Finance – Dutch Uncles

Artificial Intelligence : Providing Guidance to Indians to Effectively Manage their Wealth

Shalmoli Sarkar — Fri, 11 Feb 2022 12:35:11 +0000

In the past few years, Indian banks have grown fond of adopting artificial intelligence (AI) in their processes to provide a swifter and better banking experience to their customers. Today’s digitally-savvy customers have less patience and are firm believers of technology who expect fast, personalised, and meaningful interactions with banks and have less tolerance for the long trail of paperwork and queues. That said, AI adoption in banks has helped to boost revenues and retain customers by offering personalised services, quick and improved customer care through chatbots, risk monitoring, reduced errors rates, and better resource utilisation. In addition to this, AI has been aiding banks to entrust belief in customers as a safe place to keep money by detecting frauds, mitigating uncertain risks, and managing regulatory compliance.

Besides, bringing in operational excellence in banks, there exists a need to guide Indians about financial planning and investment that is yet to be unlocked through artificial intelligence.

But why do Indians need guidance in investment and wealth planning? Some statistics will tell you.

A dearth of knowledge in wealth management

The statistical figures shown in a survey by Scripbox, an online mutual funds platform showed the dearth of knowledge existing in Indians about financial planning. The survey found that around 72 percent of Indians of the 26-45 years age bracket are unaware of the amount of money to be invested or to be saved. 76 percent believe that there is a need for more education in the financial planning space. 56 percent lack the knowledge to handle personal finances effectively, resulting in difficulty in clearing loans. This mismanagement of personal finance is arising majorly among millennials as they lack the knowledge and initiative to earmark a portion of their income towards savings and not to forget their increasing lifestyle expenses. Another survey from Groww finds 30.7 percent of millennials lack investment awareness.

The prejudice about finance not being a women’s domain has also pushed them behind in financial planning, as only one in five women exhibit confidence in their knowledge of financial planning and are not aware how much to put aside to achieve financial freedom. This is where AI can step in to guide people about handling their finances. But how?

‘‘

A survey from Groww finds that 30.7 percent of millennials lack investment awareness.

Artificial intelligence ( AI ) for financial planning

There are multiple ways through which an average person can make money transactions. The modes of payment include cash, wallet, UPI, Credit Card, Debit Card, Gift Card, Net Banking, etc. In investment, they can invest money in Fixed Deposits, Recurring Deposits, Stock Trading, Crypto Currency, Mutual Funds, etc. With the trail of transactions being done artificial intelligence can understand the consumer behaviour specific to an individual based on the transactions made. It provides detailed information to the consumer regarding his/her expenditure depending on which one can chart out an investment strategy.

Artificial intelligence analyses the following data points to help consumers with financial planning:

Analyse the spending pattern
Determine income/debt ratio
on the above two data points, individuals can work on their credit score
Plan your investment by decreasing expenses based on the data.

Artificial intelligence for financial guidance – a gamechanger

Artificial intelligence for wealth management offered by banks to help consumers understand their savings and expenses can be a gamechanger that can improve their financial literacy. The same data can be utilised by banks to develop customised products that will help in retaining as well as gathering new customers.

Offering artificial intelligence by banks to analyse their spending, will not only help to save money but also offer guidance in investing at the right places and be creditworthy to seek home loans, car loans, and personal loans from banks and other financial institutions.

The post Artificial Intelligence : Providing Guidance to Indians to Effectively Manage their Wealth appeared first on Dutch Uncles.

Fighting Litigation Cases with Low Budget ? LegalPay is Here to Solve

Shalmoli Sarkar — Mon, 06 Dec 2021 15:02:36 +0000

A small saree business gets entangled in a dispute with its textile supplier over the latter’s refusal to come to terms with the purchase agreement signed. As the supplier is unable to fulfill the order of raw materials as per the pre-decided price, the small business owner now wants the advance paid to be returned to which the former is not agreeing. To settle the dispute the supplier makes a low-ball settlement offer and the business owner is left with no other option but to accept the offer.

What happened above?

The small business owner had to compromise on the low-ball settlement offer because it did not have the monetary resources to be able to bear the cost of lawyer’s fees and court proceedings to provide working capital.

Cases like these are not rare, there are several unrecorded cases where lack of monetary strength has prevented small business owners to seek judiciary help for contesting litigation and are forced to bow down to the offer made by the party with deeper pockets. Nothing can be as distressing as a financially weak party that denies justice by taking the case back with the fear of being unable to sustain the fight in case of stretched litigation.

To prevent MSMEs from falling into the pit of injustice, a litigation financing company is a boon. A litigation financing firm is a third party that offers the necessary monetary assistance required by the party to fight out the litigation in court without having to compromise.

The number of litigation financers in India is dismal

India has few international litigation financers with their focus to provide financial assistance only to bigger companies. Litigation financiers for MSMEs is the most neglected space, realising which Kundan Shahi the founder formed a tech-driven litigation financing company- LegalPay that alleviates the difficulties of a financially weak party for its court proceedings. Litigation financing was practiced in India since the 18th century but there has been no organised player serving this space.

What is LegalPay?

Founded in 2020, by Kundan Shahi’s LegalPay is India’s first homegrown litigation financing company that offers flexible, non-recourse funding solutions that covers litigation costs consisting of lawyer’s fees, expert witnesses, working capital, etc. Non-recourse is a condition the allows the financing company to receive its share from only out of the assets that the borrower is legally obliged to repay the loan.

