All successful businesses (globally), have a strong finance function, and that differentiates the best from the others. Here are 5 quick tips to managing and building a good business, utilizing some of the best practices in financial management.

Let’s understand what these clauses are, and how you could possibly negotiate the same, to make it a win-win proposition.

  1. 3 Year Business Plan
    A business plan is not just a document to show to the investors, but is an extremely important working document for the business owners to set targets, and track performance; with an aim to maximize returns to all stakeholders. A good financial budget will include the following:
    1. Detailed Business Assumptions (as many as you can)
    2. Comprehensive workings, supported with backup for revenue and key cost line items and
    3. Linked monthly, quarterly and annual – Profit & Loss and Balance Sheet
  2. 52 Weeks Rolling CashFlow Forecasting
    While it may sound difficult at first instance, but in reality it it is not. Look at your historical cashflow and you will definitely find a pattern. Also, you will note that many payments are infact quite structured and occur only around certain days/dates. With a disciplined approach to maintaining and reviewing a detailed cashflow forecast, you would be able to give clear visbility to your team (with respect to collection targets), your vendors (with respect to payment cycles) and to yourself (for e.g. as to when you need to raise that external debt or infuse equity, or make plans for investing surplus funds).
  3. Detailed Product/Services Costing
    When was the last time you carried out a detailed exercise to assess exact cost of the product you are selling (or services you are offering)? Not just a high level estimate, but detailed calculations. Raw Material and Manpower costs are constantly changing (infact increasing) and therefore it is very important for businesses to undertake a detailed product/services costing exercise, atleast once in 6 months.
  4. Tracking Client & Product Profitability
    It is very important to ensure you know how much profit (and not just revenue) are you generating from your various clients and from your various product & service offerings. Only if you have a good insight into this aspect, will you be able to take corrective steps, wherever required to drive your organization to profit maximization. Therefore make it a practice to include this report in your monthly MIS pack.
  5. Implementing Cost Controls
    Sometimes when the organization is growing at a rapid pace, the focus is primarily on revenue and during these times the company begins incurring expenses that could be avoided or minimized. Implementing strong procurement policy, undertake random checks, incentivize your finance team to keep a close watch on costs and most importantly, run detailed analytics and MIS reports to ensure you are checking all costs in your business.

It is fairly common for investors to ask for Liquidation Preference rights. However, as an entrepreneur, you need to be very careful about these and negotiate them well, keeping long term implications in mind.

Let’s understand what these clauses are, and how you could possibly negotiate the same, to make it a win-win proposition.

Liquidation Preference Clause
So, what does this clause mean?
If we simplify the jargons, it means that the investor is first paid (either 1x or sometimes 2x their investment amount –subject to negotiations), before paying the others, at the time of a liquidity event.

Let us understand the mechanics through an example
If a company is sold for $100 million and the Investor had put in $10 million for a 25% stake, a 2x participating liquidation preference deal will fetch them $40 million—which is two times the investment plus 25% of the remaining $80 million. The existing investors would receive $ 60 million.

This is a good clause to protect the investor and assures them of the return. But it could work disproportionately in the favour of the investor, in case the company achieves significant exit value, wherein it is primarily due to the efforts of the entrepreneur / founder.

What I would therefore suggest to entrepreneurs/founders is to agree a target return amount and basis the same negotiate a full catch-up clause once the investor has achieved their return.

Let’s understand this with an example Assume that the exit is happening after 4 years. Therefore, the investor is entitled to receive the first $20 million on exit ($10 million of original investment and 25% x 4 years, i.e. 100% or another $10 mn for the target return). Thereafter, the existing investors would get full catch-up. So, for a 25% equity stake, if the investor has received $20 million, the existing investors would receive thereafter $60 million (20mn / 25% x 75%). Thereafter, from the balance $ 20 million, everyone receives distribution in the ratio of their shareholding. Effectively, the investor would take home $25 million and the existing shareholders $ 75 million.

Therefore, from a founder’s perspective, they would retain $ 15 million more, on the transaction. And hence this becomes a million dollar advise!!!

