How should Small Business Owners/ Professionals Manage their Money?

Rishabh is a 28 year old software developer. A couple of years back, he left his job in a top IT company and started working on a freelance basis. He gets assignments via freelance websites and his professional network. He likes his freedom and the fact that he can work on a variety of projects across technologies.

Nandika, 38 is a freelance photographer. She works with companies for corporate events and photo shoots. She also takes up assignments for weddings and birthdays. She used to work in the corporate world but quit when her children were born. She is happy that she turned her hobby into a well-earning profession. She enjoys the flexibility and freedom that her work gives her.

Being a Small Business Owner/ professional has its advantages but there are a few challenges from the financial front -

• Earnings are not regular and they fluctuate. Sometimes a lot of money comes in and in some months there is literally no income. For example, Nandika did not get any lucrative offers at the beginning of the year and had no income. Her household which usually operates on two incomes was forced to be run on her spouse's income alone.
• When Rajiv was working, he had health insurance for himself and his parents. He had forced savings via Employee PF. But now, he has no health insurance and he has no regular savings.
• As a Small Business Owner/Professional, you are not just working but also marketing, prospecting new clients, following up on invoices etc. You get busy and may not have time to focus on financial planning. Rajiv is not aware of how much he has saved or if the investments he has made are appropriate for his personal situation and risk profile.

Here are some steps to follow as a Small Business Owner/ Professional to ensure that your financial plan is on track -

Develop a Proper Asset Allocation Plan – Devise a proper asset allocation plan. Usually, younger people can invest more in high risk based assets. But in case of self employed, whose income is irregular, a major portion of the income can be in fixed income instruments. Some amount should be invested in equity-based assets. It will be good to invest small sums regularly (for e.g. using the SIP method) so that the wealth grows in the long-term. If you have just started your self-employed profession, avoid huge loans.

Invest in a manner that your retirement is taken care of. Invest in PPF, NPS and equity-based assets so that you build a nice retirement kitty.

Create and Follow a Budget – Create a budget of income and expenses and follow it diligently. Even if you earn a lump sum amount, resist the temptation to splurge. If you are not able to be disciplined about financial matters, you can open two bank accounts and designate one of them as a 'Salary Account'. Use one account to receive remuneration for your assignments. Transfer money from this account to your 'Salary Account'. Spend money only from the 'Salary Account'. Transfer money for your living expenses, insurance payments, EMIs and regular investments. You will not go on a spending spree and will have cash for other purposes such as emergencies or learning to improve your professional capacity.

Build an Emergency Fund – Keep an emergency fund equivalent to living expenses for a few months. The money can be parked in savings accounts and liquid or short debt-oriented funds.

Insure Yourself – Buy a term plan if you have dependents. Buy health insurance so that if you get serious health issues, the financial aspect is taken care of. Ensure that the health insurance cover is adequate. A cover of Rs.5,00,000 and more is good in normal circumstances.

Tax Planning – When you were employed, the employer used to deduct taxes and give you the Form 16. As a self-employed professional, you have to ensure that you file your returns and pay taxes as required. You can claim deduction for expenses pertaining to business and get some relief based on total revenue earned and GST.

Small Business Owners/ Professionals have many benefits but ensure that the financial plan takes care of uncertainties due to irregular income in the short-term and long-term.