It aims to serve the $20 billion legal expenses market by helping businesses with their shareholder and IPR related disputes by gathering data from government-based websites. It focuses on late-stage cases that have financial requirements in the range of Rs 20 lakh and Rs.3.5 crore.

‘‘

LegalPay is India’s first homegrown litigation financing company that offers flexible, non-recourse funding solutions that covers litigation costs consisting of lawyer’s fees, expert witnesses, working capital, etc.

How LegalPay assists the financially weak parties?

LegalPay is a tech and data-driven litigation financer that leverages technology and data to filter such cases from the websites of Indian courts. Every case that comes to them undergoes a stringent 15-point checklist proprietary algorithm that rates the case on different metrics. Moreover, only those cases are selected for financing which has strong legal merit, an efficient legal team, and clarity on the settlement timeline.
In general, LegalPay invests in cases belonging to commercial litigations in forums such as the high court, supreme court, NCLTs, and other commercial arbitrations.
LegalPay’s earning model is a simpler one, where before investing it mutually agrees on a fixed percentage of the award upon a successful outcome of the case.

Sourcing of funds for monetary assistance

LegalPay sources its funds from large family offices and high net worth individuals (HNIs) and ultra HNI in the country and operates on a fund structure. The investors can begin investing in it with an amount as low as Rs 25000. LegalPay utilises the funds to invest in diverse cases so that investors can receive higher returns with minimum risk. The investors later earn by getting a portion from the end proceeds or recovery from such disputes. An impressive 30 percent IRR ( internal rate of return) can be earned by the investor across stages and types of cases. LegalPay also earns by charging a two percent management fee and a 20 percent carry for the transactions made on the platform.

How MSME business owners and law firms can benefit from such litigation financing platforms?

LegalPay aspires to become the NABARD of the $20 billion legal expense market in India to help allow lawsuits to be decided on their merits and not based on the party having deeper pockets. In all these years, the lack of formal litigation financing players in the legal market was largely has made the weaker party -a prey for compromises. But recently the legislature, executive, and the judiciary in India have recognised and have been promoting litigation financing arrangements as India progresses towards being a global arbitration hub.
Striking a strategic partnership with these litigation financing companies will be beneficial to the law firms as they can convert prospective clients and assist them in a better manner by referring meritorious claims to these litigation financing companies eventually becoming a revenue churner for the lawyers and law firms.

The post Fighting Litigation Cases with Low Budget ? LegalPay is Here to Solve appeared first on Dutch Uncles.

Winning Strokes Of Vistaar Finance, An Aid To Indian SMEs

Aakash Sharma — Tue, 17 Aug 2021 05:35:07 +0000

Vistaar Finance is a deposit-free non-banking financial company (NBFC) that provides loans to small businesses. Vistaar serves its clients primarily through a network of more than 200 branches.

The company manages assets worth Rs. 2,100 crore, and its credit base includes public and private sector banks, mutual funds, international development agencies and large financial institutions.

Brahmanand Hegde and Ramakrishna Nishtala founded Vistaar Finance in 1991 with the vision of financing small business owners. Vistaar has developed several loan products for SMEs that often do not have the support of traditional financial systems due to different reasons.

‘‘

As a primary lender for small businesses, Vistaar Finance is a catalyst for underserved SMEs in India and is committed to promoting their financial inclusion and economic success.

Staff and corporate culture

Vistaar Finance has recently emerged as the best medium sized financial services company to work for in India in the 2021 AmbitionBox ranking. It is also ranked 13th on the list of the top 25 medium-sized companies in India.

According to company representatives, the recent award is a testament to Vistaar’s open culture, where teamwork, transparency and integrity are paramount. At Vistaar, employees have many opportunities to improve their light skills, such as communication or technical skills related to financial products.

Vistaar has had many success stories in its journey. The company has received funding from prominent investors, including Westbridge Capital, Saama Capital, Omidyar Network, and Elevar Equity.

Who does Vistaar Finance help?

Vistaar Finance’s target borrowers are categorised into several businesses such as general supply or grocery stores, household stores, hotels and bakeries, craft stores, clothing stores, and workshops, among others. Vistaar has a unique lending process with an in-depth analysis of each sector.

For loan applicants who have no proof of income, the company is developing innovative income verification options. It also continuously improves its products and credit practices based on changing customer needs and feedback. Business owners have used Vistaar’s credit facilities for various reasons such as working capital, home purchase, and home renovation.

Unique credit method

Since the early days of small business lending, Vistaar believed that each client group needed a unique approach. Start-ups and SMEs need to be able to get loans quickly and easily. Thus, the company is committed to serving its customers with a sustainable separation of partnerships that fasten the process.

Vistaar scrutinises the customer’s business and distinguishes the diagnostic features of their business. Its reference database is regularly maintained and updated. Transactions are continuously monitored and reviewed, and changes are made during credit checks.

Vistaar products are custom-built to suit a wide range of industries to maximise business growth for customers. Its offerings have been increasing in both ticket size and tenor. Vistaar offers different products for quick and easy business loans from Rs. 2 lakh up to Rs. 50 Lakhs.

