It’s all about income
Planning is crucial to starting a business, writes Maya Fisher-French
Shaun is 21 years old and is studying towards a BCom in accounting science at Unisa. He has big plans.
While studying part time he has also started his own company, Vicsho Investment.
“I need advice on how I can manage both my personal finances and my company,” says Shaun, who adds that as his mother is funding his studies, he does not have a student loan or any other loans.
Shaun’s new business requires cash for operational expenses and for marketing his product.
“Currently, I have no income, but I do have expenses – to make business cards and to put up a website where my clients can get more information on the product,” says Shaun.
Derick Ferreira, head of product management at Old Mutual, says the most important step Shaun has already taken is to ask the right questions at the start.
What Shaun has to focus on right from the beginning is income – how to generate it, how to protect it and how to make it last.
YOUR PERSONAL FINANCES
“Seeing that Shaun is still studying, it is perhaps important to reflect on his greatest asset in life and its importance . . . his income-earning ability,” says Ferreira, who adds that once we start working, we need to protect that ability to earn an income.
During our working career we accumulate income and, in the final years of our life, we need to ensure we can sustain our income. “So any financial plan is about income,” says Ferreira.
If your starting salary was R15 000 a month and you worked for 35 years with a 6% salary increase each year, over 35 years you would have earned more than R20 million in income! That is the asset you need to protect.
Ferreira says the best way to protect this resource is to start with planning. Understand your income, expenses, goals, objectives and time frame, and get help from an adviser if you need to. Make those millions work for you.
“It all starts with a budget. This should be maintained with discipline and rewarded with compounded growth, which can only be achieved over time,” says Ferreira. He advises one should always maximise the tax benefit of saving through a retirement fund to have income to sustain you later in life.
While focusing on growing one’s income by investing it, you also need to protect it.
You can insure your income through disability and critical illness cover, and insure your finances against catastrophe. Also make sure you have a form of medical cover.
“Realistically, it will be difficult to start all of this at once, but that is why it is important to have a financial plan you review annually so that you can achieve your goals.”
Starting a business is one way to start signing your own pay cheque and generating your own income, but it can also threaten your future income if you take on too much debt.
Ferreira says Shaun should consider his personal financial obligation in terms of the business – how and where he would be personally liable for certain financial aspects.
In this case, Shaun has started an investment business and this comes with a host of regulations. In fact, the financial industry is one of the most regulated. Complying with these regulations comes with costs. Not complying is not an option as there are financial and legal consequences.
Shaun needs to make sure he fully understands his obligations and is fully registered with the regulatory bodies and has the necessary insurances in place. Again, this is all about Shaun protecting his income against unexpected events.
Ferreira says it is vital to ensure all debt and financial liabilities are fully insured as very few start-ups can stomach financial shocks and large expenses. Having credit insurance and insurance on assets is important.
BORROWING FOR A BUSINESS
The question Shaun faces right now is whether he should borrow money to cover the expenses of his start-up business. Shaun is in the privileged position of living at home and having his mother pay for his studies, so any income he generates can be put straight into the business.
First of all, as Shaun is not earning an income, it would be difficult for him to obtain a loan.
Rather than borrowing money, Shaun needs to find another way to generate income, even if it is packing boxes at his local supermarket or giving extra lessons in accountancy to school kids.
Money not borrowed is interest saved. His business would be in a far better financial position if he had no debt to repay.
Once the business has grown to a point where it is generating sufficient income and Shaun wants to expand, he could then consider a loan, as long as he is able to repay it without putting his business at risk.