Business Tools – Dutch Uncles

Short Selling, Short Covering, And Short Squeeze: A Basic Guide

Aakash Sharma — Fri, 01 Oct 2021 03:35:08 +0000

Short selling occurs when an investor borrows securities, sells them in the open market and aims to buy them later for a reduced price. Short sellers bet and win by rooting for lowered stock prices. This can be compared with long investors who want the cost to go up.

The main question that arises in everyone’s mind regarding short-selling and covering is this: How can an investor sell something that s/he does not own? And how are they allowed to sell borrowed shares of a company to indulge in short trading?

The simple answer is that the Securities and Exchange Commission of India (SEBI) enables this trade practice in the market and allows investors to indulge in short trading. The only prerequisite is that it needs to be started and finished within the same day of a market cycle; you cannot carry it over to the next day or period.

The short position is a procedure used when investors expect stock prices to fall in the short term, perhaps in the coming days or weeks. It involves borrowing stocks and selling them at a high price, then repurchasing them at a low price and returning them to the stockbroker.

The short selling process – how to do it?

To sell short, you first need to borrow the assets you want to bet against. Your broker gives you the details of potential stocks that might fall out in the coming days. You then request to borrow the shares. The broker attains another investor who owns the shares and agrees to return the shares on time. You get the shares after this journey.

Your broker lends you those shares as you are shorting a stock that you do not own. You can then sell the borrowed stocks at market value, buy those stocks at a lower price, and our broker will return the claims to the lender.

You usually do not need money to buy stocks through an intermediary. But in some cases, you have to pay for this trade. In the case of Hard-to-borrow (HTB) stocks, when there is a limited supply of stock for short selling, you must pay a daily stock borrow fee based on the price and availability of the stock.

‘‘

Short selling has a tremendous risk/reward ratio. It can offer significant gains, but losses can rise quickly and infinitely due to margin calls.

Example

For instance, a dealer sells short 100 shares of XYZ at Rs. 20 (total Rs. 2000), based on the estimates that those shares will head lower. When XYZ declines to Rs. 15 (Rs.1500), the trader buys back XYZ to cover the short position, booking Rs. 500 profits from the sale.

What is short covering?

Short-covering is the acquisition process of securities to close a short-term open position to either realise a profit or a loss. It requires acquiring the same stake that was initially sold short and handing back the shares borrowed originally for the short sale. This type of transaction is known as ‘buy to cover’.

Short-term collateral (if the asset is redeemed at the point of sale) may result in a profit or loss, whichever is greater. Short covering is required to close an open short position. The short side is profitable when it is paid out at a price lower than the original trade. If you pay a higher expense than the initial transaction, you incur a loss.

Short squeeze

When a big deal of short covering occurs in a security, it may result in a short squeeze. Resellers are forced to liquidate positions at progressively higher prices as they lose money, and their brokers invoke margin calls.

Selling under pressure (squeeze) is an abnormal condition caused by a rapid increase in a stock or other security’s trading price. In case of a short reduction, the deposit must have an unusual degree of short-sellers holding positions in it. The squeeze begins when the price unexpectedly rises. This position is essential for retail investors’ strategy as short-sellers reduce losses by exiting their positions.

The bottom line is this: the Indian stock markets’ regulatory body and government rules give the option of short trade and related practices, so why not use them vigilantly to make profits?

The post Short Selling, Short Covering, And Short Squeeze: A Basic Guide appeared first on Dutch Uncles.

What Does XIRR Mean: How XIRR Differs From CAGR

Aakash Sharma — Wed, 29 Sep 2021 08:35:09 +0000

When you read that a fund has 11% over five years, what does it mean? Does it simply mean that if a person invests in that fund for five years, they will get an 11% return? Or is it indicative of something else?

It is difficult to understand the different types of mutual fund returns. But it is absolutely necessary to understand that all of the mutual fund performance tools, including CAGR and XIRR, only report the historical aspect of a mutual fund: its past performance trends. Through them, you get to know the performance of a fund during a particular period. They are not the predictions of future returns.

CAGR – Compounded Annual Growth Rate – is the most widely used tool to monitor the average annual growth rate of funds. The average annual growth rate represents the average annual return on an investment in a mutual fund over a period of time.

So, when you invest in a fund over five years, CAGR represents the fund’s average return in each of the past five years. However, CAGR does not give a clear picture of the volatility of the market. Linear growth, as highlighted by CAGR, is not accurate for any fund.

Periodic investments are not included in the CAGR calculation; thus, it cannot give more accurate return figures on systematic investment plans (SIPs). In short, CAGR is suitable for a lump sum, but when the investment becomes sporadic and periodic, it fails to help your investment return planning.

Extended Internal Rate of Return (XIRR)

The Extended Internal Rate of Return, abbreviated as XIRR, is a measure that depicts the profits on your recurring investments like SIP. With SIP, you invest money sporadically. Even if you make some bad bets in investments at different periods, XIRR gives the correct returns for such moves.

XIRR is the summation of CAGR for individual investments. All investments in SIP programs are different. When you see XIRR, the CAGR of each category is calculated and added at the end to determine the average annual growth rate.

Example

Suppose Person X started a monthly SIP of Rs. 4000 for five years in 2015. For simplicity, let us assume that there is no redemption of the investments under the SIP. Person X invested a different amount each month, and the duration of each investment became different.

This difference is critical in impacting the yearly returns and thus the overall return. When XIRR is calculated, each investment’s CAGR is considered, and then all will be added.