You may need financing for seed capital or to expand your business into new markets.
Whatever your reason maybe to raise funds, you have got to do it right.
Apart from the obvious monetary benefits, raising funds have many other advantages that prove valuable to your organization. It not only brings in cash but also creates huge impact towards the success of the organisation.

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Undertaking mergers and acquisitions have become an integral part of boardroom business strategy, for many companies. Entrepreneurs are taking a pragmatic view of market challenges, business growth, operating costs, access to resources and thereby including M&A (Mergers and Acquisitions) as part of their business plan to achieve the desired goals.

Below are some of the key reasons for undertaking M&A:

  1. To expand into new geographies
    The world is shrinking, with every passing day. Entrepreneurs are looking to take their businesses global. But it is not easy to setup a company, hire the right team, setup processes in line with local practices and regulations, develop a sales team and then collect monies on time from customers. It takes a significant amount of time, effort and costs; leaving aside iterations to get it right. Acquisitions could help companies in quickly entering a geography, and leveraging respective business strengths in growing the same further, rather than starting from scratch.
  2. To add complimentary service offerings
    As an entrepreneur, once you have built a business in a particular segment or vertical, it is comparatively easy and quick, to offer complimentary services. Moreover, it is far easier to cross sell services rather than develop a new set of customer base. But to build a scalable business that delivers high quality services, it takes time. However, with the right acquisition, you could immediately begin cross selling, and thereby quickly scale up the business to newer heights.
  3. To save costs, with forward/backward integration
    Assuming your net profit margin is 10%, then every dollar you save on costs effectively means not having to generate additional 10 dollars in sales. Moreover, in several businesses, the customer is very sensitive to pricing and therefore the only option to improve profitability is by reducing costs. And these savings could be quickly generated, if an appropriate acquisition is done keeping forward/backward integration in mind.
  4. To acquire Technology / IP / Rights that can accelerate the ‘Go To Market’ strategy
    If your ‘Go To Market’ strategy requires some technology or special rights, or some IP or specific know how, then to accelerate the same as well as to beat the competition, acquiring a suitable business could be a good strategy.
  5. To acquire market share
    To undertake a quantum leap in the market share, undertaking an acquisition is inevitable. Further, as you acquire a larger market share, you could spread your overhead costs across a bigger business base. And thereby generate economies of scale.
  6. To gain from valuation arbitrage
    Valuation arbitrage happens when your business garners higher valuation multiples, as compared to those of the acquisition target. In such a situation there could be a significant value creation opportunity by undertaking synergistic acquisitions.
  7. To gain access to capital
    It is generally easier to raise $10 mn vs. raising $1 mn in funding; and similarly easier to raise $100 mn as compared to $ 10 mn. There are multiple factors and reasons behind it. But to undertake such a large fund raise, you need to have adequate business size that can consume so much of capital. And that can be achieved in a short span of time only through acquisitions.

These are some of the key reasons for undertaking M&A activity. However, before undertaking an acquisition, it is extremely important to plan and strategize this well. The advantages to undertaking an acquisition can be availed only if the transaction is done correctly, keeping all factors in mind. Do ensure you have the right team helping you in your M&A journey. That is the starting point.

If you are planning to acquire a business, below are the broad steps that will guide you through the process:

