How Much Debt Is Right for Your Company?

Since after the FM’s financial stimulus package, Business man will have to undergo a complete transformation Financial Budget. Since the choice left with business man is either to increase the debt or infuse the equity for the operations. Now it’s time to tread this path more cautiously. Since the forecasting of sales will be inaccurate and more volatile. If a future sales forecast is slightly lower than the actual, this could lead to a huge discrepancy between actual and budgeted cash flow, which will have a significant effect on a firm’s future operating ability. The company has to take right infuse right amount of debt or equity for long term survival.

Companies will have to observe the balance sheet and profit and loss more accurately. No company will be able to take more pressure of increasing debt and yet at the same time face the risk of not able to restart their working operations effectively.

The question of how much is right debt becomes more pertinent and important. Companies will need to find the right capital structure mix to fulfill the strategic goals of the business and managing the working capital effectively.

Establishing sound debt & equity infusion plan policy:

During the course of business we sometimes forget the importance of financial planning and forget the distress it can cause to the future of business. Before going further we need to ascertain good, bad and worse scenarios of working capital and capital budgeting decision as per the required business growth of the company and ascertain financial requirements.

Below is proprietary tool of our company which is established. This is used by PDS Global Company CFO’s Ravi Jain, who heads the finance and treasury function of 600 US Million conglomerate a textile based company in HongKong.

The next 5 questions will determine the soundness of financial plan

Find out current operations and cash conversion cycle of the company. Where do we stand as company in terms of financial reading of balance sheet?
Can business model of the company be changed for managing the operations of the company?
Assess the current debt capacity of the firms in current position & post debt capacity of the firm in good and bad situations of the firm so we don’t face any solvency issues
Can the funds needed during the next five years be raised in a manner consistent with the target capital structure
What is the company’s real financing requirements? How much additional money will it have to raise during the next three to five months and in next 1 to 2 years to carry out its portfolio of product-market strategies?

The easy accessible Debt at lower rate of interest ever than before will make entrepreneurs to plunge in vicious circle. They make it also to shrug off external factors and pressures. However debt always comes at cost i.e. repayment. So it’s advisable to consult, take proper advices & doing the financial planning more rigorously.

Conclusion:

The financial-planning teams will inevitably begin to establish a range of new capabilities within the finance function—for instance, rapid planning and forecasting; cross-functional collaborations; and dynamic dashboards, KPIs, and triggers. In the next normal, companies should consider ways to build on these capabilities and embed them into day-to-day forecasting and performance-management processes.

They may want to shift permanently to shorter financial planning cycles, more frequent review of KPIs, or the use of zero-based budgeting models. New dashboard in every function of business needs to be established and will become new normal to take effective decisions and faster.

Transforming for Growth: An Evidence-Based Guide

As the spread and far-reaching economic impacts of Covid-19 dominate the world news, we have all been witnessing and experiencing the parallel spread of worry, anxiety, and instability in business.

Indeed In a crisis, our mental state often seems only to exacerbate an already extremely challenging situation, becoming a major obstacle in itself.

Why is this? and how can we change it?

As the CEO of a firm, i’ll bring mindfulness to companies to unlock new ways of thinking and working. Is survival of Business this year enough or we have to navigate business for longer term with enough resilience? Most of the business will survive automatically this year as most of them have slashed costs but will they survive in near future? Long term planning has become absolutely unviable in this VUCA world. Moore’s law has become the norm not only for technology companies but for Traditional Businesses also.

Let’s see what’s happening in the real world out there.

First quarter of the year 2020-21 has ended with Nil Revenues for most of the companies. Companies have incurred production costs & expenses to start the momentum and business. Cash flows are not to be seen anywhere in near future. So what is that which may heal company’s losses to minimum this year or even break? What is required which shall turnaround companies structure in future.

Is it Economy Turnaround, Leadership Skills, Team Management, Innovation Management, Execution Capability, Technology Investment or Business Model? Which Tool Shall be used? When and How to implement the right strategies for this year for business?

Most ‘turnarounds’ are hype, so let’s be careful what we mean by that. Do you mean improving company effectiveness? Bringing back innovation to a group that has lost its creativity? Changing impact on the environment? Changing Business Model? Raised profits? Turning around an organization means more than improving the numbers. Everything needs fixing. Never again will the turnaround leader assume that customers always buy, vendors always ship, bankers always lend.

This is an unprecedented times where we cannot draw parallel example turnaround strategies. But what we can actually do today is learn and adopt from different successful growth transformation examples adopted in this adversity times.

FIVE WAYS TO INCREASE YOUR CHANCE OF SUCCESS

We believe that all the above functions may be necessary from time to time for any entrepreneur to survive. Given the long odds of success for growth transformations, it is important to understand what can be done to improve them. The Five factors that we identified as characterizing successful growth transformations in a measurable way span the categories of leadership, strategy, and culture.

Leadership

CEOs play an important role in a transformation’s success. They can bridge business silos, allocate resources, and serve as role models for the necessary cultural changes. This is particularly important for growth transformations, which often can take companies into unfamiliar territory in the pursuit of new revenue opportunities.

1. Take a fresh look at your business.

Incumbent CEOs who want to add an outsider’s perspective to their toolbox can break free of their traditional processes and mental models by using strategy games to explore a more expanded range of possibilities.

For example, Satya Nadella, who was hired as Microsoft’s CEO in 2014, described himself as an “insider-outsider” because of his background in the company’s Cloud & Enterprise Division rather than the then-dominant Windows division.

