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Author: Sagar

Income Tax Scrutiny Notice : 7 Major Reasons
Income Tax Scrutiny Notice : 7 Major Reasons

Income Tax Scrutiny Notice

[one_half][AdSense-A][/one_half]

[one_half_last]Income Tax Scrutiny Notice : 7 Major Reasons

A notice from Income Tax Department feels like a bomb dropped at your place, and you start finding ways on how to defuse this bomb. But, there is nothing to fear about the tax notice, if you have paid proper taxes. There are different types of Income Tax Scrutiny Notice.. 143 is a number that can make you blush, but the case is otherwise here. Why? Scrutiny notice is issued under ‘section 143(2)’ of Income Tax Act. For its number, let’s call it ‘I Love You 2’ notice.

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What will happen if I don’t file TDS return?
What will happen if I don’t file TDS return?

TDS Return

TDS Return Due Date and penalties

Oh ghosh! I missed filing TDS return. What will I do now?

CA In Delhi had explained what would happen if you don’t deposit Tax Deducted at Source (TDS) to the government’s account before due date, in previous article’. But, depositing TDS and filing returns are two different things with different due dates and different consequences. Here, CA In Delhi will tell you about TDS return filings.

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What will happen if I forget to deposit TDS?
What will happen if I forget to deposit TDS?

TDS

What will happen if I forget to deposit TDS?

TDS Payment: Due Dates and Penalties

But first, let us explain you those 3 magical words: TDS (Tax Deducted at Source):

Have you observed ‘prasaad’ offered at the place of pilgrimage? They slice out a piece of it before you can take it with you? Later they also give it back to you. [AdSense-B]

Same principle! You need to slice out a part of the payment you make to specified persons. The sliced amount will then be deposited every month into the god’s account- our government. This sliced payment, credited to deductee’s PAN, will be reflected in TDS return that you have to file every quarter. Hence, the person whose amount you deducted will be able to adjust it against tax payment that he will have to make to the government. Simple!

TDS return is to be filed by the assessee who had deducted the TDS.

TDS Payment: Due Date

For non government assessee: [AdSense-B]

S. No Particulars Due Date
1. Tax Deducted every month, except March 7th of next month
2. Tax Deducted in March 30th April

All the corporate assesses and those covered under Tax Audit under section 44AB of the Income Tax Act should deposit TDS online mandatorily. Others can also deepoosiit the same with banks.

Let CA In Delhi tell you another secret. You can pay TDS quarterly also, if Assessing Officer, with prior approval of the Joint Commissioner, permits the same. In that case, TDS due dates are:

S. No Quarter ends on Due Date
1. 30th June 7th July
2. 30th September 7th October
3. 31st December 7th January
4. 31st March 30th April

 

What if I don’t pay TDS? [AdSense-B]

Well, 1.5% interest per month awaits you then. Also, the interest will be calculated from the month of date of deduction till the date amount is deposited with the government. Pay attention! Date from which amount is deducted, and not the due date.

Example: If you deducted TDS on 20th January and instead of depositing before due date of 7th February, you deposited the same on 15th February, then the interest will be calculated from? The month of January, and not 7th February. Pheww..government is mean if you don’t pay on time.

Ok, I paid TDS every month before due date, now what? File TDS return every quarter. Click here to check due dates for TDS returns and what happens if you don’t file the same.

How To Save Tax : 3 Minute Read Can Help You Save Tax
How To Save Tax : 3 Minute Read Can Help You Save Tax

How to save tax

How To Save Tax : 3 Minute Read Can Help You Save Tax [AdSense-B]

Do we need to tell you the importance of each penny? Maybe not! You are a true entrepreneur and you know, a penny saved is penny earned for your business. You can utilize it more productively.
Paying excess taxes is the most pinching thing for an entrepreneur. Why won’t it be, it doesn’t help in developing his business in any way. ‘Excess taxes’, I said, the ones that can be saved if you exercise care or take a tax expert’s advice, not the ones that deserve to be paid on your profit. After all, the deserved ones would be used in the country’s development. This article will guide you how to save tax and invest that fund into better alternates.

