A Guide to Financial Planning for HR Consultancy Owners with Uncertain Cash Flows

I have uncertain inflows – how should I invest?

Money may not be the end in itself, but for most, it is a means to achieve many necessities as well as aspirations. Therefore it becomes important how an individual plans to use his/her hard earned money. More so when the inflows are not necessarily streamlined and consistent like that of an employee. When your personal income is linked to the performance of your firm, a well thought out plan could be all the difference between financial stability or having to make huge compromises.

Being a HR firm owner can have its ups and downs. By following certain simple financial planning steps, you can have some peace of mind with regards to your personal financial situation even though you may not have a steady income:

1. Contingency Fund: This is a basic yet most critical part of any financial planning for a self employed individual. You never know when your next pay check may come. So it pays to prepare for the worst. Thumb rule has always been 3-6 months worth of household expenses to be kept aside in highly liquid assets as an Emergency Fund. Yet we feel that when it comes to a owner/manager, it should be at least 6-9 months worth of basic expenses!  A handy tip, do not forget to count any committed payments such as EMIs and any insurance premiums when calculating the corpus. 

2. Risk Planning: or in lay man terms, Insurance Planning. This could be a considered an extension of contingency planning, but for very specific events. Following are the types of insurance policies one must always have at all times: 

• Term Life Insurance Plan: The plain vanilla term plan is exactly the only kind of life insurance anyone should purchase. Handy tip, to know the amount of cover you might need, start with at least 15 times your annual revenue/income. Don’t forget, insurance should never be mistaken for an investment!

• Individual Health Insurance: If nothing else, an individual health cover to at least cover your own standard hospitalization expenses is a must. Financial independence means you should be able to fend for yourself at the very least, even if it paying for your own recovery. 

• Critical Illness Policy: Contracting a serious illness or undergoing a major surgery would mean a drag on your finances as well as a dent on income. Such financial risks can be mitigated by procuring a critical illness policy. Such policies usually provide for a lump sum payment to tide over the finances needed, in case of being diagnosed with a critical illness.

• Personal Accident Policy: Another source of financial risk associated with most professionals is loss of income/job due to an accident. Similar to a Critical Illness Policy, this policy provides a supplement alternative income for certain weeks of disability depending on the terms of the policy. This can be used to either pay off medical expenses or help in taking care of household expenses during the recovery period.

While more types of insurances are available, it is essential that this set is acquired first. Having your Contingency funds and Risk Planning in place makes a strong base for you to venture into the world of investments.

3. Planning for Retirement: Retirement, or as financial advisors put it, Financial Freedom, is something we all aspire for. The dream of not working for the sake of survival is a goal we all work towards. Yet having an uncertain income can make such a dream feel a little distant more often than not. And while retirement always seem likes a far off goal in comparison to what seem like more pressing concerns, it should ALWAYS be top priority! Underestimating your retirement financial needs can be the one of the biggest mistakes you could make and more often than not, people realize it far too late to make any significant course corrections. Even if you have to start with small amounts, it is the consistency and discipline that will ultimately help you reach your goal.

4. Financial Goal Planning: Only after the first three steps are in place, is when you should really consider planning for the rest of the commitments/aspirations that you might have. As with any goal planning, the two critical aspects to consider are time horizon and future value of the goal, not current value. If you get these two right, the rest becomes clear.

For any individual with uncertain income flows, planning can become easier if you can channelize your savings, prioritizing in the above order! It is essentially in this area where the difference between financial planning for an owner of a firm/business versus that for an employed individual lies.

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How effective Treasury Management can ensure stability for HR Consultancy firms

As the owner and /or CEO of your HR Consultancy firm, cash flow management is a constant topic of discussions with the finance and accounts team.

What do with the excess cash in hand? Where should it be deployed so that it works a little bit more and grows whilst being highly liquid and safe? How does one ensure that enough reserves are maintained to fund working capital expenses during the low business cycles?

What makes cashflow management critical is that it helps the firm maintain the business flow and also balance better returns for idle money. This in turn goes a long way in ensuring operational functioning and continuity. The question is how is this achieved?

