Cash Flow Management – Dutch Uncles

Steps to determine whether your stock purchase is a good buy

Anju Nambiar — Fri, 10 Sep 2021 03:35:08 +0000

When the stock price of a company rises, subsequently its revenue soars. However, based solely on these factors, an investor cannot be certain that it is a worthwhile stock to invest in. You need to dive into the growth rates of the company, its challenges and valuations to determine whether the stock is worth buying.

Characteristics of a worthwhile stock

Stock exchanges are riddled with too many listings, and it may be hard for a new investor to identify a worthwhile stock. However, the following characteristics that define a good stock will help you recognise one that’s worth investing in:

A good stock comes from a company achieving consistently increasing profits. The fundamental indicators of the company will give you this information.
A good stock comes from a company with low debt. A company with low liabilities will provide higher returns.
A worthwhile stock comes from a company with a good product. If you observe the stock performance of companies with a popular product, you will realise that innovative product stocks display phenomenal performances.

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Invest in a stock only if the parent company’s cash flow report is in good health.

Steps to determine whether a stock is a good buy

Check the health of the company’s cash flow report

Invest in a stock only if the parent company’s cash flow report is in good health. By ‘good health’ we mean that the company operations must churn enough cash to cover the expenses for the cost of doing business. Extract the company’s cash flow report. If it is positive, then it’s a green signal for the investor.

Evaluate company’s profits

The profits should be solid for the company whose stock you are planning to purchase. Analyse profit growth of the company for the past 5 years in their profit and loss accounts. A worthwhile stock comes from a company that exhibits consistent growth.

Evaluate the quality of sales

Evaluate the company’s sales quality by analysing the sales turnover for the last 5 years. Has the turnover increased or depreciated? You will be able to find the answer in their profit and loss accounts. The sales revenue must have grown consistently in the last 5 years.

Check the company’s profitability

A worthwhile stock comes from a company with high profitability. Evaluate their financial ratios and choose stocks backed by high profitability figures.

Choose stocks from a company with ROA (return on asset) greater than 10% p.a. (per annum)

Calculate the ROA for the company by dividing the company’s total profit by its total assets. The ROA reflects the company’s stocks’ abilities to generate profits.

Identify good value stocks

The most worthwhile stocks gain steady growth. They are strong, and are backed by robust valuations. You can identify these value stocks by diving into the financials of the company that’s issuing the stock. The best stock buys are backed by strong and sustainable financial statements and are not overvalued.

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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

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Why Are Acquisitions And Mergers Taking the Cash Channel?

Anju Nambiar — Tue, 27 Apr 2021 05:30:08 +0000

The Indian start-up and small business space is seeing increased Mergers and Acquisitions occurring. This has undoubtedly been triggered by the disruption caused due to the Covid-19 pandemic outbreak. But an interesting development that is occurring is that corporate M&A’s (Mergers & Acquisitions) have undergone immense transformation as more deals are finalising through cash transactions.

What’s the secret?

M&As are thriving due to the Indian Government’s support and their renewed perspective towards the success of such deals. Other factors that are boosting more M&A deals include the buyout occurring in the stock market as well as the stability currently seen in the banking system.

There is availability of rescue capital for credible inorganic expansions as well as confidence capital for organic exigencies, another factor that has bolstered M&As within the country. Corporates are doing promotion of ledgers, divestments, and supplementary asset disposals. This will help them get better liquidity, and stronger balance sheets. It’s also empowering them to take careful risks that will pay off on a grand scale.

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Most corporate acquirers see all-cash deals as highly attractive mainly because it enables them to easily cancel out other acquirers from the competition.

Recent noteworthy M&As

Numerous cash M&As have taken place recently in the start-up and small business scene. For instance, Pine Labs, a Bengaluru-based start-up recently acquired Singapore-based start-up ‘Fave’ for a $45 M cash+stock deal. Pine Labs is a PoS (Point-of-Sales) Service provider start-up and Fave is a digital merchant start-up.