Let’s understand how to save tax for your business:

  • Preliminary Expenses:

    • The expenses you incurred before commencing the business: on business incorporation, logo designing, project report, or any other area, you must have thought you have already incurred expenses before the commencement of business, so, how will they save you any tax?Areyyy, don’t worry, they will still save you tax. That’s what section 35D in Income Tax Act is all about. The section provides you deduction on these expenses in 5 equal installments for next 5 years So, just don’t forget to record them.
  • Cash Payments:

    • Beware! You can make cash payments only within the limit of Rs 20,000. Payments above the same to a person in a single day are entirely disallowed under section 40(A)(3) of the Income Tax Act. Suppose, if you pay Rs 25,000 to a person, then entire Rs 25,000 payment will be disallowed. This limit of Rs 20,000 is Rs 35,000 in case of making payment to transport operators.
  • Accounting all operating Expenses:

    • Any expenses to operate a business like rent, electricity bills, phone bills, conveyance, and any other expense incurred for the purpose of business will be allowed as deduction. So, don’t let any expense go unrecorded.Have a proper accounting system in place so that entries are made as and when incurred and also maintain documents like bills in support of those expenses. Take the expert help in setting up a proper accounting system. [AdSense-B]
  • Deduct TDS:

    • You need to deduct TDS on expenses on which TDS is deductible, only then you will be allowed deduction on that expense. As simple as that!Suppose, if you were supposed to deduct TDS on contract payment of Rs 50,000, and you failed to deduct the same, the entire expense of Rs 50,000 will be disallowed.
  • Payment on actual basis:

    • This is very important! There are certain payments that are allowed only and only when they are actually paid and not when liability to pay arise. Confused? Wait, explaining.Taxes, employer’s contribution to provident fund, bonus or commission, interest on any loan or borrowings, etc will be allowed as deduction only when they are paid on or before the due date of filing the return. Did you notice ‘due date of FILING RETURN’? Yes, not the fiscal year, but due date of filing return.Hence, if you had to pay taxes for the financial year 2015-16, and you pay them after 31st March 2016, but before the due date of filing return, you can avail the deduction. Or else, they will be allowed in the year when you make the payment.
  • Depreciation:

    • The favourite method of the entrepreneurs to save tax. You must have heard that cars, mobiles, computers, and other capital assets should be bought in the name of business. You know why? It’s because you claim the benefit of depreciation to save tax. Manufacturing companies can claim 20% additional depreciation on a new machinery.
  • Valuation of stock:

    • As per the accounting standards, stock is valued at lower of cost or net realizable value. Hence, if your stock has a value lower than the cost of producing or buying it, don’t even mistakenly account it at cost. This will deprive you of tax saving otherwise.
  • File your tax returns on time: [AdSense-B]

    • Giving a damn to tax return due date is one great way to screw yourself!I encountered many entrepreneurs after the last date of filing returns saying we did not file the return because we did not have revenues. Oops, that was a mistake, a grave mistake. If you don’t have revenue, you should DEFINITELY file the return! Your losses can be carried forward for a period of 8 years.Suppose you incurred a loss of Rs 50 lakh in a year. It can be carried forward to next year, and suppose, next year you made a profit of Rs 75 lakh, then you need to pay tax on the profit of Rs 25 lakh only, after setting off the loss of previous year. Hence, assuming the rate of 30% tax on Rs 50 lakh, you save Rs 15 lakh tax, just by filing return on time.

Just a few points to keep in mind, and you can thank us after utilizing the saved tax on business development, technology, keeping employees happy and what not. There are many more ways practically to plan your taxes, according to your business. Take the help of top rated Chartered Accountants in Delhi from our homepage wherever needed and an expert opinion can literally help you save a lot.

Why Accounting For Business Is Important For You
Why Accounting For Business Is Important For You

accounting for business

Why Accounting For Business Is Important For You [AdSense-B]

Isn’t it a good feeling when everything in your house and office is in the right place and order? You can find the things whenever you need them. Plenty of time is saved and you can easily focus on big and vital things.
While a messy place? ewww! It makes you all lethargic, doesn’t let you focus, keep you in a web of clutter and you just cannot understand what you are doing and why. Similarly, Accounting keeps your finances and money in the order. It sorts out your messy environment and gives you the report of revenue you made, expenditure you incurred, profits/losses you made and help you locate the reason so that you can take the best decision for your business. Accounting for business is important

It is much more than knowing true and fair position of the business. It is also a legal requirement.

