Joseph Varughese – Dutch Uncles

Must-Read Book on Finance: FUNdamentals of Financial Statements

Joseph Varughese — Wed, 14 Jul 2021 13:55:45 +0000

Book: FUNdamentals of Financial Statements

Author: Chinmay Ananda

Published by: Zaang Publications/Finance Academy, Australia

Year of publication: 2015

I have got the chance to read many articles and books on finance and financial statements written to educate non-finance executives and entrepreneurs in the finance domain. I have written a few articles in this genre. So, when I picked up Chinmay Ananda’s book ‘Fundamentals of Financial Statements’ to read I thought it to be another book in the same category targeting the same type of readers. But I was taken by surprise.

The cover, page layout and the style of the book give a feel of simplicity and the initial thought that would come to the reader’s mind is of mediocrity. After finishing this book, I felt that this book could be a good read even for finance professionals. Take a look at the way the difference between Asset and Expense or between Liability and Income or between the items coming to Profit and Loss and Balance Sheet are explained. Here is an example from the book – “If any purchase is consumed before the Balance Sheet date it becomes expense in the Profit and Loss statement and if it is not consumed before the Balance Sheet date it becomes Asset in Balance Sheet.” Beautifully articulated!

However, the book is written by Chinmay with non-finance readers in mind and it does full justice to its purpose and objective. Like the FUN in capitals in the word fundamentals of the title manifests, it is fun to read this book and understand how to read financial statements. It is a book on finance that even a non-finance person who hates finance and numbers will love to read till the end. More importantly, the book will tempt you to explore more about finance and financial statements.

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If you can’t explain it simply, you don’t understand it well enough

-Albert Einstein

A Book on Finance for All Entrepreneurs

What I enjoyed more about this book is the way it is structured and narrated – storytelling style and narrative in such a way that anyone who reads English can relate to it and get a gist of the subject. There are no debits and credits explained in accountancy language, no finance and accountancy jargon and terminologies used in the book to explain the fundamentals, sometimes even complex topics, of finance and financial statements.

A lot has been written on the need for entrepreneurs to understand finance, accountancy and financial statements so that they will be able to do budgeting, manage cash flow, control expenses, make investment and funding decisions. Not just that, it will help them get a feel of the value of their business, understand growth and profitability metrics and take winning business decisions. Despite having a good idea and funding, we have seen many startups failing miserably for want of financial management and control in place. This happens mostly when the owner(s) or founder(s) have no idea of finance and its importance in business.

Non-finance Person Writes a Book on Finance

What might have worked well for this book is the author, Chinmay Ananda, himself being a non-finance person who did his bachelor degree in engineering and MBA with a non-finance specialisation. He taught finance himself and now teaches finance and consults entrepreneurs on financial and business problems. However, he has done justice to the Einstein quote “If you can’t explain it simply, you don’t understand it well enough” that he reproduced in his book a few times.

In the process of explaining financial statements in a way that anyone can understand, the author covers almost all topics coming under the umbrella of finance. The way he has explained Operating Profit, Profit Before Interest, Tax, Depreciation, amortisation (PBITDA), Profit Before Tax (PBT), Profit After Tax (PAT), Earning Per Share (EPS), Dividend Policies, Leverage / Profit Volume (PV) Ratio etc., makes the reader believe that finance is a very easy subject to learn and understand. The way Chinmay has articulated what happens to profit, what comprises owners’ funds, what is the meaning of return on capital employed, how differently debt and capital impact profit and tax etc., is simple for the understanding of non-finance readers.

It is not just about learning finance and financial statements for an academic purpose that is attempted in this book but how the knowledge of finance and ability to read financial statements can be leveraged for the profitability, sustainability and growth of your business, particularly SME and startup businesses. It provides owners and entrepreneurs insight into the nuances of finance and how they help them in steering their business to growth and profitability.

The book is not purely confined to finance in the strict sense as it ventures to explain how a company is formed and why a company is considered as a separate legal entity separate from its promoters or founders. On the way, it explains how capital is brought in and why it is shown on the Liabilities side of a Balance Sheet. It is in an amazingly simple way the debits and credits are explained without resorting to the help of the golden principle of accountancy.

Owner vs. Business Perspective

He explains Debit and Credit this way – “Debit money is going out of the business. For Assets, you may say we have got land and machinery. But to purchase land and machinery, money first goes out of the business. That is the reason it is important to see it from a business perspective and not from an owner’s perspective. From the business perspective if the money is going out of the business either it becomes an Expense or creates an Asset.

Credit, money is coming into the business. If it is by selling the product or service, it is called Income. If money comes into the business because of borrowing then it becomes a Liability.”

How beautifully he put it so that someone who has not gone to college can understand it easily! All you have to remember is, when money goes out of the business it is Debited and if money comes into the business it is Credited. However, it can confuse the reader a bit as it does not say which part or leg of the transaction is to be debited or credited.

Financial Statements for a Layman

The book then goes on to explain the three financial statements viz. Profit and Loss/Income Statements, Balance Sheet and Cash Flow Statement. In layman language the book makes you understand why there are three financial statements and what are their uses. It also throws light on the difference between profit and money/cash balance, why cash is more important than profit, all without using any finance jargon or formulas or theories.

The very easy manner in which it is explained as to what are assets, expenses, liabilities and income and how and why they are classified so, without employing the language and technical terms of accountancy but in a common man language is commendable.

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Employees should have sufficient information about the business and its model as every decision every employee takes impacts the profitability of the company.

What are the Most Common Financial Mistakes?

Look at some finance mistakes that are explained in the book, the first one is “Selling a Product or Service for Less than the Cost of Liabilities”. Chinmay goes on to explain how the cost of liabilities is calculated and the entire concept with an example for the reader of any level to understand.

Likewise, another finance mistake – “Investing Short-term Liabilities into Long-term Assets” is explained with simple examples like “Life of loan should be equal to the life of an asset”.

Learn about Financial Metrics from this Book on Finance

Equally important is the read on various financial metrics:

Profitability
Liquidity
Operating ratios
Break-even point (BEP)
Profit v Money.

BEP is an important study in managerial accounting, used to calculate the point at which a business is not at profit or loss. It is inevitable to know the difference between the fixed and variable cost to understand the fundamentals of BEP and it is also elaborated. He explains in simple terms with examples as to how this concept is important in various business decision making.

Likewise, understanding the difference between Profit and Money or Cash is crucial. All profit is not cash and therefore the profit shown in the Profit and Loss statement and cash balance in the cash flow statement won’t be the same. There are many reasons for this such as non-cash expenses like depreciation appearing in profit and loss statements but not in cash flow statements or sales invoices becoming part of profit but not of cash till the sales amount is collected.

One important chapter in the book – What is happening with Profit? – throws light into what happens to the profit you make and how important is this understanding for strategic decisions. Profit is reinvested in the business as part of diversification or expansion or acquisitions. It is also used to replay your liabilities. Using profit for paying dividends to the shareholders or the investors is arguably the most important purpose of profit.

The Untouched Topic by Many Books on Finance

He has devoted one chapter to crucial topics that most books and articles have not touched. This is about educating every employee in your organisation to make profitable decisions. For that, employees should have sufficient information about the business and its model as every decision every employee takes impacts the profitability of the company.

At times, the author has moved away from the core topic to areas like cost accounting, startup mentoring etc. However, it is not to be considered as a drawback since the author has reiterated a few times in the book that everything you do or any decisions you take in business have implications for finance.

Though looking like straying initially, touching upon the concepts of marginal costing, contribution analysis, fixed vs variable expenses is a real value add to the readers, that too without complicating the concepts. The reason why the word ‘straying’ is used here is that these analyses don’t form part of standard financial statements but internal management reporting.

Different Perspectives to Financial Theories and Metrics

Another exciting part is the last portion of the book where Chinmay explains solutions to some critical problems that small entrepreneurs face with real-life instances as part of his consulting career.

One portion of the book that I was not able to agree to fully was about the differentiation between Performing Assets and Non-Performing Assets. The performing asset should earn returns to take care of a non-performing asset is like the arguments that business functions in a company feed back-office function. This is not fully true like the fact that every organ in a human or animal body is important. Another is the fact that it can create confusion about the use of the terminology.

Non-Performing Assets

A non-performing asset to most people is a bank loan that is subject to late repayment or is unlikely to be repaid by the borrower in full. There is a high likelihood of readers getting perplexed here.

Overall, this is a fantastic book not only for non-finance executives and entrepreneurs but for finance professionals too. It gives insight into finance and business effortlessly and sometimes different perspectives to financial theories and metrics. This book is more pertinent for startup and SME entrepreneurs during uncertain times like the ongoing pandemic or recessionary period.

Expert Connect

Chinmay Ananda
Business Storyteller, Financial Educator at Finance Academy
Reach out to him for any financial advice for your business

The post Must-Read Book on Finance: FUNdamentals of Financial Statements appeared first on Dutch Uncles.

Turnover or Leftover; What is important?

Joseph Varughese — Fri, 04 Jun 2021 10:58:56 +0000

What does it mean by Turnover and Profit?

As the saying goes: turnover is vanity, profit is sanity and cash flow is reality. This is a meaningful statement through not wanting to conclude so at the outset itself.

At the most basic level, turnover is the total sales revenue that a business generates over a specific period. Profit is the amount of money remaining or leftover after deducting its costs for the same period. In simple terms, the turnover is the top-line, and the profit is the bottom-line of a profit and loss or income statement.

Of course, the picture is not quite so straightforward. We come across various types of profit in financial reports and related articles, each of which you calculate by deducting certain categories or groups of costs. The analogy above describes net profit which, generally speaking, removes all costs.

Here again, we see PBT which is profit before tax and PAT which is profit after tax. A business will also measure its gross profit, an important measurement by deducting the cost of goods sold (cogs) or cost of sales from the sales revenue, and sometimes exotic metrics such as the EBITDA which is earnings before interest, tax, depreciation and amortisation. Operating profit, also known as EBIT – earnings before interest and tax- is the business’s profit, excluding any deductions you’d normally make for interest and taxes but after deducting depreciation and amortisation.

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Turnover is vanity, profit is sanity and cash flow is reality.

Think of the profit and loss statement as a map, with turnover at the top, net profit at the bottom, and other profit metrics as destinations enroute to it.

Revenue Vs. Profit – An Overview

Revenue and profit are closely tied together. To be profitable, a business has to have revenue, or money coming in from income streams. That said, a business may have revenue but still not be profitable if the operating expenses exceed what’s earned.

You may have also heard the term net profits, which is synonymous with profits and net income. Net profit is the business’s bottom line. To calculate net profit, subtract Cost of Goods Sold (COGS), all expenses (including administrative, operating, and others), depreciation, interest, and business taxes from total sales.

To obtain a healthy profit, you need to know what level of turnover your business has to achieve. Look at the pricing of your product or services, company spending and use of your profits, and decide how each of these will help you meet your target. It would be wise to take into consideration what is happening economically, your business targets and the current situation in your industry and the market when making these decisions.

The profit your business is making determines the health of your company. This is because profit is the money you have made after meeting your business costs, so it can clearly show you if your business is in trouble or on the right track.

Profit Vs Cash Flow

It is very important to understand the difference between profit and net cash flow. The major difference between the two is the methodology adopted to consider revenue and expenses in statements of profit and loss and cash flow. The profit and loss statement to present profit considers revenue and cost on the accrual basis and in the cash flow, they are considered based on actual receipt and payment. For the same reason, non-cash expenses like depreciation, amortisation, provisions, deferred revenue and expenses are not included in cash flow.

There are few techniques to prepare cash flow and one is the indirect method. Under this method, adjustments are made to the net profit figure derived through the profit and loss statement for the non-cash and deferred revenues and expenses.

For example, to calculate net cash flow from net profit consider the following

Depreciation and amortisation are added back to profit (profit and loss) since they were deducted to derive the profit amount.
Depreciation is a non-cash expense in the year of reporting though there was a cash outlay when cash was invested in the respective asset.
Such above-mentioned cash investment in the asset is taken in cash flow in the year of investment.
Customer invoices raised and shown in profit and loss but not collected are deducted from profit, supplier invoices accounted for and shown in profit and loss but not yet paid are added back to profit.
Deferred revenue and provisions for expenses are reduced and added respectively.