Its essential loan products are Vistaar Saral Business Loan (VSBL), Vistaar Vyapar Mortgage Loan (VVML), and Vistaar Sampatti Loan (VSL).

Learnings for SMBs and the fintech industry

Loans to SMEs provide small businesses with a credit line to meet the needs of the company. Such loans can be used for working capital or long-term working needs.

As an NBFC, a company can provide regular loans and soft loans (small credit) to various SMEs and start-ups. A credit giving company can get more subsidies and government assistance if it helps small businesses function and expand. NBFCs can potentially replace financial market instruments and manage assets, such as investment portfolio management and equity investment portfolio.

While lending services are beneficial for SMEs and small business owners looking for sources of finance, companies operating in the financial sector and fintech can also reap huge benefits by providing support to small businesses. Entrepreneurs in the fintech and finance sectors can delve into this realm of proving funds and capture the alternative space of Venture Capital funds and traditional investors.

The post Winning Strokes Of Vistaar Finance, An Aid To Indian SMEs appeared first on Dutch Uncles.

Leap Finance: A Springboard Making Educational Dreams a Reality

Talat Rais — Thu, 10 Jun 2021 12:35:04 +0000

In the middle of every difficulty lies an opportunity – Albert Einstein.

Two men brought this quote to life when faced with obstacles during their professional careers. Working with Non-Banking Financial Company (NBFC) Incred, Vaibhav Singh discovered major loopholes in the foreign lending market, while Arnav Kumar’s personal experience suggested that availing a loan without a collateral was next to impossible, during his stint at Capital Float.

Exploring new models, the duo took it upon themselves to fix the systemic inefficiencies in the lending market through innovation and decided to start – Leap Finance – in 2019.

Leap finance, as the name suggests, is a fintech start-up based in San Francisco, California, with offices in Bengaluru. The aim is to provide loans to Indian students studying abroad without collateral, at a 5% lower interest rate as compared to foreign banks. The start-up also helps students shortlisted courses, interact with experts, provide test preps, professional help desk and education counselling.

Taking the Leap to Success

In their early days, the duo aimed at building a product that suited a diversified audience. This required them to travel for six months, “living out of a suitcase”. Their first product was designed primarily for Indian students studying in the United States, with an interest rate of 8-10%. Later on, they planned to diversify the product in countries such as the UK, Canada and Indonesia.

Leap Finance tackles the problem of Indian students paying loans at as high as 13% , while their American counterparts avail it at almost half their rate, owing to the lack of credit scores of the former in the foreign countries. The company bridges the gap by assessing secondary documents and the potential income of students bringing down the interest rate, gauging the risk associated with the loan and providing excellent financial products. Thus, Leap Finance in essence, takes a smart and a calculated ‘leap of faith’ based on the alternative data points derived from the students.

“We finance your dreams to study abroad” – The start-up ardently believes in putting the focus on the future of the customer rather than their current or past situation. In simple words, they essentially take into consideration the GRE/TOEFL/IELTS scores, along with degree certificates to assess the potential income of the student. The team states clearly that the economic background of the student has got nothing to do with their ability to avail the loan.

All that the student needs is a strong cosigner to share the burden of the loan. Cosigner is a person whose credit report and income would serve as an added security to the loan sanctioned. This is in contrast with the traditional model of extending student loans.

‘‘

The start-up ardently believes in putting the focus on the future of the customer rather than their current or past situation

The Market Play

Indian education industry has been undergoing a revolutionary phase owing to digitisation with the eruption of edtech platforms such as Byju’s and Unacademy, eventually broadening the spectrum of students’ aspirations.

With overseas education being a dream of most Indians, being a fintech cum edtech start-up, Leap Finance is able to cash in on these changing dynamics of the education industry. The share of students wanting to study abroad has increased multifold over the years due to the pro-immigration policies of countries such as Australia and Canada. With the Biden administration in place, the US’s immigration policies have also taken a diplomatic stance for the Indian students.

In the United States alone, Indian students constitute 25% of top US graduate programmes.

That being said, there has always existed a growing need for one stop solution for counselling, guidance, finance among Indian students. There are students called “value maximisers” belonging to the lower middle income group. They are the ones who aspire to have a global career but can’t afford a degree abroad. Alongside them not being able to afford the hefty tuition fee and the expenses of accommodation, their main aim remains to gain the most lucrative option out of the plethora of offers they have at their disposal. Such students most often lack collateral, thus their chances to avail a loan minimizes along with their aspirations. The market thus provided a fertile ground for a business offering for these services to flourish.

Leap Finance offers not just loans on nil collateral but also assisting overseas students to open bank accounts in countries of USA and Canada along with a credit card. Customer satisfaction remains their sole priority, hence, along with assisting students through their Youtube channel called Leap Scholar, the start-up also helps students avail credit card services, provide them with Visa assistance, IELTS and GRE counselling, internship advice etc.

Gaining Investors’ Trust

In March 2020, the company raised its seed funding for $5.5 million led by Sequoia Capital, with participation of Bhupinder Singh of Incred and Kunal Shah, founder of CRED. The principal investor at Sequoia, Ashish Agarwal, cited the strong need for approximately $15 billion credit as the reason for market’s attractiveness, which is amplified by Leap’s mission-driven team, that made the investors place their bet on the start-up.

