Friday, November 20, 2020

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.

 

Monday, November 9, 2020

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?

Friday, November 6, 2020

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

Saturday, October 24, 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.

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