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1. Failing to Segregate Business & Personal Assets
The Companies Act 2013 states that the promoter and business are separate entities. However, most Indian promoters fail to see this divide as a clear line, which prevents them from creating a separate individual asset base.
Promoters have a tendency to think that business is good, income is good - and there is no need for active financial planning, money will always be available from their business when needed. This leads to a lot of financial stress for promoters if/when their business goes through a rough patch.
Promoters are often fully invested in their own businesses, and often do not segregate funds for foreseeable future expenses like children's education, ageing parents or their retirement. Even if funds are invested outside the business, they are usually stuck in immovable assets or shared family assets, which cannot be accessed quickly.
One must plan for a rainy day when business is good, this can significantly protect you, your business and your family if/when the business goes through a tough phase.
2. Ignoring Insurance
Every individual that has financial dependents on them needs a clean Term Insurance (no exceptions) - your insurance cover should be significant enough to meet your family’s needs in your absence.
As a business owner, always buy term insurance under the Married Women's Property Act (MWP) Act - this ensures that, in case of your death, your personal insurance money will be received only by your family and no creditors can stake any claim in it against any pending receivables.
Another prudent idea would be to buy a Keyman Insurance separately for your business - so that your business can cope up with any sudden shock that it might experience in your absence.
3. Insignificant Diversification
While business owners are great at creating buckets for their business funds, many of them do not have a clear asset allocation in place for their personal funds. Don’t put all your eggs in the same basket. Similarly don’t put all your money in one asset.
They are fully invested in their business, justifying that this would be the only way to grow - however taking a concentrated risk on their business can expose them to significant drawdowns if the business falters.
Promoters should diversify their personal wealth into different asset classes like debt, equity, real estate and gold. The goal of diversification is not to beat business returns, but only to mitigate risk.
4. Relying too Heavily on Illiquid Assets
A lot of business owners are over invested in real estate or land. These are often illiquid and cannot be sold quickly. Perhaps real estate has generated significant wealth for business owners in the past, but one cannot fall in love with an asset class. One must also have diversified holdings in debt, equity, and gold which can be liquidated quickly, if needed.
Money should be divided amongst asset categories in such a way that all asset classes do not have a downturn at the same time.
5. Not having a Cash Reserve
Business owners can always feel cash starved since their companies can be running capital intensive businesses. But it is imperative for business owners to build a cash corpus that can be used in emergencies or for sudden investment opportunities. A minimum of 5-10% of your assets should be in liquid assets. This can help you deal with any contingencies, without derailing the financial plan for your business or your family.
6. Failing to plan for Retirement
It’s not uncommon for business owners to assume they will never retire or they may see the business as the only retirement plan necessary. However this can be a mistake. No matter who you are, what you do, how much wealth you have, you need to create a Retirement Fund. Period. It is the only financial goal that is common to ALL individuals and planning it sooner than later gives you a chance to optimise your returns.
Set up regular automated payments to your retirement fund to accumulate enough money to fund your personal hopes and dreams. To some extent, it’s okay if this saving takes place in spurts; however, you should aim to set aside a certain amount each year.
7. Letting your In-house Accountant or Manager take money decisions
You have to ensure that the money you worked so hard to create, is invested correctly keeping in mind your risk, goals, taxation, and investment costs in mind. This is possible only if you have a qualified, professional, full time financial advisor guide you.
If you hire an in-house treasury manager, at least hold him accountable for performance - their pay can be partly tied to performance.
8. Putting all your money in Equity
Business Owners might regularly take risks in their business, which would have paid off handsomely. The same attitude might encourage them to take higher risks with their investments as well, but you must have some stability in your portfolio. One cannot have unchecked amount of risk in every asset they hold.
In fact business owners risk a lot in their business, and some portion of their money should be in stable asset classes like bonds and debt funds, that can help undertake downside protection. This safety net will also help you deal with the business stress and drawdowns better.
9. Not Having a Will or Estate Plan
Businessmen spend their entire life creating wealth, and a will/estate plan allows them to pass down this wealth in a manner of their choosing.
Regardless of age, business owners should meet with a qualified attorney and estate-planning specialist to ensure that their goals and wishes are properly accounted for, including plans for business assets.
10. Not Getting Help or DIY Financial Planning
As a business head who’s always short on time, personal financial planning can seem like a daunting/unimportant task, which makes most promoters delay it endlessly. Hiring a financial advisor might help you get on track and stay on track with your money.
Wasting too much time searching online or having lengthy discussions with friends and family, does not usually get you anywhere, you might end up ignoring the potential pitfalls in your plan. Get the assistance you need so you can spend the better part of your day looking after your business and family.
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