Financial Due Diligence Checklist

While investing in a business or a start-up, there is a due diligence process, which primarily has two parts, viz. Financial Due Diligence (FDD) and Legal Due Diligence (LDD).

Here's a basic checklist that we use during the Financial Due Diligence process as a preliminary list of requirements.

GENERAL INFORMATION

Business Presentation

Description / details on the following (if not covered in as much detail as part of Business Presentation mentioned above):

a. Detailed description of the business model of the Company including business verticals of the past and present and verticals that the Company plans to cater to in the near future post investment.

b. Revenue Streams (past, current and future revenue streams, include description of all revenue streams to be captured)

c. Areas of Focus – Target Customer types (include segmentation undertaken based on size, needs or other criteria)

d. Detailed description of the product offerings provided, including breakup of margin % earned on each product offered

e. provide a list of all existing and under development products and services & its versions, along-with timelines.

f. List of large / key customers (cumulatively accounting for at least 50% of current revenues) and their product usage patterns (over the past 12 months). If the Company is consumer / user based company, please provide details of user data (e.g. DAU, MAU, No of registered users, CAC, user churn etc)

g. List of Key Vendors and Partners and a brief on transactions with these parties

h. List of Competitors in India and globally

i. Description or copy of company's purchasing policy, credit policy

j. All surveys and market research reports, done by the company (For E.g. Weblinks of articles and press releases etc)

k. Key areas that the Company faces challenges in when running and growing the business and the action plan to address these.

BASIC REGISTRATION/OTHER SPECIFIC DOCUMENTS

Certificate of Incorporation, MOA and AOA.

Copy of PAN, TAN, Registration Certificates of VAT, Service Tax, GST, Excise, PF, ESIC, PT, Shop and Establishments for all premises used, IEC code, and any other registration certificate as applicable to the company

Descriptive list of all significant acquisitions, restructurings, reorganizations, spin-offs and other transactions (intercompany or otherwise) not in the ordinary course of business which have occurred in the Company history.

Copies of any letter rulings, non-privileged tax opinions obtained for all such transactions.

FINANCIAL STATEMENTS/REPORTS & MIS INFORMATION

Signed Audited Financial statements along with, annexures, notes to accounts, trial balance, audit reports, CARO report, cash flow statements and any other report that forms part of the annual financial statements for Target Company for the Historical Period (from Inception till last financial year for which audit has been completed).

Unaudited financials for that part of the Historical period where audit is not complete.

Accounting Data for the Historical Period that matches the audited and unaudited financials as provided above. (Tally Backup / Quickbooks login / Xero.com Login or any other accounting software used for the historical period)

Internal Audit Reports (if any)

Management letters issued by the auditors during the historical period

Transfer Pricing - Provide copy of Form 3CEB filed, Transfer Pricing Study Report, Inter-Company agreements, Arm’s Length Pricing workings, if any.

MIS prepared, key KPI's for the Historical Period. (Customer Acquisition cost, Life Time Value, Product wise bifurcation, No of bookings and customers, Average cost etc). Where for any reason MIS and financial accounting data do not match, please provide reconciliation statements.

Co-Founder Selection Questions

A number of co-founders visit us regularly, asking for a company to be incorporated as they have a shared passion for a novel business idea, commercializing a pet project, or the will to use their spare time to start a side stream of income.

A number of times though, we've seen such partnerships not go through beyond a year or two due to rising cultural or ambition related differences between the two.

The importance of Term Sheets and Co-Founder Agreements notwithstanding, it's important that the two founders come on the same page in spirit for the benefit of the business.

Based on our experience, here are a few things that you must discuss with your co-founder when you think you've found the one.

1. Skills

a) List down your skills, achievements, and study each other's sincerely drafted work CVs

b) List out respective areas of strength - areas where you complement and/or differ from each other

c) Divide functions between yourselves in a way that you know how your functions are inter-connected, but who shall be in-charge of which function.

d) Answer to yourselves about if you genuinely feel your co-founder is amazing and you're excited to be working with them.

e) Do they like to do tasks that you dislike and vice-versa? Do they make up for your weaknesses?