Suppose Person X starts investing from Rs. 4000, and receives Rs. 5500 at the end of 5 years. Then, the XIRR calculation will be as follows:

Amount Invested = Rs. 4,000

Amount at Maturity = Rs. 5,500

Investment Time Period = 5 years

XIRR (or Annualised Return) = 6.58%

Total Return = 37.5%

So, XIRR is an excellent function for calculating returns when your cash flows (investments or redemption) are spread over a while. In the case of mutual funds, if you are investing via SIP or lump-sum or redeeming through the same channels, XIRR includes all those scenarios and helps you calculate an aggregate return considering the timings of your investment and withdrawals.

Difference between XIRR vs CAGR

Absolute returns represent the capital income of the previous year. You should not choose a fund based on absolute returns analysis. It would help if you considered CAGR or XIRR, which give you an idea of funds returns over the long term before making the investment plan. Absolute returns show the gain or loss for short term investments.

Absolute returns => (FV – IV/ IV) x 100, where FV = Final Value, IV = Initial Value

XIRR vs CAGR – which one should you choose?

You should choose either of these processes (XIRR or CAGR) solely based on your investment type and strategy. If you invest through a once-and-for-all mode, CAGR can give you the portfolio’s return earnings. In the case of SIPs where investments are cyclical, XIRR provides detailed and more accurate information.

The post What Does XIRR Mean: How XIRR Differs From CAGR appeared first on Dutch Uncles.

Zeni: Powering High Velocity Decision Making for Start-ups and Small Businesses

DU Desk — Sat, 27 Mar 2021 04:35:04 +0000

How does the proposition of a Chief Financial Officer (CFO) for $299 per month sound like? Unrealistic and confusing, right?

There is a twist. To understand this, you need to move the image of this top professional sitting in a boardroom in a suit and tie to a one inside your computer – An ‘AI-powered CFO’ which will manage all your financial functions, including bookkeeping, payroll administration, invoicing, monetary statements and beyond.

The proposition doesn’t end here. Now, it is one thing to know your expenses have increased, and an entirely different thing to understand why. Does that mean I still need to hire a CFO to analyse that for me? With technology at helm, the answer would be no.

This is what modern bookkeeping fintech start-up Zeni, founded by twin brothers Swapnil and Snehal Shinde, has brought to the table of innovation with its artificial intelligence (AI) – powered financial concierge service for start-ups. We dig in deeper into this two year-old start-up’s evolution, the product offering and how it is here to mark a change in the financial world.

‘‘

In its first year itself, Zeni processed over $300 million in transactions and is now managing $200 million in finances each month.

What is Zeni platform all about?

In simple words, Zeni offers an integrated platform to business owners that performs daily bookkeeping besides consolidating all the financial flows like spend, payments, accounts and more. At the same time, the tool connects firms to dedicated teams of finance professionals to provide guidance and deliver insights based on real-time data. It’s a blend of both AI and human finance experts that together manage every financial need of a company, especially a start-up for a flat month-to-month charge. The platform integrates with a company’s bank accounts, credit cards, payroll providers, or expense management system section. It is like Zeni is running your finance department.

The services include:

● Invoice Pay and Invoicing

● Expense and Receipt Administration

● Monetary Projections, Budgeting, and Financial planning and analysis (FP&A) Assist

● Payroll Administration

● Actual-Time Reporting through Zeni Dashboard

● Month-to-month Monetary Statements

● Yearly Taxes and R&D Credit score

Given the speed and the accuracy of this approach, Zeni is able to provide its clients with a real-time access to key financial insights via the Zeni Dashboard – including burn rate, operating expenses, cash/card balance, revenue by product, month-end reports, and more.

In its first year itself, Zeni processed over $300 million in transactions and is now managing $200 million in finances each month. It is on track to process a total of $1 billion in transactions in the next 12 months and is expecting to achieve 300% growth in 2022. Zeni claims to be specialising in technology start-ups and has over 100 clients on board since inception.

Twin Power

Shinde brothers Swapnil and Snehal always had a knack for AI and Machine Learning (ML). Swapnil worked in the technology industry for over 15 years and worked as the Vice President (VP) of Product for international markets at Rdio and also spent four years at Yahoo! as a Senior Product Manager. Snehal also worked in the technology industry for 15 years and worked at both Yahoo! and Rdio as the VP for Emerging Markets. The Shinde brothers both have master’s degrees in computer science from the University of Southern California.

Following their technology-concentrated careers, the brothers ventured into the world of start-ups with the launch of a Bollywood music streaming music service called Dhingana, which was purchased by Rdio in 2014.

This was followed by their second venture Mezi, an AI-powered Travel-As-A Service platform, that was acquired by the American Express (AMEX) in 2018. The duo spent 5 years building this human assisted AI-powered platform which today serves more than 10 million AMEX card members across the U.S. and U.K.

In between the hustle, the duo never stopped building on AI and ML technology. Even when they were dwelling on the proportion of selling Mezi to American Express, the duo brainstormed on how the later had set a Gold Standard for providing high-class personalised concierge service to its Platinum and Black card customers, but is unable to give it to all its card members because it was too human intensive and very hard to scale. The only way to democratise what American Express was doing was by using Artificial Intelligence.

Post the acquisition, the duo wanted to invest more and more in AI and ML and apply the same in different markets which were fragmented and complex. They understood exactly how a similar platform like Mezi could be effective in the world of start-up bookkeeping and accounting markets. This inspiration came from the duo’s first hand experience as start-up owners.

The brothers met with Nexus Ventures in May 2015 and showed them a mock design of how they wanted to build the product. In 20 minutes, the investors decided to fund the company.

