business, CFO, Finance, Investment Banking, management, Strategic Finance, Uncategorized

What are the differences between a finance manager and a CFO?

We get asked every other day by businesses we meet – So what is it that you do so differently? While this has become a part of our standard conversation, we thought of putting these thoughts together in a whitepaper that every SMB can use to define what they should be expecting from this new wave.

Disclaimer: Please note that these are our views are based on our experience in being advisors and working with various organizations. They are for the limited purpose of educating the officers of a company. How this applies to your business can vary significantly based on the context, stage, exact nature & size of the business.

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Uncategorized, Finance, management, CFO, Strategic Finance, Investment Banking, Valuation, technology, Mergers

The anomaly that is strategy (in finance)

The only way people can really be excellent is with truth, so you have to have a CFO who will have the intellectual capacity & the conviction to tell you that you’re wrong and try to support that with data. 

– Anthony Noto, CEO of SoFi

Why this and why today?

Traditional finance is dead. Business has changed significantly over the last 2 decades. While this has opened up a new set of opportunities to reinvent the concepts of finance, a lot of businesses are being left behind as they grapple with issues that a proactive approach to finance could have easily avoided. All hail the new king of financeStrategic Finance Thinking.

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CFO, Finance, Investment Banking, Mergers, Uncategorized

Mergers & Acquisitions, simplified and jargon-free

Coming together is the beginning. Keeping together is progress. Working together is success.

– Henry Ford

In today’s highly competitive world, the playing field has levelled. This has opened a new world of possibilities for the medium sized companies but has also allowed larger companies to become real competition. Larger companies have internally, aided by available resources, have tweaked their business models to allow them to be more competitive to SME clientele. The easiest, and in many cases the fastest, way to stay competitive and maintain the speed of growth amid competition is to collaborate. But collaboration sometimes lacks the flexibility the time commands. Enter M&A.

So we thought of putting these thoughts together in an instructional bible to help SMBs ease up and look at making the most of coming together and working at building something larger.

Disclaimer: Please note that these are our views are based on our experience in being advisors and working with various organizations. They are for the limited purpose of educating the officers of a company. The rationale and the procedure to be followed can vary significantly based on the context, exact nature & size of the business.

 

Why M&A?

Is this something I should be considering?

There is nothing more powerful than the coming together of like-minded minds working together on a common mission. This is the foundation on which all successful partnerships work. However, most organizations tend to only realize the importance of working together with their internal people and tend to forget the power of coming together with other businesses and look at long-term synergies.

  • Simplify the understanding and help create a foundation
  • Consider M&As as an important strategic move
  • Demystify and present options for consideration
  • Execute more well thought out M&As

Honestly though, is this a nut worth cracking?

Short answer: The whole is always greater than the sum of moving parts.

Long answer: Businesses, each in their unique way, develop strategies to be able to do more with less. This may make them unique and efficient in many ways in their use of talent and capital. Further, each unlocks value in its own ways and can boast of success stories at it. These success stories and learnings which are unique can be carried forward to the combined benefit of the merged enterprise.

 

What kind of benefits?

Is there something more than I am seeing?

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entepreneur, Finance, Strategic Finance, technology, Uncategorized

Leveraging the power of collaboration in tech companies

Tracing back to the advent of collaboration

From the year 2000, a massive shift occurred quietly to most, but daringly to a few. A few large organizations saw the change that was occurring. In 2007, when I was consulting with a large $Bn technology bellwether from my alma mater, I remember how this disruption, so new and so unique, was being viewed as the single largest transformation in the industry way before most of the world heard of this disruption. This arrived with the perfect storm co-created by cloud system deployment capabilities and the penetration of high speed internet. With these forces aligned, it created the SaaS disruption. It took 10 years though for its proliferation to be the product of choice for all industries. It uniquely positioned itself to productise systems and frameworks and create workflow environments which were hitherto accessible only to the big companies at a fraction of the expense. It did something else which was more succinct though. Now companies were suddenly getting familiar with having open systems and integrations and allowing outsiders in – a fundamental shift in thinking which has changed everything.

How has this affected collaboration?