Importance of Accounting For Business

  • Analysis/Decision Making: It helps in taking important decisions based on the reports on profitability, liquidity, efficiency, etc. Without proper accounts, management would be acting in blindness.
  • Record Keeping: Records are maintained for taking future actions. Government uses records of companies to make monetary and industrial policies.
  • Fraud detection: When records are maintained, tracking the events is easier. It helps in establishing good internal control, which in turn helps you detect and check the frauds taken place.
  • Raising funds: To raise funds from investors or bankers, you need to establish that you are able to generate enough revenues to yield returns to investors and banks. This can be established only when you have a maintined record to prove so. Accounting serves this purpose.

Types of Accounting [AdSense-B]

There are two types of accounting- Cash basis and Accrual basis.

The Cash basis of accounting recognizes and records the financial transaction when cash is exchanged between parties. Accrual accounting recognizes and records transactions, as and when they occur, regardless of cash exchange.

Example: Your company made a sales of Rs 50,000 but, cash will be received after 15 days. The transaction will be recorded today under the accrual method. But, under cash method, it will be recorded only when cash is received against the sale. Smaller businesses generally use cash basis of accounting, as it is an easier method.

Compulsory maintenance of books of accounts under Income Tax Act

Are you covered under this? Let’s find out

  • Section 44AA of Income Tax Act has made it compulsory for certain specified professionals to maintain books of accounts and other documents for Income Tax purpose, if:
  • Yearly gross receipts of the profession exceeded Rs 1,50,000 per annum in all the three years immediately preceeding the previous year or
  • In case of first year of business, gross receipts are likely to exceed Rs 1,50,000.
  • In case, gross receipts of specified professionals are more than Rs 25 lakhs in the previous financial year, tax audit by a Chartered Accountant of financial records is mandatory.

These specified professions are: [AdSense-B]

  • Legal
  • Medical
  • Engineering
  • Architectural
  • Accountancy
  • Technical Consultancy
  • Interior Decoration
  • Authorised Representative
  • Film Artist
  • Company Secretary
  • Information Technology

These specified professionals have a technical degree and render services. They are non traders.

Don’t forget: If in any one year, your income goes below the threshold limit of Rs 1,50,000, you are not required to maintain books of accounts.

  • Books of accounts are to be maintained by persons other than those mentioned above if:
  • His income (profit) from business or profession exceed Rs 1,20,000 per annum or his sales/gross receipts exceed Rs 10 lakhs in any of the three preceeding years.
  • In case of first year of business, if income is likely to exceed Rs 1,20,000 per annum or his sales/gross receipts likely to exceed Rs 10 lakh.
  • In case the gross receipts/ turnover/total sale of non specified professionals is more than Rs 1 crore in the previous financial year, tax audit by a Chartered Accountant of financial records is compulsory.

Don’t forget: If in any one year, your income goes below the threshold limit, you are still required to maintain books of accounts, unless sales/income falls for three years continuously.

  • Presumptive Income Scheme: Persons filing their return of income under the presumptive income scheme are not required to compulsorily maintain books of accounts. However, if they claim their profits to be less than deemed profits under the scheme, then they need to maintain the books of accounts.

Presumptive Income Scheme is a scheme, wherein profits declared in tax return are computed as a percentage of sales. Example: Under section 44AD of the Income Tax Act, assessee can declare his profits as 8% of the total revenue, if his gross turnover does not exceed the threshold limit of Rs 1 crore.

What books of accounts to be maintained? [AdSense-B]

Every possible document in relation to business is required to be maintained:

  • Cash book/ledger/journal
  • Inventory records
  • Bank Statements
  • Original Bills
  • Receipts/counterfoils of sales
  • Vouchers for payments

Whom To Approach For Accounting of Business

You can choose from a list of top rated Chartered Accountants at homepage of CA In Delhi and get accounting of your business with ease

Start A Business in Delhi : LLP, Private Limited or A One Person Company?
Start A Business in Delhi : LLP, Private Limited or A One Person Company?

