. Naturally inclined towards risk taking and endowed with the optimism that allows them to rise above entrepreneurship’s inevitable tribulations, those who run their own ventures are prone to making these five common financial planning mistakes. Make sure you’re not repeating any of them yourself.
Not saving in a disciplined manner
Entrepreneurs tend to be disinclined towards ‘boring’ investments like Mutual Fund SIP’s that afford them little excitement and also have limited prospects of reaping short-term rewards. They also tend to be averse to locking themselves into committed saving plans that entail saving a fixed sum of money on auto mode each month, preferring the thrill of speculation and leverage instead. Resultantly, many of them end up being off-track when it comes to their sacrosanct financial goals, such as their kid’s education or retirement.
Not drawing the lines between “personal” and “business”
Very few entrepreneurs have the discipline to draw strict lines between personal and business assets. Goaded by romantic tales of billionaires who sold their wives’ jewellery to remain solvent, they fail to recognize that for each such success story, there are a hundred other horror stories of entrepreneurs who put their personal assets on the line, only to fail in their pursuits and dig themselves into holes of unspeakable magnitudes.
Not setting up an emergency fund
Six months’ fixed expenses in an easily accessible liquid fund – how many times have we heard this sage advice from financial planners? And yet, most entrepreneurs choose to ignore this tenet of financial planning and live dangerously, month to month, without realising that lean cashflow periods could be just around the corner. As an entrepreneur, your monthly cashflows, at least for the first few years, are bound to be erratic. In such a scenario, it is absolutely critical to have a robust emergency fund to draw upon to fund your deficits during lean periods.
Entrepreneurs tend to be less averse than most to borrow money. After all, they are confident that the green shoots that are currently on display will mature into massive oaks in no time, affording them the chance to pay back these loans well in time! You’ll often find entrepreneurs with mortgaged assets, multiple personal loans, outstanding rolling amounts on their credit cards… this sets off a vicious cycle that eventually comes back to affect their peace of mind and decision-making ability, and counterintuitively winds up stymying their business growth too.
Not being adequately insured
The natural risk takers that they are; many entrepreneurs simply find the notion of transferring risks to an insurance company to be unnecessary – after all, ‘bad things only happen to other people’. Hence you often find many businessmen underinsured on the term and health fronts. This may have catastrophic consequences for their families, especially if an unfortunate eventuality leaves them saddled with the entrepreneur’s previous debts. Even health related emergencies can prove to be disastrous, as an entrepreneur may be lacking in free cash for the first few years of their business.