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Finance

How to make smart decision using Financial Statements

by Sanjeev Archak Sanjeev Archak No Comments

Okay. Let’s start with the most quoted phrase “Data is the new oil”.A business operation contains tons of data in receipts, vendor bills, customer receivables, subscriptions, inventory among other things.All this can be overwhelming for a business owner. This information if used and analysed correctly, can drive growth in the business. In this post we shall explore how to make smart decisions using financial statements.

What are financial statements?

Financial statements comprise of:

  1. Profit & Loss Statement
  2. Balance Sheet
  3. Cash Flow Statement

In addition to the above you can add Financial Forecast or Budget Statements to the list. Now, let’s examine each of these items and how it can contribute to your business.

Profit & Loss Statement

This statement is also called as Income Statement. This statement will show:

  1. Revenue: sales generated in a particular period
  2. Costs: expenses incurred in a particular period
  3. Profits: which is the net of sales and expenses

Maximizing profits must be the ultimate goal for a business. This information will help you create a budget, control your expenses and increase your revenue. In order to make informed decisions financial statements must be compared for different periods to form a trend. Here is how a trend can help:

1.Check how your business is doing

Maximizing profits must be the ultimate goal for a business. Gross profits and net profits are useful indicators. These are often termed as top line and bottom line. An upward curve for both top and bottom line indicates that your business is making money.

2.Where are you spending your money?

A cursory glance at your Profit & Loss statement will tell you where you are spending your money. Hence, ensure that there are clearly marked accounts in your expenses list like rent, salaries, and internet expenses. It is important to avoid accounts like suspense or loosely defined account heads like miscellaneous expenses. A multi-year comparison will tell you not just where you are spending but will compel you to look for reasons as to why you are spending.

3.Increase your margins

Margins are also called as Gross Profits. In simple terms Gross Profits=Sales minus cost of goods sold. What is Cost of Goods sold? Let’s take an example of a business selling toys.  The cost of purchase includes:

  1. Cost paid to the wholesale merchant/distributor
  2. Cost of transportation to the store
  3. Any other cost incurred in procuring the toys

It is important to note that cost of goods sold does not include indirect costs of such as rent, salaries or electricity. A lower cost of goods sold will lead to a higher margin. Therefore, in most businesses it is easier to control cost of goods than increase the sales price. A lower gross margin is a  sign that the business is under stress.

4.Impact of taxes

Taxes cannot be avoided. So there must be plans to minimize and plan your taxes. Tax planning includes a whole range of factors starting from selecting the legal entity for your business, availing sector specific deductions, labor law compliance’s etc. Always look for trained help to manage your taxes. Let our experts at Integra Books help you.

Balance Sheet

As the name indicates it is a statement that balances assets and liabilities. A balance sheet is a point statement i.e., that indicates the total assets and liabilities of a business as on particular date. Let us now look at what a balance sheet contains:

  1. Assets: this what your business owns
  2. Liabilities: this what your business owes

A healthy balance sheet must be asset heavy and light on liabilities. Further, while looking at a balance sheet you are likely to see terms like current assets, current liabilities, equity etc.

What is an asset?

Assets are what you have acquired to run your business. Assets are further divided into fixed assets and current assets. Fixed assets are defined as assets which are used to produce goods or render services. In other words, fixed assets are not held for sale. Examples of fixed assets include machinery, computers, and trademarks.

Current assets are typically held for sale. A prime example is inventory. Inventory is sold to generate revenue. Sales proceeds in the form of cash or bank balances are current assets as well. Dues from customers are also classified as current assets. Current assets can be converted to cash within six months to one year.

What are liabilities?

As the name suggests, liabilities are what a business owes to others including banks, lenders, vendors, credit cards, government and employees. Further, liabilities are grouped into current and non-current liabilities.Current liabilities are likely to be paid within one year whereas non-current liabilities are to be paid after a year.

How to compute working capital?

Working capital is the oxygen that keeps a business alive. How to compute working capital? It is done through a simple formula:

Working Capital=Current Assets minus Current Liabilities

A positive result means that the business will not run of cash in the near future. Whereas, a negative result means that a business will have to borrow money to meet expenses.

How does working capital impact a business?

All right let us break this down. Two important items of current assets are customer dues and inventory. High customer dues will lead to low cash balances as recovery is low. Similarly, a high inventory means that sales are low. Money invested in producing these goods is not getting converted to sales. 