Start a business in Delhi and the most confusing question that pops up in mind- whether I should incorporate a private limited company, an LLP (Limited Liability Partnership) or an OPC (One Person Company). Isn’t it? No worries! This article will clear your doubts and un-clutter your mind so that you can confidently go ahead and start taking action. Basically, suitability of all the three forms of entities depends upon your needs and your situation. Let’s have a look from various points of view:

Minimum requirement:

While minimum two persons are needed for a private limited company and an LLP, OPC comes to the rescue of those who want to start a business alone. LLP requires minimum 2 designated partners, private limited company requires minimum 2 directors and OPC requires minimum 1 director and 1 nominee for shareholder. Not to forget, directors and shareholders can be the same person.

Formation and compliance cost:

Out of these three, formation and compliance cost is highest for companies and relatively lesser in OPC and least for LLP out of these three.

Fund-raising options:

If you have a plan to raise funds, then close your eyes and start a private limited company. Investors invest against share in equity,  which can be possible only in the case of a company. But keep your eyes wide open to all the all the compliances that you need to follow regularly in that case.

Board Meetings:

If you opt for a private limited company, it is mandatory for you to hold the first board meeting within 30 days of incorporation. Also, you need to hold minimum 4 board meetings in a year. There is no such requirement to hold a board meeting for an OPC with one director or an LLP. However, for an OPC with more than 1 director, first board meeting to be conducted within 30 days from the date of incorporation and at least one meeting in each half of the calendar year.

Annual General Meeting (AGM):

Mandatory only for private limited companies, while no such requirement for OPC and LLP.

Statutory Audit:

Mandatory for every private limited company and OPC while for the LLP, mandatory only when turnover is more than Rs 40 Lakh or contribution is more than Rs 25 lakh.

Above points in simplified and tabular form: [AdSense-B]

Basis Private Limited Company One Person Company LLP
Minimum Requirement 2 shareholders

2 directors

(Shareholders can be the directors)

shareholder = 1

director = 1

nominee of shareholder = 1

(Shareholder can be the director)

2 partners
Formation and compliance cost Highest Relatively lower Relatively lower
Fund-raising options Best for fund raising Chances are low Chances are low
Board Meetings First meeting within 30 days from the date of incorporation
Minimum 4 boards meetings in a calendar year.
Board meeting not needed in case of 1 director.
In case of more than 1 director, first meeting to be conducted within 30 days from the incorporation date.At least 1 meeting to be conducted in each half of the calendar year.
Not compulsory
Annual General Meetings Mandatory Not Mandatory Not Mandatory

Nutshell 

If you just want to do business with no plan of raising funds and want to incur minimal compliance cost, LLP is the best option for you. Compliance costs are there, but are lesser than that in a company. No audit is needed for an LLP, until turnover crosses Rs 40 lakh or contribution is Rs 25 lakh. So, if you project that turnover will exceed Rs 40 lakh or contribution is more than Rs 25 lakh, then forming a company is a better option.

But, if you have a plan to raise funding in the future, then forming a private limited company is the best option. But, with pros, comes the cons! You need to bear higher compliance cost and an extra headache of complying all the laws as non-compliance can lead to penalties and interests or even imprisonment in many cases.

In the middle of these two, lies One Person Company. Compliances are lesser than a private limited company, but more than an LLP. Funding chances, still not at par with a private limited company. Also, OPC will be there only and only if paid up share capital does not exceed Rs 50 lakh or turnover does not exceed Rs 2 crore. Otherwise, it will be mandatorily converted into a private limited company.

Did we forget to tell you the mandatory words you need to use after the names? Private Limited, LLP and OPC to be used in the respective cases. Which one do you want? XYZ Private Limited, XYZ LLP or XYZ OPC Private Limited? Choose carefully!

Whom To Approach

You can choose from a list of top rated Chartered Accountant in Delhi at our homepage and start your business with ease.

CEOs Should Not Miss This : 12 Vital Financial Ratios
CEOs Should Not Miss This : 12 Vital Financial Ratios

Financial Ratios

CEOs Should Not Miss This : 12 Vital Financial Ratios [AdSense-B]

A CEO (by whatever name called), being the leader of an organisation has an ultimate responsibility of running the entire organisation. A Good CEOs should not miss some of the financial ratios and always ensure (either themselves, or with expert assistance) that finance, the foundation on which a business runs, is well managed and stable.