The capital was used to expand the company’s user base, focus on product development essentially with plans to expand the service to countries like Vietnam and Indonesia.

In March 2021, the start-up raised a whopping sum of $17 millions in the investing round led by Jungle Ventures. At the time they had a user base of 5 lakhs registered international students and 2 lakhs active users on the platform.

Securing funding at a time when the global pandemic has dampened students’ ambitions, did prove a challenge to the Leap team. However, they held their grounds. According to Amit Anand of Jungle Ventures, it was the sheer motivation and patience of the student community, especially the ones who held back their admissions at foreign universities, that encouraged hundreds more students to pursue education abroad.

In an interview, Vaibhav in fact talked about Covid-19 being a boost to their business to the extent that 2021 might even turn out to be a breakout year. Agarwal of Sequoia Capital, being impressed at the company’s approach towards tackling the pandemic, was particularly in awe with Leap Scholar – a counselling service provided by the start-up – which helped the start-up strengthen its foothold in the market. Amidst the lockdown hiccup, the company cashed on their online property.

The team aims at using the capital from Series B funding to expand their product portfolio into creating non-lending products in order to dive deeper into new markets.

‘‘

Securing funding at a time when the global pandemic has dampened students’ ambitions, did prove a challenge to the Leap team.

Democratisation of Finance

The start-up has come a long in a short span of two years. Alongside them serving as a one-stop solution for students looking to study abroad, they are also bringing in much needed change in the finance industry of the country, particularly in terms of financial literacy and financial assistance through the digital space.

India has the second largest unbanked population in the world, that amounts to 190 million people. Many people do not have access to loan services owing to documentation and collateral issues. This population ends up getting informal credit at an exorbitant rate of interest by moneylenders, often leading to a huge chunk of the population being rendered landless/assetless. Simultaneously those who can avail bank services face a crippled technological system, something that the leading banks of the country are yet to catch up with.

Current situation calls for a revolution in the lending space as the pandemic has taken a huge toll on the financial condition of many. Although NBFCs did solve the problem of collateral to some extent, however, that came with rendering security to banks through a high interest rate. It is more about affordability than availability.

Leap Finance through actively improving accessibility of credit through incentives such as no collateral, has in essence been working towards democratisation of financial services. They solve documentation problems through a requirement of minimum details such as pan card, Aadhar card and credit report of the student.

Through a thorough comparison of various loan options on its website, it offers clarity on the best loan option available via visual representation and interactive interface. This eases the job of students, particularly value maximisers and the ones with less agency, rendering them a one-stop solution in an otherwise fragmented value chain industry.

Creating a Uniqueness

There are multiple players in the edtech industry offering similar services as Leap Finance. One of them is Avanse Financial Services, an NBFC acquired by Warburg Pincus, which stands at a valuation of $66 million. Offering education loans, it has a strong competitive advantage against Leap Finances, owing to its full stack model.

The term ‘full stack’ was coined by Chris Dixon, suggesting it as a company which provided its customer with an end product. In essence, Avanse provides skill development courses and loans to educational institutions besides financial services.

At the current valuation of $22 million, Leap has a long way to go with regards to securing fundings and developing its revenue model. The start-up, in essence, is focussing on diversifying its services in the fields of counselling, customer-driven/tailor-made solutions to issues related to pursuing education abroad, and extending banking services to customers as well.

Going Beyond Loans: Monetisation the User Base

Leap through its Graduate Loan product has built a customer base of 234 crore as of now, i.e. sanctioned 234 crore loans.

At the same time, they are also focussing a great deal on their Youtube channel Leap Scholar. In an interview, the team confirmed plans to expand their services to become a neobank – a smart/digital bank that has no physical branch, but functions to cater to all the services that any physical bank does. Some of the examples of neobanks are Razorpay X and Insta Pay, that help individuals to open a bank account, make payments, request refunds etc.

While these banks essentially offer these services to businesses, Leap Finance aims at becoming the neobank in the international students community, offering full-fledged banking services to its customers.

Earlier it restricted its services to underwriting loans based on students’ future income, which slowly progressed into offering bank account services in the USA and Canada. With the new proposition, it would start earning like a typical bank but with a much more sophisticated and advanced digitised system.

The start-up’s future plans may also include offering courses and tie ups with educational institutions, similar to its competitor Avanse. Leap has been building a strong user base through offering free of cost counselling services through its Youtube platform and comparison of university programmes through its blog. There is a huge possibility in future for the company to start offering international educational courses through its amassed online user base, hence adding another revenue stream.

The post Leap Finance: A Springboard Making Educational Dreams a Reality appeared first on Dutch Uncles.

Blockchain Start-Ups in India Disrupting Finance

Anju Nambiar — Tue, 08 Jun 2021 08:31:42 +0000

What is Blockchain?

It is defined as a ‘digital ledger of transactions’ and is a technology that powers cryptocurrencies and NFTs (non-fungible tokens is a unit of data which when stored on a blockchain, certifies a digital asset to be unique and hence non interchangeable).

What is Disruption?

Disruption essentially means the ability to rapidly change an industry and subsequently cause changes to other linked sectors as well. In this scenario, the Blockchain technology is disrupting finance by transforming payments across many other sectors like Cybersecurity, Healthcare, etc.

