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With the recession looming over our heads, all businesses are in hot water. The situation is however particularly alarming for SMEs and startups that don’t have a financial cushioning. However, previous data shows, that not every business suffers from economic downfall. Many companies make the most profits during recessions. How? Click to read more!
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Here is everything you need to know about creating a cap table for your Pakistani startup, and the three mistakes that all new businesses should avoid. When you’re starting a new business, there is a lot to consider. Gathering capital, selecting investors, and hiring employees are all essential activities for new startups. However, it is important to be cognizant of your funds, assets, capital, and fair market values. Many new Pakistani business owners dive in head first without taking a minute to organize their finances. However, taking a step back to create and maintain an accurate cap table can prevent a lot of trouble in the long-run. What is a Cap Table? A capitalization table, commonly referred to simply as a cap table, is a list of all the securities your company has issued and who owns them. Securities include common equity shares, preferred equity shares, stock, convertible notes, warrants, and equity grants. In the simplest terms, a cap table is a record of who owns what inside of your business, including stock, shares and assets. Typically, a cap table will include the following information: Names of shareholders Number of shares (both common and preferred) Fully diluted shares Percent ownership Stock class Price per share Value At the same time, the capitalization table will also show a breakdown of the total number of shares in the company, including: Authorized shares Outstanding shares Unissued Shares Shares reserved for stock option plan Having a neat and organized cap table is very useful. Firstly, it is used to show investors before they put any money towards your company for their due diligence. It also makes valuation of your business and its financial position much easier. By maintaining a neat and organized cap table, you can see how many shares you have available in your option pool at any given time. It prevents you from overselling or underselling shares. Cap Table Mistakes to Avoid Now that you understand what a capitalization table is, and its importance for your Pakistani startup, let us take a look at the major cap table mistakes that every new business should avoid. 1. Not Regularly Maintaining the Table As a rule of thumb, you should update your capitalization table any time there is a chance in the stock ownership of your company. Failing to maintain this record in real time can create a lot of confusion and headaches down the road. To avoid this mistake, update your cap table after any of the following events: Financing Liquidity changes Employee grants Option exercises Employee termination 2. Not Using Proper Software Tools When you first start out, it may seem simple enough to maintain the record on a standard Excel spreadsheet. However, as your business grows there will be many financing changes, and manually maintaining the table will become too difficult. Therefore, you should look into getting a proper software tool early on. This will allow you to automatically update the table whenever there are changes, and will reduce the risk of inaccuracies. 3. Entering Inaccurate Information We cannot stress enough on how important it is to enter complete, accurate information in your capitalization table. Failure to do so can cause a lot of wasted time tracking down the correct information in the future. Therefore, be very conscious of entering true and accurate information. This includes correct financial information, as well as complete shareholder names and data. Need more help with drawing up a capitalization table? We can help you! Here at Metric, we offer the best virtual CFO, financial modeling, valuation, accounting & taxation, investor due diligence, and policy control design services. Contact us now!
