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Be your own startup CFO

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Be your own startup CFO

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Learn how to be the CFO for you own startup. What are the important financial concepts for an entrepreneur, the financial documents for startups, reporting, balance sheets etc. And the main budgetary provisions for startups.

Learn how to be the CFO for you own startup. What are the important financial concepts for an entrepreneur, the financial documents for startups, reporting, balance sheets etc. And the main budgetary provisions for startups.

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Be your own startup CFO

  1. 1. Trusted Partners in your Growth & Prosperity Gopal Chopra & Associates Chartered Accountants www.gca-associates.com
  2. 2. Contents 1. How to be your Own CFO 2. Suitability of Type of Organization 3. Budget Provisions for Startups © Gopal Chopra & Associates
  3. 3. © Gopal Chopra & Associates
  4. 4. © Gopal Chopra & Associates • Finance, Accounting & Compliances : Knowledge of Accounting, Tax & Compliance of the Legal framework • Trusted Advisor : A key, objective source of advice & counsel to big or small commercial decisions • Legal Counsel : Reviewing & understanding legal documents • Risk Manager : Understand & identify potential risks and complexities of the organization’s business and risk mitigating strategies • Finance Manager : Procurement & effective utilization of funds for the organization Roles & Duties of a CFO
  5. 5.  Ensure financial discipline and avoid bankruptcy  Responsible for Finance which is one of the 5 critical Company-Building processes (Product Development, Customer Acquisition, Customer Development, Team Building, Finance) © Gopal Chopra & Associates  Financial Performance Measurement  Financial Decision-Making  Risk Assessment Importance of a CFO
  6. 6. Tips for becoming CFO of your own Organization 1. Risk Assessment and Managment : • Business operates in an uncertain environment, resulting in Risk. • Various factors contribute to uncertainty like :  Industry Specific  Overall economic climate  Government Regulations • Impact of uncertainty can range from a meagre loss of income to a major threat to the going concern capability of the business. Risk Management • Quantification of risk tolerance limits; • Evaluation of strategic options and business cases; • Development of risk measures and warning signs. • Ensuring Pre-emptive measures in place • Marrying Risk assessment with performance measurement • Management of Risk Associated with Debtors and Creditors © Gopal Chopra & Associates
  7. 7. Ratio Analysis is generally considered the best possible method for Business Risk Assessment. Some of the Ratios that can be used for this purpose include : • Liquidity Ratios: Include Current ratio, Liquid ratio & Cash ratio. These indicate the company’s ability to meet its current obligations on time. The higher these ratios are, the lower will be the liquidity risks. • Profitability Ratios: Include Goss Profit ratio, Net Profit Ratio & certain other relative measures which indicate the profit-earning capacity of business. Lower Profitability Ratios in comparison with the performances of peers will indicate inefficiency. • Stability Ratios: Include Debt to Equity Ratio, Lower Debt Equity Ratio indicate the long-term stability of business & lower Going Concern risks. • Cash Flow to Sales Ratio: It gives investors an idea of the company's ability to turn sales into cash. Higher the ratio, lower will be the Cash Shortage risk for the Company. © Gopal Chopra & Associates
  8. 8. The Budget Process © Gopal Chopra & Associates Review by Top Management & Board Finance Team prepares the Budget based on Historical Data, current position, assumptions and vision of Management 2. Budget & Financial Planning : • Failing to plan financially might mean you're unknowingly planning to fail. • Financial budgets are financial plans that are structured to detail projections on incomes and expenses on both a long-term and a short-term basis. • Include Income Statement, Balance Sheet & Cash Flows Review by Finance head (CFO)
  9. 9. Budget Matters requiring attention  Cash Flow is Key initially rather than Profit  Assumptions – Document & Verify ALL key assumptions  Involve all key people in the process  Make people accountable  Department Plans  Capex Plan  Break-even point for your business © Gopal Chopra & Associates
  10. 10. 3. The Fundraising Journey : • Seed Capital : The initial capital used to start a business (comes from business founder’s personal assets, friends or family. • Angel Investor Funding : Comes at an early stage of business from high net-worth individuals, retired entrepreneurs, executives and other angel investor etc., when the business idea is just a concept. • Venture Capital/ Private Equity : Their funding is usually available after the above stages when there is proof of concept for the product or service & start-ups require funding for commercialization/ scaling-up of operations • IPO : Required at more advanced stages of fund requirements. © Gopal Chopra & Associates