Indian start-ups disrupting finance

Polygon

Polygon wants to make blockchain mainstream. The start-up is disrupting finance by facilitating quick, low-cost transactions on the main chain and by attracting high investor interest. Polygon’s very own form of Bitcoin named ‘Matic’ is among the top 20 global currencies with a market cap of over $10B.

Instadapp

Instadapp is a Hyderabad-based blockchain start-up which is disrupting finance with their blockchain-based platform that’s solving problems in decentralised financing. The regulatory landscape in India which is not conducive to crypto transactions. Instadapp offers foundational DeFi (decentralised finance) integration which services can plug into in the absence of infrastructure and can even offer their own system to top it.

WazirX

WazirX, a Mumbai-based cryptocurrency exchange is disrupting finance even amidst the regulatory cloud in India and RBI’s apprehension of the crypto boom. Their NFT (Non-Fungible Tokens) marketplace recently went live. Banks and crypto exchanges like WazirX are at war regarding crypto investments. But that is not deterring WazirX from taking leaps in enabling crypto usage in India with its NFT trading platform which is the first of its kind in South Asia.

Other noteworthy Blockchain start-ups disrupting finance

CoinSwitch Kuber, an Indian focused crypto exchange is popular among newbies to the crypto world for its clean UI. Psi Phi Blockchain lab is disrupting the healthcare and supply chain industries by optimising the supply chain data flow with blockchain-based products for these sectors. Next is Print2Block, a Chennai-based blockchain start-up which is disrupting governance by assisting the state government of Maharashtra in issuing Covid-19 test certificates. Also worth mentioning is Primechain, which is disrupting the banking sector with its blockchain based solutions.

Zebi is another noteworthy start-up which has come up with a unique NFT platform for the cricket world. Unique digital collectibles pertaining to cricket (e.g., an autograph) can be exclusively purchased and owned on Zebi’s platform.

KoinEArth’s MarketsN platform is disrupting the supply chain by enabling greater collaboration between suppliers, logistics, service providers, and distributors. CoinDCX, a cryptocurrency exchange, is targeting millennial and GenZ crypto investors to consider Bitcoin as an investment class asset. SoluLab’s blockchain applications are disrupting multiple industries like finance, healthcare, real estate, and more. The company is also offering blockchain development services and is also an active investor in this space.

‘‘

CoinDCX, a cryptocurrency exchange is targeting millennial and GenZ crypto investors to consider Bitcoin as an investment class asset.

What’s in it for me?

The biggest outcome of investing in a blockchain start-up is that you can facilitate lightning-fast payments and transactions for your customers. The upside for customers availing blockchain services is that they will enjoy a better output at much lower fees compared to banks and traditional financial institutions.

Blockchain technology is piping hot currently in the fintech world and start-ups are in the race to capture the market. Some of the successful Indian start-ups mentioned above have shown tremendous growth and potential, even amidst a less conducive environment within the country. Blockchain is a goldmine to tap into mainly because it can disrupt multiple industries. Start-ups venturing into Digital Contracts have immense potential of winning foreign investments.

The post Blockchain Start-Ups in India Disrupting Finance appeared first on Dutch Uncles.

How to Take Care of Your Money?

Monica Behura — Sun, 06 Jun 2021 06:05:04 +0000

Practicing good financial health is as pertinent as maintaining great physical fitness. Developing habits that help an entrepreneur to take care of his own personal wealth will aid him to reach his financial goals and teaches how to save money. For example, investing money in conventional methods such as Fixed Deposits, buying government bonds, mutual funds, buying shares of profitable stable companies, etc. Creating a budget, following a debt management plan, having a fool proof retirement plan are one of the several ways to practice financial well-being.

Following are the ways in which an entrepreneur can keep up with his financial targets:

Hire a professional advisor

To increase your wealth, hire a professional financial planner that will help you make intelligent investment decisions. A financial planner makes you aware of the risks involved in a particular investment, the profitable returns on it. He/she draws a futuristic plan for both long-and short-term investments.

Clear the debt

Debt elimination plans are imperative to reach financial goals. It is a burden that can be handled effectively with thorough planning. For example, clear high interest debts in a short term than the small debts. Systematic planning is important to clear off debt which can act as a hurdle to bigger investment plans. An entrepreneur should get its debt under control, otherwise he will continue paying interests on the debt. So, reducing one’s debts should be a part of one’s financial plan.

‘‘

Developing habits that help an entrepreneur to take care of his own personal wealth will aid him to reach his financial goals and teaches how to save money.

Budgeting right

The beginning to reaching financial goals is setting realistic budgets. Allocate percentage of your income, toward expenditures, and other financial priorities. At least 30% of your money every month should be saved after all the necessary expenses and paying interest debts. Similarly, 30% of the annual income should go into saving investments and retirement planning. Keeping track of income and expenses, daily, monthly, quarterly, half yearly and annually helps the budgeting flow in the direction that’s planned to achieve the financial goal. Have a personal budget set for yourself, to account for expenses, separate personal from business.

Invest in your future – Make retirement plan

Businesses can fall out any time especially the booming start-ups, therefore, an entrepreneur should take calculated risks in his investments- he/she can invest in retirement plans that yield good returns up to the point of 50% when it matures after ten, twenty or thirty years or more. One should invest in at least 2 to 3 such plans varying in the period and number of investments. For example, Rs 30 lakh invested for 10 years, Rs 40 lakh invested for 15 or 20 years, so on and so forth.

