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Due Diligence

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.

 

How to prepare for a Due Diligence Audit

by Sanjeev Archak Sanjeev Archak No Comments

You’ve nailed the pitch, and now it’s time to focus on what investors will ask for once you’ve caught their initial interest. We have already covered the pre-funding and post-funding checklists. In this post we will try to guide you on how to prepare for a due diligence audit.

Once an investor has expressed interest in investing in a company, the deal will enter into a due diligence process. “Due diligence” is a term given to the investigation or audit of a potential investment. Throughout the due diligence process, investors look to confirm all material facts in regard to investment.

Investing in early stage companies is risky and conducting extensive due diligence can reveal problems with a company’s business early on allowing investors to identify the key risks associated with the investment.This will allow them to either develop a risk mitigation plan with the company or back out of the investment altogether.

Some investors conduct due diligence prior to issuing a term sheet, a nonbinding agreement used to propose the terms of an investment. However,most investors, especially when participating in more competitive deals, will issue a term sheet and then complete due diligence. For those deals, successful due diligence results in the legal paperwork being drafted and the investment round closing.

A due diligence (DD) check list is divided into:

  1. Financial DD
  2. Legal DD

Financial Due Diligence

Financial DD covers all aspects of business with a financial perspective covering books of accounts, taxation,  A typical Financial DD check list is reproduced below:

Particulars DD Requirements
Accounting Records, documents and MIS Access to  Accounting package
List of books, records, documents, registers maintained
Sample copies of cash and bank vouchers
Bank reconciliation statements
Monthly MIS
Borrowings Detail of all secured/unsecured loans/working capital debt/ loan from shareholders/ directors & relatives loans
Purpose of loan
 Sanctioned amount, disbursement date/ schedule
Balance confirmations from lenders
Financials / Returns / Assessment status Audited Financial statements
Internal audit report
Tax audit report
Transfer Pricing report
Copies of notices / inspection / orders from VAT / Service Tax / Income Tax authorities
Status of assessments
Key Contracts / Agreements Agreements/ contracts with customers and relevant amendments/addendums as application
Details of Patents/Trademarks Nature of intellectual property – codes generated, physical machinery invented, new formulation, etc.
Ownership of patents
Research and development strategies
Fixed Assets Fixed assets register
Details of intangible assets
Capitalization Policy – Tangible and Intangible Assets
Debtors Age-wise analysis of debtors
Breakdown of provisions and bad debts
Creditors Age-wise analysis of creditors
Payroll / Renumeration Consolidated payroll register
PF / ESI / PT payment Challans and returns

Legal Due Diligence

Legal DD  covers foreign exchange regulation, company law compliance’s,labor law compliance’s.A typical Legal DD check list is reproduced below:

Particulars DD Requirements
Shareholder Details List of all current shareholders including addresses and numbers of shares owned
Share Certificates
Details of the Directors Name of all the directors, appointment of directors, resignation of directors
Board and General Meeting Minutes Copies of Board Minutes
Copies of Annual General Meeting and Extra Ordinary General Meeting Minutes
Private Placement Offer Issue Letters
Record of Offer Letter
Filings with the ROC
Annual Return filed with the ROC Forms filed with the ROC
Charge created on Assets Filings with the ROC
Incorporation documents MoA(Memorandum of Association) and AoA (Articles of Association)
Certificate of Incorporation
Register of Members Register of members
Register of Debentures holders
Loans/Investments/ Guarantees and Securities Register of Contracts
Register of Loans
Register of Investments

A sample DD check list can be found here. Founders and the team have to devote time and energy to the DD audit. Typically, a VC team will be using the gathered diligence materials to write a note to enable investment decision.

So if you are raising money and want help with due diligence audits get in touch with our experts at Integra Books.