One's business surplus has to be intelligently channelled into creating a reserve for business and also ensuring that their own financial future is secured
What exactly do we understand by a Wealthsmith? You guessed it right! Just as the goldsmith moulds your gold ornaments and the blacksmith moulds hard iron, the Wealthsmith actually helps you mould your wealth. But, why do you need a Wealthsmith? Let us say, you are a 35 something professional who managed to start his business 10 years back and has built the business to an enviable level. You have expanded your business operations across India, your clients are happy, your income statement is showing a healthy profit and the cash is flowing in at a steady pace. Now that your business is in auto mode, can you actually afford to relax? The answer is an emphatic “No”. So what should be your focus?
Your Wealthsmith suggests a five-point focus for you:
1. You have worked for your business success and have put your operations almost in an auto mode. The challenge for you now is to make money work harder.
2. You have age and success on your side and now need to translate this income into wealth. Remember, income has a bad habit of dissipating if an effort is not made to convert it into wealth.
3. As a businessman, you are always exposed to the vagaries of the business cycle. That means your business surplus has to be intelligently channelled into creating a reserve for business and also ensuring that your own financial future is secured.
4. You are here for the long haul, so don’t worry about the short-term returns that you can earn. Focus on how you can grow wealth over the long-term without taking on undue risk considering that you also have a business to support.
5. Balance your returns with your liquidity. The risk appetite will be lower as you do not have an automatic cheque reaching you on the last day of every calendar month. Your wealth plan must be designed along these lines.
Eight Wealthsmith ideas to manage your money smartly:
Avoid high-cost debt at the very outset
If you are an entrepreneur, the last thing you want is to get stuck in high-cost debt that can put pressure on your personal finances and on your business finances. Use any liquidity you have to get rid of high-cost loans as they can be a major drag on your own solvency and your business solvency.
Ensure that your life is adequately insured
As an entrepreneur, you are responsible for your personal finances and for you’re the finances of your business. Ensure that your life is adequately insured to take care of your family expenses. Also look at key man insurance for yourself considering your role in the business.
As an entrepreneur, health is your wealth too
You cannot allow sudden hospitalisation expenses for yourself and your family to put a strain on personal finances and on business. Your family should have adequate health cover to overcome any kind of exigency without impacting your cash flows.
All assets and liabilities must be adequately insured
Insuring your life and health is one part of the story. Equally important is to insure your assets and your liabilities. Any loans for your home or car should not become a burden on the family. You cannot afford to spend your cash flows towards replenishing your assets. Get them insured.
Keep aside an emergency fund to take care of routine expenses
Emergencies could come in a variety of ways. You could be confined to bed for a couple of months or your business may be going through regulatory issues. Have an emergency fund in place to take care of these exigencies. Remember, whatever the circumstances, your personal finances and your business finances cannot be disrupted.
There must be a steady portfolio of debt funds to fall back upon
When you are running a growing business you must have a good chunk of your funds in safe instruments like debt funds and bank fixed deposits (FD). But are they not sub-optimal? There is a reason here. It is hard to predict the sudden need for funds that may arise and you cannot do a distress sale of your equities. A better way will be to either use your debt funds or to take a loan from the bank against your FDs. This is an important building block if you are a growing business.
Don’t lose out on the opportunity to create wealth through equities
At the end of the day, you need to create wealth for your business and for your family. You need to ensure that your business cash flows are intelligently utilised. You need to provide for liquidity and low volatility assets, but you can surely afford to take some amount of risk. Equity funds will help your business also build wealth over a period of time. In your case, the equity funds will be a veritable source of wealth creation in the long run.
Create a second line of defence for business
This is always advisable when the business is overly dependent on you. Get your spouse more involved in the day-to-day operations so that there is a back-up. Let your spouse, your key colleagues, your lawyers and auditors know a lot more about the nuances of your business. Also, talk to your lawyer and create a succession plan. It will avoid hassles in the future.
FOCAL POINT
- One's business surplus has to be intelligently channelled into creating a reserve for business and also ensuring that their own financial future is secured
- It is hard to predict the sudden need for funds that may arise and you cannot do a distress sale of your equities. A better way will be to either use your debt funds or to take a loan from the bank against your FDs.
The writer is head of Research and ARQ, Angel Broking
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