Managing your enterprise growth by numbers by Vinod Keni | #TiEInstitute

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This deck was presented by Vinod Keni (Avishkar Ventures/ Intellecap) at the #TiEInstitute knowledge Series session for Growth stage entrepreneurs on managing finance led growth by. This is one of …

This deck was presented by Vinod Keni (Avishkar Ventures/ Intellecap) at the #TiEInstitute knowledge Series session for Growth stage entrepreneurs on managing finance led growth by. This is one of the three modules covered by Vinod at this session.

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  • 1. 1 Managing By Numbers
  • 2. Managing By Numbers – use financial data and ratios to determine the most appropriate strategic direction for your organization. Effective Financial Management help organizations plot their way through an environment filled with opportunities and dangers. FINANCIAL MANAGEMENT – KEY TO SUCCESS
  • 3. FINANCIAL MANAGEMENT IS THE ENGINE • Manage proactively rather than reactively. • Borrow money more easily; not only can you plan ahead for financing needs, but sharing your budget with your banker will help in the loan approval process. • Provide financial planning information for investors. • Make your operation more profitable and efficient. • Access a great decision-making tool for key financial considerations. With a good financial management system, you will know not only how your business is doing financially, but why. And you will be able to use it to make decisions to improve the operation of your business. A good financial management system helps you become a better macromanager by enabling you to:
  • 4. EFFECTIVE FINANCIAL PLANNING ALLOWS YOU TO • Avoid investing too much money in fixed assets • Maintain short-term working capital needs to support accounts receivable and inventory more efficiently • Set sales goals; you need to be growth-oriented, not just an "order taker” • Improve gross profit margin by pricing your services more effectively or by reducing supplier prices, direct labor, etc., that affect cost of goods sold • Operate your business more efficiently by keeping selling and general and administrative expenses down more effectively • Perform tax planning • Perform sensitivity analysis with the different financial variables involved.
  • 5. MANAGING BY NUMBERS – SIMPLE TIPS • Have a plan. Make budgeting & financial planning integral • Know your financial position • Cash is King • Keep your books/records up-to-date • Manage receivables aggressively and chase debts • Look for operational efficiencies – save more money • Inventory Control • Get the right kind of funding • Spread your risk • Anticipate changes & be prepared • Stay nimble & flexible • Don’t bury your head in the sand!
  • 6. 6 FINANCIAL RATIOS • Financial ratios help you get a better handle on your operations, see when things are out of kilter, and set down milestones for the future – Do I have enough working capital? Do I have enough money for salaries? Is my debt too high? Do I have too much inventory? Am I using my assets wisely? How profitable is my business? Corresponding to figures from your financial statements, ratios make relationships in your business more understandable. A ratio is only a shorthand note: It shows you what's going on according to your financial accounts.
  • 7. 7 KEY RATIOS FOR YOUR BUSINESS • Quick/Acid Ratio = Cash and Near Cash ÷ Current Liabilities Measures ability to meet current debt, a stringent test since it discounts the value of inventories. The rule of thumb is 1-to-1. A lower ratio indicates illiquidity. A higher ratio may imply unused funds. • Current Ratio = Current Assets ÷ Current Liabilities Another measure of ability to meet current obligations. Less accurate than the acid test for very near term, but probably better a measure for six months to a year out, since it contains receivables and inventories as well as cash and near cash. The rule of thumb is 2-to-1, though this will be affected by seasonality. • Receivables Turnover = Sales ÷ Receivables Measures the effectiveness of credit and collection policies. If your ratio is going down, collection efforts may be improving, sales may be rising, or receivables are being reduced. If your ratio is going up, sales credit policies may be changing, collection efforts may be flagging, or sales may have taken a nosedive. Caution: This ratio depends on when receivables are measured and the seasonality of the business. Careful bookkeeping is also essential. The same applies to inventory turnover: Make sure that the measures are comparable from month to month. Use average receivables (inventories) if you can.
  • 8. 8 KEY RATIOS FOR YOUR BUSINESS • Days Receivables = 30 ÷ Receivables Turnover Another way of looking at receivables. Particularly useful in explaining graphically what changes in credit and collection operations do to a business. • Inventory Turnover = Cost of Goods Sold ÷ Average Inventory A measure of how well inventory is managed. Most businesses have a steady inventory turn. Compare your figures from year to year, asking yourself what causes the inevitable fluctuations. Small fluctuations are probably due to the flow of work. If you produce one jumbo jet a year, your inventory picture will be very different from that of a dealer of ripe tomatoes. • Gross Margin Rate = Gross Margin ÷ Sales Permits comparison of margins over months with dissimilar sales. Ideally, this holds pretty steady in good months and bad -- but it depends on your business. It can distort fluctuations if sales are erratic. • Net Profit Rate = Net Profit ÷ Sales An overall batting average: The aim is consistency over the long haul, not just short-term stardom.