Therefore, with cash becoming scarce a business no option but to hold off on paying current liabilities. This will lead to delayed payments to vendors, lenders or even employees which can lead to  halting the business.

What is equity?

Equity is what the sole owner or shareholders have invested in the business.  Theoretically, the business owes back the invested money to the investors.

Cash Flow Statement

The success of a business can be measured by its free cash flows. A cash flow statement indicates the 

  1. Cash Inflow: cash from sales, loans etc.
  2. Cash Outflow: cash paid to vendors, employees etc.
  3. Cash balance: Net off inflow and outflow

A positive cash flow means  cash coming into your business is more than cash going out. This denotes that your customers are paying on time and vendor gets paid on time. This is an ideal situation where  your business can run without taking on debt. As a business owner you must always have  an eye on the cash flow statement. It is imperative to have a positive cash flow.

Your business’s financial data will help you make informed, strategic decisions that maximize revenue and turbo charge your business’s growth. In order to stay ahead you need the best technology available. Zoho Books is a cloud based accounting software which has a dashboard which containing all the vital details of your business. Not just that there are tens of reports which you use to make informed decisions.

Of course, you need a combination of technology with human expertise. At Integra Books, we combine technology with the best experts to provide the best services. Get in touch today.

Purchase Order-Purchase to Payment Cycle

by Sanjeev Archak Sanjeev Archak No Comments

A purchase order is a document sent from a purchaser to a vendor to confirm a specific purchase of goods or services. One little document can go a long way in clearing up the logistical confusion of a growing business. A purchase order is an important part of the purchase to payment cycle.

What is a purchase order?

A purchase order is raised by a buyer to a vendor. A purchase order denotes what exactly the buyer requires, terms of the delivery, quantities and prices of products or services. Often a purchase order is initiated by the purchase manager in an organization. Further, the purchase order or P.O. as it is called, goes through multiple levels of approval within the organization. Post approvals it is sent to the vendor. Needless to say, quotations have to be obtained from vendors before a P.O. can be raised.

Zoho Books allows the users to configure multi-level approvals for a purchase order with e-mails or in app notifications sent to all stakeholders.

Why use Purchase Orders?

1.They make life easier:

A purchase order is a document which puts down in writing the deliverables of a vendor. It is the best way to avoid miscommunication and time consuming back and forth with vendors. Further, all the internal stakeholders in the business are aware of what is purchased and can plan the business ahead.

2.Provides audit trail:

Purchase orders remove a lot of stress from the auditing process by providing auditors with a conclusive audit trail and an easy way to cross-check invoices and packing slips. Without purchase orders, prepare for a long, painful process of poring over invoices, receipts and emails with vendors.

3.Purchase Order is a legal document:

Once a vendor acknowledges a P.O. as accepted by him, it creates a mutually binding contract between the buyer and the seller. The seller is bound to deliver as per the terms agreed.

4.Tracking Orders becomes easy:

A purchase order makes it easy to track the goods and services coming into a business. It is essential for a business to track when shipments are arriving, how to pay for them etc., a concept like “Just in Time” will work only if production planning works in sync with purchase and receiving functions.

What should the Purchase Order Contain?

Here is list of items a P.O. must contain:

  1. P.O. Number
  2. P.O. Date
  3. Vendor name and billing address
  4. Buyer name and shipping address
  5. Additional contact information
  6. Delivery date
  7. Shipping method
  8. Shipping terms
  9. Item name
  10. Item description and technical information
  11. Item quantity
  12. Item unit cost
  13. Line total
  14. Taxes
  15. Total price
  16. Payment terms

What happens to a P.O. goods or services are delivered?

Upon the delivery of the goods, a goods received note (GRN) is generated detailing the items received. This GRN is compared with the P.O. to check if the ordered goods have been received. If the GRN is in agreement with the P.O. it is forwarded to the accounting department and the P.O. is “closed” The accounting folks do a three way match between:

  1. Purchase Oder
  2. Goods Received Note
  3. Vendor Invoice

If all three are in agreement, then the vendor is paid. This completes the “purchase to payment cycle”.

When not to raise a Purchase order?  

Certain regular, recurring purchases relating to the day-to-day operations of a business including rent, electricity, internet are usually billed for the month and do not require a purchase order.