First things first, when you talk about treasury management, you are indirectly referring to constant flow of money in very short time periods. And as most boutique/SME’s face volatile business turnovers, money can be required on priority basis at any point. Hence the priority in Treasury Management primarily lies in ensuring liquidity and safety of capital invested rather than high returns.

Secondly, while significant growth in short term investments should not be expected; it should not necessarily be considered that there are no better options other than the company current account. While Fixed Deposits and Recurring Deposits have been traditional avenues for company owners to park extra monies, they remain inefficient from a taxation perspective. Tax Deducted at Source (TDS) is a definite thorn as tax incidence is occurring even though there are no capital gains received in hand.  Furthermore, falling interest rate scenarios are making them an even less attractive option.

An alternative that should be considered is liquid/ultra short Term/ short term debt mutual funds. Two aspects they score over traditional avenues is (A) they usually do not have any exit penalties  as compared to bank FDs and (B) they are more tax efficient due to tax deferment, as tax incidence only occurs at the time of realised capital gains at the hands of the investor, and they are eligible for indexation benefits as gains from any debt mutual fund investment held for 3 years or longer are taxed at 20% after indexation, thereby improving post tax returns.

In addition, often companies decide to park certain monies with a longer term view. This could be to prepare for possible expansion/acquisition as envisaged in their business plans. But as the requirement of funds is not in the immediate future, short term investment options might not work out in the best interest. Hence separate planning should be considered for such investment purposes.

Last but not least, understanding past company cashflows and extrapolating the data to approximate future cashflows is essential to determine the kind of investment strategy would be ideal. This analysis, while including business growth projections, should also include current liability repayments and expected abnormal gains in the future.

While managing cashflows will indeed be a constant objective, through efficient planning and proper advisory it need not become a source of constant headaches.

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Why Risk Management is critical for HR Consultancy firms!!

Insurance is still a highly misunderstood concept in India. People often look at insurance plans as an investment option. Yet the golden rule of insurance is that it should always be separated from your investments. For a HR Consultancy Owner, a combination of various types of insurance policies can insulate the business as well as themselves and their family from potential risks. Insurance policies such as:

• Vanilla Term Life Insurance: This is a primary insurance that one should procure for pure life cover. The sole objective of such a policy is to ensure continued financial stability for your family in the eventuality of your sudden demise.
• An Individual/Family Health Insurance: This type of policy is meant to cover for standard hospitalization expenses in case of an illness. Depending on the requirements, such policies can cover just a single individual to a family of four and even more.

However, one must now look beyond these basic necessities. Someone who is constantly on the move and if he/she is the sole bread earner of the family needs to have other risks covered. Risks such as:

• Critical Illness Policy: Contracting a serious illness or undergoing a major surgery would mean a drag on your finances as well as a dent on income. This phase of “no cash inflow” could be extended if recovery periods take longer than expected due to a serious illness. As such a substitute income source has to be provided for such situations, either to pay, at least partially, for basic household expenses or fund the significant expenses that are part of any big medical procedure. Such financial risks can be mitigated by procuring a critical illness policy. Such policies usually provide for a lumpsum payment to tide over the finances needed in case of being diagnosed with a critical illness.
• Personal Accident Policy: Another source of risks associated with most professionals is loss of income/job due to an accident. In such cases, temporary or permanent disability caused due to any accident can force the individual to stop or totally cease his work. On top of that the costs related to recovery are usually on the higher side. Hence, similar to a Critical Illness Policy, this policy provides a supplement alternative income for certain weeks of disability depending on the terms of the policy which can be used to either pay off medical expenses or help in taking care of household expenses.

But insurance should not have to be curtailed to insure just the individual. Founders of HR consultancy firms are usually the most valued personnel in the organization. After all, they are ones that drive the image and the growth of the firm forward, eventually becoming indispensable to the firm. The firm therefore must look to protect itself from possible fall in revenue/image from unforeseen events related to such individuals. Policies such as:

• Keyman Insurance Policy: this is a policy that a firm takes for a key employee such as the CEO/Founder, through whom a lot of business is generated. Losing such a valuable individual due to his/her demise can lead to significant financial loss. Hence in addition to being tax efficient from the company standpoint, such a policy also helps the firm deal with such loss in case of an unfortunate event.
•  Directors and Officers Liability Policy: This is a little more unconventional type of a policy. It is specifically applicable only when to provide cover for the personal liability of Directors arising due to mistaken actions carried out by directors in pursuance of their managerial duties. Such policies covers paying for legal costs incurred while defending the individual director in a court of law. Such policies provide protection for claims brought against directors and officers for actual or alleged breach of duty.