By looking at few important financial ratios, he can largely judge the overall efficiency of the business, locate weakness, take sound decisions and hence, ensure financial well being of organisation.

I have compiled some of the important financial ratios that will give you a major idea about the company’s financials. If you are short of time, just read summary. Let’s find out what these ratios communicate:

Hello cash flows, how are you doing? Check liquidity ratios to find out. [AdSense-B]

I. Liquidity Ratios: They tell you about cash flow position of business. Higher they are (upto certain level), better it is! These are:

  1. Current Ratio: Current Assets/ Current Liabilities
    Summary: Current ratio reflects ability of business to meet its short term obligations. Current Ratio less than 1 indicates that company’s short term liabilities are higher than its current assets, which is not a good indication of financial health. However, too high Current Ratio (more than 3) is neither a good sign

    Detailed:
    Current ratio reflects ability of business to meet its short term obligations. Do you want to ensure good cash flows? If yes, then aim for moderately high current ratio. ‘Moderately’ high, please note.
    Higher current ratio indicates higher ability of business to pay its short term debts, yes, it’s a positive indication. Current Ratio less than 1 indicates that company’s short term liabilities are higher than its current assets, which is not a good indication of financial health.
    However, too high Current Ratio (more than 3) is neither a good sign as it indicates company is not using its funds efficiently. You can make better use of resources in this case, maybe!
  2. Quick Ratio/Acid Test Ratio: (Current Assets-Inventories)/ Current LiabilitiesSummary: It judges company’s ability to pay its short term liabilities with most liquid assets (cash and cash equivalents, marketable securities and accounts receivable). As evident, it excludes inventory. Higher the quick ratio, better is company’s health.

II. Profitability Ratios: Monitor your profit margins. Higher they are are, better it is!

  1. Gross Profit Margin: (Revenue-Cost of Goods Sold)/Net RevenueSummary: Cost of Goods Sold= Opening Stock+ Purchases+ Direct Expenses- Closing Stock
    Is product/service price ideal? This ratio can help! Gives you margins earned in goods produced/service provided.Detailed: Gross Profit Margin reflects product cost and pricing decision of the company. If your gross profit margin is 30%, it indicates you spend 70% to produce the product/ provide service. Higher gross profit margin than industry indicates higher competitive edge of the company. When your margins are pretty high, you have room to reduce price and gain market share.
  2. Operating Profit Margin: Earnings Before Interest and Taxes (EBIT)/Net Revenue [AdSense-B]Summary: EBIT= Gross Profit- Operating expenses, excluding interest charges
    Operating margin indicates company’s profitability from its operations. It is also an indicator of company’s ability to pay interest on debt keeping in mind the leftovers.Detailed: Gross Profit margin was good, but you have many other expenses. Salaries, administrative, marketing and many more. Did we include them in Gross profit margin? No. We include them here in operating profit margin, as they are part of operations.
    Operating margin indicates company’s profitability from its operations. It is also an indicator of company’s ability to pay interest on debt keeping in mind the leftovers.
    Example: 20% Operating Profit would mean that company earns 20% profit from its operations excluding interests and taxes. So, higher, the better!
  3. Net Profit Margin: Profit After Tax (PAT)/Net RevenueSummary: It measures the net profit earned by the company on the sales made after paying all the expenses and taxes.Detailed: This is the ultimate profit margin you were waiting for!
    This ratio measures the net profit earned by the company on the sales made after paying all the expenses and taxes. It indicates how much value has the company made for its shareholders. Higher the net profit margin, better is the company. And, happier you are. ????
  4. ROE (Return on Equity): Profit After Tax (PAT)/ Net Worth
    Summary: It measures profit attributed to shareholders in return for investment put in.Detailed: You invested your money. You want return. How much return you earned on money invested? Ask this ratio.
    Return on Equity measures profit attributed to shareholders in return of investment put in by them on the company. Higher ROE gives assurance to equity investors that their funds are utilized in right direction and are giving them good returns. Needless to say, higher the better!
  5. ROA (Return on Assets): Profit After Tax (PAT)/ Total Assets, excluding fictitious assets
    Summary: It reflects efficiency of the business in utilizing its assets.Detailed: Quite similar to Return on Equity, ROA reflects efficiency of the business in utilizing its assets. How much profits have been generated by the company by employing assets. Just like ROE, higher ROA also indicates better financial health of the company.
    If difference between ROA and ROE is large, it means company has employed lot of debt. In that case, it is advisable to have a glance at solvency and liquidity ratios.