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Profitability is, of course, critical to a company's existence, but growth is crucial to long-term survival.

Turnover (Revenue) or Profit: Which is Important?

Overview

The immediate answer to this question is – both. In normal circumstances, both are important and profit is relative to the revenue meaning more revenue will return more profit and a dip in revenue will result in loss or decreased profit.

However, focusing on turnover, in isolation, is not always the answer. You can have all the sales you like but if you’re spending more than you’re bringing in, the business won’t last, let alone grow.

Making a crore rupee in turnover is not the same as putting a crore rupee in your pocket. Out of this crore in turnover, you need to pay for the expenses incurred towards producing and or delivering the final product or service that you are selling. The expenses include costs of materials, pay for your staff, premises and all the other costs required to be spent for running the business. What you put in your pocket is likely to be nowhere near the crore you earned as total sales.

In addition, if the business is growing rapidly you will need to invest in more stock, more debtors, better resources, good technology tools, bigger premises and the like. The result can often be that whilst your top line is growing, you’ve got no cash. This is a dangerous situation.

This applies also to established businesses that have been around for a long time but have found “the next big thing”, and invest heavily in growing business in that new area. Often, rapid growth in sales is built on the back of aggressive pricing by buying market share. That might be a good strategy for the short term, but sooner or later you have to make money out of those sales or your business is likely to perish.

Profitability

When the business grows in sales rapidly it is generally a good time to improve margin by getting a good price, even at the risk of losing sales. In other words, you’ve acquired and retained a loyal customer line, and sales are growing strongly but you’ve never made a profit. Though this is not a hard and fast rule, the ideal situation is to increase sales and profit in sync unless certain thought-out strategies are in place and the business owners are well aware of this.

Profit goes directly to the owners of a company or shareholders, or it is reinvested in the company. Profit, for any company, is the primary goal, and with a company that does not initially have investors or financing, profit may be the corporation’s only capital. On the other hand, revenue is shared among many stakeholders like suppliers, employees, lenders and finally the shareholders.

Without sufficient capital or the financial resources available to sustain and run a company, business is certain to fail. No business can survive for a long time without making a profit, though measuring a company’s profitability, both current and future, is critical in evaluating the company. Although a company can use financing to sustain itself, it is ultimately a liability, not an asset.

Growth

Determining and focusing on profitability at the beginning, or start-up, of a company, cannot be avoided. At the same time, growth of market and sales is the means to achieving that initial profitability. Identifying growth opportunities should become the next important item on any company’s long term goal list after a company moves beyond the early-stage start-up phase.

Growth for a business is essentially an expansion, making the company bigger, increasing its market share and ultimately making it more profitable through the synergy of strengths and economies of scale. Measuring growth is possible by looking at some pertinent metrics, such as overall sales, staff strength, market share, and turnover.

Though the present profitability of a company may be good, growth opportunities should always be explored, since they offer opportunities for greater overall profitability and keeps analysts and potential investors interested in the company.

Growth enhances the value of your business. Having a proper understanding of the present condition of any company is essential to creating a successful growth strategy. If a company has too many weak areas, such as performance, sales or marketability, a premature attempt to grow can ultimately collapse the business. A first step is the consolidation of current markets, essentially meaning the lockdown of the current state of a company before attempting to alter it with growth.

There is Only One Key Measure of Overall Business Performance, And it is Not Revenue.

Start-ups and fast-growing companies need to be aware that growth can be both good and bad. To be successful and remain in business, both profitability and growth are important and necessary for a company to survive and remain attractive to investors and analysts.

At a broader level, you have two options to increase your margin, either by lifting prices or buying better. In other words, by increasing the sales realisation or reducing the cost. Your rate of growth may slow down but you make more money and you’ll find improvements in your cash flow.

You’ve invested money in your business and you should understand how much and what profit you need to generate to earn an attractive return on that capital invested. This is called your return on capital employed (ROCE). You should get a return on your investment that is better than the return you might get in other alternative investment opportunities. That is the real test of the performance of your business. Though not part of this discussion, the return has to be read in terms of present value using discounted cash flow techniques.

The Bottom Line

Profitability and growth go hand-in-hand when it comes to success in business. Profit is key to basic financial survival as a corporate entity, while growth is key to profit and long-term success. Investors should weigh each factor to understand which one, revenue or profit, is more important at a particular point in time of your business as they are correlated and interconnected. The importance can change from revenue to profit and vice-versa spending on the stage of your business.

We won’t go into more details about various economic and financial theories which depict different pictures than what we see at the first look. It is not always true that profit is linearly proportional to revenue. Sometimes, you may make more profit, not only in terms of a per cent but in an absolute amount too, on lesser revenue. It all depends on many factors like the cost structure – the proportion between variable and fixed costs-, dynamics of pricing – whether market decided or business decided-, whether in a monopolistic or competitive market, the status of your product or services in the market and many such factors.

Profitability is, of course, critical to a company’s existence, but growth is crucial to long-term survival. A growing company may not be earning any profits yet, but may nevertheless provide a great investment opportunity. Last but the least, you need to look at both profit and cash flow as they give different perspectives to profitability.

Expert Connect

Chinmay Ananda
Business Storyteller, Financial Educator Finance Academy
Connect with our expert to assess the financial strategy of your business and take your fundraising plan to next level

The post Turnover or Leftover; What is important? appeared first on Dutch Uncles.

How often you need to analyse financial statements and what should you look for?

Joseph Varughese — Fri, 28 May 2021 13:35:04 +0000

What does it mean by Financial Statements?

When we hear the term ‘financial statements’ what comes to mind are three financial reports viz. Profit and Loss or Income statement, Balance Sheet and Cash Flow statement. These three statements hold a prominent position in the management of an organisation as they are statutory and hence mandatory reports that are to be prepared, get audited, filed with statutory and tax authorities, placed before shareholders in general meetings. These reports are required to be prepared annually and every quarterly in the case of listed or publicly held companies.

Financial statement analysis as a process uses analytical procedures to evaluate the financial health, risks, performance and future potential of a business. Even the smallest business should do financial statement analysis and can benefit from the results as a guide for the business owner. What level and type of analysis are required to be performed depends on certain factors; the form of the business, if publicly held, or if the business is for sale, for external parties like investors or for making their investing decisions.

Financial statements communicate the financial position and performance of a business for the consumption of the board of directors, senior management and external parties. The three most important financial statements that are generally used for financial statement analysis are:

Profit and Loss Statement: This report shows an organisation’s financial performance over a period showing the revenue and expenses. It is called an Income statement in the US.
Balance Sheet: The balance sheet shows an organisation’s financial position at a point in time. It shows the assets, liabilities, owner’s equity, as well as the company’s net worth.
Statement of Cash Flows: The statement of cash flows shows the organisation’s cash inflows and outflows during any given period.

These reports are mandatory and at the same time very crucial for internal and external stakeholders. These are the reports that are reviewed and considered by investors while planning investment, lenders when evaluating credit applications, markets while considering portfolio investments, tax authorities for assessment of income tax returns among many other such uses.

Businesses, small and big, must be well informed of internal and external factors that affect their business to survive in a competitive and volatile environment, and one of the vital competencies they must develop is to read and understand important financial statements. Running a business without understanding these financial reports is like driving a car without a dashboard.

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Running a business without understanding the financial reports is like driving a car without a dashboard.

Users of Financial Statement Analysis

The various users of financial statement analysis include:

Management of the company: The topmost priority of the board of directors and senior management is in the financial performance of their organisation. For the board and management, the finance department of the company does an ongoing analysis of the company’s financial statements, particularly operational metrics that aren’t seen by external entities.
Investors: The prospective investors scrutinize the health of the organization by performing due diligence using analysis of the financial statements to understand the company’s ability to continue as a going concern, issue dividends, generate cash flows and ensure that the company continues to grow at least at the historical or current rate.
Creditors: A creditor or anyone for that matter, who has provided funds to the company will be interested to know the ability of the company to pay back the debt and obligation, and their cash management measures.
Regulatory authorities: In cases of publicly held or listed companies, the Securities and Exchange Board of India (SEBI) examines their financial statements to see if the statements conform to accounting standards as well as the SEBI rules and guidelines. In addition, financial statements are to be filed with ROC and Tax authorities.
Shareholders or members: Audited financial statements are to be placed before shareholders in annual meetings and have to be adopted or approved by the shareholder members.

Performing analysis of financial statements

Investigating the health of the business, finding logical explanations for the variances and performing changes based on the positive or negative trends are the ultimate goals of the financial statement analysis. The most common methods and techniques used to perform Financial Statement Analysis are:

Horizontal Analysis

The horizontal analysis, also referred to as trend analysis, is a two-year or multi-year comparison of the financial statements and their elements. This comparison provides the stakeholders with insight into the aspects that could contribute significantly to the financial position or profitability of the organisation. For instance, a company earned Rs. 4 lakhs more than its previous year. This increase in turnover appears to be a positive development at the first glance. However, when it is learnt that the costs of goods and services sold increased by Rs. 5 lakhs resulting in a negative impact of Rs.1 lakh, the positive picture of this additional turnover of Rs. 4 lakhs is changed to a less positive or negative picture.

Horizontal analysis can be performed mainly in two different ways:

- - Direct comparison: This type of horizontal analysis compares the profit and loss statement and balance sheet on a line-by-line basis. For example, it compares each line of the financial statements for two or more years to determine the absolute amount by which each line item increases or decreases. This helps you determine which line items need to be investigated further.
  - Percentage method: It is generally easier to interpret percentages than absolute amounts under the direct comparison method. You use two periods of financial data and compare the accounts or items by dividing the first year by the second year and converting them into percentages. You will see how much the change was in the second period on a percentage basis.

Horizontal analysis allows you to spot trends or variances in your company’s financial position between years. It shows you where your company is doing well and where you need to give more attention. It is not only helpful to management but also investors and creditors.

Vertical Analysis

Vertical analysis is a financial statement analysis technique in which every line item of the financial statements is listed as percentages, based on a figure within the financial statement. By doing this analysis, insight would be created about the changes in the allocation and distribution of the total assets or the percentage of each expense item to earn one unit of revenue. By representing the different items as a percentage of the total turnover, it’s easy to get insight into the whole company’s or every division’s costs, expenses and profit.

A profit and loss statement vertical analysis provides you with insight into the cost of goods sold, gross margin, operating expenses, operating profit, EBITDA etc. as a percentage of sales for the period. A balance sheet vertical analysis can be used to show the line item percentages of your total assets. For instance, if you have reported sales at Rs. 50,00,000 and cost goods sold at Rs.30,00.000 leaving Rs.20,00,000 as gross profit, it means your gross profit is 40% and cost of goods sold is 60%. Likewise, if you have total assets of Rs. 2,000,000 and Rs.200,000 in cash, your cash is 10% of your total assets. Likewise, if your current liabilities is Rs.500,000, then your current liabilities are 25% of your total assets.

Ratio Analysis

A ratio between two items is used for representing the relationships between different figures on the profit and loss account, balance sheet, cash flow statement or other financial reports. Ratio analysis is used for obtaining a quick insight into the organisation’s financial performance in various key areas and comparing companies that differ in size as well as with the industry averages. Additionally, ratios could be used in the form of trend analysis for identifying the areas within an organization where performance has deteriorated or improved over time. Some of the key ratios include:

- - Profitability Ratios: Profitability ratios measure the efficiency and performance of the management. Some of the commonly used profitability ratios include gross profit ratio, net profit ratio, return on equity capital, return on capital employed, operating ratio, earnings per share and dividends yield ratio.
  - Liquidity Ratios: These are calculated to ascertain whether a company can meet all of its existing business obligations. The most important liquidity ratios are:
    Current ratio: shows the ability to pay off current liabilities (current assets vs current liabilities)
    Quick ratio: from the above, subtracts inventory from current assets to express a more strict indicator of the ability to pay current liabilities
    Cash ratio: percentage of cash you have for short-term debts
  - Solvency Ratios: Solvency ratios evaluate the organisation’s ability to meet its long-term interest expenses and also repayment obligations. Common solvency ratios are:
    Debt to equity: the amount of equity that can cover debts
    Debt to Asset: indicates the percentage of assets that are funded by debt
    Interest Coverage: measures the ability of the business to meet its interest charges on debt. Derived by dividing Earnings before Interest and Taxes (EBIT) by Interest expenses
  - Efficiency / Activity Ratios: These ratios let you know how well your business uses its assets. Common efficiency ratios are:
    Inventory turnover: shows how often your inventory is sold and restocked in a period
    Accounts receivable turnover: how often your accounts receivable are collected
    Accounts payable turnover: measures how fast you pay off your creditors
    Total asset turnover: shows how well you use your total assets to generate revenue
    Working Capital Turnover Ratio: how effective a business is at generating sales for every rupee of working capital. This is calculated by dividing Sales by Working Capital (Current Assets – Current Liabilities)

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Industry analysis is valuable because you can get at least a rough idea if the company is on the right track compared to your peers and competitors in the same industry.