  11. 11. © Gopal Chopra & Associates - • Market Feasibility Report: Basic Research for identifying whether enough demand to make business feasible. - • Business Plan: It is a roadmap for business that outlines goals and details to achieve those goals. - • Business Valuation : Business valuations for pre & post- investment scenarios which help in attracting investment - • Investment Plan: Milestones at which equity & debt financing required. General Financial Documents Required
  12. 12. You need a concrete game plan quantifying money needed at each stage & planned use of that money Know your Strengths & Weaknesses Know your Business (uniqueness) & overall Industry Fundraising Tips and Truisms Investor confidence will eventually arise on account of bottom line today or in near future Time around something that generates momentum/ buzz © Gopal Chopra & Associates If you must fundraise to prove initial assumptions, raise as little as possible Always pinpoint the next milestone to be achieved such as launching a new product
  13. 13. © Gopal Chopra & Associates 4. Spending Money : - • In Business plan, market research, etc. - • Legal advice, Tax professionals and Accountants - • Necessary marketing and branding. - • Technical support or any Activity which promotes Revenue Where to Spend …..
  14. 14. © Gopal Chopra & Associates • Extensive Staffing : Hiring too many people. • Incorrect Recruitment : Hiring the wrong people. • Improper Investment : High Capex in the initial stages. • Incurring too much Debt Upfront : Raising a lot of debt to get the operation off the ground, resulting in high interest burden. • Initial unplanned spending : Spending money on unallocated expenditure, resulting in cash flow problems. Common Spending Pitfalls …..
  15. 15. © Gopal Chopra & Associates 5. Financial Reporting : Balance Sheet • Assets • Liabilities • Equity Operating Statement • Revenues • Expenses Cash Flow • Sources of Cash • Uses of Cash Dashboard • Key Financial Metrics • Key Non- Financial Metrics The Basic Financial Reporting Package
  16. 16. © Gopal Chopra & Associates Tips for Good Reporting  Summarise your reportings : Use Summary Format wherever possible  Narrative : Tell your Stakeholders what’s going on  Dashboard : Give people a quick pulse of your • Operating metrics • Revenue Trends  Don’t waste time : Don’t spend a lot of time on this early on  Transparency : Provide Transparent Fund-Raising Information  Non-Financial Indicators : Include Non-Financial indicators
  17. 17. Cash Flow Statement © Gopal Chopra & Associates`
  18. 18. Income Statement
  19. 19. © Gopal Chopra & Associates Balance Sheet
  20. 20. When do you need one CFO ? • As Advisor : From day 1 (For Opportunity Assessment) • Part-Time : Early (For help with 1st Funding, etc.) • Full Time : Before 2nd round of Fund-Raising (For help with 2nd round, etc.) © Gopal Chopra & Associates
  21. 21. © Gopal Chopra & Associates
  22. 22. © Gopal Chopra & Associates
  23. 23. © Gopal Chopra & Associates Form of Business Key Features When to opt Positives & Negatives Sole Proprietorship  Refers to a person who owns the business & is personally liable for its debts  The simplest business form  Not a Legal Entity On start of business to validate proof of concept. Pros :  Low-cost & easy option, for persons looking to test their business concept Cons :  Less funds to invest  Owner is personally liable for all business liabilities  Ownership is not transferable Partnership  A business organization in which 2 or more individuals manage & operate the business  Both are equally & personally liable for all business debts  No minimum Capital requirement  Only 2 people needed to incorporate it If 2 or more persons are there who want to start business early, then they can register partnership and later, can convert it into a private limited company. Pros :  Another relatively low-cost & easy way to form a business  More investible funds available in comparison to proprietorship Cons :  Partners can be personally at risk for liabilities of business  Ownership is not transferable
  24. 24. © Gopal Chopra & Associates Form of Business Key Features When to opt Positives & Negatives Limited Liability Partnership (LLP)  Partnerships with a feature of limited liability of all but one partners  Separate legal entity  Minimum 2 persons with profit motive needed to incorporate it LLP enjoys benefits of a Private Limited Company & a traditional partnership firm. Because of increasing compliances in private limited company, it is recommended for start- ups to incorporate LLP if they are not planning to raise investments in future. Pros :  Limited partners are not personally liable for business debts  Ownership can be transferred Cons :  No provision to raise public funds One Person Company (OPC)  Only one person required to form it  It enjoys all benefits of a Limited Liability Company If the person is the single founder planning to start a business or is already running a business as a sole proprietor, then OPC is an ideal choice. Converting proprietorship into OPC anytime can be done at ease. Pros :  The Director and Nominee Director of a One Person Company are not personally liable for the liabilities of the Company.  OPC may be converted into other type of legal form by making amendment in the MOA. Cons :  Not appealing to small proprietors since its base tax rate is quite high (apprx. 30%)  High statutory Compliances.