  1. Preliminary Mapping and creating a Shortlist
    You should run a detailed process to map, identify and shortlist your acquisition targets, basis your business strategy.
  2. Due Diligence
    Normally, this will be done in two phases. One will be before agreeing to a “Term Sheet”. And another thereafter, which will be a detailed one, before signing the definitive agreements. Some companies offer virtual data room and some physical data room. In either scenario, your preparedness is extremely important to run this process swiftly. Remember, if a company has decided to sell, there is a high possibility they would be talking to others too. You need to therefore check well and act with speed.
  3. Business Model, with restructuring plan
    As soon as you have access to information from the target company, you should develop your own detailed financial model and run sensitivity analysis. This should be a very detailed plan. It should also include all the elements of restructuring that you have envisaged, along with timelines, to understand the impact on cashflows, profitability and viability of the acquisition target. Ideally, this should be built as a month on month plan, that runs for 3 to 5 years.
  4. Deal Structuring
    It is not just the value but how the overall deal is structured, that is important to making a successful acquisition. As the saying goes, ‘the devil is in the details’; look at all the aspects of the transaction. Utilise learnings from diligence, from the business model and through interactions with various stakeholders, to get a 360 degree view of the deal terms. At this point you should ensure that you have your best team helping you with analysis and the negotiations. Infact, it is quite useful at this stage for you to counter with structures that results in a win-win deal for all.
  5. Definitive Agreements
    The next important step is to draw up detailed transaction documents. While there are standard formats and a good law firm can help you with the required documentation; you should capture key assumptions to the business understanding as part of the seller’s representations and warranties. You should also incorporate relevant aspects from your findings, or shortcomings identified during the diligence process. You should visualise all worst case scenarios, and capture appropriate terms in the agreement to address eventualities. Note that, to close the definitive agreements, you will need to deploy good negotiation skills. Further, you might also need to be practical and flexible on certain aspects.
  6. Post Acquisition Integration Strategy
    Valuation arbitrage happens when your business garners higher valuation multiples, as compared to those of the acquisition target. In such a situation there could be a significant value creation opportunity by undertaking synergistic acquisitions.
  7. To gain access to capital
    Basis the plan developed, you will now need to ensure that it is being executed as intended. Initial days are extremely crucial, and you (along with your senior team), should give your undivided attention in making the acquisition a great success. Make it a point to meet all the employees, key clients and vendors. Have a comprehensive integration plan to avail the desired results in a time bound manner.

A Product pricing decision can either make or break your business, as the consumer demand is considerably affected by the price of the product. Businesses strive to achieve an equilibrium price where demand meets supply. However, this optimum price can only be achieved once the business managers have covered all the aspects of the costing throughout the manufacturing cycle. SuperCFO provides an easy guide for business owners to help them undertake detailed product costing.

Costing in manufacturing operations

In cost accounting, major emphasis is given on capturing all the costs in the production process and proportionately assigning them to each unit produced. There are many ways of computing the cost of unit produced with the simplest of all being dividing the overall cost of all the inputs or the Bill of Materials by the number of units produced. While this is fairly easy and widely preferred by SMEs, the biggest limitation of this method is that it fails to capture other indirect overheads like the capital cost of equipment, training costs etc.

To overcome this, manufacturing businesses can look to undertake Activity Based Costing (ABC), wherein each of the firm’s activities are tracked and are used in determining the near-true cost of each product. ABC is based on the principle that every output requires firms to undertake certain activities and to perform each activity a firm requires resources. For example, undertaking detailed product costing is a cost to the business in itself and by using ABC firms can identify and capture this cost during the process.

Costing in Service operations

Although cost accounting or product costing was originally developed for the manufacturing industry, but with increased demand for professional services and the advent of service as a product, firms are interested to know the overall costs incurred in delivering a service to the customers. By undertaking cost accounting, a management consultancy firm is able to charge tailored rates for each of the services offered to clients. Though a consultancy is a single product firm, each product is a customized package depending upon the problem tackled or client’s requirement. For a management consultancy, staff costs constitute over 70% of the overall costs while the other overheads like rent and systems account for the remaining. To capture staff costs, firms must prepare a comprehensive timesheet that allows staff members to input details of the tasks performed for each of the clients and hours spent on completing the task. These activities can later be filtered in chargeable and non-chargeable tasks to ascertain the final cost to the vendor.

SuperCFO highlights five key areas that companies for improvement for achieving detailed product costing.