2. Entrepreneurial Experience

a) Whether they have founded any venture in the past?

b) Have they been a part of an early team within an entrepreneurial venture that belonged to them or to someone else?

c) What happened of that venture? What is the sense of ownership that they have towards that venture and its results (success or failure, both)?

d) Are your independently made business plans with financial figures and timelines in sync? Can you both agree on a mutual philosophy and decide on one plan?

New FoSCoS Portal for FSSAI Registration

The Food Safety and Standards Authority of India (FSSAI) has launched Food Safety Compliance System (FoSCoS) to be applicable across India with effect from 01-Nov-2020. The portal can be accessed at http://foscos.fssai.gov.in.

It replaces the existing Food Licensing & Registration System (FLRS) which was accessible at http://foodlicensing.fssai.gov.in.

Users of the FLRS may use their existing credentials to log in to the FoSCoS portal.

User Manuals and Video Tutorials on the portal can be accessed here: https://foscos.fssai.gov.in/user-manual. 

Reference

FSSAI Order No. 15(31)2020/FoSCoS/FSSAI dated 12th October 2020

Due Date Extension: GST and Income Tax

Due Date: 31-Dec-2020

GST Annual Return & Audit (GSTR 9 & 9C) for FY 2018-19

Income Tax Returns where accounts are not required to be audited

Tax Audit Report (Form 3CA, 3CB, 3CD, 3CEB, etc) for FY 2019-20

Due Date: 31-Jan-2021

Income Tax Return where accounts are to be audited for FY 2019-20

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Source: Announced by the CBDT and CBIC through Press Releases today. Notifications to follow.

Performance Metrics for Start Ups

If you run a tech startup, we bet you understand the importance of data and a constant monitoring of your performance across finance and operations with the right metrics.

While working with start-ups, these are the few metrics we use to evaluate financial performance, efficiency in operations and other essentials which investors would love to see during the next investment round.

Here is a quick summary of a few such numbers that you must track as part of your Weekly and Monthly MIS.