If you don’t measure, you cannot improve

Which financial reports should be analysed?

Businesses need constant information on a variety of parameters and trends such as market demand, market share, price, competitive activity and opportunity, cost of production, investment, fund needs, cost of capital, and taxes. Of these, the most vital ones are the financial information such as revenues, costs, profits, capital, salaries, loans and investments.

As explained above, these financial reports commonly and statutorily known as financial statements are to be prepared mandatorily. By learning to read these essential financial statements a lot of valuable and critical information can be gathered by different stakeholders of the company which may include owners, investors, lenders, creditors, the lay public, authorities, financial analysts and other interested parties.

In addition to the three reports discussed above, many organisations prepare, review and analyse various other reports internally. They are better known as management reports and normally not shared with any external stakeholders unless decided to by the management. These reports vary in form and content depending on the industry, size and form of the organisation. The nature of such management reports for a manufacturing organisation is naturally different from that of a company in the service industry.

The management reports are normally customised to the requirements of the management of a company and have no standard norms for it. However, they normally include analysis of working capital, accounts receivable ageing, contribution (sales – variable cost), budgets, budget vs actual variance, standard costing and variance, cost structure, product cost, break-even, life cycle costing, optimal product mix etc depending on the industry, size, type of business and form of the organisation.

The above-mentioned management reports along with the financial statements need to be analysed by companies, small and big, to ensure that the financial foundation and health of the organisation are sound and intact, and deficiencies are identified for taking measures to solve them. Though not exhaustive at all, here are some of the metrics and measurements an entrepreneur must have a grip on.

Be aware that your company owns enough to pay off what your company owes meaning you have sufficient assets to pay off your liabilities.
Understand the difference between long term and short term assets and liabilities and hence the urgent and non-urgent liabilities and how they can be taken care of at the required time.
Be sure that you can meet the expenses and generate enough profits to service capital, debt and equity.
Importance to be in the know of how much money is blocked with your customers i.e, accounts receivable, and inventory and if it is normal or abnormal as per accepted standards and benchmarks
Evaluate if your capital or investment is generating the required return
To have a plan as to when and how much funds you will require to sustain and grow your business in the short-run and long-run
Know how to price or bid for your products or services or projects
Get an idea of optimal product mix that will generate profits optimally
Be sure that the company complies with taxes and other statutory obligations

In addition to the above, you can perform industry analysis to look at a company by comparing the financial ratios to those of an entire industry to see how the company performs in comparison. Periods are matched and industry average ratios are used for purposes of comparison. Industry analysis is valuable because you can get at least a rough idea if the company is on the right track compared to your peers and competitors in the same industry.

How often to analyse?

Financial statements are prepared, reviewed and analysed annually and in certain cases every quarter. For outsiders and external stakeholders, mostly financial statements are the only sources of financial information. Management reports are internal and it is not mandatory to give external stakeholders access to them.

Mandatory or not, all companies must prepare financial statements and management reports every month for proper review and analysis to help you with decision making and devise corrective measures where needed. This is all the more relevant and crucial for small and startup companies because small companies in the early stages cannot withstand even minute disruptions in the market and therefore intensive scrutiny of each item in its financial reports is a must. Annual reports and their review are important but not at all sufficient for conducting the operations successfully particularly of start-ups and small enterprises; it is more of a post mortem.

You can still decide to prepare a balance sheet and cash flow quarterly if your resources don’t allow it to be monthly. However, it is important that at least profit and loss statements, receivable ageing, working capital are generated, reviewed and analysed every month. This is because monthly reviews give you inputs on how your topline and bottom-line are performing vis-a-vis previous year or budget or industry standards, how fast to collect receivables so that you can pay off liabilities on account of supplies and operating expenses without which a business will struggle to survive.

Expert Connect

Chinmay Ananda
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Finance for Non-Finance Entrepreneurs is not a choice but is the need of the hour!

Joseph Varughese — Fri, 21 May 2021 08:05:04 +0000

A common tendency among entrepreneurs, particularly of startups, is to accord the least priority to finance and accounting; whether to know about it or get help on it. This is one mistake most non-finance entrepreneurs commit that can turn out to be very costly to their business.

Neglect Finance at your peril

Start-up entrepreneurs need to know a certain amount of finance for two reasons:

To get a feel of what is happening in their business in terms of its performance and outlook
Their cash flow will not permit them to onboard senior finance professionals in the early stages.

If startup founders don’t have the budget to hire an accountant, they will need to be their own. Even if the company does have an accountant, entrepreneurs should understand enough about the subject to have meaningful conversations with their potential partners, investors, auditors, authorities, employees, customers, suppliers, and other internal and external stakeholders.

That said, having reasonable knowledge of finance and accountancy is important not only for startup entrepreneurs but for anyone running or managing a business. Even when you have qualified finance professionals at senior levels in your organisation, it is of utmost importance that you understand finance.

Managing costs, cash flow, invoices, vendors, collection, taxes and payroll probably isn’t what a start-up entrepreneur imagined would do when he decided to launch his own business. But they are critical components of running any successful company, especially in the early stages when they are both steering the ship and running the show.

For almost all organisations, accounting and finance influence nearly every facet of their business. Whether you’re applying for a business loan or grant, managing payroll and employee benefits, paying expenses like rent and utilities, invoicing vendors, pricing your products or services, seeking investors, projecting growth, invoicing customers and collecting money, the accounting will form the basis of everything you do in business. In other words, each and everything you do in business has a financial impact one way or another.

An entrepreneur having a stronghold on finance stands to gain the following advantages for the business:

A strong understanding of assets and liabilities, what business owns and what business owes
Strategic decision making based on data from Profit and Loss Statement (Income statement in the US), Balance Sheet and Cash Flow statement
It makes the business ready for fundraising
It prepares the business to manage costs, working capital and risks

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The ability to sustain the business during the crisis and scale in a profitable way calls for a reasonable understanding of finance and accounting.

While business is getting established

Most founders – particularly in the early days of their business – are focused on acquiring and retaining their first clients and customers. While you are busy with generating revenue, who is going to maintain the books and manage the business’s finances and compliances?

Without a full-time accountant on board, it can be hard for the entrepreneur to do anything more than just the bare minimum in terms of financial analysis. You may outsource the bare minimum accounting work to accounting service providers but you should still have some basic knowledge of accounting and finance to manage the service provider to avoid ending up in a mess.

You need to be in control

A financially literate business owner is more likely to be fully in control of his/her business. Gaining an understanding of what financial statements viz. balance sheets, profit and loss statements and cash flow mean provides a clear view of the financial performance and state of your enterprise and subsequently facilitates good business decisions.

As a business owner you don’t have to run all of the financial functions, but gaining some degree of financial acumen gives you the best chance of building a business that can thrive with a solid foundation, and can prepare you for a number of the challenges that you will inevitably encounter on your journey.

While your business scale-up

All entrepreneurs need adequate financing to launch and subsequently grow their businesses. Access to loans or credit lines or funding is a key factor in the process of expansion and growth for startup enterprises. Finance helps the entrepreneurs decide when to go for IPO or other funding sources.

When the time comes to talk to private equity firms, banks or investors the ability to be able to talk the talk will undoubtedly prove to be invaluable and it calls for financial literacy on the part of non-finance entrepreneurs. Understanding the fundamentals of the financial tools that enable businesses to operate successfully helps entrepreneurs not only with formulating their overall strategy but also with staying on top of nitty-gritty details like customers who haven’t paid up, suppliers who have billed too much or are not paid in time or delay supplies, current liabilities that need to be settled immediately or numbers that used to be black slipping to the red in your Profit and Loss statement.

All startup businesses need to grow profitably to succeed. The ability to sustain the business during the crisis and scale in a profitable way calls for a reasonable understanding of finance and accounting. The knowledge of finance will also make you better equipped to deal with the finance professionals whose job is to assure the integrity of your business’s accounts and finance.

The health of your business to a great extent depends on how much understanding you have of finance as a non-finance entrepreneur. Every entrepreneur must know the below financial tools and techniques if you want to enter the world of entrepreneurship and run a business successfully.

Entrepreneurs must understand crucial financial tools

Managing Cash Flow

‘Cash is king’ is a time-tested saying and it is true. This is true for all businesses whether established companies or startups in their early stages. For many businesses, especially the new ones, where credit lines are limited and financing is difficult, internally generated cash proves to be one of the most critical assets. It serves as the fuel to your company’s growth engine. Without it, you can’t pay suppliers and employees and you will find it difficult to maintain inventory, reach customers, and grow the business.

Paying due attention to cash inflows and outflows enables entrepreneurs to plan accordingly, prevent any unnecessary cash shortages, and reinvest or use excess cash judiciously to grow the business.

The reasons why you don’t have the luxury to neglect cash flow are the following:

- - Many start-ups fail because of poor cash flow management resulting in a cash crunch.
  - Entrepreneurs must perform cash flow analysis regularly. This will help you identify the risky situation and alert you to take measures to come out of such difficult situations.
  - Reviewing the amount of cash collected and used by a company in a set period and how much cash is available to perform other functions is one of the most difficult and critical aspects of financially understanding your business.
  - You will be putting your business in a very dangerous position if you don’t stay on top of your cash flow. However good your idea does not help you when you run out of money.

Maintaining a strong Balance Sheet

The balance sheet provides a snapshot of a company’s financial health and position at a particular point in time. It allows those running the business to quickly see what resources are available and how those resources were financed and show both the assets and liabilities. On another note, what you have right now and what you owe others.

Entrepreneurs can use the balance sheet to keep their business in control. While sales may be increasing exponentially, keeping an eye on the liabilities side of the balance sheet is important to the long-term success of the business. Even though investors care about growth potential, they also care about how much the company owns versus how much it owes. The balance sheet gives investors, and potential buyers, a solid understanding of where the company stands. Why should you know how to read a balance sheet? Here are the reasons:

- - A balance sheet is a report card that shows the financial position and health of the business.
  - A balance sheet helps you calculate the value of your company. Having an idea of the value can give you an insight into your plans.
  - A balance sheet also works as an early warning system. If your business is not producing growth equity, looking at the assets and liabilities on your balance sheet can help you find out why. For example, if your inventory is a part of your assets, if the inventory doesn’t sell quickly it can become your liability.

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Having sufficient knowledge of finance and accountancy can help non-finance entrepreneurs in steering their companies towards a growth path.

Identifying the Path to Profitability

Profitability is defined as how much money is left from the sales after all expenses have been subtracted. This may seem obvious for those interested in starting a business, but it can sometimes fade into lower priority during the early stages of a company.

It’s often necessary to take a loss early to reach a target market, acquire and retain customers, increase visibility, or launch products successfully, but this cannot be a long-term strategy. The Profit and Loss statement and other financial analysis dashboards give insight into the profitability and outlook of your business.

You must have total control over expenses and limit your fixed expenses at the beginning. A piece of sound knowledge and understanding of finance and accounting is a must to control cost through analysing what expenses the avoidance of which can affect the business and what expenses should be avoided.

Calculate your costs and margins, and decide on pricing

An entrepreneur particularly in the early stage must know how much he should charge for their products or services and how that impacts the profitability. If the business has competition, the market decides the price but the entrepreneur should be aware that price takes care of his costs and margin. If it is a new product or service, he should know what could be the ideal price at which he can make a profit and what the customers will be willing to pay for his /her products or services.