We hope in this post we have able to address the basics of the Purchase to Payment cycle.

How to reduce debt?- An easy guide

by Sanjeev Archak Sanjeev Archak No Comments

All businesses have to borrow at some stage to fund growth. Debt in your balance sheet is not an unusual item. However, it is not a comforting factor in your financial health. India has seen several large scale debt related defaults by large corporate’s. This begs the question-How to reduce debt? Debt Management is the answer.

Here’s a step-by-step plan to help you reduce your business debt, so you can reclaim your sanity and start focusing on other important tasks.

Start with a Budget

We can’t emphasize how important it is to have a budget. In fact, we have written a whole blog about this. A budget is the best way to set target for revenues and limits for costs. Measuring these targets with actual revenues and costs will give you a good idea where you stand as a business. A business owner will actually be able to determine how much he can borrow and how long it will take to repay the loans.

Make a repayment plan

EMI’s for debt repayment are known to very borrower right from the start. So for a business, it is all about having money to fund the repayment schedule. One of the key aspects of this plan is cash flow management. A business needs to have enough cash for EMI payments. There are two thumb rules a business can use to save cash:

  1. Control spending: spend only on essentials. This is a tough plan which requires a lot of discipline.
  2. Earmark cash for repayment: set aside a % of your sales or profits each month to pay EMI’s

Set an “Exit Date” for Debt

This is a part of the “Repayment Goals”. Marking out a date in your calendar to be debt free will keep your motivation levels up. The lenders too would have specified a repayment schedule and pre-closures are not penalized anymore by lenders.

Negotiate Terms with Vendors

It is simple, ask for more credit. Most successful retail companies let vendor manage their working capital for them by asking for discounts or more credits. This will help you streamline your cash flows as well.

Avail the right debt product

 Identify the debt product which works best for your business. If working capital is what you are looking for then consider availing cash credits, overdraft or a working capital term loan. However, if you want to fund an asset purchase then avail a term loan. The security for the loan depends on the type of loan for e.g, for an asset purchase a mortgage on the asset will be security. However, an overdraft or a cash credit will be secured with stock or receivables of the business.The interest rates for these debt facilities vary as well. Choose an option that suits you best.

Renegotiate the terms of loans

What if you are not able to pay EMI’s? Don’t panic. You always have the option of renegotiating your loans. This requires the lender to recast the repayment schedule or include a moratorium period. Additionally, you can ask for a funding of interest via a funded interest term loan. This is easier said than done as it takes an excellent track record of the borrower to renegotiate.

Keep an eye on margins

Interest payments have a huge impact on margins. It is important to minimize the hit of interest on margins. As a business change your product or service mix to reduce low margin offerings.

Explore leasing

Leasing equipment’s often works out cheaper than owning them. Leasing will help reduce huge upfront payments for equipment’s.

Final Thoughts

It’s perfectly normal to be worried about repaying loans. The best way of getting rid of this stress is to pick debt management/reduction ideas, commit to a plan and make it happen.

Setting up Financial Systems

by Sanjeev Archak Sanjeev Archak No Comments

At Integra Books we have helped multiple clients raise capital from Angels and VC’s. Fund raising is an exhaustive process involving due diligence , pre & post funding compliance’s. Investors look at not only at the business prospects  but also at the financial systems in the  company. Consequently, having a few key things tied up and organized can make all the difference.  We have already given you a primer on making your accounting effective.  Here is a quick guide on setting up  financial systems.

Set up Books of Accounts

An ideal  accounting system reduces the time spent by the founders on record keeping, provides the investors and founders with profit & loss statements, cash flow and balance sheets. A software like Zoho Books integrates with whole range of applications like Zoho Payroll, Zoho People,Zoho Expense in the background so you can concentrate on running your business.

Track your Expenses

A business must track every rupee spent. A clean Profit & Loss statement makes the audit a smooth affair. Moreover, there are tax rules which have to be  complied with regards to expenses. Hence, a keeping a keen eye on expenses is critical. A tool like Zoho Expense  can completely digitize the process of expense management. Say goodbye to shoe boxes of receipts, further Zoho Expenses syncs with Zoho Books enabling automation.