  1. Consistency: Companies should be consistent in capturing the costs. For example, a company’s production division may order excess inventory and may fail to capture the cost of holding that inventory.
  2. Information Technology (IT) Systems: To capture all the costs, companies are required to have robust accounting systems. Due to limited IT resources, companies find it difficult to track and apply overhead costs to its products.
  3. Weak Forecasting: In most instances, management teams miss sales forecast by margins, which result in over or under production of units. In either case, production costs are far from actuals.
  4. Communication: To arrive at real production costs, different departments in an organization need to work in close sync, especially the finance and the production department. For example, a production manager needs to communicate at what capacity is the production line operating in each quarter. This will help the finance team to allocate actual costs instead of inflated costs.
  5. Changing prices: To remain competitive, it is important for companies to account for the latest price of raw materials and other inputs. For e.g. the finance department must account for dynamic pricing like changing price of commodities as this may impact the cost of raw materials significantly

A Virtual CFO, by increasing their financial control and visibility, enables business owners in informed decision making process. The roles and responsibilities of a Virtual CFO are similar to that of any Full-time CFO of a large corporation. A good virtual CFO helps business owners/leaders bridge the gap between finance, operations, and strategy that allows them to focus on long-term goals.

In an SME, a virtual CFO is broadly responsible for the following:

  1. Accurate Reporting
    Virtual CFO is responsible for ensuring the balance sheet records all the assets and liabilities of the company as this helps in better management and planning for the next financial year. The role of a Virtual CFO is to oversee the financial or accounting team to ensure that the profit figures provide a true and fair reflection of the company’s performance for the period.
  2. Develop strong internal controls
    SMEs in India often suffer from management deficit and hierarchical top-down organisational structure and this is evident from their weak internal controls. Very few percentage of SME owners understand the importance of having adequate internal controls in place that promote best practices and adequately minimise risk. A Virtual CFO provides business owners with necessary expertise required to establish strong internal controls that help you manage resources better and bring about increased operational efficiency.
  3. Create a strong financial base
    CFOs role has evolved from being just a financial gatekeeper to part of the senior leadership team. They are expected to maintain and lend a high-level view of the organisation and the business environment. They are responsible for setting up a strong financial base of the company that is vital to the overall organisational success. They are CFOs are also expected to achieve.
  4. Provide wider oversight
    In larger organisations, CFOs are expected to develop cordial relationships with leaders of the various functions to create a common vision and view of the organisational performance, challenges, and opportunities. In an SME, where the leadership team is limited to business owners/partners, a CFO is expected to oversee various functions such as HR, Information Technology, payroll etc. in a bid to increase functional effectiveness and minimise overall expenses.
  5. Maximise Revenues and Minimise costs
    Most SMEs operate in challenging environments where competition is cut throat and limited access to capital. A good virtual CFO can help business owners in improving not just the bottom-line but also the top-line revenue figure. With strong domain expertise, long ranging and wide experience and strong access to a network of specialists, a Virtual CFO can offer SMEs opportunities to open up new markets and propel growth.

CEO’s and CFO’s primary role is to run the business and find future growth avenues. But businesses, over time, need funding for a plethora of reasons. So next time you are in the market looking to raise funds from external sources, follow these 5 rules that will help you secure your funds faster, so that you can get back to building your business and execute your vision.

Rule 1 – Research Well
Undertake thorough research about the investor (the Fund) and the team you plan to meet. Ask questions to your investment banker. And not just that,perform independent research on the Investor by reading on the internet or asking people in your networking circle. Also, you can consider listening to recorded calls of Analyst/Investors of other companies, in which the investor has already invested in. All this will assist you in preparing and strategizing appropriately for the meeting.

Rule 2 – Practice makes CxO’s perfect
Nothing can replace good planning and practice. You should undertake mock presentations and have someone prepare a comprehensive list of possible questions and undertake mock Q&A round. This will be of immense help in boosting your confidence while answering the investors. Generally, you can approach the Finance PR Firm or the Investment Banker to seek help in this regard. This is very important because you only have one chance in front of that investor. You should, therefore, practice well before you start meeting investors.

Rule 3 – Never Trust Technology
Technology has always been a great aid, but relying completely on tech can be worrisome, as gadgets might just give up when you need them the most. So don’t just rely on showing your presentation on your laptop or in the Investors meeting room using their projector. You never know what could go wrong. It could be the case that AVs in the meeting room begin to malfunction or the meeting rooms are occupied. The best approach, therefore, is to carry printouts of your presentation. That will allow you to comfortably run your presentation even in a Coffee Shop.

