Essential Personal Finance Steps Before Quitting Your Job to Start a Business
Dreaming of leaving your corporate job to launch your own venture? While passion and a solid business plan are crucial, financial preparation is equally important for survival during the challenging early years. According to investment advisers and successful entrepreneurs, meticulous personal finance planning can make the difference between success and premature failure.
Building Your Financial Runway
Before submitting your resignation, begin constructing a financial corpus that will cover household expenses until your business generates revenue. Start by calculating your monthly obligations including rent, school fees, insurance premiums, and other essentials. Then, estimate how long it might take for your new venture to start earning income.
"Whatever your initial timeline estimate is, double it in terms of both expenses and duration," advises Jugal Wadhwani, a Noida-based entrepreneur who launched his software-as-a-service company after leaving a steady job. Wadhwani initially anticipated six months to generate revenue but ended up waiting over a year for his first deal.
Financial experts recommend keeping this emergency fund in easily accessible instruments like money market funds, ultra-short duration mutual funds, or arbitrage funds. Only one to two months' worth should remain in savings accounts given today's low interest rates of 2.5% to 3%.
Establishing Safety Nets
Before relinquishing steady income, create multiple financial safety nets. N. Raghu Kumar, a Bengaluru-based SEBI-registered investment adviser who left his corporate banking job in 2020, recommends setting aside three distinct funds:
- Business capital for initial operations
- Three years of household expenses
- A separate emergency fund for unexpected situations
"Health insurance is mandatory," emphasizes Kumar. "One medical emergency could force you back into employment." Comprehensive coverage for yourself and family members provides crucial protection during the vulnerable startup phase.
Managing Spending and Lifestyle Changes
Entrepreneurs must prepare for significant lifestyle adjustments when transitioning from salaried employment. "Just be mentally prepared for delayed gratification," suggests Wadhwani, noting that extravagant spending and travel common among corporate employees become inadvisable when income becomes unpredictable.
Shirshendu Banerjee, founder of Delhi-based Soundboard Media, stresses balanced spending in business operations: "Don't get caught in this idea that the image needs to be bigger than the product. It falls through eventually." However, he cautions against being overly frugal where product quality matters, citing his investment in professional microphones for his podcasting business.
Navigating the Debt Equation
Ideally, settle personal loans and credit card debts before launching your venture. "One should not be coupling this with ten types of EMIs," warns Wadhwani. If unavoidable debt exists, include those payments in your monthly expense calculations.
For business financing, Raghu Kumar suggests considering loans only after spending substantial time in operations: "If an individual has spent about two years in the business, they would know if there is light in sight." Business loans should be calculated decisions based on revenue projections and repayment feasibility, not gut feelings.
Developing Contingency Plans
Every entrepreneur should have a Plan B. This might include returning to employment, developing side gigs, or pursuing alternative income streams. Banerjee, whose first business venture failed when larger competitors entered his market, now teaches podcasting and produces content for others alongside his main business.
"For every Chetan Bhagat, there are so many non-Bhagats," Banerjee reminds aspiring entrepreneurs, cautioning against being swayed by exceptional success stories without recognizing the statistical realities of entrepreneurship.
The Mental Transition
The journey from employee to entrepreneur requires significant psychological adjustment. "Everything that I thought about running a business turned out to be so different," reflects Wadhwani. Perseverance through moments of doubt becomes essential, with decisions needing to be driven by logic rather than emotion.
Raghu Kumar emphasizes the mindset shift required: "Your mindset will have to change from an employee to an entrepreneur." This includes recognizing when to invest in marketing and technology despite initial cost concerns, a lesson Kumar learned from his own experience of underinvesting early in his financial planning business.
Ultimately, quitting a job for entrepreneurship demands careful financial preparation, realistic expectations, and psychological readiness for the challenges ahead. By building adequate runways, establishing safety nets, managing spending wisely, and planning for contingencies, aspiring business owners can significantly improve their chances of navigating the difficult early years successfully.