Dissect your spending habits

The pandemic has taught us to be frugal, so no point spending on luxury rather spending on items that will yield great benefits monetarily in the future like investing in art. Introspection on spending habits is not a great trait of a successful entrepreneur. Buy nothing on credit to pile on debt, even if you can pay it without any hassle. Future could be uncertain.

Build a contingency fund

A sound emergency fund should cover 6-12 months of personal expenses as well as cover business expenses to sail through bad times when paying debts. Fixed Deposits that yield 9.5 % interest rates could be detrimental at this point, investments in bonds, will help. But investments in mutual funds that are subject to market risk might or might help with a great amount. Similarly, shares that are subject to ups and downs of the stock exchange will help sail through, but the amount will depend on the stock market strength or vulnerability.

Insurance is a must

Health, and term life insurance is something one should take when one is young, so when one gets older and the hospital costs skyrockets, then the insurance will cover the expense. Purchasing the best health insurance is a must. It should cover your family as well. Building a business without insurance is fine but going ahead as you take the ladder upward towards success, you should have sound health insurance. If your family is dependent on you and your business to provide for them, one should have a reliable life insurance plan, this will ensure they are covered and are safe from taking any burden of the business financial loss. Life insurance is important because your net worth is related to your business. Long term disability plan should also be in place in case of any disability that might happen in the unforeseen future.

Takeaway home

It isn’t a bad idea to take some business funds home when the business is in a growth phase. Use that fund to bolster your savings for personal goals. Because your worth is not the same as the company’s valuations. So, count your money when it is at your table. An entrepreneur should only pay himself out of profits not revenue. Don’t cut a big slice of profit as a pay check or bonus, rather invest that money for it to grow.

A line of credit

For an entrepreneur a line of credit is beneficial because it allows cash to be readily available, without tapping into your personal wealth. A line of credit is like a credit card, because once you pay back, the fund replenishes. This gives you freedom to spend money your way without any hurdles. A line of credit is beneficial as it is in conjunction with other financial options available to business owners.

Replenish, recharge

Having a solid business and personal financial plan in place will let you take a break from the busy life. Going for vacations with friends, family and the like will let you refresh your mind, body and soul. Maintaining personal wellbeing is important to run a successful business.

Invest as per risk tolerance

Once your retirement investment is on its way, along with the contingency fund in place, an entrepreneur should invest in a diversified portfolio of assets that is appropriate as per the time horizon and risk involved. Depending on your investment, personal financial goals, one should invest in stocks, mutual funds, gold, real estate that one can withdraw once the price inflates and re-invest in another portfolio for maximum personal finance. But one must be updated on the price fluctuations.

‘‘

An entrepreneur should only pay himself out of profits not revenue. Don’t cut a big slice of profit as a pay check or bonus, rather invest that money for it to grow.

Will making

Making a will before tax implications could leave the entrepreneur’s legal heirs and beneficiaries exposed to tax liabilities that could leave them next to nothing from the total value of assets. So, a solid functional estate planning needs to be done.

Tax benefits

One has to separate personal and business finances for greater tax benefits, and the ability to take advantage of tax deductions is a huge plus for entrepreneurs. Keeping accurate records of personal and business expenses will assist in the event of tax audit, keeping a check will ward off the tax guys.

Fintech, a tool to manage money

Fintech today is transforming the financial management capabilities of entrepreneurs and businesses. There are various personal finance tools and services that are constantly evolving that help manage money better. This trend has been beneficial for businesses, particularly smaller enterprises, making finance automation, data analysis, and flexible financing options within reach.

Manage your personal credit score

An entrepreneur needs to make sure that his personal credit is solid. Paying bills on time, your credit score should be excellent. The percentage of one’s available credit limits that he is borrowing at any given time during the month is the credit utilisation ratio that he needs to pay attention to. If you keep this ratio below 30%, this will help to achieve a better credit score and easier time getting personal loan approved.

Protect personal assets from creditors

Personal assets can be at risk if an entrepreneur is sued for personal wrong doing or as a result of a personal guarantee. However, there are ways to protect personal assets from these types of claims. One can consult with an estate planner or a bankruptcy attorney to prepare a structure to further shield assets from liability of business obligations.

In-sync with trends

An entrepreneur should ensure that all aspects of the plans are regularly reviewed and kept up to date with any regulatory changes that could occur anytime.

Cost effectiveness

Entrepreneurs should use cost benefit analysis before making final decisions when it comes to their personal finance. One should avoid paying more than the expected returns.

Increasing wealth

An entrepreneur’s mind should always keep ticking as to how to maximize personal investment returns. Knowing one’s priority, as to whether to invest the profits or revenue earned from business on a new bond, real estate, or in a company or to buy an expensive car. Maximizing income for the next few years before indulging in luxury should be made clear.

Personal money goals

Having a written financial goal for the targeted month or year-either short or long term to improve personal wealth by a certain amount or percentage gives a direction to your actions. Scattering your wealth in different baskets helps to grow your money as in stocks, real estate, bonds, mutual funds, fixed deposits etc.

Budget spending and plan savings

Budgeting one’s spending and saving is a must. Experts say when you are mindful of both your habits, tracking it will help contribute to wealth growth.