Profitability Ratios
Gross Margin	Net Sales - Cost of Goods Sold (COGS)
Operating Margin	Net Sales - COGS - All other expenses excluding interest and taxes = Earnings Before Interest & Taxes (EBIT)
EBITDA Margin	Earnings Before Interest, Tax, Depreciation & Amortization (EBITDA)
Net Profit Margin	EBIT - Interest - Taxes = Profit After Tax (PAT) as a percentage of Revenue
Operating Cash Flow Margin	Net Income + Depreciation + Change in Working Capital
Return on Equity	Net Income / Shareholder's Equity
Return on Assets	Net Income / Total Assets
Working Capital Ratios
Working Capital	Current Assets (incl. Stocks, Debtors, Bank) - Current Liabilities (incl. Payables)
Current Ratio	Current Assets / Current Liabilities
Cash Ratio	Cash & Cash Equivalents / Current Liabilities
Quick Ratio	(Current Assets - Inventory) / Current Liabilities
Efficiency Ratios
Receivable Turnover Ratio	Net Sales / Avg. Debtors [where Avg. Debtors means (Opening Debtors + Closing Debtors)/2]
Asset Turnover Ratio	Net Sales / Total Assets
Fixed Assets Turnover Ratio	Net Sales / Total Fixed Assets
Inventory Ratios
Inventory	Raw Material + Work in Progress + Finished Goods
Inventory Turnover Ratio	Cost of Goods Sold / Avg. Inventory [where Avg. Inventory means (Opening Stock + Closing Stock)/2]
Days Inventory Outstanding	365 / Inventory Turnover Ratio
Cost of Goods Sold	Opening Inventory + Purchases + Direct Costs - Closing Inventory
Carrying Cost	Rent for Warehouse Space + Interest on Working Capital blocked on Unsold Inventory
Economic Order Quantity	√[(2 x Order Cost per Order x Annual Demand) / Annual Carrying Cost per unit]
Safety Stock	(Max Daily Usage x Max Lead Time in days) - (Avg. Daily Usage - Avg. Lead Time in days)
Reorder Level	Lead Time Demand + Safety Stock
Inventory Ageing	Value and Category of Items lying unsold based on length of time
Financial Leverage Ratios
Debt to Equity Ratio	Total Debt / Total Assets
Equity Multiplier	Total Assets / Total Total Equity
Interest Earned Ratio	EBIT / Interest Expenses
Cash Coverage Ratio	EBITDA / Interest Expense
Altman Z-Score	Read here
E-Commerce Metrics
Average Order Value (AOV)	Total Revenue from Orders / No. of Orders placed in a period
Avg. Revenue per User	Revenue / No. of Active Users per Month
Avg. Revenue per Visitor	Revenue / No. of Visitors
Revenue by Product Line	Revenues for each line of product or services
Sales Conversion Rate	Total No. of Sales / Total No. of Sessions on the Store
Cost per Visitor	Total Marketing Costs / Total Visitors
Contribution Margin per Order/Customer	(Revenue - Direct Variable Costs) / No. of Orders
Contribution Margin After Marketing (CMAM)	(Revenue - Direct Variable Costs - Marketing Expense) / No. of Orders
Refund & Return Rate	Sales Return & Refunds / Total Sales
Cost of Returns	Direct Costs incurred on Sales Returns
Monthly Unique Visitors (MUV)	Sum of all visitors from all channels on a website or app in a month
Customer Conversion Rate	No. of Signups per Month / MUV per Month
Shopping Cart Abandonment Rate	No. of People Leaving with Unpurchased Items in Cart / Total Users Adding to Cart
Checkout Abandonment Rate	No. of People Leaving During Checkout without Purchase
Customer Acquisition Cost (CAC)	Marketing Cost / No. of New Customers
Conversion Rate	Net Sales / Avg. DAU or MAU
Lifetime Value (LTV)	CMAM / Churn Rate
LTV / CAC Ratio	(CMAM / Churn Rate) / (Marketing Expense / No. of New Customers)
Payback Period	CAC / CMAM
Customer Retention Rate	Renewing Customers / Total Old Customers
Repeat Customer Rate	Customers Making Multiple Purchases / Total Customers
Cost & Revenue per Campaign	Revenues and Costs attributable to a particular Marketing Campaign
Other Tech Startup Metrics
Daily/Monthly Active Users	Avg. No. of Users per Day (DAU) or per Month (MAU)
Bounce Rate	No. of Visitors who went back inactive / No. of Visitors
Monthly Recurring Revenue (MRR)	Sum of all revenues that automatically renews on a monthly basis
Annualized Run Rate	MRR x 12
Annually Recurring Revenue	(Annual Subscription Price x No. of Subscribers x Renewal Rate) adjusted for growth
Revenue Multiples	No. of Orders x Avg. Price per Order x New Subscribers
Growth Multiples	Avg. Daily New Subscribers x Avg. Daily Revenues
Revenue per Employee	Net Revenue / Avg. No. of Employees
Churn Rate	No. of Lost Customers / Total Customers
Burn Rate	Avg. Amount of Cash lost per Month
Viral Coefficient	No. of Existing Customers x No. of Invitations sent per Customer x Conversion Rate / No. of Existing Customers
Impressions	No. of Times your Ad is presented to someone
Reach	Total No. of followers or subscribers
Engagement	Reach / Impressions
Click Through Rate (CTR)	No. of Subscribers clicking on the Content sent via Email or otherwise
Organic Acquisition Traffic	Customers Acquired per period without paying for advertisement