“I’ve got an excellent idea for a business but I have to pay off my debts. I can’t afford to pay other loan instalment.”
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I remembered that statement came from a young professional woman who attended my Financial Planning class last year. Her name was Andini (nickname), 27 years old and she worked at a local bank. She decided to attend the class because she was very keen to set up her own startup – an online accessories shop.
At that time, I recommended Andini to do self financial check up and she should not give up her dream to set up her own business. I believe there were still several options that she could do to start her business with the negative cash flow.
No matter how good your product and your service, your business plan isn’t complete without a financial forecast. Therefore you have to understand your financial condition first when you want to set up your own business particularly when you don’t have enough money to start.
Finally, she did a self-financial check up to review her financial condition. I will explain briefly several steps that we recommended to help her to reach her dream.
Checking Up Andini’s Financial Condition
I reviewed Andini’s financial condition by preparing a simple financial report of her cash flow statement to measure her cash inflows and outflows in order to show the net cash flow for a specific period of time.
Cash inflows generally include the salaries, interest from savings accounts, dividends from investments, capital gains from the sale of financial securities like stocks and bonds. Cash inflow can also include money received from the sale of assets like houses or cars. Essentially, cash inflow consists of anything that brings in money. Cash outflow represents all expenses, regardless of size. Cash outflows include rent or mortgage payments, utility bills, groceries, gasoline, entertainment (books, movie tickets, restaurant meals, etc.)
Purpose: The purpose of determining cash inflows and outflows is to find her net cash flow as the result of subtracting your outflow from your inflow. A positive net cash flow means that you earn more than you spend and that you have some money left over from that period. On the other hand, a negative net cash flow shows that you spend more money than you receive. Identifying her financial condition with this financial report is the first step to taking control of her money. It can be wacky if she knows that she does not spend her money wisely.
Below is Andini’s financial condition:
Cash Inflow :
Salary Rp. 15.000.000
Other Income –
Total Cash Inflow Rp. 15.000.000
Cash Outlflow :
Utility Rp. 2.500.000
Car Loan Rp. 3.000.000
Credit Card Installment Rp. 2.000.000
Fuel Rp. 1.000.000
Meals Rp. 3.000.000
Phone and Internet Rp. 500.000
Insurance Premium Rp. 1.000.000
Entertainment Rp. 2.000.000
Investment Rp. 1.000.000
Family Donation Rp. 1.000.000
Total Cash Outflow Rp. 17.000.000
Based on the above financial condition, I have already recommended her to implement following steps. You can apply them if you have similar condition.
1) Identify Income
Identify income from resources such as salary, investments and retirement are important in helping you to achieve financial goals. Be sure to include income from all of resources and to determine all money that she regularly receives, so that she can be realistic in keeping record of all money that she has to spend regularly.
2) Review Spending
Spending includes everything you spend your money on all of what you expense like utility bills, groceries, transportation costs, saving for emergency, debt payments, and life insurance premiums. Some of our expenses can be on a weekly or monthly basis. You can calculate monthly amounts of your annual expenses, simply by dividing 12 months from the total amount that you have to pay.
3) Get out of Debts
Debt is a part of life and can help you get an education, buy a car, own a home, or expand your business. When debt is managed well, it is enable you to improve your life and get things accomplished. But if debt is not managed well, it will hinder your progress rather than move you forward. When you have some extra money that can be found when you receive a bonus at work, consider using it to pay down your credit card or car loan. It will pay you big dividends in the future because it goes straight to paying down your principal balance.
4) Find Ways to Save
Pay yourself first is the easiest way to save money rather than spending it. Make sure that you never get a chance to spend the money in the first place. Since Andini has regular investment, she already set up an auto invest at her bank. If you are not a full time employee and can’t set up an automatic deposit for your regular paycheck, decide on a specific cash amount to manually deposit into a savings account each month and stick to this goal.
5) Build a Budget
If you have a budget that isn’t working from you, just start it over. If you haven’t really created a successful budget before, start with the basics: how much do you spend on bills every month? How much are you like to invest? How much would you like to save and spend? Once you’ve divided up your money into those basic categories, you have a pretty good foundation to build a more specific budget.
6) Get Help from Financial Planner
Find friend that learn Personal Financial Plan or check a certain financial planning services that you think suit on you. You may refer to set a Single Objective Financial Planning and Comprehensive Financial Planning.
7) Financial Review
Your annual financial review should revisit each of your priorities and your strategy for reaching them. If your conditions have changed, make adjustments as necessary. At least once a year, check your goal to meet your time frame, risk tolerance, needs, and preferences, and to perform any rebalancing that might be necessary in light of the past year’s market performance. You also need to take some time to look at specific investments and evaluate whether they continue to have a role in your portfolio. It’s important to match your investments to certain time frames or specific goals.
Along with consistencies and disciplines, you will pay all your debts off and you will have enough money to start it up. Always remember that the most passionate entrepreneurs are driven by more than just money. They’re driven by living a fulfilled life.