Non-finance entrepreneurs should have a reasonable grip on cost accounting techniques and applications to ensure the following:

- - There is data available about the cost to produce a good or deliver a service that is dynamic and constantly shifting due to internal factors or external factors like economic conditions.
  - Prompt and accurate decision making to make necessary adjustments to the pricing structures.
  - Have sound understanding of fixed and variable costs and contribution margin analysis.

Compliance

If you don’t give due importance to compliance with various laws and regulations, you may end up in trouble. You must have basic knowledge and update on various tax laws like income tax, GST, etc. and corporate laws like company laws, labour laws, etc. You should know when and how to pay taxes and file returns, when to deduct and pay TDS, what, when and how to comply with company laws, PF, ESIC, Gratuity, Shop and Establishment, etc.

In addition, an entrepreneur should keep updated on various incentives, tax benefits that central and state governments declare from time to time and through finance bills (budgets) for businesses particularly startups or you will stand to lose or forfeit such benefits.

Communicating about Money

Solid communication skills are essential to nearly every aspect of running a business, but they’re particularly important when dealing with finance and accounting. As an entrepreneur, you must be comfortable and able to discuss the hard numbers of your business – with employees, vendors, and investors, authorities, auditors or other stakeholders.

Forecasting the future of your business

For most entrepreneurs, growth is a key motivation. To grow successfully, an entrepreneur must be capable of forecasting the future outlook of their business. Accurate predictions about future revenues, future operating costs, future resource needs, and future profit levels are necessary to attract investors, secure funding, hire employees, allocate funds for marketing and capital expenditure, and onboard new clients or customers.

Capital Expenditure Vs Revenue or Operating Expenses

Non-finance entrepreneurs must be able to differentiate between capital expenditure and revenue expenditure (the expenses that are period expenses and are written off in the P&L in the financial year). Understanding the difference gives you an insight into whether each expense affects your profit or balance sheet reporting. This means if the expense is short-term or long-term. It also throws light into how an expense impacts future cash flows.

Valuation

This is one most important thing that keeps playing in the minds of start-up founders. Valuation helps business attract funding and financing at a lower cost or on favorable terms. An entrepreneur must have sufficient knowledge of valuation techniques to make sure that his business is valued at the value that her/his business is worth. Valuation is mostly done when the company is looking to sell a business or acquire or merge with other companies or dilute equity by acquiring funding or go for IPO.

A business valuation might include an analysis of the company’s management, its capital structure, its future earnings prospects or the market value of its assets. Common approaches to business valuation include a review of financial statements, discounting cash flow models and similar company comparisons. In the case of a listed company, the value of a business is its market cap.

Yes, knowledge of finance is a must for entrepreneurs

Whether you are considering starting your own business or have already taken the leap, strengthening your finance and accounting skills can enable you to reach your entrepreneurial goals.

Having sufficient knowledge of finance and accountancy can help non-finance entrepreneurs in steering their companies towards a growth path. The lack of financial literacy and the non-existence of the finance team can be detrimental to the survival and growth of your business.

Expert Connect

Chinmay Ananda
Business Storyteller, Financial Educator Finance Academy
Connect with our expert to assess the financial strategy of your business and take your fundraising plan to next level

The post Finance for Non-Finance Entrepreneurs is not a choice but is the need of the hour! appeared first on Dutch Uncles.

Please don’t get confused with accounting vs finance!

Joseph Varughese — Fri, 14 May 2021 08:50:04 +0000

The key difference between finance and accounting is that finance is the management of the money and the investment of individuals, organisations and other entities, whereas, accounting is the process of maintaining financial records as well as reporting the financial affairs of the organisation to provide a true and fair view of the financial performance and position of the organisation.

Accounting Vs Finance: an overview

In simple terms, accounting is about recording and maintaining monetary or financial transactions commonly known as books of accounts, reporting on financial results and position known as financial statements, auditing the accounts, complying with tax and other statutory obligations whereas finance is about analysing, planning, controlling and managing the assets and liabilities of an organisation for its future growth and sustenance. In other words, accounting is about today and finance is about tomorrow.

However, finance and accounting are terms often used interchangeably. This is not strictly correct or wrong. While both functions are related to the management and control of an organisation’s assets and liabilities, each discipline has a different scope and focus. When it comes to evaluating the financial health of an organisation and making strategic financial decisions, it’s important to have an in-depth understanding and working knowledge of both disciplines.

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Finance and Accounting both are dependent on each other, in such a way that accounting is a part of finance and finance is dependent on accounting.

Finance is often considered as a broader term under which accounting comes as a subset. This is also not exactly true though at the same time this is not without substance. For example, the finance or accounting function, though named differently in each organisation, is responsible for all financial and accounting functions in an organisation.

Finance and Accounting both are dependent on each other, in such a way that accounting is a part of finance and finance is dependent on accounting. The financial analysis is done with the help of the financial reports or statements, an accounting output, submitted by the auditor. In other words, they both are very closely interconnected and interdependent, or we can say, finance begins where accounting ends. While it is true that finance and accounting both have evolved from economics, it is finance that is more related to economics.

Finance professionals do analyse and advise their clients or management of the organisation they work for as to which securities or portfolios or financial products they should or should not invest in from short term or long term or retirement perspectives.

Both accountants and finance professionals work for financial services organisations, businesses, and government agencies. However, they provide different services for their clients and employers. While accountants can help with your tax advice, provide audit services, a financial advisor can help plan and save for retirement or advice on the best investment products.

Accounting can also be broken down into managerial accounting and financial accounting. The main difference between managerial and financial accounting lies in the presentation of information and its use. Managerial accounting, also known as management accounting or cost accounting, focuses on internal reporting that is used by management for planning and decision making, while financial accounting focuses on aggregating financial information into financial statements, which are used both internally and externally.

Major differences between Finance and Accounting

Accounting vs. Finance: The basics

The difference between finance and accounting is that accounting focuses on the day-to-day flow of money in and out of a company, whereas finance is a broader term for the management of assets and liabilities and the planning for future growth of the organisation.

If you want to take a detailed look at a company’s books of accounts and financial position you need to be skilled more in accounting. It’s often said that accounting looks back to a company’s past financial transactions and performance, whereas finance looks forward to planning future acquisition and management of its assets.

Accounting is more about accurate reporting of what has already happened, compliance with corporate and tax laws, and accounting standards relevant to the respective country; it is Ind-AS in India, US GAAP in the USA, IFRS in Europe. On the other hand, finance is about looking forward and reaping benefits from investments, growing the value of the organisation, and mitigating risks and losses. Finance looks at a longer time horizon whereas accounting is typical of a one-year time frame.

Finance refers to how a person or organisation generates and uses capital—in other words, how its funds are managed. This often encompasses activities such as investing, borrowing, lending, planning, budgeting, and forecasting. The field of finance can be broken down into three branches viz. personal finance (for individuals) corporate finance, and public finance (for the government) depending on whose finance is managed.

The typical activities involved in accounting include summarising financial position and publishing thorough financial statements—including income statements or profit and loss statements, balance sheets, and statements of cash flow—that are used to understand an organisation’s financial position at a given time.

Compliance

Accounting has to comply with many statutes like tax laws, company and other corporate laws, accounting standards, rules and regulations of central banks like RBI in India or Federal Reserve System in the USA, stock exchange regulators like Securities and Exchange Board of India (SEBI) in India or Securities and Exchange Commission (SEC) in the USA, and as well report to creditors, shareholders, investors and other stakeholders.

Finance has no such statutory obligations except maybe concerning central banks (RBI in India) or securities boards (SEBI in India) if compliances related to some of the finance activities like IPO, exchange listing, borrowing, forex matters, investments become finance mandates.

Scope and focus

Both finance and accounting operate on different levels of management of the assets and liabilities of an organisation. While accounting provides a snapshot of an organization’s financial situation using past and present transactional data, finance is inherently forward-looking assuming that all value comes from the future.

In accounting, insight into an organisation’s financial position is gained through what is known as the “accounting equation,” which is: Assets = Liabilities + Shareholders’ fund or equity as is seen in a Balance Sheet. One side of the balance sheet are Assets and another side are Liabilities and Shareholders’ funds or equity. Both sides will always be equal.

The above formula looks at what a company owns (its assets) by way of fixed assets (like plant and machinery, computers, furniture etc) and current assets (like accounts receivable, cash, inventory etc.), what it owes (its liabilities) by way of long term liabilities (loans and liabilities payable after one year) and current liabilities (accounts payable, overdraft etc.), and the residual, which is assets minus liabilities, belongs to shareholders (fund or equity) which constitutes paid-up capital, reserves and surplus and retained earnings.

Finance considers cash as king and looks at business through the lens of cash. While accounting relies on transactional data, finance looks at how effectively an organisation generates and uses cash through the use of several measurements.

Free cash flow is arguably the most important financial tool or technique, which examines how much money a company has to distribute to investors and shareholders or reinvest after all expenses have been met. It’s a strong indicator of profitability and can be used to make investment decisions today based on an expectation of future cash inflows.

There is always a difference between the profit as per profit and loss statement ( accounting) and cash generated as per cash flow (finance) because cash flow does not consider non-cash expenses like depreciation and uncollected receivable or unpaid payables. Only cash realised and cash disbursed are considered in the cash flow.

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An entrepreneur, particularly of start-ups, should understand finance more than accounting.

Measurement of financial performance

This is one major difference in scope that underscores the underlying principles of accounting and finance. Most of the accounting standards, tax authorities and corporate laws insist on maintaining accounts on an accrual basis. The accrual method of accounting mandates recording financial transactions as they are incurred or earned as opposed to when they are paid or received in cash.

For example, you have invoiced a customer on 30th March 2021 but payment is received on 28th April 2021, it will be accounted as revenue in the financial year ending 31st March 2021 under the accrual accounting method. In contrast, in cash flow, this revenue will be considered only in the next financial year starting on 1st April 2021.

The accrual accounting principle makes it possible to compare the year-on-year growth of a company’s revenues, costs, and profits without factoring in one-off events, as well as seasonal and cyclical changes. It also assumes matching principles that expenses incurred for earning an income should both be accounted for in the same period.

Finance does not follow the accrual method, instead believes that the best way to measure economic returns from a company is to calculate the cash it’s able to generate and leverage, which is dependent on when that cash is exchanged, paid or received.

Assessing Value

Another point of difference between the two disciplines is their value approach. In accounting, the assets and liabilities are captured at historical cost. This is handled much differently in finance, through a method known as valuation, to determine the worth of a company. Finance considers the time value of money in high esteem. The time value of money is a widely accepted notion that there is a greater benefit to receiving a sum of money now rather than an identical sum later.

The popular technique to service the present value of future benefits or cash flows is discounted cash flow analysis, which is applied to a series of cash flows over a period of time. To apply the method, all future cash flows are estimated and discounted by using the cost of capital to give their present values (PVs). The sum of all future cash flows, both incoming and outgoing, is the net present value (NPV), which is taken as the value of the cash flows in question. Here is the DCF formula:

where: CF = Cash Flow in the Period, r = the interest rate or discount rate. n = the period number.

For example, assuming a 5% annual interest rate, Re.1 in a savings account will be worth Rs. 1.05 in a year. Similarly, if Rs.1 payment is delayed for a year, its present value (pv) is Re.0. 95 because it cannot be put in your savings account to earn interest. We can calculate the PV using the above formula as: 1 (cf) /(1+05 (r))^1 (n) = .0.95
The valuation of the business is done pre and post-funding or acquisition using discounted cash flow (dcf) and with/or a combination of other methods. This is one finance tool the knowledge of that cannot be skipped by any entrepreneur.

Leveraging financial know-how

Both finance and accounting are highly valuable and important tools for assessing a company’s position and performance. By understanding the underlying principles of the two disciplines and how they contrast and complement, you can develop greater financial intuition and make better business decisions. That is why almost all accounting qualifications have curriculums that give equal importance to both accounting and finance. No finance leadership can do justice to their role without having a deep understanding and expertise in both disciplines.

