His new employer's share price kept rising with every funding round and so Mohan kept on counting his millions. Now, Mohan had to upgrade his lifestyle, since he was a millionaire! He bought a nice house, with an EMI of Rs 1 lakh and his household expenses started increasing with expensive clothes, watches, meals, and travel.
But one fine day, within a year of his joining, when he went to office, his employer told him that they were restructuring the business due to losses and investor pressure; and hence his position was made redundant. And that his last month's salary would be paid in installments over the next two to three months, since the company didn't have adequate funds!
Mohan was shocked, and didn't know how to react. He had upgraded his life so much that he was virtually living paycheck to paycheck. He had a good outstanding on his credit card, and had EMIs to pay.
Worried, he immediately started applying for jobs everywhere. But as with everything, when you want something, you don't get it. He just couldn't find even one employer who would even at least match his compensation, and would only get offers closer to his last compensation since companies out there valued his services only at about Rs 1.2 lakh per month.
But that wouldn't work for him, since his monthly EMI itself was 1 lakh, and then there were monthly expenses, and taxes. The more he waited to find the right job, the more debt he kept building on from his friends, family and of course credit card companies, where he alsostarted paying huge interest.
He tried to encash his ESOPs, but since the start-up's value had crashed, his options' value had reduced significantly, and moreover there were no buyers.
This story is not just about one Mohan, but many of them. But who is to blame here? Is it Mohan, who should have planned his finances well, OR the start-up that gave higher than industry average compensation to Mohan and influenced him indirectly to upgrade his lifestyle and then one fine day just fired him.
I think both are equally responsible.
Mohan should have been cautious with his finances. Following are three important things an individual should consider when planning finances:
1. As income increases, keep expenses under control and save the maximum. These savings will not only help in a worst-case situation, but over a period of time earn returns and will help grow the wealth.
2. Ensure you have adequate insurance coverage - life as well as mediclaim (for self and family).
3. Build a reserve fund that can fund your commitments (EMIs, expenses, contingencies, etc.), for six to 12 months. That will ensure you don't have to pick up another job under a lot of stress, compromising on your preference.
On the other hand, the start-up should have also planned its finances and resources very carefully.
Below are four things the start-up should have done:
1. Have a robust financial budgeting model, to plan your resources.
2. Implement the practice of reviewing detailed rolling cash flow forecasts for next 12 months, every week.
3. Don't go overboard in hiring talent at high cost. Stay within market norms. Remember, every rupee saved is a rupee earned, and that would normally translate to revenues of 10X.
4. Remember: Revenue is Vanity, Profit is Sanity and Cash is Reality. So conserve cash.
If there was caution prevailing from day one, it would have helped the start-up to conserve cash and survive much longer; and would have also not hampered Mohan's life so much.
The author is Managing Director, SuperCFO Services