In 2019, Zeni launched its AI – powered financial concierge service for start-ups, with founders Swapnil and Snehal taking charge as Chief Executive officer (CEO) and Chief Product Officer (CPO), respectively. The company is headquartered in Palo Alto, California, United States and has a team of 40 and growing.

To date, Zeni has raised a total of $13.5 million in funding over two rounds. Their latest funding was raised on March 9, 2021 from a Series A round. The two year-old start-up has a line of as many as eight marquee investors, including Sierra Ventures, Liquid 2 Ventures, Saama Capital, Firebolt Ventures, SVB Financial Group and others.

The first paid client came in January 2020. By March 2021, Zeni had managed over $200 million in funds each month throughout over 100 start-up clients. Lockdown also worked in the company’s favour as the majority of businesses were working remotely and looked at Zeni as their remote finance team.

Saving the Burnouts: Single Pane of Glass for Start-Ups

Zeni aims to solve the real-world pain points of start-ups. Despite having a number of tools online to manage finances, the process remains highly fragmented. There are payroll platforms, accounts receivable (AR) and accounts payable (AP) flows, expense management tools, etc.

On the human talent side, there are part-time professionals, perhaps even a CFO, to oversee various aspects of these financial flows. The process is both complex and expensive. A CFO generally comes at the growth stage at a high cost, leaving the start-ups with too many complex tools and independent financial experts to choose from.

Start-ups are in a need of a single tool that can streamline financial management across a variety of functions and offer them something beyond accounting. This is where Zeni’s product offering makes sense, especially for early-stage start-ups with no finance team at place.

The single platform, as mentioned earlier, handles all end-to-end finances of start-ups with both technology and human experts. In a traditional accounting model, there is a scope for human error with manual crunching, starting from data entry, transaction categorisation, and attaching transaction documentation in the accounting software etc.

What takes hours of dedicated human resources, takes only a few minutes with Zeni. Plus, nobody has to wait till the end of the month to know what is brewing in the financial cup. This is important for start-ups as real-time visibility, management, and skilled help with a finance resolution will help them maintain a tempo with their rising enterprise.

‘‘

The integrated dashboard offered by Zeni to early and growth-stage companies is a unique offering as it is updated on a real-time basis.

How Financially Healthy is my Start-Up?

Zeni offers real-time bookkeeping, which means founders can see exactly how the financial operations of their start-ups are performing in real-time, access the transaction-level data supporting the high-level reports, and use this information to course correct as issues arise.

Majority of the start-ups fail to keep their business alive as they remain unaware of the financial troubles building up or where they are going wrong with the finances. They fail to keep their business financially viable and sound and soon run out of cash, calling it quits.

This problem can be eliminated with real-time check and analysis which cannot be done without technology. The Zeni dashboard is able to generate those insights highlighting the key contributing factors affecting changes to the monthly finances.

This also saves them the effort and resource to dig through the spreadsheets to understand what is going wrong or what went wrong. Zeni literally spells it out for them! This could save start-up from scrambling or burning out.

Pitch it Right!

A lot of start-ups do not have their finances in order which is extremely important during a pitch. Having up-to-date, accurate and readily available financials is a must to reflect to the investors that you have a strong hold over the same. This is also important so when investors start the due diligence process, the business is in the best possible position to gain the investment a start-up needs.

Zeni made a smart move by offering experienced professionals for the same as well to help start-ups manage and track the goals as they move through the funding process.

Is Zeni Placed Uniquely?

The answer would be yes. Zeni is placed uniquely as its offering goes beyond simple automation to advanced FP&A and CFO grade presentations and reports.

The integrated dashboard offered by Zeni to early and growth-stage companies is also a unique offering as it is updated on a real-time basis. This gives the necessary transparency to both the executives and the decision-makers. Hence, breaking the silos of information that is created within each software as the company’s existing financial accounting software is integrated and provides an across-the-board view into the company’s financial position.

The B2B fintech market is blooming with a growing number of digital finance platforms readily available for start-ups. But just because the tools exist doesn’t mean that entrepreneurs’ financial woes are over.

Understanding from this point of view, Zeni is uniquely placed as it aims for consolidation and simplification. Plus, with its proposition of in-house financial experts besides the AI-driven tools, gives the full package comfort to business owners.

Looking at a $19.59 Billion Industry

The accounting software market was valued at $12.01 billion in 2020 and is expected to reach $19.59 billion by 2026, at a Compound Annual Growth Rate (CAGR) of 8.5%. The future of AI-powered financial concierge has the potential of becoming a must-have for all the start-ups where all the financial services are consolidated into one single platform and the offering goes beyond that.

There has been a complexity around the finance world and it’s about time that the area is simplified for the start-up world. Zeni is definitely a step in that direction. Moving forward, the company is gradually coming out of its stealth mode to double charge its growth numbers with investment in team and sales.

The post Zeni: Powering High Velocity Decision Making for Start-ups and Small Businesses appeared first on Dutch Uncles.

Business Development – The Only Way to go About

Tanisha Achrekar — Fri, 19 Mar 2021 04:35:04 +0000

Waking up early, exercising every day, or eating more greens are some habits that we often try to inculcate for developing and bettering ourselves. No matter in which sphere of your life these habits fall into, anything that makes you better than yesterday can be termed as personal development. Similarly, in a business, there are various sectors and departments inter-connected to one another. Whether it be the new sales technique contributing to the revenue or the new product launch that will expand your audience reach, the business overall is affected. Any action that enhances your business will fall under the umbrella of business development.