For those who want to better understand their organisation’s financial performance in the context of the markets and external factors, and contribute to financial strategy, understanding the fundamentals of finance is crucial. Developing your financial acumen is key to making better business decisions.

Author’s views

A lot has already been written by academicians, educational institutions, career consultants, subject matter experts and researchers on Accounting Vs Finance from different standpoints.

An entrepreneur, particularly of start-ups, should understand finance more than accounting. This is because of two reasons; one is that accounting tasks especially in the early stages can be outsourced to accounting service providers but it is not that easy to do the same for finance though virtual CFO services are plenty these days.

In the early stages of a start-up, the entrepreneur should have a grip on working capital, funding, cash flows, risks and more importantly valuation which are all finance functions. That said, some basic understanding of accounting, even though outsourced, is a must to understand finance too. In nutshell, both accounting and finance vary in scope and substance but are interconnected, interrelated and complementary.

Expert Connect

Chinmay Ananda
Business Storyteller, Financial Educator at Finance Academy
Reach out to him for any financial advice for your business

The post Please don’t get confused with accounting vs finance! appeared first on Dutch Uncles.

Founders! Are You Listening: When It is Not All Good Do Not Shy to Ask for Help?

Joseph Varughese — Sun, 02 May 2021 03:35:04 +0000

‘To be the person who will give and not take, is not a matter of pride or generosity, but probably a conceited view of your superior self-sufficiency’, is an apt statement with regard to founders, for that matter anyone, who has inhibition in asking for help when needed.

It takes a lot of courage, confidence and willingness to seek help in order to be a great leader and entrepreneur who can forge a new path and achieve what others have not been able to accomplish in the past. It is also very important to be self-aware that you are going to make a bunch of mistakes during your journey, and be more than just okay with it.

Shying away from asking for help when in need would lower your chances of coming out of difficult situations and achieving success. I have no second thought to say that finding the help you need is part of your job as an entrepreneur, and learning to ask for it will bring you that much closer to success.

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Confident leaders are those who are prepared to admit they don’t have all the answers and are willing to ask for help

Founders always have the pressure of many responsibilities on their shoulders of conceiving a world-changing vision for their new product, impressing potential investors, rallying employees and exhibiting the business acumen to navigate through various stages of growth of their business among others. The challenge emerges when you have to be dynamic in your approach and thoughts to pivot in volatile and changing situations like recession, pandemic. That is when the urgency of the need for help by way of advice arises.

There is a natural inclination for founders to retreat and turn inward in face of crisis. They feel insecure and demeaning to look out for advice from outside and even within the company whether the situation, for example, is of unprecedented spike in demand or slowdown in demand.

Founders shouldn’t feel that they have to go it alone. An abundance of support and high-quality advice can make all the difference in difficult times, which means the importance of getting the most out of your existing network of advisors and investors need not to be overemphasized. Research shows that most founders do not know how to ask, can’t ask, or do not want to ask.

Founders are aware that there are no tried-and-true play books available on demand for the difficult situations founders are facing during the course of their path. Advice is by no means a silver bullet. The truth is that no one person — founder, investor, advisor or otherwise — has all the answers to every problem. An ability to effectively seek and hear out different perspectives from various sources can make a meaningful difference as founders try to fix the things for their startup. In other words, the mere act of listening, collecting and evaluating advice, even if it’s ultimately discarded, can be a useful guide for founders when all are not good. .

Confident leaders are those who are prepared to admit they don’t have all the answers and are willing to ask for help. Acknowledging your fear to ask for help but moving forward in spite of it makes a leader who knows when to ask for help, learns how to accept it with grace and is willing to offer help in return.

Building a successful business all alone simply is not possible, yet many entrepreneurs shy away from asking for help are support even within the company. The main reason for this is fear of rejection. You may consider the following points to remove your fear of rejection and increase the chances of getting what you need.

People want to help.

Researchers, academicians, theologians, founders, investors, and leaders all agree that helping others gives them a greater purpose and makes them feel good about themselves. The want to help others is a natural instinct that some studies show is present at birth. Give others an opportunity to help you, it makes everyone feel satisfied and happy.

In the midst of uncertainty and shifting priorities, your advisors will be more than interested to give you a helping hand by involving in the decisions you’re making as a founder. But without the right structure in place for asking and receiving advice, even a well-intentioned advice can only create more noise that complicates your decision-making process.

Patrick Ewers, an early LinkedIn director and relationship-building expert, agrees that the concept may sound remarkably simple, but he rarely sees people taking advantage of it. Ewers introduced the idea of ‘value payloads’. “I love the term value payload because it sounds so tangible,” says Ewers. “Value payloads are anything you provide to people that could help them. They could be introductions to people they want to meet, articles about a problem they are trying to solve, a note saying you saw their work and sent it to someone else. Most of the time it requires sending one email, which is easy to make a habit.”

Allusion of transparency.

Thinking that others should see what you’re struggling with and voluntarily step in to help is referred to by psychologists as allusion of transparency. I have heard some founders talking about their belief that someone in their life should know what they need and that they shouldn’t even have to ask. This is a misplaced expectation that may lead to disillusionment at times. Just ask for help, it makes life much simpler because no one is a mind reader.

No one will stop liking or respecting you.

It is nice to be kind and respectful, but let them know that you will understand if they are unable to offer you help, and ask your question outright without beating around the bush or becoming overly apologetic.

There are numerous important decisions resting on your shoulders as founders. You feel the weight of your employees, investors and advisors trusting you to make the right decisions, often with imperfect information. Asking for help from one of your advisors or investors or peers or senior employees can feel like you’re admitting that you don’t know something you’re supposed to. The best way for building deeper and meaningful relationships with your advisors and investors is by being candid and vulnerable.

First of all, you need to stop thinking that asking for help will be inconvenient to others. Asking for someone’s help is a sign of respect and will make them feel good. Follow these rules: try to figure out the answer before you ask for help? Next, think about the problem. Lastly, make a list of questions to ask. This will help your preparation make it more comfortable for you to ask for help.

Check how your colleagues ask for help

Your fears may not be unfounded that asking for help where you work could be perceived as a sign of weakness. If that’s the case, then find the ways others ask for and accept help at work. Watch and even ask someone who could help you with this critical, simple but important question: “What might be the best way to ask you for help on this project?” Let people give their perspectives on how to do it.

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The truth is that no one person – founder, investor, advisor or otherwise – has all the answers to every problem.

Give them details.

Rather than living with the problem and waiting for the other party to jump in to save you, tell them exactly what you are looking for. Sure, it feels better if they step up and offer help without you asking for it, but it’s not fair to expect that from them.
Take the guesswork out of it for the other person; when you lay it all out you set them up for success and you’ll get what you need from them.

Instead of seeking advice, ask for their candid feedback, additional information, more data which is a whole different story. Look for someone who can help you think about a problem in a way that you haven’t considered.

Everyone needs help in life, no matter who you are. The important thing is knowing who to go to for help and doing your due diligence in researching the issue first. After that is completed, approach the expert and let them know what you have found during your research and then your problem. This will show them that you are in real need of their expertise.

Here are the four areas to navigating advice:

First, choose who is in your network of people giving advice
Second, manage the psychology of advice – both your psychology and that of the advice giver
Third, differentiate the types of decisions you are trying to make when getting advice
Fourth, make judgement about good advice vs bad advice

Maximize strong advisor relationships.

As a founder, you’re used to measuring the success of your business with quantitative numbers, from pipeline to revenue to customer retention. However, advisory relationships have limited metrics to measure success and rather feedback tends to be qualitative. Amy Chang, founder of Accompany (a networking startup acquired by Cisco) and current EVP and GM at Cisco Collaboration, has mentioned that she amassed many advisors over the years but struggled with measuring the effectiveness of these relationships and their contributions.

Tell them why you chose them specifically.

In some instances, it’s a good idea to let the other party who is the advisor know why you chose them for help in the first place. You preempt the advisor by saying that it’s sometimes difficult to do everything for yourself. By stating the facts and your needs up front you can avert any attempt on the part of the advisor to dismiss your needs. He also knew exactly which of his many skills you are depending on to help you out.

When a specific someone comes to mind, be forthright about it. They will feel good about your observations and it helps to move the conversation right to the point.

Thank them but don’t make it transactional.

Like all successful relationships, advising is a two-way street. As a founder seeking advice from your mentors, investors and advisors, it’s crucial to make sure that you are demonstrating appreciation for those that help you tackle the twists and turns of running a startup. However, right now things are so chaotic that just saying “thank you” to those that have provided game-changing advice can get lost in the midst of other to-do list items.

Offering a favor in return for a favor can backfire on you as it can seem manipulative because we all know that offering a return favor makes it harder to say no. Thank them tactfully. A small gift card in the mail, flowers, or an otherwise meaningful token of your appreciation are all appropriate gestures.

Your friends, colleagues, peers, investors and relatives all have good reason to help you since they respect and care for you. Give others an opportunity to lend a hand, because it can make everyone happy.

Know what it means to follow up

This is one of the most important things that many don’t care about much. Whatever advice someone gives you, give them feedback on how it was considered, acted on or applied, and what happened as a result. Your advisors care deeply about giving advice or creating connections that make an impact for your business and want to know their time is being well spent. Letting them know that their guidance had an impact on you and your business is a critical best practice that will help you, them and other founders. However, one of the challenges involved in the follow-up process is staying organized and keeping track of where advisors have been helpful, especially when you spread your search for help across multiple advisors, investors and mentors.

Advice Paralysis

A piece of caution here. One of the best pieces of advice about advice I have heard came from Dennis Hightower, the former head of Disney International. “There are 13 ways of doing anything, and 11 of them will work. Just pick one and do it,”. In other words, there is not usually only one right choice. So most of the time, making a decision quickly and moving forward is the best way to take advice. Don’t worry about finding the one true path because often there may be many paths that can lead to success. Don’t get caught in advice paralysis.

The post Founders! Are You Listening: When It is Not All Good Do Not Shy to Ask for Help? appeared first on Dutch Uncles.

How to Get a Home Loan as an Entrepreneur?

Joseph Varughese — Mon, 26 Apr 2021 09:35:05 +0000

Indians across generations and geographies whether salaried or self-employed, young or old, rich or poor share a dream of owning a home. Ownership of a home remains a part and parcel of our national identity, social standing, personal achievement and security. It is, arguably, the single topmost dream of an average adult in India. At the same time, we cannot overlook the new fad of the new generation considering ownership of a house as an unwanted and avoidable burden and instead opting to live in a rented house.

Home, an average Indian’s topmost dream!

Till a few years back, say before 1990, people used to plan to own a house only post retirement using their savings, provident fund, gratuity, and other retirement benefits and corpus. Those were the days when home loans were unheard of in India. The financial market and banking products have undergone a lot of changes particularly post the economic liberalisation of the ‘90s.

Home loans have become easily available at low-interest rates, and in easy instalments and people have started opting for EMI in place of rent thereby owning houses at their early age. Almost all the commercial banks, both public and private sector, NFBCs and financial institutions like LIC have exclusive home loan arms or subsidiary companies under them.

The dream for houses and home loans have become an integral part of most of India’s adult population. However, home loans do not come that easily. Banks do proper due diligence before approving loans to ensure that their loans do not become NPAs and unrecoverable. The basic criteria that home loan companies evaluate are whether the applicant has recurring disposable income and will be able to pay EMI without default.

From the applicant’s perspective, factors such as interest rates and the loan amount will influence your choice between different loan products in the market. At the same time, multiple factors determine your eligibility for the loan. The importance of paying attention to these factors cannot be stressed enough, for they determine whether your loan application will be approved, how fast your loan application will be processed, and the amount, terms and tenure of the loan.

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Home loans have become easily available at low-interest rates, and in easy instalments and people have started opting for EMI in place of rent thereby owning houses at their early age.

How to plan a home loan?

Here’s looking at some of the top things that you must keep in mind when applying for a home loan to get the best deal and its smooth processing.

Type of employment

You can avail of a loan of up to 80 per cent of home value with most home loan companies. If you are a salaried individual, lender institutions review your net salary to evaluate your loan application for its eligibility, tenure and loan amount. A good rule of thumb that can give an indicator is to compare your EMI-to-net income ratio. If your salary falls under the INR 25,000-40,000 per month bracket, your EMI should not cross 50 per cent of your income. If it is more than INR 40,000, then the EMI should not exceed 65% of your income.