Rule 4 – Role Play
Investors want to hear about the company’s financials, compliances and related matters, only from the CFO. And hear business, primarily from the CEO. In fact some investors even insist on CFO’s being a part of the fundraising team from the Company. So you should first form the right team that should be participating in road show presentations (you may decide to have one or two senior executives, who are vital to the business, in addition to the CEO & CFO as part of the core fundraising team. Note that having more than 3 is not advisable). Therefore take some time to predetermine which questions/subjects of questions will be answered by which team member.

Rule 5 – Speed is important
IOn a fundraising road show, you need to maintain speed and ensure thay you meet as many investors as you can. To get firm commitments from them, make sure to follow-up aggressively post your meeting with the investor. If you give more time, you might lose the excitement and the interest you would have generated through your meeting. Moreover, you never know when some external, uncontrollable factor could create negative sentiments, thereby adversely impacting the efforts you would have put in on this entire process.

Over the last year or so, there has been a heightened debate within the business communities and events around terms such as “sustainable growth” and “cash burn”. These terms are closely associated with the modus operandi of new businesses or start-ups. In essence, what these terms mean is that start-ups are running businesses with negative cash flows. With large Venture Capital infusions, companies resorted to these practices to quickly gain market share but now that the things have reversed a lower burn Rate has turned out to be a key metric for raising funding.

Why undertake Cost Management?

Ideally for any business to stay afloat and succeed it is important that it closely monitors its costs and find innovative ways to optimise them. When the conditions turn sour, Start-ups and SMEs quickly feel the pressure to curb costs. While aggressive cost cutting can help improve the bottom line in the short-term, it can prove to be detrimental to company’s growth in future. To avoid falling prey to such situations, businesses need to adopt a robust and effective cost management strategy.

An effective cost management strategy cannot be devised from the information available on the internet. Each business has its own complexities in which they operate and hence makes a strong case for seeking a professional help.

A classic example for this can be a Garment export company operating out of Mumbai, whose executives often travel overseas for the purpose of Business development and Client relations. To some SME leaders, cutting on travel costs would be a prime target for such a business. But without the vital overseas business contacts, the long-term business growth may turn feeble. However, below are few things that the SME could look into from a Cost Management perspective:

  • Is the entire team required to travel, or can few key members travel?
  • Instead of multiple trips to different clients, can a round trip be structured, covering several destinations?
  • Is the choice of airline governed by ‘Frequent Flier’ membership or ‘Lowest Best?’
  • What class of travel is considered for travel and is there any room for savings costs here?
  • Can the team take such flights that provide maximum working hours, while perhaps reducing number of hotel nights, for stay?
  • Is there an opportunity of undertaking some additional work during the trip, thereby increasing productivity (which could include follow-up on collections, or operations related discussions)?
  • What kind of expenses are allowed on the trip to ensure avoidable expenses are not incurred?

What is an effective cost saving strategy?

Companies may look to fix office supplies and sundry expenses but this may just yield meagre results. An effective cost management strategy is not just about saving on variable costs; rather it is about aligning all costs with long-term business goals. It also helps to have some level of systems and processes in place as they help in evaluating the impact of a cost cut and in avoiding a wrong cost cut or reverse it quickly.

In the case of professional service companies, Salaries and Benefits account make up most of the total costs and leaders expect most of the savings to come from budget cuts under this head. Rather than going for a direct cut in employee compensation as it may discourage them, companies can look at for example rationing meal reimbursements and cab services by linking them closely with the attendance pattern. This basic monitoring process can help a business plug, what could be a major leakage in the system.

The need for taking a holistic view

Most SMEs and early stage start-ups lack adequate resources and ability and thus find it difficult to take a holistic view of their finances. As a matter of fact, some SMEs even abstain from preparing a balance sheet, due to a not so strong financial reporting function. Such gaps in accounting practices later turn out to be a breeding spot for inefficiencies.

When the business environment is weak and payment cycles stretched, working capital is the first one that comes under stress. With an able CFO or a financial professional on board and strong accounting practices, businesses can find such pain points well in advance and prepare themselves to face the storm.

