be your own startup cfo

Trusted Partners in your Growth & Prosperity

Gopal Chopra & AssociatesChartered Accountants

www.gca-associates.com

Contents

1. How to be your Own CFO

2. Suitability of Type of Organization

3. Budget Provisions for Startups

© Gopal Chopra & Associates

How to be your Own



• 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

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)


Financial Performance Measurement

Financial Decision-Making

Risk Assessment

Importance of a CFO

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


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.


The Budget Process


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)

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


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.



- •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

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


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


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 …..


• 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 …..


5. Financial Reporting :

Balance Sheet

• Assets• Liabiliti

es• 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


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

Cash Flow Statement

© Gopal Chopra & Associates`

Income Statement


Balance Sheet

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.)


Types of Organizations for Startups



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


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.


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.

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


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.


Budget Provisions for Startups



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.


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.

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 & AssociatesChartered Accountants

www.gca-associates.com34, Babar Lane, Bengali Market, New Delhi-110001, India

Tel.:+91-11-23350585, +91-11-23350137, +91-11-41526668E-mail: [email protected]


http://www.gca-associates.com/

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be your own startup cfo

Small Business & Entrepreneurship