A combination of such policies may be crucial for HR Consultancy Firm owners to cover risks. Uncertainties are the only certainty in life. And while you can never rule them out completely, you can soften the hardships that come with such hard times if you have the necessary insurances in place. In the end, that is the singular function of any Risk Management Plan.

 

 

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Why HR Consultancy Owners should plan their finances!

Money may not be the end in itself, but for most, it is a means to achieve many necessities as well as aspirations. From striving to improve one’s lifestyle to providing for your family and their requirements, money forms a critical element to ensure such objectives are met. Therefore it becomes important how an individual plans to use his/her hard earned money; More so when the inflows are not necessarily streamlined and consistent like that of any regular employee.

Being the owner/ partner of an HR Consultancy firm can bring about such financial challenges. Challenges such as:

• Separating Personal and Business Finances/Assets: Like any SME industry, HR Consultancy firm owners/partners often have their personal and business finances completely intertwined. Usually the business demands all the attention and inputs, often forcing the owner to align and every sacrifice to a certain extent on the personal financial needs. This often leads to personal assets being exposed to business risks. Professional advice can go a long way in separating both sides while ensuring requirements for both are met.
• Treasury Management: In the cut throat environment of HR Consultancy, business can have highly volatile periods resulting in fluctuating cash flows. The owner/partner generally does not have the time or expertise to better handle his company’s liquidity requirements or the expertise. A professional view might help you better manage such difficulties.
• Contingency Planning: With complete commitment to business requirements, owners/partners often forget to provision for personal emergencies. This more often than not results in these individuals turning to overdraft facilities and/or soft loans from members of close circles. Also, people consider their Bank Savings Account as an avenue that fulfils this purpose. While it does check on the liquidity parameter, it falls short on possible returns and taxation. A suitable alternative could be Liquid Mutual Funds. They provide the same liquidity, but also provide superior returns. And lastly, if these funds are held for 3 years or more, they are given preferential tax treatments due to indexation.
• Risk Planning: for very specific events, or in lay man term, Insurance Planning. Following are the types of insurance policies one must always have at all times:

• Term Life Insurance Plan: the plain vanilla term plan is exactly the only kind of life insurance anyone should purchase. Handy tip, to know the amount of cover you might need, start with at least 15 times your annual revenue/income. Don’t forget, insurance should never be mistaken for an investment!
• Individual Health Insurance: if nothing else, an individual health cover to at least cover your own standard hospitalization expenses is a must. Financial independence means you should be able to fend for yourself at the very least, even if it paying for your own recovery.

While more types of insurances, it is essential that this set is acquired first. Having your Contingency funds and Risk Planning in place makes a strong base for you to venture into the world of financial planning and investments.

• Planning for Retirement: Retirement, or as financial advisors put it, Financial Freedom, is something we all aspire for. The dream of not working for the sake of survival is a goal we all work towards. Yet having an uncertain income can make such a dream feel a little distant more often than not. And while retirement always seem likes a far off goal in comparison to what seem like more pressing concerns, it should ALWAYS be top priority! Underestimating your retirement’s financial needs can be the one of the biggest mistakes you could make and more often than not, people realise it far too late to make any significant course corrections. Even if you have to start with small amounts, it is the consistency and discipline that will ultimately help you reach your goal.
• Financial Goal Planning: With the pressure of handling both a business as well as personal priorities, identifying/planning/prioritizing for certain personal duties sometimes takes a back seat. It is in such moments that Financial Planning through a professional can make significant difference in how to navigate through such critical decisions.

For the owner/partner with volatile income, planning can become easier if you can channelize your savings in to the above mentioned order. Prioritizing can make all the difference! It is essentially in this area where the difference between financial planning for a self employed individual versus that for an employed individual lies.

 

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