What is business development?

The term business development is often used unclearly and the meaning changes according to the conversation. People often mistaken business development as something to do with sales. While definitely sale is a part of business development, is just one of the many spectrums of it. Business development is for all those ideas, plans, strategies, and activities that improve a business and makes it better than before. It can be defined as the process of creating long-term value for an organisation through its customers, markets, and relationships. Some of the day-to-day activities in your company that can be termed as business development are –

Brainstorming and coming up with new ideas for your business.
The sales teams working on how to get more customers.
The product development team enhancing an existing product.
Conducting market research for better understanding and expansion.
Improving and nurturing relationships with customers.

Some of these business development practices may be one department’s work. On the other hand, some are inter-linked activities involving several departments.

‘‘

The price of success is hard work, dedication to the job at hand, and the determination that whether we win or lose, we have applied the best of ourselves to the task at hand.

- Vince Lombardi

What business development looks like in different areas of business?

Different departments take care of different things in the business. So, business development in each of them also looks different. Read on to know more about what it looks like in different areas of business-

Strategic partnerships
Strategic alliances and partnerships are a great way to grow your business and take it forward. Whether you are entering a new market or want to take your products international, partnerships can play a fruitful role. Here the legal and finance teams are an obvious part of the process. Along with them, here the business development team also comes into the picture. It will help you to weigh the pros and cons of your decision along with seeing the available partnerships options.

Sales
The sales team is focused on creating opportunities through market expansion, leads and bringing in product development along with diversity. The goals set by the sales department are in line with business development and the strategic objectives of the company. For example, the sales team is selling only locally and plans to expand in several other cities. Along with accessing the potential sales opportunities, a part of the business development will involve conducting research on these potential markets. At the end of the day, if your expansion is bringing more cost than profits, it is worth re-consideration.

Finance
At the end of the day, businesses run on profits and finance is a potent part of any business. The role of business development here would be to incorporate cost savings and minimise expenditure as much as possible. While the sales pipeline might have several existing opportunities, it is vital to also consider the cost incurred in turning those leads into sales. For example, the grocery store has several channels of distributors contacting them every day. While the grocery store owner will consider the quality, the price point can be a deal-breaker regarding who gets the distributorship.

Product management
Business development activities that go across borders need a lot of work to be put in especially regarding the markets and products. Such works usually need the involvement of project management, legal and manufacturing departments to work collectively. Developing a business by taking it international requires a lot of planning and effective execution.

Entrepreneurial or managerial level
No matter what business you run, communication is a part and parcel of it. As an entrepreneur, you need to communicate on an everyday basis with several people. Having expertise in your soft skills is needed in several matters. Whether it is coordinating with your employees, networking with potential clients or negotiating with customers, all are a part of the business development initiatives that you take at an entrepreneurial or managerial level. Any business development plan begins at this stage as it is the beginning of an expansion plan.

Marketing
The way a business grows and develops through its marketing team is by attracting prospects. The marketing team helps in expanding the business of an existing saturated market. A new market will lead to new customers and therefore a new revenue that did not exist before. The business development here will include analysing the market deeply, knowing the target audience, observing the existing competition alongside seeing the overall need for your product or service.

Vendor management
When you are planning to expand and grow your business, you need to consider the need for external vendors. Collaborating and managing these external vendors will have a cost associated with it. Also, there are several things to consider before finalizing the vendor and streamlining the entire process. This is where the business development team will take matters into their own hands and clear things up.

While conducting several activities in a business, the development team needs to ensure that they are adhering to fair practices and abiding by corporate governance. Be it the corporate social responsibilities or the business ethics set by the organisation, both need to be followed. Conducting work with utmost ethics will lead to an increase in trust of both external and internal people that are associated with the development team.

‘‘

Formal education will make you a living; self-education will make you a fortune.

- Jim Rohn

Why is business development needed?

Irrespective of the departments and roles, everyone is a part of an organisation’s business development. While some are hired to only cater to specific goals, others may need to juggle between their responsibilities. Being an inevitable part of the grind, below are the key goals of any business development:

Expansion of business
The business development goal is to expand the existing clientele and increase its reach as much as possible. Expansion may be physical or even virtual. For a local business attempting to take its first step in e-commerce, the expansion would be more virtual. Whereas, for some expansion would be an increase in mass production to meet more demand and negotiate raw materials prices due to an increase in quantity. Your business can expand in several ways depending upon the prevailing opportunities.

Better relationships with the consumers
The consumer is the king and the sooner the needs of consumers are met, the more likely they will keep opting for your products/services. The goal of any business development plan is in the end to retain the existing customers while bringing more in. This goal cannot be achieved if your relationship with your consumers needs some work. Evolving and improving the relationship with your consumers is an integral part of developing and expanding your business. Business development activities would look like coming up with ways to address consumers’ complaints and questions, training the customer service team and reducing the response time so consumers’ queries are addressed quickly.

Boost in profits
More profits equal to more funds. These additional funds can be utilised by your company to further invest in expanding your business. Whenever any business plan is formulated, in the initial planning stage itself it is considered how will the development profit the business. While some plans take time initially, they may have huge benefits in the long haul. Expansion of the market, introducing new products to the existing one or reducing the cost incurred in the production are some ways of boosting profits. Anything that reduces operational costs or increases sales is aligned with the business development goal of increasing profits.