Set up a Payroll System

Employees are the most critical component of your business. A properly structured payroll can be a win-win for the employees and the employer. A payroll system must ensure compliance with tax & labor law, ensure payment on time to employees. Here is where Zoho Payroll can automate the payroll process, create diverse pay structures and enable payment on time. Integration of Payroll with Books reduces a lot of manual work.

Stay Compliant with Laws

India is has many compliance’s to be met by businesses. Recently, India has moved up on Ease of Business rankings  but a lot more remains to be done. Non compliance can have grave consequences both founders and investors. Every business needs help to stay on top of compliance’s. At Integra Books, we have developed a Compliance Calendar which intimates our clients on compliance due dates.   

 Set up a Reporting System

Now that you have an accounting software integrated with other tools, its time to set up a reporting system. Investors mandate that financial reports be provided regularly. This report goes beyond P&L and Balance Sheets and must provide key metrics of your business. As founders,automating these reports will reduce both time and effort. We recommend Zoho Analytics.

Prepare for  Due Diligence

Due diligence is a precursor to funding. It is a test a business must pass before money can roll into the company. We have provided a due diligence check list here , the next venture round or sudden acquisition suitor always happens at the least convenient time, so make sure you’re prepared ahead of time!

Financial systems are required to take the business to the next level. Every business must leverage technology and automation to avoid chaos. As companies grow the burden of managing numbers and compliance’s always tend to fall on few shoulders. Moreover, logistical challenges around these can overpower any business. Early adoption of financial technology can reduces these challenges freeing up founders to run the business.

At Integra Books  we have helped many business’s transform their finance functions. Get in touch to transform your business.

 

Retail:Financial Metrics

by Sanjeev Archak Sanjeev Archak No Comments

Anyone with a business knows that the numbers don’t lie.Retail is a hyper-competitive industry. And, I promise, your competition is already tracking and measuring retail metrics.  Retail, in particular, is data rich with constant tracking on so many levels. A lot of business owners lose out as they do not know what to look for or if they do they struggle to find a way to bring the data together. Let’s get familiar with key financial  metrics for retail businesses.

Stock turn/inventory turnover

Also known as inventory turnover, stock turn is the number of times stock is sold through or used in a given time period.Stock is a huge part of your retail operation. So if you find yourself replenishing an item frequently that item has a high turnover. If you rarely need to order it then it has a low turnover. 

To buy stock, you need cash, once you buy the stock that money is then tied up in that product until it is sold. If something has a very low turn rate it means it reduces your cashflow and essentially ties up funds on your shelves. Figuring out the worst performing items and reducing your number of lines on that basis can improve your cashflow and boost your bottom line.

Gross margin

Every business needs to make a profit in order to survive.Gross margin is defined as: total sales revenue minus the cost of goods sold, divided by the total sales revenue, expressed as a percentage.Tracking Gross Margin ensures you are actually turning a profit.Having this information available  real-time as possible means you can act fast and avoid  losses 

Cashflow

Cash is king. A business cannot survive without cash.A retail business needs cash daily to keep the show running. If you are selling seasonal products then cash management becomes crucial in the off season. Track these trends and understanding when they will occur allows you to stay ahead . A cash forecast always helps you stay on top of your cash situation.

Average Transaction Value

All retail marketing efforts are directed towards attracting new customers. A retail business needs to find ways of increasing the customer spend over a period of time. An increase in 10% spend by a customer,across product lines can be huge.Tracking the average sales value and then finding ways to improve it is vital.The key is to increase the average sale value and add to your revenue.

What metrics do you find the most useful in your business?

 

Quick Tips to Improve Cash Flow

by Sanjeev Archak Sanjeev Archak No Comments

Cash is King. There are no two ways about it. Effective cash flow management is one of the  the foundations of a business. How do you improve cash flow? In theory it is simple, increase your cash inflow and decrease the cash outflow. However, putting this formula into practice is easier said than done. Hence, managing your cash flows requires foresight.

We have explored the need for cash forecasting and budgeting in our previous post .In this post we will provide you with some pointers on how to improve cash flow :

1. Review of Costs

Review the costs being incurred in your business and formulate a budget for major expenses. Bench mark these expenses against a  previous period. Look for cost savings by looking for cheaper products and services.

2.Inventory Management

If you are a manufacturing business or a retail business then managing inventory must be a focus area. Categorise inventory into fast,slow and non moving items. Stocking fast moving items will lead to quick inventory to cash cycle and cut cash blocking in piled up stock. There are various inventory management tools available. We recommend Zoho Inventory.

