Finance Orientation:For PE/VC Funded IT Product/Services Co

Seemant Shrivastav,Managing Partner,Attentio Corporate Services LLP

Agenda

• Introduction: Key Components

• Finance: Do’s

• Finance: Don’ts

• Focus Areas for Business Owners

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Why Finance is Important for PE funded Cos

• Once a firm raises PE money, it is bound to operate in a defined channel with a large list of “Don’ts” and a few “Dos”

© 2015 Seemant Shrivastav

Finance: Key components

Business plan

Balance Sheet

Income Statement

Cash Flow Statement

Project Costing

© 2015 Seemant Shrivastav

Balance Sheet Basics

Liabilities (Source) AmtAssets

(Application)Amt

Owners Equity 100 Fixed Assets 90

Long Term Debt 40 Current Assets 60

Current Liabilities 10

Total 150 Total 150

A Simple Balance Sheet Representation

Long Term Source

Long Term Use

Short Term Source

Short Term Use

© 2015 Seemant Shrivastav

Two Golden Rules for Balance Sheet Management

• Always invest (or spend) your money on assets or investmentswhich will generate a return which is equal to or more than cost ofcapital for your firm

• Invest your money in such a way that assets generate returnsbefore liabilities demand an outflow

© 2015 Seemant Shrivastav

Typical IT Product & Service Co Income Statement (Profit & Loss A/c)

Particulars Current period YTD Prev year Plan Variance

Revenue from OEM

Revenue from Enterprise

Revenue from Govt

Developer Revenues

Total Revenue

YOY %

Employee Costs (Operations, IT, R & D )

Total

Gross Margin

GM %

S&M, G & A Cost

COD, Sales, Distribution & Marketing

Sales & Marketing employee cost

Administration Costs

Total

Operating Profit (EBITDA)

OP Margin

Finance Income

Finance Expenses (if any)

Depreciation

Other income

Other costs

Total

Profit before tax

Income Tax

Profit after tax

Cash Flow

Cash Flow Statement:

• Shows Cash earn/(burn) from Operations and its rate

• Indicates Cash inflow/(outflow) from Investing activity (Assets)

• Indicates Cash inflow/(outflow) from Capital (Financing)

Typical Cash Flow Statement

Thus is an important tool to track a firm’s financial health

© 2015 Seemant Shrivastav

Project Costing

Cost Sheet :

• Assists in arriving the Cost & pricing of Product/Services

• Aids in calculation & maintenance of desired margins

Typical Project Cost Sheet

Cost Sheet is an important planning & control tool

Category Budget for Period in kUS$

M0-M1

M1-M2

M2-M3

M3-M4

M4-M5

M5-M6

Human Resources (internal)

Human Resources (external)

Purchases (COTS)

Equipment

Premises

Tools

Travel costs

Training

Review activities

Other

Total 1 1 2 5 2 1

Total cumulated 1 2 4 9 11 12

© 2015 Seemant Shrivastav

Business Plan

Two types

• Top down

• Bottom up

Further classification:

• Flexible (sensitivity)

• Fixed

Business Plan

Top down

Flexible

Bottom Up

Fixed

© 2015 Seemant Shrivastav

Business Plan (contd)

• Don’t plan for certainty– everything is uncertain

• Build Sensitivity analysis in the model factoring in worst case, base case & best case scenarios

• It’s a good idea to give a stretch plan to Sales team. Say Boardapproved Sales plan is 100 then inform Sales that they need toachieve 110 or 120 depending on team capability & marketconditions

• Major expenses, Salaries, Professional fees, Marketing, Biz dev etcneed to be monitored closely vis-à-vis the plan

© 2015 Seemant Shrivastav

Some Finance Do’s

• Do review your Sales, Receivables, Payables & Cash position(including investments) once in a week.

• Do go through the MIS provided and understand the key drivers ofyour business. There could be some important parameters comingup as we develop the MIS. Say segmental & geographical revenueanalysis, productivity or revenue per employee realized etc.

• Do review your compliance status vis-à-vis compliance calendarprovided once every month.

• Do engage in regular discussions with investor reps on financialperformance of company and do ask for help where needed.

© 2015 Seemant Shrivastav

Some Finance Don’ts

• Don’t underestimate the importance of building a good businessplan. Recommend you folks kick start the exercise in Q4 2015-16.

• Don’t ever leave finance to your Consultants, CFO or Controller(whenever you have one). The buck stops at you!

• Don’t hide or try to cover any bad news from investor, its always agood idea to discuss and work out solutions with investor (see slide:troubled relationship)

• Don’t assume a month or quarter of bad results are an aberration. Ifyou drill down to major reasons of the bad results, you’d be able toisolate and address the problems and resolve the organizationperformance challenges quickly.

© 2015 Seemant Shrivastav

Troubled Relationship

Its best to avoid conflict as no one wins this war!

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Focus

As a business owner focus on

• Cash earn vs Burn

• Working Capital & Investments

• Margins on Sales and EBITDA

• Capex plan & ROI

• ROCE (IRR)

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Others Important Focus Areas

• Corporate Governance

• Reporting & Flagging off matter to investors

• Compliance

• Risks & Controls

© 2015 Seemant Shrivastav

Questions

THANKS