Efficiently conducting operations
A business cannot reach heights by conducting lousy operations. Business operations running efficiently is aligned with all other goals of business development. This is because it directly impacts the customers, the profits and the course of expansion. Employees are more of an investment than an expense in a company as man force is needed in conducting most business operations. Bringing in talented employees, optimum machines and a well-versed manager will lead to the smooth and efficient functioning of any and every department in the company.

It is difficult to boil down a vast and narrow concept like business development into a thing or two. Any activity in your business that is adding value to it, in the long run, will account for business development. With the new ideas and transformation, the entire ecosystem of your business will witness overall growth. The development plan of any business needs to be aligned with its core objectives. Read our article on “business objectives” to know how you can set clear and well-established objectives for your venture.

The post Business Development – The Only Way to go About appeared first on Dutch Uncles.

Lean Canvas: Map Out Those Brilliant Ideas

Tanisha Achrekar — Mon, 25 Jan 2021 03:48:19 +0000

An entrepreneur grinds every day facing new challenges and taking advantage of the opportunities. One of the biggest challenges he/she faces is having an idea out on papers. You cannot just say I have an idea as an entrepreneur you are answerable to a bunch of people mainly your employees and investors. You need a plan. However, mapping out your idea may take weeks and months. How can you map out your idea quickly and effectively? This is where Lean Canvas comes into the picture.

What are the Lean Canvas?

The Lean Canvas is a simplified one-page business plan. Ash Maurya created this method and it is an adaptation of the Business Canvas Model by Alexander Osterwalder. The Lean Canvas helps you to map out all the essential points of a business idea. It provides a structure to your ideas, making it more concrete. The Lean Canvas model was created for entrepreneurs to help them map out their ideas simply and clearly. It is a time-efficient model as it is the go-to one-page format for brainstorming business ideas.

Understanding the components of Lean Canvas

Lean Canvas has nine blocks that highlight the needs and requirements of a start-up. The blocks create a logical understanding of how an idea would look on paper. Read on to know exactly what the nine blocks are all about:

Problem

What are you bringing to the table? What problems of your customers are you planning to solve? In this block, write the customer issues you plan to address with your idea. Know the top three problems your customer is facing and make a note of it.

Customer Segments

You cannot solve your customers’ problems without knowing who your customers are in the first place. In the customer segment section, write down your target customers. The type of customers you are targeting will help you to think what problems they are probably facing.

Unique Value Proposition

What sets you apart from the rest of the competition? Your USP is your unique value proposition that you are offering to your customers. In this segment, you will write about what unique value your business has to offer. Especially, when they are competitors attempting to solve the same problem as you are. What makes your brand or product stand out? Write about that in this section.

‘‘

Everything begins with an idea.

- Earl Nightengale

Solution

After you have found your customer’s problems, look for what solutions do you have to offer. How do you plan to tackle the problems your customers are facing? You may not hit it at your first shot, but at least you have started brainstorming for solutions. One of the best ways to find the solution is by conducting research amongst your targeted customers. Give them surveys and questionnaires to know what they feel and then use those learnings while finding the solution.

Channels

Channels are the medium through which you are going to reach your customer segment. Here you need to brainstorm through what channels can you reach your targeted customers the most. Like if your customer segment is millennial, social media like Instagram, Twitter, and Facebook would be the way to go. Find out the channels used by your customer segment and reach them through it.

Revenue Streams

How is your business plan going to make money? This section addresses where the revenues will come from the plan. Talk about how you are going to price your product/service. Though you may feel as your business is just getting started you should lower the cost or even offer services for free like most start-ups. However, avoid only focusing on getting validated by your customers. Conduct research and work on a price point that will generate revenue and the customer’s will be willing to pay for as well.

Cost Structure

To get your product/service out there in the market, a number of costs are incurred. If you have a website, you need to consider how much building it will cost to get customers on your landing page. At every step of the business, there is a cost involved. To have a rough break-even point, estimated costs and potential revenue streams need to be calculated.

Key Metrics

The only way to know that you are on the right track is to evaluate your business using its key metrics from time-to-time. Every business has different key metrics to keep track of. If you run an e-commerce website, probably the traffic you are attracting would be one of the metrics you would monitor.

Unfair Advantage

As an entrepreneur, while filling the lean canvas, it might be challenging to come with an unfair advantage. What sets you apart from the rest of the competition? Having an unfair advantage helps in attracting investors attention. Your unfair advantage can be anything like your well-equipped team, a loyal customer base, fixed set of clients, insider information, or a cost-effective plan compared to the competitors. Your unfair advantage should be such that it cannot be bought with money or easily copied by a competitor.

How to create a Lean Canvas?

The whole purpose behind creating a Lean Canvas is to get your ideas on paper for you and others to see. It is an alternative to the traditional business plans that are time-consuming and may not offer insights that are often needed. When you are creating your Lean Canvas, you can do it alone or along with your business partner. Basically, take 20 minutes and jot down everything that is in your head in those nine boxes. Some people like to have their Lean Canvas on paper while others prefer to have a PDF version of it. To each its own here, whatever sails your boat.

There are also several tools available online to create your Lean Canvas with the utmost ease. Some entrepreneurs prefer taking a print of their Lean Canvas or writing it on paper and placing it in a place where they can see it every day.

What are the features and benefits of creating a lean canvas?

Lean Canvas being a quick way to formulate business ideas from a business model to a marketing campaign, it has several benefits. It acts as a visual guide and helps to communicate your idea more effectively.

Focused on the entrepreneur

The Lean Canvas model was crafted for entrepreneurs. It is a simple business model which proves to be of great value to any start-up business. It is focused completely on what an entrepreneur is thinking and revolves around him. It helps him/her gain a clear perspective of his/her idea before involving other people.