A precondition to any collaboration is an open mind. Where one can freely discuss synergies than be worried about theft of intellectual property by sheer discussion itself. With an open system environment, companies began to see how great technology could be accessed by everyone for a fraction of the cost, establishing that letting someone in can save money. Now organizations needed a nudge to say that collaborations can add business value. In 2009, I remember how an acquisition by another big bellwether of a small technology outfit in Europe was of strategic importance to them. Making less than 1% of their own top-line, this large technology company was ready to take the plunge of letting in a small team of engineers join them rather than do what might come to them easier – build their own team. A surprising move, but it gave them access to a downward integration possibility which could get them into market 3 years sooner and maybe worth billions in years to come.

Why would a tech company have this internal conversation though?

Collab 1

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CFO, entepreneur, Finance, Investment Banking, Strategic Finance, Uncategorized, Valuation

How to value a running business for a stake sale – a practical approach

SFO Valuation Study

2017 was a harbinger of times to come. Reported PE exits in India hit an all-time high crossing Rs. 80,000 crores across over 300 deals (Rs. 377,000 crores in the US). This is apart from the thousands of stake sales which occurred across the country in the VC and Angel Investment space and thousands more not covered by the media houses owing to their private nature. Interestingly the Indian Government was also a significant participant as divestment measures were at an all-time high in 2017. But how different is a valuation for a stake sale? What does one need to do differently?

What differs?

Valuing a running business for investment is slightly different from valuing a business for a stake sale. The fundamental difference being an understanding of partnership in the future as against liquidating a position today. While an investment transaction may be quite satisfied in a multiple or DCF valuation, a stake sale/ secondary transaction requires establishment of a reasonable price for a transaction. While reasonability is a factor of the high price of ownership or auction fever (Research published in the Journal of Consumer Research) and buyer-seller expectation management, practitioners deploy more than one method to ensure that reasonableness can be as less subjective as possible.

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Uncategorized

About when we remodeled a company to 10x returns

How it began

Quattro Private Limited is a 4 year old company providing hardware development services with a team of over 100 employees. Prequate was brought in to help Quattro remodel the business for proposed investments.

Quattro had just developed a great product with good interest for introduction to rural markets. They were aiming to manufacture the products with a EBIT of 27% of USD 10Mn in 5 years. They had been approached by investors who had asked them to perform a scalability assessment.

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Image credits: http://dilbert.com/strip/2015-05-09

Getting to work

Quattro started a limited engagement that allowed Prequate to develop the renewed business model within the IBM&A offering and strategize investments.

Prequate started off with looking into the product that was developed. In the course of such delivery, Prequate noticed that:

  • Product had been designed with abilities to remotely manage the software backend
  • Model was built on a product sale model that netted cash on each product sold
  • Working capital requirement bloated due to lead time payments
  • Profit needed scale which needed continuous inflow of money

While the product delivered ongoing benefit, the revenue model was one-time only.

 

The approach

Prequate deduced that the fundamental business model was a value-in-use as compared to value-on-sale. It meant that the business model needed to address:

  • Is the model rewarding usage while de-risking delivery?
  • Who gains from using the product – the buyer or someone else?
  • Are we profiting from the continuing value of the product?
  • Can contracts become onerous someday due to support?

 

⇒  A new approach to the business was necessary to highlight value.

Action Time

1

Perform a scalability assessment: Identify the key variables that provide sustaining value to the business

2

Fit an ecosystem fundamental: Develop a new business model to boost the NPV of the business and create an eco-system

3

Redesign the revenue model: Developing continuing revenue streams based on usage

4

Re-design the fund raise strategy: Create new raise plan in a tranched manner using off balance sheet funding arrangements to increase IRR and decrease dilution

 

Improvements made

Prequate redesigned the business model that:

  • was based on a dynamic franchise + sale model of the devices and had a revenue model was based on per use basis
  • strategized delivery of training manuals online over displays in different vernaculars for faster adoption
  • created avenue for performance incentives for promotion and use
  • split cash flow to
    • equity infusion: development of content, marketing
    • debt: device roll-out
    • off-balance sheet: working capital

 

Impact

  • Win 1Cumulative EBIT increased by 1000% over a 5 year horizon
  • Win 2Net jumped to 47% from existing 17%
  • Win 3 | Adoption risk brought down to 25% from 80%
  • Win 4 | Cash requirement reduced from USD 10Mn to USD 4Mn
  • Win 5Big Data opportunities opened up in 3 years

 

What happens when Finance understands your product

Disclaimer: The nature of professional services is to provide tailored advisory based on the facts and circumstances of the case. Advice is never a one-way-fits-all. You may need to approach your advisor to effectuate a plan that suits your business.