Housing finance companies calculate your loan repayment capacity by relying on your salary slip for the last six months. They also take into account your credit history, details of existing debt and EMIs, and your bank statements. The evaluation also factors in your Form 16 filing ( for the authenticity of income) for the last two years and 26AS (as a counter check from TDS) statement for two years. The number of family members who are dependent on you is also considered during the evaluation of your eligibility for the loan.

If you are self-employed, it would get a bit tougher for you. The risk perception regarding self-employed professionals is greater because lenders usually look for financial stability, the repaying capacity of the borrower irrespective of which profession is being done or carried out by you before approving the loan. Being an entrepreneur, particularly of an early-stage startup, your ability to generate income is a crucial factor in becoming eligible for a home loan. However, there are a host of options available today when it comes to availing loans, especially with the rise of new-age financial institutions that are keen to tap into this underserved market.

Now, with the technology available to evaluate loan applicants’ profile, things are improving for the self-employed. Lenders are looking to tap an under-served market like that of self-employed. The demand for home loans from the self-employed segment is growing across cities. So, now we have several housing finance companies offering home loans specifically designed for the self-employed. The loan tenure is also enhanced for those with their own business.

A good credit score is crucial

The importance and need of good credit score history cannot be overstated for anyone applying for a loan, whether salaried and self-employed professionals. Financial companies evaluate your entire credit report to establish your creditworthiness, which determines the loan amount, duration and interest rate. Your credit score, also known as the CIBIL score helps the lender to review aspects such as your previous loan repayment behaviour and history of credit card dues or delay or defaults in payment, etc. Your CIBIL score gets better if you clear your dues (such as postpaid telephone bills and existing EMIs) in time. A credit score of 750 or above is mostly a prerequisite to avail of a home loan.

In a credit report, home loan lenders also check if any previous loan is settled with write-offs or settlement by the institution. Write-offs occur when you settle a loan with a lender in case you’re unable to repay a loan. Applicants must do everything they can to improve their credit score before applying for a new loan. And repaying the written-off amount mentioned in the credit report is one such step they can take. Other steps include not defaulting on existing EMIs, avoiding borrowing too much at a time, diversifying your credit among others.

DTI (Debt-to-Income) and FOIR (Fixed Obligations to Income Ratio)

Whether salaried or self-employed, net monthly income is given prime importance by home loan lenders when considering a home loan application. They also ensure that the applicant has good repayment capacity with a low debt-to-income (DTI) ratio. Doing so underlines that you have robust financial health and can take new debt without unduly stressing available capital or income.

A DTI of 40 per cent is typically the threshold limit for sanctioning loans for most lenders. Your loans can get rejected outright if the DTI is higher than 40%, even if the credit score and net income meets the requirements, due to low financial liquidity.

Home loan lenders also use FOIR (Fixed Obligations to Income Ratio), a popular parameter, to determine loan eligibility. All the fixed obligations that a borrower is supposed to meet regularly every month form the FOIR. The fixed obligations do not include statutory deductions from the salary such as Provident Fund, professional tax and deductions for investments such as insurance or a recurring deposit.

As per the home loan bank’s eligibility criteria, the borrowers should restrict all their fixed obligations including the currently applying loan EMI to 50% of their monthly income. Or in other words, considering that 50% of your income is required for your living expenses, the lender would see that all your monthly loan obligations/liabilities should be only 50% of your monthly income.

Age of loan applicant

Age mainly impacts the duration or tenure of the loan, irrespective of whether you are a salaried or self-employed professional. The maximum tenure given by housing finance companies is 30 years for a salaried employee, which affects the EMI amount and the overall interest paid. The maximum age limit is extended by 3-5 years for self-employed applicants than salaried applicants.

Young applicants are often preferred, as they have lesser liabilities and are more likely to earn higher income over time. They also have more time to repay the loan. The risk appetite of most lenders decreases as the age of the borrower goes up since they have relatively lower FOIR and additional liabilities. If you are a home loan applicant between 41 to 60 years, you will need to close outstanding loans and include the income of your spouse before applying for new long-term credit.

Borrowers above 60 years of age are usually offered step-down repayment options and may require a younger, employed individual—typically an offspring or a close relative—to be a co-applicant. These options are generally exercised in cases when one of the co-applicants income is likely to decline after a certain period.

The event of moving into one’s home may be the culmination of a long-held aspiration but the journey typically consists of various steps taken and decisions made along the way. A home loan is one such step. By keeping the aforementioned factors in mind, applicants can ensure that this single step can become a giant leap towards owning their dream home.

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The Self-employed need to establish their business for a minimum of three years with at least two years of ascending profits lately before applying for a home loan.

- Sukanya Kumar, Founder & Director, RetailLending.com

Professionals have an edge

Home loan lenders prefer lending to self-employed professional categories such as doctors, chartered accountants, company secretaries, lawyers, and engineers. This is because they have specialized skills, domain knowledge and, most importantly, a steady income source.

Other categories of self-employed non-professionals find it difficult to get a home loan. Gaurav Gupta, the co-founder and CEO of the online aggregator of financial products and services MyLoanCare.in explains, “Self-employed non-professionals working in cyclical sectors have fluctuating monthly incomes from their professions. The probability of default on loan repayments is high. So, lending institutions reject home loan applications or offer loans at higher interest rates.”

Company stability and financials critical

The lender checks for the stability of the company by examining the financials when you apply for a home loan. Sukanya Kumar, Founder & Director of home loan advisory firm, RetailLending.com says, “The Self-employed need to establish their business for a minimum of three years with at least two years of ascending profits lately before applying for a home loan.” Otherwise, the loan assessor at the financial institution will reject the home loan application at the initial stage itself.

The start-ups with no profits to show will find it difficult to get home loan approval despite funding from investors in the business. Banks don’t consider sources of funding to operate the business while accessing the loan application nor do they consider future profits and cash flow from the business. Your business must show growth in cash profits, revenues and tangible net worth in the past three to five years at the time of applying for a home loan.

Basic requirements

In addition to the standard documents like bank statements of current and savings account for the last 6 months,, PAN, KYC, residential proof, the entrepreneurs must have the following things to get a home loan from any bank.

Your business profile

Proof of business existence

Educational qualification

Income tax returns of last 3 years with computation of income

Last 3 years CA certified/audited balance sheet and profit & loss account

The above documents are important to be submitted for all the entrepreneurs to get a home loan, in addition to meeting various criteria explained above.

A piece of advice

Though it looks to be a bit difficult for entrepreneurs, particularly those in the early stages, to get home loan approved, it is very much achievable if you do your homework properly and efficiently. First of all. you must be realistic about the amount you are looking for as a home loan. Your chances of getting a home loan approved is very high if you are willing to make a higher down payment while purchasing a home, show substantial savings and good business growth prospects, select a good property, and have a good credit score. It is important to build an income profile in a manner that can make you eligible for a home loan. This includes proper statutory compliance including payment and filing of ITR, GST, where applicable, showcasing a stable and adequate income stream, and proof of integrity in business and non-business transactions.

The post How to Get a Home Loan as an Entrepreneur? appeared first on Dutch Uncles.

How do You Measure Workers’ Productivity When Working From Home?

Joseph Varughese — Thu, 22 Apr 2021 09:30:48 +0000

The need to work, live and survive in the environment of the Covid-19 pandemic has ushered in innumerable changes to the ways we were doing and conducting things in life hitherto. Many of such methods and methodologies which were exceptions till one year ago have abruptly become new normal during this period and some are likely to stay so for long or permanently so. One of such evolved normal is the new mode of working from home or WFH, its acronym, which has become one of the very common buzzwords these days. The few other common synonyms for Working From Home are remote working and mobile working though not strictly carrying the exact meaning. However, for this discussion, we will stick to WFH as much as possible.

Is WFH a new normal here to stay?

It is not to be misconstrued that work from home is a new concept that was unheard of or was never practiced before pandemic days. It has been in existence for some time though in small amounts and mostly as exceptions. Certain sections of the workforce have worked remotely since the time of the industrial revolution, though not necessarily from home. For example, sales workforces, account executives and customer care teams are often located far from corporate headquarters and spend their time with clients in the field from time immemorial.

In recent years, collaborative software tools that can address varying requirements of collaboration, high-speed internet connections, and as well the corporate efforts to reduce real estate costs, broaden talent pools to include workers who live far from office locations, and attract and retain hard-to-find skill sets have all contributed to growing popularity of WFH among companies. The high-speed internet connectivity, cloud computing and collaborative software tools were already being used by employees to work from home after office hours and during weekends and holidays when they used to work from the office.

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Organizations today are responding to a new normal, with many knowledge workers now unexpectedly working from home remotely full time.

WFH challenges and concerns

What is worrying most of the companies and their managers is whether these workers are as productive and as innovative as workers in centralised physical offices. How can organisations manage the effectiveness and measure the productivity of workers performing their job remotely without any physical supervision? This is one question that is still bothering many companies and their managers.

Before we dive into the subject of employee productivity and its measurement process, we need to be well aware that WFH is plausible only in certain sectors, segments, and functions of work. While remote working may be practically possible in areas like knowledge works, customer services, service providing, it is virtually impossible to emulate this in manufacturing or facilities management or construction or housekeeping or such similar areas where the physical presence of human beings is unavoidable and non-replaceable.

The above statement is made by being unaware of the fact that Industry 4.0 technologies like AI, IoT, Cloud, Big Data and Analytics can leverage some amount of automation or remote working but the work is not purely a human effort and a WFH mode. We are discussing here humans working remotely and not about robots replacing humans.

Enablement of WFH environment

Organizations today are responding to a new normal, with many knowledge workers now unexpectedly working from home remotely full time. The nature of this transition has sparked a major question: How do we best measure productivity in knowledge workers, and given those impacts, what is the future of mobile or remote workforces? However, I believe that more than employee productivity measurement, the enablement of employees to work remotely from home is the major challenge.

Leadership teams including Chief Human Resources Officers (CHROs) and Chief Information Officers (CIOs) have already enabled mobile workforces through collaborative technologies in many companies and others have been catching up fast. In today’s world, there is no need to lose your connection with your employees just because they work from home. Implementing the right collaboration tools like Teams, Zoom, Office 365, Google Meeting, to name a few, is the first step in enabling and consequently improving the WFH employee productivity. Supporting employees on infrastructure, connectivity, furniture needs, etc. are the other priorities.

Measurement of employee productivity while working from home

This author believes that the apprehension about how to measure employee productivity while working remotely is unwarranted to a great extent. The issue is that many companies and people are finding themselves leading a remote team for the first time, post-Covid. The transition to make managers who are used to having their team all in one place embrace the environment of managing remote teams can be hard and challenging.

Now, coming back to the question of measuring the productivity of employees working from home or remotely, a lot has already been written on this subject by companies that have put WFH in practice, researchers, human resource practitioners, media, academicians, and companies selling productivity tracking and measuring tools. I am taking a very different position on this that the productivity of workers used to be measured when they were working in physical offices too formally or otherwise.

There is not much change needed to be made in the metrics and processes adopted in measuring the productivity of employees working in the physical offices under direct observation of their supervisors or managers to be adopted in the metrics and process of measuring the productivity of work from home workers. The only difference is that tracking and measurement are also remote like the work being measured. These days, with the advancements in cloud computing and availability of high-speed internet connection, using tools and applications remotely has become very normal.

It has been easy to measure employee productivity when you could look out of your office door or bob your head above your cubicle to see what everyone is doing. A good manager can pick up on body language alone whether someone is making progress or struggling but how does that translate to virtual teams? Do you believe that the above style of tracking and measuring work is anything modern and appreciable? Before we dive into the metrics of remote employee productivity, it’s important to put things in perspective.

Some say, when your employees were at their desks, it was easy to spot who was using their time productively. When your employees are working from home, it’s much harder. I beg to disagree with this argument. You should not get tempted to put new metrics in place for your remote employees. Understand that they will still need to do the same steps, follow the same workflows they were doing earlier to achieve the same results. The difference, of course, is that you can’t now see them doing these steps. Also, be aware that it is not the effort or number of hours put in that matters but the outcome, output, and results.