Disseminate risks

With this strategy, entrepreneurs are earning money through multiple businesses and reaping interest incomes through various investments, and with capital gains. In this way, entrepreneurs are diversifying and lowering their personal financial risk. In growing one’s wealth, the entrepreneur needs to consider his objectives, investment timelines, his tolerance to risks involved, in short, choose the most suitable financial plans.

However, note that holding money in stationary form will yield no benefits, investing in mutual funds, fixed deposits, real estate, startups will get interest income, profit percentage.

Protecting personal wealth

Implementing safeguards around wealth that is invested becomes imperative, therefore placing it under an insurance policy that is designed to protect one’s finances – namely, health, life, trauma, and income protection insurance in case of any adverse circumstances

Adopting a frugal lifestyle

Being thrifty is a virtue. Minimizing one’s needs so that he can maximize the amount into investments. Developing a frugal lifestyle is an art one can develop with long term planning, budgeting expenses, finding ways to reduce unnecessary expenses.

Expenses below income

Living below your means is the way one can surplus on savings and cut down on unnecessary expenses. This will allow one to repay debt, save for rainy days, add to the emergency fund or make investment on a lucrative deal.

The post How to Take Care of Your Money? 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.

‘‘

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)

‘‘

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
Business Storyteller, Financial Educator Finance Academy
Connect with our expert to analyse your financial statements and evaluate the risks and potential of your business

The post How often you need to analyse financial statements and what should you look for? appeared first on Dutch Uncles.

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

‘‘

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.

‘‘

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.

Zerodha: Building India’s Biggest Stock Brokerage Firm

Dhishan Rajshekhar — Sun, 16 May 2021 10:35:05 +0000

In the early 2000s, India was reaping the true benefits of the economic liberalisation of 1991. The markets were thrown open and the country was in the spotlight. The red carpet was laid out for companies to step into the world of trading with the Sensex reaching an all-time high. However, the dream was short-lived as the crash of 2008 brought the stock market to its knees. It was a bad time for investors and brokers – they had lost everything.

“In dreaded times, brave are the ones that will not lose hope, it’s what keeps us human”.

Around 2010, following the crash, it was the worst time to enter the market with the broking industry being at an all-time low. However, one company saw this “low” as an opportunity for disruption. The brother duo Nikhil and Nithin Kamath decided to create a complete online brokerage firm that would offer broking services at a discount, giving rise to – Zerodha.

A “Bull” Run

The word Zerodha means ‘zero barrier’ (number zero is coupled with ‘rodha,’ a Sanskrit word meaning barrier). In simple terms, Zerodha’s platform is an online retail and institutional broker dealing with commodities and currencies.

The company is currently valued at $1 billion and is one of the very few bootstrapped start-ups to achieve this feat. It stands at the top of the list with the highest number of active users to date. The company facilitates more than 5 million trades a day, accounting for nearly 15% of all such transactions in the country. Zerodha has grown by leaps and bounds over the years having face-offs with established brokers such as ICICI Securities and Kotak Securities.

Nithin, who serves as the Chief Executive Officer (CEO), presents Zerodha’s rise as a culmination of the ease of access to the millennial generation, which garnered the use of such apps on the basis of ‘free brokerage.’

Journey from $1 to $1 Billion

The founder duo come from a very different background. The older brother, Nithin, was an average student who discovered trading at the age of 17. He went on to pursue his Bachelors in Engineering from Bangalore Institute of Technology following which he picked up jobs at call centers before starting a franchise of Reliance Money where he worked as a sub-broker. On the other hand, Nikhil, a Mathematics genius and a chess pro, hated school. At the age of 17, the school dropout started selling phones and worked shifts at a call center.

The Kamath brothers had one thing in common: An appetite for savings. The duo saved a comfortable amount of money during their early days and started ‘Zerodha’ in 2010. And there was no going back. They had stints at multiple places in the field of stock trading and market analysis and hence were not alien to the “sophisticated” world of trading.

They churned out strategies that targeted the newer generation and it worked wonders.

‘‘

Zerodha is currently valued at $1 billion and is one of the very few bootstrapped start-ups to achieve this feat.

Remaining Lean: Pure Technology Play

Besides providing an online broking platform, the Zerodha Universe is home to a number of other apps that make trading easier. These apps have been developed for specific needs:

Kite

It caters to the equity and commodities market using a meticulously designed website that serves a raging number of millennials with its ease-of-access and well-designed graphics.

Console

The console website offers customised reports on the basis of user’s investments and sector growth and variation.

Small Case

It is mainly concerned with mutual funds and portfolios that are designed by Zerodha experts to help millennial and fresh investors find their way in the stock market. The app provides ‘customised investment portfolios’ for the users which is one of its distinctive features.

Streak

Streak is a platform that is used for creating and testing out trading strategies.

Hence, it was a pure technology play. Zerodha avoided all kinds of frills and remained attuned to their goal of providing tech-backed trading platforms/apps.

However, they believed in creating a community and educating their users to keep the buzz going. Zerodha brought in a stock market education app known as ‘Varsity’ containing lessons on everything about trading. The main motive for this app was to target prospective millennial investors and help them learn trading on their own. This way, Zerodha was able to build a well-rounded offering which helped them bring in a large customer base.