You can contact us at connect@prequate.in if you wish to see how this can be executed for your business.

Uncategorized

About when we saved a company ~20% of subcontracting costs

How it began

Beta Limited is a 15 year old well established manufacturing company with a top-line of approximately USD 3Mn based out of India. Prequate was brought in to help Beta manage further growth by analyzing and changing old systems and introducing future thinking.

Beta was in a mature stage and wanted to move to a people independent setup. They relied on experience and rule of thumb for determining the key controllable factors in their industry – pricing and costing mechanism.

Image credits: http://dilbert.com/strip/2010-05-05

Getting to work

Beta started a continuous engagement model that allowed Prequate to develop the management reporting frameworks within the CFO Office offering. Over the course of the next 12 months, Prequate became an integral part of the business with specific charge of the management reporting for Beta. In the course of such delivery, Prequate Team began the process of overhauling the finance function and noticed that:

  • Costing of all products were on an ad-hoc basis for specific projects only
  • Pricing mechanisms were based on rule of thumb and increments factoring the BOM costs only
  • True profitability for each LOB and product line was never evaluated as products were launched

Costing and pricing function are primary to any business, more so for a manufacturing company where sustenance becomes questionable if not adequately assessed and monitored. Each unit may become potential onerous to the company.  A new sceintific approach was necessary.

The approach

The main questions to be addressed behind any cost or pricing mechanism need to be addressed:

  • Does the system capture all costs?
  • Are there costs factored? Say, the cost of the standard delivery and collection terms and associated credit costs or customization efforts and related manpower costs?
  • Is there information flow for studying profitability on SKU basis or is it a work back?
  • Is costing information dynamic? When was the last time it was updated?

⇒  A new costing philosophy which was linked to pricing was needed.

 

Action Time

1

Detailed operations study: Understand the setup and functioning of all systems including the composition of every product and its manufacturing line

2

Review of SOWs & Job orders: Study the term, conditions and pricing system and the competitive position of the company in each SKU with dependencies between product lines

3

Process Study: Study each process in isolation and then as a whole as a part of the organization to analyze gaps in understanding and cost capture

4

Analyze wastages: Understand the products and the wastages associated at each step to set up standard measurements

5

Understand consumption: Understand the consumption patterns of different products and their respective reorder and fulfilment levels

6

Build Standards: Build out standard worksheets with manufacturing workflows tied in which will form the new norm for cost capture and reporting and get buy-ins

 

Improvements made

  • Dynamic BOMs were incorporated into the system to generate real time feedback across product lines
  • Renegotiations with sub contractors since their pricing was constant and not pegged to the size and nature of work
  • Study of individual processes and production lines led to recognition of numerous hidden costs
  • Building of a dedicated purchase team to reduce wastage and monitor levels with defined goals to reduce purchase costs
  • Developed a method for recognition and accounting of abnormal wastage which was not even identified before
  • Introduction of reporting at a manufacturing line level on efficiency and wastages was introduced

Impact

  • Win 115%-20% reduction in subcontracting in Year 1
  • Win 2 | 12% reduction in wastages due to continous monitoring
  • Win 3 | Economies of scale due to consolidate buying from ‘Purchasing Team’
  • Win 4 | Higher accountability + Better cost determination of time costs due to improved reporting and accountability
  • Win 5 | Finance thinking from all departments within the organization

What happens when Finance thinks business

Disclaimer: The nature of professional services is to provide tailored advisory based on the facts and circumstances of the case. Advice is never a one-way-fits-all. You may need to approach your advisor to effectuate a plan that suits your business.

You can contact us at connect@prequate.in if you wish to see how this can be executed for your business.