When your sales force was working in the office, you saw them on their phones or searching the internet for leads. They still need to do this, even when working remotely from home. The difference is that you don’t see it.

There were many software tools available and used to track projects, tasks, and measure KPIs. Projects used to be tracked and measured by milestones, timesheeting, KPI benchmarks while the work was performed in a physical office. What companies do in the new normal WFH environment is not much different from what was done when in a physical environment.

So, what is the real issue? Good question!

It’s all about trust

It’s easy to trust your team when you see them every day, and you can see that they are at their desks working. But what about when they are working from home? Are they working, or are they just watching the latest series on Netflix or Amazon Prime or applying for new jobs?

Here’s the thing: A good worker is a good worker, no matter where they are working, whether they are being watched or not. If you know that your team usually performs well, there’s no reason to expect they’re going to suddenly become lazy workers just because they’re working from home without your physical surveillance. Trust them – and more importantly, trust yourself that you made the right decision when you hired them. That is why companies hire for attitude and cultural fit than for the skill set.
The best thing you can do to promote trust with your remote team is to be transparent with them. Communicate with them, keep them up to date with how things are going and expect regular updates from them too, whether positive or negative.

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If you can't measure it, you can't manage it

- Peter Drucker

Organization is key

One of the most effective measures for managing work from home employees is on what they deliver and not how much time they spend or when they logged in and out. But to accurately measure that, you need to know what your expectations from employees are. This is an integral part of company culture, policies, mission and vision.

Tools to Measure Employees Productivity

There are plenty of remote employee time tracking tools, but I would ask you to be cautious and careful before you use them – for two reasons:

The first is that one of the benefits of remote work is that your staff can work when they’re most productive and that might not be 9-5.

Secondly, it pays to get away from your desk sometimes. Getting outside, for example, has huge benefits for creativity.

That said, there are many remote work monitoring software that are micromanaging tools. You may use them judicially. There are also tools out there that let you view your remote workers’ screens without them knowing. But that’s creepy to say the least.

Encourage communication

One adjustment that you will need to make when managing remote teams is in your communication. We advise managers who are new to remote teams to communicate with the teams as much as possible, because remote work can be isolating, and you don’t want your team to feel overlooked. Comments and feedback on tasks aren’t enough; try and check-in via chat or other media daily to touch base and see how they’re doing.

Avoid micromanagement whether it be of workers working from the office or home. Just don’t because that one thing most employees hate. Even you might have hated it somewhere in your career. We know it can be tempting to check up, especially when they work remotely but if you do that you will do two things; firstly you will keep interrupting your team when they’re trying to do their job, and secondly you’ll make them feel that they’re not trusted and incapable.

Things to consider when evaluating Employee Productivity in WFH

You must be well aware that not all employees’ productivity will be measured by the same metrics. Some employee productivity will be based on things the employee cannot control, such as meetings, answering phone calls, and re-scheduled priorities.

You can help your remote employees work more efficiently by:

Providing the right tools for connectivity and collaboration

Limiting the amount of time the employee spends on things unrelated to his or her tasks like meetings, calls, emails

Having a firm accountability policy and practice in place

Touching base with employees regularly without interfering with their workflow

Having one-on-one’s that allow the employee to address any issues or concerns with his or her work

Providing flexible metrics to measure employee productivity

Providing clear outlines and timelines of each task

Letting each employee see where their projects fit in with other projects

By investing in the required tools, platforms, and mindsets and taking a more data-driven and analytics-based approach to monitoring productivity, innovation and performance, team managers and human resources can position their companies to both recover and thrive as the world returns to work.

A knowledge worker’s productivity will not be one simple measure or formula, as it must allow for the changing nature of work and include both direct and indirect factors. It will also vary based on the nature of the business and industry. An accounting firm might measure accuracy and timeliness of reports and analysis while a technology company would measure not just the output of a DevOps professional in terms of lines of code but also how efficient the code is and how bug-free the code is.

As Peter Drucker said, “If you can’t measure it, you can’t manage it.” And if you can’t manage it, you can’t bring that knowledge into remote workforces and ensure the effectiveness of workers who may no longer be in their supervisors’ line of sight. This is, however, applicable to both environments.

It is more of mindset than metrics

Let me conclude this discussion by stating that measurement of productivity of remote or work from home workers is not any game changer. It will almost be the same way these knowledge workers were measured when they were working from office, only that the mode has changed.

It all boils down to a couple of things which may look off the track; one is that you must have trust in your employees wherever they work from, then that you should hire your employees for their attitude and cultural fit. If you struggle to track and measure the productivity of employees whether in offline or online mode, it shows the misjudgments and errors that crept into your recruiting process.

The post How do You Measure Workers’ Productivity When Working From Home? appeared first on Dutch Uncles.

How are Entrepreneurs Charged Income Tax?

Joseph Varughese — Tue, 20 Apr 2021 09:35:03 +0000

One of the important elements that an entrepreneur needs to decide on during the business formation stage is the form or structure of the business. Entrepreneurs identify the relevant business organisation structure based on several factors such as ease of commencing operations, compliance requirements and the costs involved, connectivity and accessibility, availability of required skill set, agreement with other members and need to raise funds among others.

Tax implication is one important element that varies with the business structure. The tax rules differ depending on the business form and hence it is important that you evaluate the pros and cons before finalising the business structure.

Before we move further on this subject, it will be ideal if we glimpse through certain basic concepts of income tax for readers, if any, who don’t have sufficient exposure to the basics of the income tax. We will touch upon a few fundamentals like person, residential status, legal entity, heads of income, financial year, assessment year as defined in Income Tax laws.

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A legal entity is a concept that is about defining business as an entity different from its owners. For income tax purposes all business entities except proprietorship are considered as separate legal entities.

Some Income Tax basics

The word person in Income Tax has a meaning entirely different from the common parlance and is very wide and broad under Indian Income Tax Act and embraces in itself Individual / HUF, Company and Firm. Though the definition of person also includes Association of Persons or Body of Individuals, Artificial Judicial Person and Local Authority, we will confine our discussion to the common category of individual, company and firm here.

The concept of the residential status of a person is about defining a person as resident or resident not ordinarily resident or non-resident. We will not get into more details of its definitions and how status impacts tax liability in this discussion. We will consider only residents here. A taxpayer would qualify as a resident of India if she/he satisfies one of the following two conditions:

1. Stay in India for a year is 182 days or more or
2. Stay in India for the immediately 4 preceding years is 365 days or more and 60 days or more in the relevant financial year

It is also important to be aware of the various heads of income. There are five main heads of income according to the provisions of the Income Tax in India as follows:

Income from Salary
Income from House Property
Income from Profits and Gains of Business or Profession
Income from Capital Gains
Income from Other Sources

Various provisions and tax rates apply depending on the head of income under which a particular income falls along with factors like person, status.

A legal entity is a concept that is about defining business as an entity different from its owners. For income tax purposes all business entities except proprietorship are considered as separate legal entities. What does it mean to a taxpayer is that income tax is charged to the income of legal entities i.e. business except in the case of proprietorship in which case there is no differentiation between the business and its owner for tax.

In all the other cases, the owners of business will be charged tax for the income they have earned in their personal capacity. For example, the amount received from his / her company or any other company as salaries, sitting fees, consulting fees will be charged to tax in their personal capacities. With the scrapping of Dividend Distribution Tax, the dividend has now been made taxable in the hands of the dividend receiver. Needless to say that income from other sources will also be included as income in individual return.

A financial year, also called previous year, is the year in which the income is earned. Assessment year is the year in which Income Tax Return (ITR) is supposed to be filed and assessed. For example, if the income pertains to the year 2020-21, that is the financial year or previous year. The year 2021-22 is the assessment year relevant to the previous year 2020-21.

How Income Tax is charged to business and entrepreneurs?

Let us examine the tax implications of some major business forms and how income tax is charged to entrepreneurs in different situations.

Limited Liability Partnership or Partnership Firm: An LLC or registered partnership firm is taxed as a separate legal entity different from its partners. In computing the taxable income of a firm any salary, bonus, commission or remuneration that is due to or received by a partner is allowed as a deduction subject to certain restrictions. Where a firm pays interest to a partner, the firm can claim deduction of such interest from its total income subject to a maximum interest rate of 12% per annum.

Any of the above payments made to partners and deductible from the income of the firm to compute its taxable income are taxable in the hands of partners in their individual tax return as per the income tax provisions applicable to individuals at the tax slab rates stipulated in the respective Finance Act. However, the share of profit distributed to partners won’t be taxable in their hands as the profit is already taxed in the hands of the firm before sharing with partners.

Income Tax is charged at the rate applicable to firms (including LLP) for the relevant financial year.

Company: A company is a person having a separate legal entity distinct from the members who constitute it. A company is incorporated as per the provisions laid out in the Companies Act 2013.

The applicable taxes are charged to companies, domestic as well as foreign, as per the provisions of Income Tax. Taxable income is calculated taking various provisions related to recognition of revenue and allowability of expenses into consideration. Expenses are allowed to be deducted from gross revenue based on various provisions of Income Tax which has a very basic requirement that expenses that are deducted must have been incurred for generating the revenue being considered.

Any salary, commission, bonus, allowances paid to directors as per the provisions of Companies Act 2013 are taxable in the hands of members or directors in the capacity as individuals. Dividend, after the scrapping of Dividend Distribution Tax by Finance Act 2020, unlike share of profit of partners, is now taxable in the hands of individual investors or dividend receivers.

Income tax is charged at the rate of 25% in the case of domestic companies having Rs. 400 crore or less in turn over and 30% in other cases. However, there are other provisions like 115 BAA with a lower rate of 22% and Minimum Alternate Tax at the rate of 15%. All the above-mentioned tax rates are basic rates and surcharge and cess will apply as applicable.

One Person Company: One Person Company is a relatively new concept that was introduced in the Companies Act, 2013 to help the solo entrepreneur so that he/she can create a formal company structure without needing a director/partner as is the case with a private company/ partnership. Like a Private Limited Company. An OPC is a separate legal entity distinct from the member who constitutes it.

For taxation, an OPC is recognized as a private company under the Income Tax Act and is therefore subject to the same rate of tax as a domestic company. It is important to note that an OPC can only be incorporated by an Indian citizen resident in India.

Sole proprietorship: A sole proprietorship, as the name suggests, is owned by a single individual. It is not legally recognized as a separate legal entity and is, therefore, an informal structure usually adopted by small businesses. Income Tax does not distinguish between the proprietorship business and its owner and tax is charged and assessed accordingly.

A sole proprietorship is taxed according to the relevant income tax slab applicable to the individual taxpayer and therefore is a more suitable structure compared to an OPC.

Individuals: An entrepreneur is an individual as well as owner or partner or member of a business she/he owns. How business is charged to tax is briefly explained above. The entrepreneur will be charged to tax in his individual capacity for the income he/she receives by way of salary, interest, commission, bonus, dividend, consulting fee etc from the company he/she owns and runs or from other sources.

Individuals are taxed at the slab rates as stipulated in the respective Finance Act. Alternate Minimum Tax: Like Minimum Alternate Tax (MAT) is for companies, as per the Alternate Minimum Tax (AMT) provisions, income tax payable by a non-corporate assessee cannot be less than 18.5% (plus surcharge and cess as applicable) of adjusted total income as defined in section 115JC

In a nutshell, an entrepreneur is subjected to tax in two means, one by way of tax to the business and second by way of tax to the individual.

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In a nutshell, an entrepreneur is subjected to tax in two means, one by way of tax to the business and second by way of tax to the individual

House Property Income, Capital Gain

The income by way of rent from house property the entrepreneur owns will also be subjected to tax under Income from Property. However, if owning and renting properties is the business of an entrepreneur, such rental income will be considered as Income and Gain from Business or Profession. Likewise, what is to be noted is that share of profit to partners is not taxed again in the hands of partners but the dividend is taxed in the hands of shareholders.

Income Tax Reliefs and Incentives

We will take a look at certain reliefs and incentives allowed by the Government for small businesses and startups.