Saves time

A business idea can take days sometimes even weeks to get on paper. The time one business is preparing an idea, another business may be launched implementing it. Time is more valuable than anything in a business. The Lean Canvas model is time-efficient to bring your idea on papers. It will not take you more than 30 minutes to fill the blocks in your Lean Canvas. Making it one of the most time-efficient brainstorming models.

‘‘

The difficulty lies not so much in developing new ideas as in escaping old ones.

- John Maynard Keynes

Helps in mapping an entrepreneur’s mind

The Lean Canvas has been designed to promote clarity in an entrepreneur’s mind. It helps him/her in mapping out everything regarding the business idea that is in his/her mind. Also, the model is so simplified that it can be adopted for different niches, making it handier and more useful.

Has a solution-based approach

The first block of the Lean Canvas is a problem and eventually, the solution is followed. It has a simple approach where it compels a person to think about what problem is their business addressing? How are they going to solve it? The approach is problem-solving and solution-based at the same time. It helps a business to understand the ‘why’ behind their model.

Aids in finding a company’s USP

An entrepreneur thinks hard when he/she is filling the unfair advantage section of the Lean Canvas. Here he/she is compelled to think about the unique value proposition of his/her business model. Along with thinking about what will make him/her stand out, an entrepreneur is also forced to think of how his/her USP cannot be easily copied by any entrepreneur. Finding an edge over the competition that cannot be adopted easily is a game changer to any business.

Easy to understand

The Lean Canvas has nine sections that compel an entrepreneur to think intensely. Also, the boxes have a limited spacing allowing him/her to focus only on the key points of any section. It ensures that the entrepreneur is jotting down things to the point. The Lean Canvas is a crisp and clear model which is quite easy to understand. It helps an entrepreneur gain his own perspective on his idea before showing it to anyone else.

The Lean Canvas is one of several business models available. It’s a quick way to get those ideas out of your head and on to papers. Read our article on the ‘Business Model Canvas’ by Alexander Osterwalder to know about the business model that inspired the Lean Canvas.

The post Lean Canvas: Map Out Those Brilliant Ideas appeared first on Dutch Uncles.

Interest and Interest Rates Explained

Aakash Sharma — Thu, 24 Dec 2020 07:52:21 +0000

Often, we come across terms that are frequently used today, but the actual significance and meaning of those terms remain obscure to many.

The list comprises terms like investment and capital, GDP, trade deficit, etc. Seemingly, ‘interest rate’ is one such term. You might come across this term quite often- while watching the business news, seeing an advertisement about insurance, availing banking services, and various other situations.

What is interest and interest rate?

In the financial and economic spheres, ‘interest’ refers to the payments made by borrowers or financial institutions that receive or charge additional sums on loans or deposits on the primary amount borrowed, i.e., the principal sum. For example, customers typically pay interest on a bank loan, in which they spend the bank more than the amount owed to the bank. Alternatively, customers can save and therefore withdraw more than their previous deposits as well. In the case of savings, the customer plays the lender’s role, and the bank plays the recipient.

The ‘interest rate’ is the amount payable for each period in terms of each percentage of the amount lent or deposited (principal amount). The total interest on the amount taken or deposited depends on the principal amount, rate, compound and loan, term of deposit, and term of the loan.

How does it work?

Banks are primarily the fundamental entities that apply the interest rate on the financial transaction with their customers in the organised sector. Keep in mind that we do not include the rate used in unorganized sectors, usually in rural areas, although they work in the same way. It works in two ways:

Borrowing

The interest is applied to any money you borrow from a bank or a financial entity. Any loan is sanctioned on the assurance of the borrower’s repayment of the loaned amount. Besides, to compensate the lender for the risk of lending the money, more amounts than borrowed have to be paid back.

Lending

Interest is applied when lending money as well. If you have surplus capital, you can invest that money by lending or depositing it in a bank with the hopes of earning interest.

Banks charge interest on the entire balance of your loan or credit lines taken from them, and part has to be paid in predefined periods (SI and CI). Failing to make payments increases the debt despite paying the loan’s principal amount. This is because its collection from borrowers is a primary source of capital inflow for banks and financial entities that provide loan credit lines to customers.

If a bank thinks that the debt is less likely to be repaid from the borrowing party, it charges higher rates. As a result, banks apply higher rates on revolving loans, which means loans like credit cards, as these loans are more expensive to manage. Banks also charge higher rates from people who they deem as risky. Effectively, the higher your credit score, the lower the interest rate. A credit score represents your creditworthiness, i.e., your capability to repay a loan taken from banks.

‘‘

Interest rate is the amount payable for each period in terms of each percentage of the amount lent or deposited- principal amount.

Payment or gain of interests depends on the following points:

Rate
Amount of the loan
Repayment period

A higher rate or a longer-term loan amounts to the borrower paying more.

Earning

If the funds are borrowed or deposited in a bank account with interest-bearing facilities like a savings account, you can earn it. Banks do the lending on your behalf with your money: they use your money to lend to other customers and make additional investments. Eventually, they pay a portion of their profits in the form of interest to you.

Banks regularly pay interest on your deposits. You will see interest payment transactions and notice in your account balance increase over time. You can spend this money or save it on your account to continue earning interest.

Let’s understand this with an example.

Suppose you deposit Rs 1,000 in a savings bank account with a 5% interest rate service available. With simple interest, you’d earn Rs 50 in a one-year period. To calculate:

Multiply Rs 1,000 in savings by 5%

Rs 1,000 x .05 = Rs 50 in earnings

Account balance after one year = Rs 1,050.