  • 9. 9 KEY RATIOS FOR YOUR BUSINESS • Return on Assets (ROA) = Net Profit ÷ Total Assets A better profitability measure than ROI. ROA shows how well you're using your assets. However, since profits are a volatile short-term measure, this should also be taken with a grain of salt. The long-term trend is what matters. A large investment in fixed assets to handle growth will seriously alter this ratio. • Return on Investment (ROI) = Net Profit ÷ Net Worth (Note: Net worth might show up on your financial statements as shareholder's equity.)Another profitability ratio, best looked at occasionally, because it tends to magnify short-term shifts in thinly capitalized companies. All ratios must be taken in context. The reason to look at them on a monthly basis is to make sure that you spot trends as they develop, not afterward. If you are doing something exceedingly well, you need to know it. And if something is wrong, it's better to find out sooner than later.
  • 10. 10 KEY RATIOS FOR YOUR BUSINESS • Common Size Ratios can be developed from both B/S & I/S – Calculate each line item on the statement as a % of the total – Common Size Ratios make comparisons more meaningful ; they provide context for your data • Working Capital = Total Current Assets – Total Current Liabilities It represents the amount of capital invested in resources that are subject to relatively rapid turnover (such as cash, accounts receivable and inventories) less the amount provided by short-term creditors. Working capital should always be a positive number. Lenders use it to evaluate a company’s ability to weather hard times.
  • 11. Managing Capital
  • 12. Better capital management can accelerate your journey to market leadership. CAPITAL IS THE LIFEBLOOD OF EVERY BUSINESS
  • 13. 13 THE FINANCING DECISION • Flexibility - Today’s financing decisions will influence tomorrow’s financing decisions • Risk – Financing with debt will increase risk • Income – Financing can influence earnings & thus affect return on equity • Control – Financing could change control • Timing - Financing decisions need to be timed to take advantage of the marketplace
  • 14. BASIC CONSIDERATIONS IN MANAGING CAPITAL • Capital for any business – new and growing can be: • Capital infusion through stock/shares by founder, management, family, friends & Investors • Debt – bonds (both long & short term), Debentures, overdraft, term loans, etc. • Capital can be Short-term or Long-term • Capital can be internal or external Effective Capital management is to find an "optimal" capital structure - the right mix of capital sources (debt and equity) that minimizes the overall cost of capital and maximizes values to the shareholders (owners of the business).
  • 15. 15 SOURCES - SHORT TERM & LONG TERM • Short Term Capital: • Bank overdraft/Loans • Trade credit • Deferred Expenses • Factoring/Receivables Financing • Personal Loans • Medium Term Financing: • Term Loans • Leasing/Hire Purchase • Long Term: • Shares/Stocks/Equity Financing • Mortgage Loans • Retained earnings • Venture Capital/PE • Project Finance
  • 16. 16 UTILIZATION OF CAPITAL • Short Term Capital: • Use short term capital sources for meeting working capital needs, inventory, trade purchases • Medium Term Financing: • Used to finance purchase of machinery, office equipment, IT equipment, and projects that will provide returns in 2-3 years • Long Term: • Typically used to finance large and long term capital projects – acquisitions, buying capital equipment, construction of factory/office
  • 17. 17 OVERTRADING • Overtrading is another term for undercapitalization: • Support a large volume of business from too small a working capital base • Supply of funds failing to meet demand for funds • Could result in a liquidity crisis • Serious, sometimes fatal!
  • 18. 18  Vinod is a serial entrepreneur, consultant, CFO & investor who during his 15 year career in the US led companies through multiple financings, M&A and exits. He has taken two companies through NASDAQ listed offerings. His domain expertise includes technology, healthcare, outsourcing, services, food services, hospitality and manufacturing.  As a serial entrepreneur, he has cofounded companies in technology, services, outsourcing and hospitality. Successful exit with ROI to investors & founders.  Experience includes M&A, cross-border operations, business development, finance, startups, governance, IPO, management & operations  CFO of an early stage Venture Capital Fund in India; has helped raise more than US$100 million for two funds managed by the VC fund. Familiar with fund raising, LP relations, due diligence, deal making, portfolio management and reporting.  Founder of boutique consulting company that has worked with early and growth stage companies providing financial management, operations and strategy execution consulting. Clients include VC funds, US & European MNCs, etc.  MBA (JWU-US), MS – Finance (Bentley - US), CPA & CA . Angel Investor - member of Indian Angel Network. Co-founder, TiE Atlanta, Charter Member - TiE. Co-founder & Director – Atlanta Hitech CEO Council VINOD KENI
  • 19. 19 Vinod Keni vkeni@aquariangroup.com +91-9845414179 Contact