  25. 25. © Gopal Chopra & Associates Form of Business Key Features When to opt Positives & Negatives Private Limited Company  Most preferred form of business  Can be formed by 2 persons  Has a Separate Legal Entity For two persons willing to start a business, and also having plans to raise the funds in future, private limited company is the best option. If there are no plans to raise funds, but they want to have a strong foundation, then also private limited company is recommended. Pros :  Limited Liability of members.  Can easily raise funds from investors. Cons :  High statutory Compliances.  High Setup cost as compared to others.  Not allowed to invite public for deposits. Public Limited Company  Biggest & most powerful form of business in India  Can raise funds easily from public at large For persons really planning big or having a big business already running, wanting it to expand, public limited company is the best option. Pros :  Limited Liability of members.  Opportunity to raise capital by issuing shares to public Cons :  Harder to set-up  Shareholders have lesser & diluted control over the Company.
  26. 26.  Nature of Business Activity :Businesses providing direct services like tailors, restaurants and professional services like doctors, lawyers are generally organised as proprietary concerns. While, businesses requiring pooling of skills and funds like accounting firms are better organised as partnerships. Manufacturing organisations of large size are more commonly set up as private and public companies.  Scale of operations : Volume of business ( large, medium, small) is a key factor. Large scale enterprises can be organised more successfully as private or public companies. Small and medium scale firms are generally set up as partnerships and proprietorship.  Market area served : Size of the market area (local, national, international) served is another important factor. Enterprises catering to national and international markets or where the area of operations is wide spread (national or international), company ownership is appropriate. But if the area of operations is confined to a particular locality, partnership or proprietorship will be a more suitable choice. Factors Affecting the Selection of Appropriate Form © Gopal Chopra & Associates
  27. 27.  Degree of Control desired by the Owner(s) : A person who desires direct control of business, prefers proprietorship, because a company involves separation of ownership and management.  Amount of Capital required for the Establishment & Operation of the Business : With Sole Proprietorship requiring the least Investment, a Public Company demands the highest. Just like any other form of business, a partnership may be converted into a company when it grows beyond the capacity and resources of a few persons, since a company can go to equity shareholders for inviting subscriptions to its share capital.  Volume of risks and liabilities : The volume of risks and liabilities as well as the willingness of the owners to bear it, is also an important consideration. Taxation : Comparative tax liability is also a factor to be assessed before selection of an appropriate form of business. © Gopal Chopra & Associates
  28. 28. © Gopal Chopra & Associates
  29. 29. © Gopal Chopra & Associates  Corporate Tax Rate @ 25% : New manufacturing firms (startups) from March1, 2016 shall be taxed at 25%(plus cess & surcharge) with no exemptions allowed to them  Corporate Tax Rate @ 29% : Companies with Turnover < Rs.5 crores in FY 2014-15 shall be taxed at 29%(plus cess & surcharge)  100% Tax Exemption for 3 years : Startups pertaining to innovation, commercialization of new product, services driven by technology or Intellectual Property, setup between 01.04.2016 & 31.03.2019 can now avail 100% tax exemption for any three consecutive assessment years out of the first five years from year of incorporation (except MAT), adhering to certain conditions.  Employee Provident Fund : Government to pay Employer’s contribution to EPF of 8.33% for all new employees (with salary upto Rs. 15,000 per month) for first 3 years, saving some cost for the Startup companies.
  30. 30. © Gopal Chopra & Associates  No Tax on Capital Gains : In order to promote investment in startups, the 2016 budget has announced that capital gains will not be taxed if investment is made in a regulated or notified Fund of Funds upto Rs. 50 Lacs. and by individuals in notified startups, in which they hold majority shares.  10% Rate of Tax on Patent Income : In order to improve the awareness of intellectual property registration and promote patent registration, a special patent regime has been announced in the 2016 budget. The royalty income from use of patent developed and registered in India will be taxed at the rate of 10% only, with no related expenditure or any allowance being permitted.  Quarterly Payment of Service Tax for OPC : The Budget has proposed quarterly payment of service tax for One Person Company. All companies are currently required to pay service tax on a monthly basis.
  31. 31. The information contained here is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Gopal Chopra & Associates Chartered Accountants www.gca-associates.com 34, Babar Lane, Bengali Market, New Delhi-110001, India Tel.:+91-11-23350585, +91-11-23350137, +91-11-41526668 E-mail: info@gca-associates.com © Gopal Chopra & Associates

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