However, most banks calculate interest income for every year, not just for a year later. It can be used because these compounded gains are useful to you. Compound interest will work something like this-

Your account balance would be Rs 1,051.16 after one year.

Your annual percentage yield (APY) would be 5.12%.

You would earn Rs 51.16 over the year.

The difference seems small here, but the amount taken as an example here is only Rs 1000. For every Rs 1000, more interest will be earned. Over time, as more money is increased, the process will continue to yield more prominent and more significant rewards. If you leave your account, you will earn 53.78 rupees the next year, up from 51.16 rupees the first year.

Paying

Interest can be applied to different types of business or personal transactions, a few of which are mentioned below:

Payment of Debt in Instalments

In addition to secured loans such as homes, cars, and student loans, monthly payments are often consistent with interest costs. Every month, part of the first payment reduces debt, and the amount of it adds to the payment costs. With these loans, you pay off your debt within a certain period. For example, a 15-year house loan or 5-year vehicle loan will include repayment of the original amount borrowed plus interest on the amount gathered over time.

Revolving Debt

A revolving loan is a loan that lets you borrow every month, and you can repay your debt regularly. For example, if you are using a credit card, you can reuse it, given that the transactions are within the credit limit. There are many ways to calculate interest, but it is not difficult to understand how to pay interest in revolving debt payments.

Additional Costs

Loans are generally valued at an annual interest rate. This number indicates the annual rate and may include additional charges to the sum accumulated. Net rate expense corresponds to part (not annualized).

Types of Rates

Simple (Regular) Interest- SI

It is calculated by multiplying the daily interest rate by the number of days between payments.

Formula is:

SI = Principal x I x Rate x Time, i.e., SI = P x R x T

For example, if an individual takes a loan for Rs 3 00,000, her/his SI on the loan at the term of the loan for, say 20 years, will be:

SI= Rs 3, 00,000 × 15% × 20= Rs 9, 00,000

This means, after 20 years, the lender will get Rs 9, 00,000.

Compound Interest Rate – CI

Some lenders prefer the CI on loans as it results in the borrower paying a higher rate. CI is also called an ‘interest on interest’ as it is applied to the principal and interest previously collected.

The CI paid at consolidation is higher than the standard SI rate method. Sum is paid monthly on the principal, including interest collected in previous months. The flat rate is the same for both ways (simple and compound) in the short term. However, as the loan grows, the gap between the two types of interest rates widens.

The formula for CI => p × [(1+rate) n−1]

Where: p=principal, n=number of compounding periods

If you are saving money using a savings account, CI is favourable. It includes the interest accrued on these accounts and allows the account holder to pay the bank using these deposits.

For example, if a business deposits Rs 5, 00,000 into a high-return savings account, the bank can take Rs 3, 00,000 of these funds to use as a mortgage loan. To compensate the business, the bank pays 6% into the account annually. So, while the bank is taking 15% from the borrower, it gives 6% to the business account holder, or the bank’s lender, totalling it at 9%. In a nutshell, savers lend the bank money, which, in turn, provides funds to borrowers in return for a stake.

‘‘

Banks do the lending on your behalf with your money: they use your money to lend to other customers and make additional investments.

Conclusion

Therefore, it can be concluded that interest plays a chief role in the finances of all types of businesses, either new or well established. As we have learned, when consumers pay less in interest, this gives them more money to spend, which can create a booming effect of increased spending throughout the economy. This is how big of role interest rates play in the economic setting of a country.

Read more about financial topics like GDP, GST, EBITDA and others on our website.

The post Interest and Interest Rates Explained appeared first on Dutch Uncles.

PEST Analysis: Market Research for Businesses

Aakash Sharma — Thu, 24 Dec 2020 12:25:10 +0000

Precise planning and calculation are necessary for undertaking any task- PEST Analysis

Precise planning and calculation are necessary for undertaking any task, be it going on a road trip or starting a new business. And for planning, some tools always come in handy to give the best possible outcomes. This method can be used to examine the situation you might find yourself in the future and attain a decision in a particular time frame. One such tool that is extremely important for planning any business, or in fact, for any activity that can be deemed necessary is PEST Analysis.

Let’s get into the details of what PEST analysis, how to do it, and how it benefits you in setting up your business.

What is PEST Analysis?

Let’s make it clear in the very beginning, PEST analysis has nothing to do with the harmful animals and plants that are often found on grasslands and farms. PEST is an acronym that stands for Political, Economic, Social, and Technological factors that an entrepreneur must keep in mind while setting up her/his business. These factors are critical to be analysed as these have decisive power of influence over any business’s organizational decision making and running.

Similar to PEST analysis is SWOT analysis – it is the analysis of Strengths, Weaknesses, Opportunities, and Threats of a business.

PEST analysis is done as a part of an external examination when conducting a strategic market analysis or research. It takes into account the various macro-environmental factors that need to be considered for a company. In simple words, it is a strategic tool to understand market growth or decline, business conditions, operational potential, and direction.

Components of PEST Analysis

As mentioned above, PEST is the acronym for the political, economic, social, and technological factors of the business industry. Naturally, these four elements form the components of the analytical process. They are explained below:

Political

In political factors, the government’s intervention in the economy and functioning of businesses is considered.

For example, political issues that impact businesses primarily include tax policies, labour laws, environmental laws, trade barriers, taxes, and political stability.

Political matters may include goods and services that the government intends to provide or provide. Moreover, government policies also impact a country’s health, education, and infrastructure industries.