3.Get paid faster by Customers

Make it easy for customers to pay you by using payment gateways. These integrate cloud based accounting apps and makes collections & reconciliation a breeze. Monitoring credit periods is a must to manage cash from customers. 

4.Price your products/services

It is important to price your products/services to maintain their perceived  value. Increase in sales prices will lead to positive cash flows whereas decrease in sales price may result in increase in sales volume thereby leading to increased cash flows. So these decisions should not lead to loosing customers or decreasing  sales. It is a fine line to tread.

5. Build a cash forecast

Cash forecast is a strategic decision making tool. Hence it is important to run forecasts at regular intervals, this could be monthly, quarterly or even annual. A forecast always gives you a heads up.

Get proactive with cash flows

Work closely with your accountant to do all this. A cloud based accounting software helps you to do this and much more for your business. 

Our experts at Integrabooks will advise you on your cash flow management and working capital which helps to streamline your finances and produce improved cashflow. Get in touch with us today!

 

 

SaaS metrics

by Sanjeev Archak Sanjeev Archak No Comments

Keeping track of key metrics is very important and can give you a great overview of how the business is doing. Traditional financial metrics like EBITA,Net Profit, Cash to Turnover does not cut it for a SaaS business. What metric should a SaaS company use to measure performance?  It doesn’t need to be all-consuming so let’s keep it simple. 

Here are the top metrics a SaaS business should track to keep growing and stay on the right path.

1.  Cost Per Acquisition (CPA)

Acquiring customers costs money. There is a cost involved in running Facebook ads, Email campaigns, Google ads. The formula for measuring CPA is simple.Your total marketing costs divided by a number of new clients you attract is your CPA. If you have a high CPA then you will have to re-look at your marketing processes and adjust accordingly. 

2. Customer Lifetime Value (CLV)

It is apparent that CLV has to be higher than CPV to generate a profit. This means that you consider the net profit over the entire course of your business’s relationship with a customer rather than just an initial sale. Depending on your business model this might be weeks, months or even years. SaaS companies have a recurring billing model which result in a loss in the initial transaction due to trial period discounts.

3. Gross Margin

A positive gross margin is required for a business prosper. So what is gross margin it is the difference between sales revenue and cost of goods sold. Increase in sales volume should allow increase in gross margin due to efficiencies.

4. Customer Churn

Customer loyalty is critical for a business. Customer retention costs nearly five times more than acquiring a customer. It is important to measure the time that the customer stays with your business. Something as simple as adding some user-friendly training videos your customers can access may improve churn.

Some simple ways to examine the drop-off points are to survey existing customers and test some changes, ultimately implementing the most effective changes.

5. Cashflow

Cash is King. Without cash, a business dies, it’s that simple. A profitable business need not be a cash rich business and would be struggling to pay day to day expenses.

Its important to build a cashflow forecast for a range of scenarios. A dynamic forecast will enable to make strategic business decisions. 

There are endless financial metrics you could track in your business but getting a handle on just these five will give you a great starting point and help you keep your business on track, improve your bottom line and manage growth in a profitable way.

If you are a SaaS company, we recommend Zoho Subscriptions to handle all your subscriptions. Let our experts Integra Books help you with setting up Zoho Subscriptions.

Happy Tracking.

 

 

Get to Know About the Penalty for Late Filing of Service Tax Return [And More]

by Sanjeev Archak Sanjeev Archak No Comments

Every service provider in India is aware of service tax and many have at some point dealt with a penalty for late filing of service tax return. For those who are not aware, service tax is an indirect tax that is levied on the services provided by any service provider. Consumers are responsible for paying this service tax which is included in the invoice, and service providers are responsible for collecting it and paying it through the service tax return.

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Significance Of Having a Financial Plan For Your Business

by Sanjeev Archak Sanjeev Archak No Comments

You have always dreamt of starting a business of your own and finally, you got the right business idea which you are very enthusiastic and pumped up about. What’s the next step after this? What do all successful entrepreneurs have in common that makes them turn their small startup businesses into multi-million dollar companies? Well, one common advice that all these entrepreneurs would suggest is to have a sound financial plan for your business.

Planning is bringing the future into the present so that you can do something about it now.

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