Strategy

Strategy is very much relevant in today VUCA world also, but it has be constantly reviewed and changed as per time to time. To create successful growth strategies, ideation capabilities bring together a rigorous analysis of consumers, customers, and trends within a proven framework.

Strategies need to be developed now for short term and long term goals both.

2. Take a long-term perspective on strategy.

For example, in 2008 most major Indian computer game companies used a cyclical business model: they developed a game, sold it to customers for a one-time fee, and worked toward their next launch. Activision saw an opportunity to grow customer lifetime value by switching to a subscription model based around smaller monthly payments and more frequent, incremental, updates to games from their main franchises. SaaS Business based softwares have turned from one time installation fees to Subscription based fees per user per month.

3. Prioritize exploration over exploitation.

We found that growth transformations accompanied by high CAPEX & high R&D spend versus industry averages are 29 percentage points more likely to succeed. That suggests that a growth-oriented company should think beyond increasing sales of existing products and invest in developing new offerings, finding ways to continually reinvent themselves. Though exploration can seem riskier than exploitation, companies willing to explore can reap significant rewards.4.

4. Treat transformation as an ongoing capability.

Companies should lay the groundwork for future transformations by developing an adaptive firm with capabilities to change and respond quickly to new opportunities as they emerge—embracing an ““always-on”” approach to transformation. Firms also should build their knowledge base of successful change strategies, with the emerging science of organizational change.

Culture

Culture shapes companies’ abilities to respond to change by influencing how individual employees handle decisions. Cultures that instill a sense of purpose and think holistically about change increase the odds of a successful growth transformation.

5. Become a purposeful organization.

Our analysis suggests that companies that have a stronger sense of purpose are 17 percentage points more likely to transform for growth successfully. Asian Paints and Uniliver companies has become Business Institutions rather than successful entities with their goal of equitable growth to all stakeholders.

Conclusion

To lead a successful growth transformation, a leader must have a clear understanding of his/her values and priorities, as well as the motivation for taking on such a herculean task. Leaders need to communicate, communicate, and communicate more and more with all stakeholders for opinion, criticism and new ideas.

Survival = (speed of your understanding of the situation) x (the magnitude of the pivots/cuts/lifeboat choices you make) x (the speed of your time to make those changes)

A New horizon for manufacturing and operating businesses, which CA can explain to their clients

GOI has announced a scheme of Customs Bonded Manufacturing cum warehousing commonly known as Manufacture and Other Operations in Special Warehouse Regulations,2020 (MOOSWR,2020)

In order to strengthen the initiative of Aatma Nirbhar Bharat and promote manufacturing and other operations in India, this scheme allows importing Capital goods and raw materials without payment of Basic Customs Duty and IGST.
Most interesting benefit is that this scheme delinks the amount of duty saved with any quantum or export obligation unlike older scheme, further this benefit is also extended to the importer who import goods/raw materials for sale/removal in domestic market.

Benefits in Detail:-

Benefits always push anybody who has a partial or a little interest in a scheme or a product. It is the first thing which every customer or an interested one looks at. Here are a few for this.

Import Raw material without payment of BCD and IGST
- Bring these material to factory and use them for manufacturing/other operations without payment of BCD/IGST
- Upon export of finished goods, the BCD/IGST on imported raw material so consumed in those finished goods stands waived
  - In case of clearance for homeconsumption in domestic area, BCD/IGST needs to be paid at thetime of removal from the factory i.e.bonded area without interest– Deferral in payment ofduty;
  - Import Capital goods without payment of BCD and IGST and pay later without interest only if removed later for home consumption in domestic market. This will save huge cash flows while new setup/expansion
  - No export commitments or export obligations
  - License has no requirement of annual renewal. It is valid perpetually till cancelled.
  - No day-to-day monitoring by customs officials. Only risk based audit shall be conducted

Who can obtain a license under this scheme?

License is a formal written permission from the government or any particular institute who leads or does the controlling or regulatory work. There is a standard procedure and protocols which needs to be followed by every individual or a group who wants one.

There are a set of criteria which the license seeker needs to undergo which are enlisted below.

Any owner of any warehoused goods that carry on any manufacturing process or other operations in relation to such goods.

Any person planning to import Capital goods, for setting up new factory or for expansion purpose

Person whose major raw material is imported goods can take the benefit of this scheme and defer the liability to pay BCD/IGST

An importer who imports goods for trading purpose can defer the liability to pay BCD/IGST up to 90 days without interest

What are the factors to evaluate the quantum of benefit of the scheme?

Quantum of projected imports in the next 1/3 years and the value of customs duty cost on the same.
Reduction in the above cost on account of waiver of the customs duty under this scheme of MOOWR/ Bonded Manufacturing.
Plotting the normal lead time between import of goods and its removal from the factory after manufacturing and assessing the working capital saving on account of deferral in payment of customs duty i.e.savings on account of opportunity cost.
Computing the input-output norms and assessing the percentage of imported material as per BOM in the final output goods at each distribution level i.e. at every stage at which the duty liability is going to be levied.
An assessment of the duty benefit must be made as to the applicability of the benefit on various types of duties levied vizSocial welfare surcharge, Anti Dumping duty, safeguard duties etc.

Areas where industry can take help of professionals:-

Compute the quantum of benefit
Comparison with the other schemes
End to end compliance assistance like licensing application, coordination at the time of inspection, implementation of the required systems w.r.t. accounting of goods movement and reporting the same to the authorities as required