Another noteworthy acquisition has been Byju’s paying $1B for ‘Aakash’ which was a part-cash, part-equity deal. The cash transaction amounted to $600M and the rest was paid in stock.

A third acquisition of significance has been Bengaluru-based telecom start-up iBus Networks acquiring Ubico Networks in a 100% stake, all-cash deal.

Reasons for taking the cash channel

Most corporate acquirers see all-cash deals as highly attractive because it enables them to easily cancel out other acquirers from the competition.

Such offers may be preferred during an M&A transaction because may not affect the future performance of the company. Cash give-and take may also occur when shareholders are sceptical about the viability of the deal and so a premium price is offered by the acquirer.

A strong reason why cash may be swapped in exchange for stakes in a company may be because of global currency fluctuations. Currency considerations may prove to be profitable for the enquirer.

The most obvious reason may be that the company getting acquired or being merged into the acquirer may specifically request for a cash infusion.

What’s in it for me?

It is the era of start-ups, as well as a new age of cash rich companies and M&A activity is high currently. These Indian players have their eye on numerous outbound investment opportunities. These companies are mostly seasoned business houses who lack novel business opportunities.

If your start-up is struggling from the pandemic, it’s a golden opportunity for you to swap your ideas for cash deals.

Cash-rich companies are eager to buy over these ideas since they are looking to achieve quick, inorganic growth and are aggressively getting into M&A deals.

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Effective Ways to Use Technology in Your Small Business

Shalmoli Sarkar — Sun, 14 Feb 2021 02:35:04 +0000

A small business in India is shy in implementing technology as it believes that incorporating technology brings in complexities. But that is not true. Small businesses get entangled in the redundant processes of handling finances, scheduling meetings, handling customer queries, managing invoices, purchase orders, etc. All of these activities consume a considerable amount of time and human intervention can make errors, no matter how diligent your employees are. Implementing technology ensures greater efficiency and versatility, making it a natural progression for processes. Below are some pockets to explore where the inclusion of technology will prove to be cost-effective, increase productivity and reduce dependence on manpower.

Technology for better productivity

Businesses when they begin new, a single individual handles myriad responsibilities that demand enormous multitasking. Handling myriad functions by the same person can be a labourious task if he is a business developer who is into recruitment, and marketing as well. In such conditions, the use of project management tools or time tracking tools becomes beneficial to the businesses, since it can give a better picture of how much time we allocate for a task and find out the gaps that consume most.

Building better customer relations

For any venture to survive, it needs sales to happen. Addressing customer complaints and building a loyal customer base should be at the top of any business’s priority list. A business owner should begin nurturing customer relationships right from day one with the help of Customer Relationship Management (CRM) software. A CRM software gathers information at a central place that has the customer’s overall purchase history, customer info, and every customer interaction with your business, which can be shared with your employees as well. With CRM software in place, every question, every service request, and past detail of customers is at your fingertips, which benefits the business by understanding the customer better, identifying cross-selling and up-selling opportunities better, and acquire new customers. It is designed to help businesses to improve customer relationships and increase customer lifetime value.

Managing financials

Management of financials is the most vital part of any business where nobody can afford a single error. To streamline your accounting and bookkeeping process its accuracy and security should be paramount. Businesses should depend on the accounting software to automate the process of payrolls, receivables, and payables, efficient filing of taxes online, and other financially sensitive tasks. Further, businesses can implement cash flow management software to forecast cash flow based on past transactions and historical financial data within the software.

Learn, share and collaborate

The pandemic has pushed the workforce indoors which necessitates the use of cloud solutions to easily share, collaborate important documents with your remote workforce. Sharing documents through cloud solutions helps make changes and communicate them on the spot and share accordingly. This brings flexibility and seamless collaboration among employees. Implementing teleconferencing solutions and web conferences are an excellent medium to conduct meetings, inductions programmes as well as offer business training to your remote workforce.

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