Quitting your job to start a business can be a difficult decision, especially if you have a dependent family and children, existing liabilities and responsibilities. Here are a few financial steps to take before bidding goodbye to your regular job beginning a new business.
Ensure sufficient capital for your business
A sizeable portion of your lifelong savings will get locked into your new business as capital contribution. Moreover, you may have to keep infusing fresh capital in your business till it starts delivering profits in a sustainable way. A substantial portion of your capital can get locked as working capital for liquidity and cash flow management.
Many businesses fail to scale up in the initial years just due to the lack of working capital. Borrowing funds from formal lending institutions for fixed or working capital requirements might be difficult in the initial years as lenders prefer businesses generating profits. Lenders may also ask for your IT returns, bank statements and other financial documents while evaluating your loan application. Lenders may additionally ask for collateral security for loan applications not eligible for the CGTMSE cover.
Hence, it is important that you accumulate sufficient capital to meet the fixed and working capital requirements of your business until it becomes eligible for formal credit or other alternative sources of finance.
Accumulate sufficient corpus to meet unavoidable expenses
The first implication of quitting your job would be the loss of income certainty. You will continue to incur daily and unavoidable expenses – utility bills, rent, insurance premiums, loan EMIs, etc. Hence, you must set aside an additional corpus to generate a monthly income till your business starts generating sustained profits. Estimate the period required (conservatively) for your business to reach its break-even period. Then, calculate the corpus you may require after factoring in your current daily and unavoidable expenses and an assumed inflation rate.
Once you quit your job, ensure that you park this corpus in investments offering a higher degree of liquidity and capital protection. Those having a higher risk appetite can invest in ultra-short duration or low duration debt funds. Those having relatively lower risk appetite can invest in high-yield savings accounts or fixed deposits of scheduled banks.
Make sure you are adequately insured against uncertainties
As you financially prepare yourself to quit your salaried job to begin a new venture, ensure that you have adequate life insurance cover for yourself to provide a replacement income to your family in case of your untimely demise. This cover should be at least 15 times of your current annual income. Consider purchasing a term insurance policy as it provides a big-ticket life cover for very low premiums. Also, do not forget to take adequate health and critical illness insurance to reduce the risk emanating from rising healthcare costs.
Continue your ongoing investments
Investments towards crucial life goals should continue even after you quit your job. For instance, if you should continue your SIPs mutual funds for your child’s higher education. Stopping them for a few years while you build and scale-up your business would result in missing out on capital appreciation. You will have to either contribute a bigger amount later on to create that corpus or avail costlier loans to meet that financial goal.