Economic

Economic factors affecting a business majorly consist of economic growth, exchange rates, inflation and interest rates. These factors have a plausible impact on the functioning of businesses work and their decision-making processes.

For example, interest rates affect a company’s capital expenditure and its growth and expansion. Exchange rates can impact the value of exports and supplies and the value of imports.

Social

Social factors include facets of cultural and moral awareness, population growth rates, age limits, occupational outlooks, and safety protocols. Strong trends in social factors affect a company’s demand for its products and business.

For example, an aging population could mean a smaller and undesirable workforce, which will end up increasing labour costs. Moreover, businesses adopt different management strategies to keep up with emerging societal trends, like increasing racial and gender diversity in the workplace.

Technological

Technological factors comprise technical aspects that impact a company’s activities like R&D, automation, and technological transformation.

For example, technological changes in an industry can affect a company’s existence in the market, the minimum level of costs, and influence the hiring decision. Technological changes also impact costs, quality, and innovation in a business.

‘‘

The best part about the PEST analysis is that it doesn't require anything that you can't find sitting right on your study table-a pen and a sheet of paper.

Why is PEST analysis critical?

As we have already established, immense planning and analysis go into setting up a business. And a plethora of parameters need to be checked off the lists to ensure a safe, reliable, and impactful landing of a new business in the market.

And, well, PEST analysis is one such tool to help in the process because it:

Helps assess the suitability of your business strategy for the wider environment and stimulates strategic thought process,

Considers all external impacts affecting your organization,

Pushes for a more transparent and more insightful decision-making process, and

Enhances the planning, marketing, organizational transformation initiatives, sales and development, project management, and research methodologies.

As PEST analysis gives a greater understanding of your company and business proposition, it leads to more effective long-term strategic planning. It leads to heightened attention to potential threats and dangers while providing insights for valuable business opportunities.

Political Factors

(Politically influenced factors that could impact the store)

Municipal Permissions
Opening/Closing Timings
Goods Delivery Permissions
Permissions for selling particular goods (essential medicine, liquor, etc.)
Environmental impacts by your store (if any)
Funding for your opening your store
GST rates and policies

Social Factors

(Social dispositions, behaviours, and trends that influence your organization and target market)

Business contribution to the community
Employee health
Leisure time for labourers
Customer relations and general behaviour
Trends and awareness
The sensibility of community ties
Population in the area

Economic Factors

(Overall economic forces that could impact your business)

Growth rates
Seasonal business
Demand in the area
Labour costs
Raw material costs
Capped monetary investment

Technological Factors

(Technology that can impact the way you produce, distribute, and market your products and services)

Competitors technology
Online transactions
Telephones and communication
Automation
Email services to customers
Digital Presence (website/application)

These are just examples of what might impact retail stores’ setting in the political, economic, technological, and social senses.

After you have done the PEST analysis, you need to ask the right questions that originate out of each of the four columns:

Political Factors: What is the government’s policy or political party that can hamper or boost your business? Is the political climate stable, or will it change?

Economic Factors: What financial factors will affect your business in the future? How are you doing financially now? How does this affect sales and prices?

Social Factors: How do customers believe, value, and relate to your sales practices? What role do cultural rules and human behaviour play in your business?

Technological Factors: What technologies and inventions are available or ongoing? How will this technology impact your business?

You need to analyse and consider the PEST analysis outcomes and plan with the possibilities of how potential changes are affecting the company in the future.

To get the most out of PEST analysis, you should collect suggestions and reviews from multiple sources and people. Gathering other people can be difficult, inconvenient, and expensive when you work with a large or dispersed team. Various technologies, such as video conferencing, networking, and brainstorming platforms, can help address these challenges.

Who can use PEST analysis?

PEST analysis can be used for any business or even event management purposes. As it helps establish the external factors that could impact decisions, it gives a detailed overview of a fool proof plan.

It can be used by new businesses, as shown in the above example. It can, and is, also be used by conglomerate companies that produce a wide range of products, like Reliance Industries or Disney, to maintain inter-departmental coordination and research for further growth. College students can even use it to organize fests and events to understand better the impacts of such events on society, the college, and the students.

You can also use it to analyse an organization’s internal structure to identify strengths and weaknesses in the company’s internal law, economic outlook, climate, and technical framework. The results of this analysis may facilitate change or adaptation in areas considered below average.

Thus, PEST analysis can be used at any organizational level in any suitable scenario.

‘‘

PEST can be used to analyse an organization's internal structure to identify strengths and weaknesses in the company's internal law, economic outlook, climate, and technical framework.

Applications of PEST Analysis

After the process is completed, the application is a critical part of the procedure. You can use PEST analysis to identify and utilize existing business environmental conditions. It can also identify current or future challenges to plan on how to manage these challenges effectively.

PEST analysis can be combined with other business strategy analysis forms, such as SWOT analysis, to obtain more complete results. Comparing these completed analyses provides an excellent foundation for making correct decisions.

Shortcomings & Limitations

Depending on PEST factors’ dynamic nature, many of the elements analysed can change within an hour or a day. Some factors are based on assumptions and may not be accurate. The data collected is too large; it must be used with caution. Its accuracy cannot always be ascertained again because it is obtained from multiple outside sources.

Nevertheless, PEST aspects impact strategic business decisions like marketing activities, product development, and research projects. And the analysis helps entrepreneurs make better business decisions and improve efficiency by studying the factors that can affect their business.

The post PEST Analysis: Market Research for Businesses appeared first on Dutch Uncles.