Presumptive Tax

For early-stage start-ups, it may be very difficult to keep a track of all the Sales, Expenses, Depreciation and also keep invoices and records of all these. Therefore, to simplify the manner of computation of Income, the Govt has also introduced the Presumptive Scheme of Taxation wherein a person can disclose his Income as below:-

Income = 50% of value of services provided (applicable for Professionals) if annual turn over does not exceed Rs.50 lakhs
Income = 8% of total value of goods sold (applicable for businesses) if the annual turn over does not exceed Rs. 2 crore, and where the income is credited digitally, the profits will be considered at 6 per cent. It is important to note that if a taxpayer opts for the presumptive taxation scheme, he won’t be allowed to avail of any deduction provided under Section 30 – Section 38.

Conditions you need to meet for opting for a presumptive taxation scheme under Section 44AD.

1. You must file a presumptive scheme for 5 years continuously.
2. In case you wish to file your income as per regular business before the expiry of the said 5 years, you would lose the benefits of the presumptive taxation scheme and will be disallowed this for the subsequent 5 years.

This Scheme of Presumptive Taxation is only applicable to Individual Proprietors, HUF and Partnership Firms but not applicable to Companies and LLPs.

Tax Incentives for Start-ups

The existing provisions of section 80-IAC of the Act, inter alia, provides for a deduction of an amount equal to 100% of the profits and gains derived from an eligible business by an eligible start-up for three consecutive assessment years out of ten years at the option of the assessee. The eligible start-up is required to be incorporated on or after the 1st day of April 2016 but before the 1st day of April 2022 (This was up to the 1st day of April 2021, extended to 2022 by Finance Act 2021). These 3 consecutive years for which 100% tax exemption is allowed can be chosen by the start-up at its discretion from any of the first 10 years. (Amendment introduced vide Finance Act 2020).

This deduction would be available to the eligible start-up if the total turnover of its business does not exceed Rs. 100 Crores in any of the years beginning from the year of its incorporation.

All eligible start-ups who intent to claim the benefits of such tax incentives would be required to:-

1. Maintain Separate Books of Accounts for Eligible Business
2. Get their Accounts audited by a Chartered Accountant
3. Furnish Audit Report in Form 10CCB along with ITR

Meaning of eligible Start-ups

The benefits of 100% Tax Deduction are not allowed to all start-ups but are only allowed to eligible start-ups. Only the start-ups which satisfy all the following mentioned criteria are considered as an eligible start-up.

1. Incorporated as a Company or LLP
2. Incorporated between 1st April 2016 and 1st April 2022 (Increased from 2021 to 2022 in Finance Act 2021)
3. The Total turnover of the business does not exceed Rs. 100 Crores
4. Certified by the Inter-Ministerial Board of Certification in respect of Eligible Business i.e. it is a business that involves innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property.
5. Should not be formed by splitting up or reconstruction of a business already in existence.

The scope and purpose of this write-up is to give a broad view as to how income tax gets charged to entrepreneurs. We have not discussed various tax rates, the computation methods, filing, assessments and related procedures. Entrepreneurs need to keep updated on the changes and amendments in various tax laws and rules or will end up in unenviable positions by way of penalties, punishments and legal actions. They should also keep ears and eyes open to know about various reliefs, rebates, exemptions given out to businesses particularly startups through Central and State Finance Bills (Budgets), government notifications, amendments etc. so that they won’t miss out on them.

The post How are Entrepreneurs Charged Income Tax? appeared first on Dutch Uncles.

Your Start-up is a Part of Your Life, Not Your Entire Life

Joseph Varughese — Sun, 18 Apr 2021 03:30:04 +0000

If you have ever had several stressful weeks in a row, you are probably familiar with the symptoms of burnout like; energy exhaustion; negative feelings or cynicism related to one’s job; or reduced professional efficacy.

For founders, the topic of work-life balance can be elusive – the line between work and life is very thin. With the weight of a company’s responsibilities on your shoulders, it’s hard for founders to maintain a typical work life balance. They work late nights, answer calls, send emails, finalize pitch deck etc. throughout the weekend without taking a break and end up exhausted and tired.

We have heard of different types of entrepreneurship like; Innovators, Imitators,. Researchers, Buyers, Hustlers, etc. People who work hard and put in constant effort are known as hustler entrepreneurs. They often start small and work toward growing it to a bigger business with their hard work rather than capital. Their aspirations to succeed are what motivates them, and they are willing to do whatever efforts it takes to achieve their goals. They do not give up easily and are willing to take up challenges to get what they want to achieve in their life.

Hustling is important – maybe the most important thing for startups – but we are still human. It’s critical to have a structure in place that allows you to get the work done that is necessary for the success of your business. But I also think people need to be a little more flexible and kind to themselves. At the end of it we all work to live, we don’t live to work.

‘‘

Hustling is important - maybe the most important thing for startups - but we are still human.

Prevent Burnout by Trusting your Team

It is not that the 24/7 hustlers of the world are anything bad, but it’s unrealistic – not to mention unhealthy – to expect everyone to hustle 24/7. Honestly, if you find yourself working too much, it means you don’t have trust in your colleagues and team and, hence you might not be delegating enough. You might be over-stretching yourself by not allowing others to do the job they are mandated to do.

There is a tendency on the part of some founders to do everything themselves without delegating the responsibilities to the team and this is one thing that leads to burnout. It adds to the perils of work life imbalance and the consequent stress on founders. This is an unhealthy trend or attribute and if not tacked it will do more bad to you than good.

The excessive “hustle” startup culture, which is something like working all hours, is dangerous and damaging to people’s health, people’s expectations of themselves and others, and to life and culture as a whole. We have heard of people who have burnt out and walked away from the companies they’ve started and spent so many unsociable hours working to build. It doesn’t have to be that way to be successful.

Are you getting addicted to your startup?

When you’re a founder, your company is part of your identity – but you have to take care of yourself, your well-being, your body and mind. There are jobs, there are careers, and there are passions. When you take the massive risk required to start your own business, it probably falls in the third category, passion. It’s something you’re deeply passionate about and identified with. Your work is almost like your identity. It’s something you couldn’t imagine stop doing.

When your business is your passion, you might not even realise how hard you are working. It’s nice when your work doesn’t feel like work, but it also means you have to be extra mindful of your energy levels and take care of yourself. You get addicted to it may not be an overstatement.

As a founder, it’s your job to increase efficiency of working. Your team needs trust, space, and resources to deliver – and they need to be supported enough to take time to breathe and focus on other things in their lives that matter. This culture comes from the top, the founders and evolves to be part of company culture.

What the founders follow in their startup is what will become the foundation of the company culture and the culture emerging out of unhealthy work life balance will be detrimental to the sustenance and growth of the company.

What is work-life balance for an entrepreneur?

What a work-life balance means to an entrepreneur and what it means to another individual, can be vastly different. A structured time schedule, coffee machine chit-chat, scheduled holidays, efficiency based on corporate performance measures and universally accepted professional codes which helps employees maintain a balance, essentially fly out the window.

When you have a startup to run or are a small business owner, you have no choice but to forget the 9 am-5 pm work environment and embrace a 24×7 work week. Responding to client calls and emails, through the day and night, last-minute projects, demanding roadmaps, pitch deck final touches, conference calls, and meetings are your new normal. Vacations and holidays are a daydream; tight deadlines are your new weekend agenda, and your social life seems to revolve around your colleagues and clients.

When that’s the case, it’s difficult to figure out the work-life balance that works for you. Because your work is your life, and your life is your work. If you were ever asked to stop, it would be like telling a runner not to run or a singer to stop singing. It would tear out a part of you, and you wouldn’t be the same person comfortable with the situation.

You have to be realistic about your schedule, calendar and commitments. I truly believe most jobs can be completed in the allotted time if you’re focused and dedicated. Some startup founders say they work nonstop, and maybe they’re in the office for the majority of the day—but they’ll break for an hour in the middle of the day to play games or take coffee breaks. They aren’t working the entire time they’re in the office. So instead of trying to show up an impressive number of work hours, make the hours you do work matter. This is good.

How to win the Marathon of Business?

Founding a company is a marathon, not a sprint. We have seen entrepreneurs who go hard for six months and can’t keep it up. They go through sleepless nights. And then when the company needs them the most, they’re tired and useless. Their mental energy is completely exhausted. They are burnout!

That’s why I prefer to think about founding a company like a marathon. You could sprint the first 25 kilometers—but there’s still 25 more kilometers to go. Your time will be terrible. You’re better off keeping a moderate, sustainable pace.

‘‘

Work-life balance is not about getting something over on someone—it’s about making sure your mental state is good to go every day so you can steer the ship forward to reach the desired shore

It’s the same in business. You can up the pace occasionally when it’s necessary, but you don’t need to slog sacrificing your sleep.

Science teaches us, with less sleep, you get diminishing returns. Studies say anything less than five hours of sleep puts you at 60% capacity. I believe you can’t run a successful business at 60%. You need to be at 100% capacity because that’s what your clients demand, your team demands, and your family demands.

If you pace yourself, you’ll discover just how much more productive you can be.
Of course, there will always be more work to do. You could be selling more, could be marketing more, and could be writing more code. Absolutely. But at a certain point, you need to hang your hat and let go of what is unimportant. Otherwise, you’ll drive yourself insane. Work-life balance is not about getting something over on someone—it’s about making sure your mental state is good to go every day so you can steer the ship forward to reach the desired shore.

It is also the leading cause for burnout, loss of motivation, loss of enthusiasm, and then the pessimism and negativity slowly sets in. Taking your work home can make one feel edgy all the time. These adverse factors slowly start to take hold of mental, physical, and emotional health and work efficiency which will not help you succeed in your dream venture.

Tips on How to Keep the Balance in Work-life and avoid Burnout

This is not an exhaustive list of do’s and don’t for founders to follow in order to maintain work-life balance by remaining healthy and balanced. However, this is a list of tips that can open up the mind of founders toward exploring ways to reach their goals without burning out. Here are some.

Don’t take on more than you can do or chew, even when you feel you may be the only one who can accomplish the task. Keep a good network of friends, colleagues, professionals, and freelancers to whom you can seek help or outsource. There is always an alternative that you can tap on.
Learn to say no. This is something difficult to practise but a must in business and profession to avoid burnout. Say no to your client, investor, colleague or family when you do not want to undertake a task or meet a schedule or go for a party. Prioritize what you want to do.
Time management skills are a blessing, if you have it in you. If not, see which time management tools work best for you and implement them in your workday.
Get a mentor who has done all of this before. Seek his/her advice before embarking on difficult tasks. Make things easier for yourself, so that you aren’t spending that extra time ruminating over it at home.
Make sure to have an exercise schedule, early in the morning or late in the day, short breaks between sessions for a breath of fresh air and to stretch your legs.
Make play a part of the work. Ask yourself what you can do to bring in the fun element into the workspace — music, movie nights, team bonding, light humour, all of this helps disperse the tension at the workspace not only for your but for your team too.
When you are taking a weekend off or a break, tell your colleagues or employees clearly that you will not be checking messages or emails during that period and stick to it.
Keep a dedicated device for work, a phone and/or laptop for work calls, notifications, emails, and messages. Sometimes work communication can get so overwhelming that it can become hard to differentiate between friends and family, clients and other peers. Be honest with your family or partner if you are having trouble with balance, ask them to point out to you any areas where you are allowing work to loom over personal life and relationships.

The work-life balance, as an entrepreneur is a tricky battle, but like any other, it is nurtured with practice, fostering skills, and dedication to the highest good of yourself and the business.

A work-life balance is a necessary part of any healthy work dynamic, a personal life constantly invaded by work can cause sleepless nights, irritable mornings, anxiety, low moods, and general listlessness. Entrepreneurs understand that they cannot follow elaborate health schemes and protocols. What they can do is include small check-ins on how they are feeling and how they can keep track of their mental, physical and emotional health.

If you don’t balance your act but work as if your start-up is your entire life, you may end up living a worrisome and frustrate life without achieving what you aimed for. This becomes a major reason of burnout. Failure is not the end of your life, if you are healthy enough mentally and physically you can try again. Many successful startup founders went through a series of failures before striking gold. Hustling is good but only as much as it is practised judiciously and carefully.

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