Thursday, October 15, 2020

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



Wednesday, October 14, 2020

Altman Z-Score: Financial Strength Test in Your MIS

The pandemic has brought many businesses to its knees, which now have an even higher amount of debt, continuing fixed costs, and lower contribution margins owing to sub-par sales figures.

Such times bring about the need for greater discipline in financial management. At this juncture, we recommend businesses to use the following test to track its credit strength and financial performance over the next few months, to ensure that it's on the path to recovery.

Objective of the Altman Z-Score

1. Predicting Bankruptcy: The Z-score is a value derived by running a test of credit strength on a business. The formula is used to predict the probability of an entity going into bankruptcy within two years.

2. MIS Reporting: Companies may use the formula to check their financial health by using simple values as taken from their profit & loss statements and balance sheet, computed as part of its MIS report. The score takes into account profitability, leverage, liquidity, solvency and activity of the enterprise.

3. Investment Decisions: Consider purchasing a stock if its Z-Score value is near 3, and consider selling if the value is closer to 1.8.

4. Economic Analysis: Prof. Altman had calculated that the median Z-score of manufacturing companies in the US in 2007 was 1.81. Such companies had a credit rating of B, mostly. This indicated that 50% of the firms should have had lower ratings, were highly distressed and had a high probability of becoming bankrupt. These calculations led him to believe a crisis would occur due to corporate defaults, which trickled in during 2009.

Calculation Formula

Where
A = Working Capital / Total Assets
B = Retained Earnings / Total Assets
C = Earnings Before Interest & Tax (EBIT) / Total Assets
D = Book (or Market) Value of Equity / Total Liabilities
E = Sales / Total Assets

For Privately Held Manufacturers: Z = 0.72A + 0.84B + 3.107C + 0.42D + 1.0E

For Publicly Traded Manufacturers: Z = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

For Non Manufacturers: Z = 6.56A + 3.26B + 6.72C + 1.05D

For Emerging Markets: Z = 3.25 + 6.56A + 3.26B + 6.72C + 1.05D
 
Evaluation

Private Manufacturing Companies:
Score                        Meaning
Below 1.23               Distress Zone - heading towards bankruptcy
1.23 to 2.9                Grey Zone - focus should be on improvement
Above 2.9                Safe Zone - good financial health

Public Manufacturing Companies:
Score                        Meaning
Below 1.8                 Distress Zone - heading towards bankruptcy
1.8 to 3                     Grey Zone - focus should be on improvement
Above 3                    Safe Zone - good financial health

Private Non Manufacturing Companies:
Score                        Meaning
Below 1.1                Distress Zone - heading towards bankruptcy
1.1 to 2.6                 Grey Zone - focus should be on improvement
Above 2.6               Safe Zone - good financial health

Calculation Sheet for Your MIS

Saturday, October 10, 2020

GST ITC Reconciliation with GSTR-2A

Necessity of GSTR-2A Reco from Feb to Aug 2020

Rule 36(4) of the CGST Rules allows for ITC to be availed up to maximum of 110% of amount appearing in GSTR-2A at the time of filing of GSTR-3B.

Among the pandemic linked compliance relief measures announced by the government, one under GST laws was announced vide notification No. 30/2020-CT dated 03-Apr-2020, by which the rule of 110% of ITC appearing in GSTR-2A was to be looked at cumulatively for the tax periods from Feb 2020 to Aug 2020, finally adjusted in the GSTR-3B for September, 2020.

Accordingly, all tax payers are advised to ascertain the details of invoices uploaded by their suppliers under Section 37(1) of the CGST Act for the periods from Feb to Aug till the due date of filing Form GSTR-1 for September 2020 as reflected in GSTR-2A.

Tuesday, September 29, 2020

Detailed Guide on E-Invoicing under GST (w.e.f. 01-Oct-2020)

The E-invoicing System under the provisions of the GST law relate to generation of a digital invoice on a portal as provided for such purpose by the GST Department.

Such invoices reported on the portal will automatically reflect for approval on GSTR-1 as well as E-Way Bill portals.

Applicability Threshold

Turnover Threshold: Generation of e-invoices and application of QR codes is mandatory for all businesses with annual  aggregate turnover (based on single PAN) of Rs. 500 crore or more (in any preceding FY from 2017-18 and onwards), with effect from 01-Oct-2020.

B2B & Exports: Such e-invoicing is required for B2B invoices and not for B2C invoices where the recipient is an unregistered person. Further, such e-invoices are also mandatory for exports, zero rated supplies, deemed exports, debit and credit notes for registered recipients.

Exempt Suppliers: Further, SEZ units, insurers, banks, NBFCs, GTAs, suppliers of passenger transport service, and suppliers of services by way of admission to exhibition of cinematograph films in multiplex screens have also been exempted from generating e-invoice.

Voluntary or Customer Mandated: For a few other businesses that do not meet this turnover criteria, customers may still mandate or stress on providing of e-invoices from their vendors to ensure that they do not lose out on input tax credit (ITC) in case the vendor makes any error in filing its GSTR-1. It is possible that currently, to manage traffic, the e-invoicing portal may have certain restrictions around voluntary generation of e-invoices.

Changes in Corporate Social Responsibility (CSR) Provisions

The Companies (Amendment) Act 2020 will be coming into effect now, with a primary purpose to decriminalize various offences. However, the following amendments have been brought about with respect to Corporate Social Responsibility requirements from companies.

Applicability of CSR Provisions

CSR provisions as specified under Section 135 of the Companies Act, 2013 are applicable on companies which satisfy any of the following criteria:

(a) Net worth of Rs. 500 crore or more;
(b) Annual Turnover of Rs. 1000 crore or more;
(c) Net Profit of Rs. 5 crore or more.

Such companies are required to spend at least 2% of their average net profit for the immediately preceding 3 financial years on CSR activities as directed and deliberated by a duly constituted CSR Committee as per an officially formulated and published CSR Policy.

There are no changes in the applicability provisions.

Relaxation from Formation of CSR Committee

It has now been proposed not to constitute CSR Committee in case the amount required to be spent under CSR does not exceed Rs. 50 lakh.

However, this does not absolve the company from its requirement to discharge CSR liability.

Setting off Excess Payment under CSR in Future Years

The Act now allows CSR applicant companies which have spent an amount in excess of the requirement of the Act to set off such excess amount out of their obligation in the succeeding financial years in such manner as may be provided by the rules.

Penalty for Non Compliance

Non compliance of CSR provisions may invite penalty of twice the amount required to be transferred by the company to the Unspent CSR account or Rs. 1 crore, whichever is less.

In addition, every officer shall also be liable to pay a penalty of 1/10th of the amount required to be transferred in Unspent CSR Account or Rs. 2 lakh, whichever is less.