It managed to build credibility with such products, which is extremely important for any start-up. If you see, Zerodha avoided the whole model of relationship managers and sub brokers as well and avoided spending mullahs on advertising, hence maintaining a lean business model.

The stock market had never seen such a revolution where the technology removed the barriers of extreme high cost and poor support system in the broking industry. It created a buzz in the world of start-ups as not many dared to bootstrap their way to success at their early stages.

‘Zero’ dha Funding: Using Every Penny Wisely

Zerodha was set up with complete internal funding (Kamath brothers’ savings). It is commendable how the start-up entered the unicorn club without a single rupee sourced from outside.

The company adopted the slow and steady pace and took almost a decade to boom. They wanted to build a seamless, easy-to-use and transparent trading platform/app and roped in their chief technology officer Dr Kailash Nadh in 2013.

Every penny was used to innovate and develop products that could provide advantages to trade easily. The core strategy was ‘zero brokerage’ – no charges other than for intraday trading at Rs 20. The market grew, the users boomed and Zerodha was able to scale up efficiently.

Zerodha has focused on quality products and dynamic innovation since the beginning and continues doing the same. The company reinstated the fact that “one can grow within a pool of limited resources as well, if the technology is strong”.

The Game Changer: ‘Zero’ Brokerage USP

Zerodha brought in the era of discount broking, fixing rates of intra-day trading at a maximum fee of Rs 20. Equity of delivery was free, with no applicable charges on the same. The company was one of the first institutional brokers to keep such low prices on their services.

When a Demat account is opened with Zerodha, a customer is charged Rs 300 as annual maintenance charge (AMC), per year. The company brings massive revenues from such trades, 2/3rd of which are from the millennials aged between 18-35. These youngsters require a platform which is easy to use and has low brokerage charges. ICICI Securities has a minimum fee of Rs 35 for intra-day trading, while Zerodha caps it at Rs 20. This factor of competitive pricing led users to hop to the Zerodha platform.

This “discount strategy” was exceptionally well-thought of. Zerodha follows a low operational cost model and the entire company operates online due to which they were able to scale-up the business instantly. The strategy not only led to a continuous inflow of consumers all year round but also aided the word-of-mouth marketing. This is clearly reflected in the company’s revenue numbers.

It is important to mention here that the Zerodha model is not unique. It is similar to that of American financial company – Robinhood. However, Zerodha is credited for aptly implementing the same in the Indian territory.

‘‘

Zerodha was set up with complete internal funding (Kamath brothers’ savings). It is commendable how the start-up entered the unicorn club without a single rupee sourced from outside.

Catching the Millennial with ‘Ease’

Zerodha is one of the first companies to come up with strategies to garner customers from the millennial segment of the population.

They had started out by targeting independent traders but soon understood the need of the hour to tap this younger segment, which remained very different from the “complex” stock market. Zerodha came in as an agile, easy-to-use and transparent tech-based platform which made things simple, rather “cool”. The motto was simple- Buy shares in the most hassle-free manner.

This strategy works wonders among a tech-savvy generation that runs low on time and high on impatience. If you look at Zerodha’s app, it has a supercool black mode and even the most complicated and boring graph looks right out from Tony Stark’s garage.

Zerodha became that one-stop solution that had everything you could ask for – an easy-to-use trading portal, a stock market educational app and a mock trading platform.

Sustaining the First Mover’s Advantage

Zerodha, indeed, cashed on the first mover’s advantage and became the top stock broking firm. It has remained attuned to its core offering of keeping the equity delivery free. No other company has managed to do this.

As the industry witnesses an influx of new-age fintech start-ups, Nitin believes that they will continue to dominate the segment because of their “never-ending hunger for innovation, development and consistent growth”.

With newer stockbrokers like Angel Broking, Upstox entering the market, Zerodha remains unaffected. The race for technological leverage always lies with the one who did it first and did the best. Having said that, digital payments giant Paytm’s entry into the segment will be something to watch out for. But investors will always rely on an experienced institutional broker who would also provide support that is internationally renowned.

Zerodha, has beaten established institutional brokers like Motilal Oswal, ICICI, HDFC, Kotak Securities to affix its name at the top of the list. So much so, that the competitors have reduced their pricing to Zerodha’s level. However, this move has been deemed ineffective by experts as Zerodha has managed to create that credibility for itself above others.

Not in an IPO rush

The company has no IPO plans as of now. When asked, Nithin shared with Dutch Uncles that taking Zerodha public might take away the simplicity and the distinctive feature of the company. He states that the founders will lose their autonomy and will have to divert their focus to cater to the demands of the shareholders.

Experts also do not feel the need for Zerodha to raise outside capital as it is raking in enough profits to run the company, keeping the costs at check. Having said that, Nithin is not completely shut to an IPO plan and said will consider the same if the company’s user base widens extensively. As of now, Zerodha relies heavily on its own revenue and profits to sustain its business model.

The brothers refuse to rest their laurels and continue to hustle each day. They are also running a successful hedge fund known as True Beacon. One thing common in Kamath brothers ventures is their strong tech base and product focus. This is one of the biggest reasons why their products need no advertising.

The post Zerodha: Building India’s Biggest Stock Brokerage Firm 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.

‘‘

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.

‘‘

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.