III. Activity Ratios: Test management’s performance using these ratios.

  1. Debtors Turnover Ratio: Net Credit Sales/ Average Debtors [AdSense-B]Summary: It indicates company’s efficiency in collecting its dues from debtors.Detailed: How soon are you recovering from your debtors? This ratio indicates company’s efficiency in collecting its dues from debtors, conversion rate of debtors into cash in order to maintain cash flows and avoid bad debts.
    High debtors turnover indicates company is efficient in collecting cash from debtors but if it is too high, it may also reflect strict credit policy which can make company lose its customers to peers.
  2. Creditors Turnover Ratio: Credit Purchases/ Average CreditorsSummary: reflects how swiftly a company pays off its creditors.Detailed: Ok, now how soon are you paying your creditors? Creditors’ turnover ratio can tell. It reflects how swiftly a company pays off its creditors. Since, payments to creditors mean reduction in cash, it should have a good balance between cash flows and utilization of credit period as well as discounts availed on early payments.
    High ratio means company is paying off creditors quickly, thereby reducing cash balance. However, company might also be availing early payment discount and vice-versa.
  3. Inventory Turnover Ratio: Cost of Goods Sold/ Average Inventory

    Summary:
    It indicates movement of inventory from the company. High inventory turnover means company is selling at a faster rate.Detailed: Are you selling your goods slow, fast or too fast? This ratio indicates movement of inventory from the company. High inventory turnover means company is selling at a faster rate, which is a good indication. Lower inventory turnover indicates that lots of resources are tied up in inventory and selling is slow. Again, coming to second side of story, too high inventory turnover could mean that company could get stock out in case demand is very high. Be wary of that.

IV. Solvency Ratios: You don’t wish to get bankrupt! Then, pay attention to these

  1. Debt-Equity Ratio: Total Debt/ Shareholder Funds Summary: It indicates debt that company has raised to finance its total assets as against the equity.Detailed: Ratio of 1:1 indicates that debt raised is equal to amount belonging to shareholders, and in case of theoretical winding up, creditors/lenders will have all the claim over company’s assets leaving no claim for shareholders. D/E ratio of 2:1 or 3:1 is ideal depending on the industry.Presence of leverage boosts up the Earning Per Share. Hence, suitable balance should be maintained between solvency risk and EPS.
  2. Interest Coverage Ratio: Earnings before Interest and Taxes (EBIT)/ Interest [AdSense-B]Summary: indicates ability of a company to meet its interest obligation from earnings generated.Detailed: Are you able to earn enough to pay interest on your debts? This ratio indicates ability of a company to meet its interest obligation from earnings generated. Higher the ratio better is the company’s ability to meet its interest obligation. Interest coverage ratio of 3 times indicates that earnings are 3 times the interest amount and hence, is perceived positively from both company and the lenders

Oh, and keep in mind, that ratios will vary from industry to industry and over time. Every ratio tells two stories. Interpreting them requires knowledge of your business, your industry and the reasons for fluctuations. If any assistance is needed, you can contact top rated Chartered Accountants In Delhi at the homepage of CA In Delhi. They can offer sound advice, which can help you interpret and improve your financial performance. It’s important to keep in mind that ratios are only one way to determine your financial performance. Beyond what industry a company is in, location can also be important

When you take care of above points, ratios give you great insight about financial health of your business.

How To Value A Startup : An Overview About Startup Valuation
How To Value A Startup : An Overview About Startup Valuation

Value a startup

How To Value A Startup : An Overview About Startup Valuation

Namastey from CA In Delhi! This article will guide you all about how to value a startup. The way startups are becoming the trend of the season, days are not far when pados wali aunties who used to compare marks of their children earlier as a part of gossip will ask each other “Mere bete ke startup ki valuation $3 million h. Tumhari beti ke startup ki kya valuation ho gyi?” [AdSense-B]

Every other day there is a news of a startup being valued and raising funds. Har cheez ki ek keemat hoti h and startup is inevitably one of them. But how are they valued? Let’s find out!