To grow in challenging conditions, companies must look to undertake an extensive exercise to review all their business processes, cost approval & review mechanism, supply chain systems, levels of automation, procurement policy, and employee productivity, amongst others. A detailed gap analysis will throw light on opportunities for better Cost Management across the organisation.

Another useful tool is to undertake detailed benchmarking analysis, comparing your Company’s financials against that of the Industry averages.

How can it help?

It is very difficult for businesses to operate in an environment of slower economic growth, stiffer competition and high costs of capital. It is, therefore, imperative for businesses to get their act right with the resources available in hand. Optimum utilisation of resources not only helps drive profitability but also assist in gaining market share. In fact, an all-encompassing cost management strategy would help in the most vital aspect of a business, that is pricing the goods and services right (not too low, to leave any profit on the table; but not too high as well to lose the client).

Only with detailed analysis across various parameters will give the company’s leadership an updated sense of the market conditions vis-à-vis their Company dynamics, which can serve as an important yardstick to take operational as well as strategic decisions.

Cost Management is more than just cutting costs; it’s about wise use of resources!

At a time when start-ups or new age tech companies around the world were brimming with practical solutions to real-life problems and the leaders of the major economies were still looking at ways to combat the menace of cash in their respective economies, the Prime Minister (PM) of India launched a direct and scathing attack by way of demonetization. In the 40 minutes long speech by the PM of India on Nov 8, flushing out billions of black money from the system remained the prime stated goal behind the move, while cashless or digitization was one of the many other supplementary goals. But, for many bureaucratic and political reasons, the government’s narrative/actions post the demonetization announcement gradually kept shifting from Black Money to promoting a Cashless society in India.

Over the next many days, in a bid to achieve the revised objective of a Cashless society, the government rolled out many incentives to encourage the use of digital payments. But nearly after 100 days since the announcement, the word on the ground is that the cash transactions are largely seen returning to the pre-demonetisation era. But it would be wrong to claim or even state that the situation is only unique to India when pitted against its peers. Cash is still King, not just in emerging countries like India, but even in the developed countries like Germany and Japan for example.

A recent study undertaken by the Bloomberg ( reveals that German’s use cash for over 80% of transactions followed by Australian’s who use cash for conducting over 60% of their total transactions. Generally, lack of financial Infrastructure and low financial literacy are two prime reasons cited for slow adaptation of cashless economy. The findings from these developed economies give enough reasons to reject the hypothesis. As found in the survey, people tend to hold cash as it is believed to be anonymous, untraceable, provides the option of tracking your spends tangibly without having to pull out your phone.

Close to home, the situation is no different in the far more developed country Japan, which in spite being a tech-driven economy it is widely known to be a cash-based society. The reality is that demand for cash has kept on growing, according to various statistics, the Japan’s total cash in circulation has outstripped its economic growth in the last five years. Japanese, even the elderly, are known to comfortably carry around thousands of yen on them.

Back home, with remonetisation underway, cash seems to have made a big comeback. Most retail stores have reported cash transactions to have returned to about 30% of the total sales, which they expect to return to the pre-demonetization level of 40-50% in just a few months. Though digital transactions registered huge uptick, rising multi-folds in Nov-Dec period when there was an absolute dearth of liquid money. In Jan, when the liquidity situation improved considerably, RBI reported a 10% decline in digital transactions and sharp 18.6% decline in the PoS terminals. These indicators back the views of Indian retailers on the return of cash transactions.

Hence Indian’s shouldn’t be isolated and put in a different basket for their love for the pinkback – the colour of new Rs. 2000 bill. Globally, countries like Sweden that have reported swiftest transition to a cashless society were able to do so after their institutions were able to win considerable trust from their people. The migration, It was a long, planned and yet arduous process. In India, the demonetization exercise, by no means, was a swift one. The government and the RBI issued multiple guidelines in a single day, with policies seemingly changing by each passing day. People, on the street, explained the exercise as being caught in an unwanted chaos and cited losing trust in the most credible institution of India, the RBI.

While the government may continue to try with all its might to make people move to digital payments, the move would only happen once the citizens, largely the dominant rural population, are made aware of the advantages and are comforted with the Idea of paying through phone, until then Cash would still be the undisputed king.