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Many people have a difficult time understanding the difference between cost of goods sold (COGS), and operating expenses. It is normal to feel confused, after all, both are essentially money that is being spent from your business. However, COGS and operating expenses are fundamentally different, and both show different things about your company’s financial health. Whether you are a new business owner, or simply new to the world of accounting, it will benefit you to understand the difference between expenses and cost of goods sold. What is the Cost of Goods Sold (COGS)? The cost of goods sold (COGS), also sometimes referred to as cost of sales (COS), or cost of revenue (COR), refers to all the money your business spends creating and delivering your final goods or service. This includes everything that goes directly into making the product and delivering it to your customers. For example, if you are producing shirts, then the cost of goods sold would include the cost of thread, cloth, dyes, wages for manufacturing labour, and whatever freight costs are included in the production or delivery. It is very important to note that the COGS does NOT include indirect or overhead costs such as wages, rent, or utilities. Simply put, the cost of goods sold accounts for all the direct costs of producing the actual goods or services that your business makes. What are Operating Expenses (OPEX)? On the other hand, operating expenses refer to all the indirect and overhead expenses that are involved in running your business (but not in directly producing the products). As we all know, there is a lot more that goes into running a business apart from the production of your main service offering. Utilities, rent, salaries, marketing and advertising expenses, and legal fees are just a few of the many indirect expenses that your business will incur. Therefore, when creating financial statements, operating expenses refer to all the overhead and indirect costs involved in your business. What Do COGS and OPEX Tell You? On one hand, the cost of goods sold tells you how efficient you are in making your product or service. You may have high revenues, but if the COGS is very high, it is possible that you will have low profit margins. OPEX, on the other hand, tells you how efficient you are at running your business overall. If you find that operating expenses are skyrocketing, it may be due to extra expenses that are falling through the cracks, or that there are expenses that you simply cannot afford. Investors will take a look at your financial records and assess both COGS and OPEX when performing their due diligence. Therefore, it is important to keep accurate records of both. The Best Accounting and Bookkeeping Services in Pakistan Vixperts offers the best accounting, bookkeeping, and financial services for Pakistani businesses and startups. Turn to us for all your virtual CFO, financial modelling, valuation, accounting & taxation, investor due diligence, and policy control design needs. Contact now for a FREE diagnosis of your company’s financial health!
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New businesses are in a delicate situation where they are not earning revenues. However, they are spending money to invest in equipment, pay expenses, overheads, and more. Therefore, it is very important for Pakistani startups and new businesses to keep track of the money they are spending. It is also necessary to understand exactly how much money they can spend before going bankrupt. Burn rate and runway are two calculations that are useful in this situation. It is used by startup companies and investors to track the amount of monthly cash that a company spends before it starts generating its own income, and how long they can continue to spend that money before going bankrupt. Here’s what you need to know to understand “burn rate” and “runway” What is “Burn Rate”? Burn rate is a measure of how quickly a business is losing, or burning through, their venture capital (money). It helps them understand how long they can continue spending this amount of cash before running out. In other words, burn rate is the actual amount of cash your account has decreased by in one month. This usually describes a company’s negative cash flow. How to Calculate Burn Rate Calculating burn rate is very easy and straightforward, especially if you have a cash flow statement on hand. Burn rate is calculated using the following formula: Burn Rate = (Starting Balance – Ending Balance) / # Months Starting balance refers to the amount of money that you have at the start of the period. This is subtracted by the amount of money that you have by the end of the term. The number of months refers to how many months are between the starting and ending balance. EXAMPLE: Starting balance = 500,000 Ending balance = 200,000 Months = 2 months Burn Rate = (500,000 – 200,000) / 2 = 300,000/2 = 150,000 Therefore, the burn rate is $150,000. The company is burning through $150,000 over the given time period. What is Runway? On the other hand, runway refers to the amount of time a company has before it runs out of cash. Burn rate is actually used in order to calculate the runway. This is because burn rate reflects the net cash that your business burns through in a given time period. Hence, you can use that data to see how many months it would take before you “burn” through your cash balance How to Calculate Runway: Calculating the runway is very simple. The first step is to calculate the average burn rate, using the formula given above. Next, you can use the following formula to calculate runway: Runway = Total cash balance ⁄ Average burn rate = # months before you run out of money Total cash balance refers to the cash you have on hand, while average burn rate is the amount of money that your company spends, on average, in a given time period. Example: Total cash balance = $600,000 Average burn rate = $150,000 Runway = 600,000/150,000 = 4 months before the business runs out of money Therefore, the runway is 4 months long. The company has 4 months before they run out of money. The Best Financial Services in Pakistan Now that you know how to calculate burn rate and runway, you will be able to gain valuable financial information for your company’s future. If you are interested in gaining more financial knowledge and benefitting from expert accounting, bookkeeping, and financial services, contact us at Vixperts. We offer virtual CFO, financial modelling, valuation, accounting & taxation, investor due diligence, and policy control design. Contact us now for a free valuation and diagnosis of your company’s financial health.
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