There are three stages of a startup:

– Early stage
– Growth stage
– Exit stage

Early Stage

Early stage of a startup is a stage where the company has not generated any revenue or has generated very little. It has an idea or a plan (theoretical or implemented) that has a ‘potential’ to generate revenues in future.

To raise funds from investors in exchange of the shares in the company, you need to value a startup. Fund raising and share dilution normally depends on the kind of investor you are raising funds from (Angel investor, Micro Venture Capitalist, Venture Capitalist, friends and relatives, etc). Normally, 15%-25% shares get diluted at this stage and founders need to be careful in dilution as they may have to raise funds in future as well and may have to dilute more equities. [AdSense-B]

Valuation at this stage is mainly determined based on various factors including how much funds you need to run the business for a given time period Investors generally want to see growth in 18 months. Example: If your business needs around Rs 1 crore and your company raises Rs 1 crore in exchange of 20% shares, value of your company is Rs 5 crores (Rs 1cr / 20%).

To value a startup, following factors are considered:

Revenues: Obviously, revenues are most vital part of the company. Every organisation exists for making money. But, this holds true mainly for B2B companies. Maybe to your surprise, for B2C business, more revenues may lower the valuation of your company. It is because if you are charging your consumer, consumer may not like to deal with you and this adversely impacts your growth and hence valuation

Number of users: If your company has large number of users, it is a concrete proof that company can generate revenues anytime as business model is likable for users. This is called ‘traction’. Snapchat had valuation of $16 Billion without having any revenues. Interesting much? ????

Founder’s goodwill: Be afraid not of sheep leading a pack of lions, but a lion leading a pack of sheep. This is the case here. Investors having confidence in founder and leader of the organisation who has had prior success can easily get funding even if he does not have revenue or traction. Instagram and Pintrest are the best examples of such funding.

Industry of operation: If the industry where your startup belongs to is attractive, investors are more willing to invest at a premium.

Growth Stage [AdSense-B]

This is the stage where your company has revenue or traction. Valuation at this stage is easier and multiples are used here to calculate the value of your company.

Multiples can be calculated from comparable transactions occurred in the market or companies of similar kind for calculating multiple of Enterprise Value to EBITDA or revenue or number of users of that similar company. Once the multiple is known, same can be applied to

Multiple= Enterprise Value
Revenue/EBITDA/no of users

EBITDA/revenue/number of users of the relevant company taking into account different scenarios. Different scenarios here mean highest possible revenue/ebitda/users or lowest possible revenue/ebitda/users.
Other way can be to discount the current and projected future earnings of the company based on the trends of the revenue and other factors. Such aggregated discounted earnings can be used as a value of the startup.

Here also, several other factors are taken into account by investors like management, state of business, opportunities, competition, technology, reputation, external risks, etc. These factors play strong role in negotiation for valuation between founders and investors. Founders always want more valuation while investors would like more equities in exchange of funds.

Exit Stage

Exit Stage: Investors now want return for the money they invested previously in the startup.
They plan to sell their shares to other company or investor or through an Initial Public Offer.
Valuation here is again done keeping in mind the comparable transactions happened in the market for similar companies using their multiples and applying them for the relevant startup.

Replacement cost method is also used to value the company. It means the value of building the similar company from scratch at current point of time.

Projected revenues for future years (generally 10) are discounted at a suitable discount rate (as per industry and company standards) and cumulative discounted revenue can be used as a valuation of the company.

Good entrepreneurs and investors choose to use mixture of valuation methods to value their company based on the situations and industry and then use them as a tool to negotiate better.

At every stage, lot of comprehensive research and analysis of the company and industry is required since many assumptions and estimates are made at the time of valuation. That is what makes startup valuation a mixture of science and art.

Next time when somebody asks you “Toh kya keemat h tumhare startup ki?” Go proudly tell what it is. ????

Whom To Approach

You can choose from a list of best chartered accountants in delhi at our homepage and get your startup valuation done with ease.