A businessman needs an Independent Financial Adviser (IFA)!
When I see young men and women start a business on their own, I ask them for details of their team. Not many of them mention an IFA, even if they are investing in mutual funds. I know why. The IFA is more of a form-filler than a real, holistic, full-view-holding financial adviser as some of us think they should be. She is an independent financial adviser/ registered investment adviser, who will help you with your financial goals, asset allocation, risk anticipation, etc.
As a businessman, many of your decisions — from which form of organisation to start with (sole proprietorship, partnership, limited company) to how much salary to take — is not something that you can handle alone. You need a team and one very important person in the team is an IFA who can stand up to you. Let me give you an example.
This guy aged about 32 (married to a 30-year-old) was quitting his job and starting a business. Of course, he had no IFA, but his father (a retired insurance professional) was handling his finances. No, it was not handled too badly, but it had many components missing.
When you are 32 and have zero business experience, you also have no experience in handling medical insurance, term insurance, credit card debt. And hey, his FATHER was USELESS in all these matters.
1) You actually do not know what one illness can do to your business! If your parent ran up a `10 lakh medical bill, your business will suffer. Removing money from the working capital of a fledgling business is not the smartest thing to do. Borrowing to pay medical bills is also stupid; it means you did not have enough (or appropriate) medical insurance.
2) You do not take a salary for whatever reasons, and this puts stress on the house cash flow. It also means that all your other goals take a back seat, and this can cause stress in family life.
3) If you are a 27-year-old female with RICH parental support and your business partner is a 43-year-old male with a wife and two kids, OBVIOUSLY, your financial requirements will be different. It takes an IFA to plan your cash flow.
4) If you’ve never done budgeting, cash flow management or debtor monitoring, you will need a chartered accountant to be doing that in your business. You will need an IFA teaching you how to do the same things in your personal life.
5) Planning salaries, taxation and office administration is boring enough. Will you find the time and inclination to manage your own personal finances, especially if your business is growing at a fabulous pace?
6) I remember setting up a term insurance plan and a pension plan for a law firm. The younger partners wanted the term insurance plan in place and the older partners wanted the pension plan in place. Believe me, it is complicated. As a young entrepreneur, you will not do it. You will keep postponing it, and suffer the consequences.
7) If you have always handled a salary, welcome to the world of earnings volatility. It is not easy to manage the cash flow of an entrepreneur. So, an IFA will suddenly be talking to you about the virtues of a liquid fund, an ultra-short bond fund, a pension plan — things you may not know.
8) If you think you can figure it out on the internet, welcome to mumbo jumbo. “Why indexing is great for you” and “Indexing does not work in India” are two articles you will find on this very blog! How are you going to handle all this? Similar is the story in personal taxation, medical insurance, cash-flow management. Phew! Please concentrate on your business.
9) Forcing you to diversify your portfolio is also important. You will tend to ignore important aspects of your personal finance because you are “busy”. Making a will for example will take a back seat.
( PV subramanyam writes at www.subramoney.com and has authored the best seller ‘Retire Rich - Invest C 40 a day’ )