Outsourcing is a business practice in which services or job functions are farmed out to a third party. The business case for outsourcing varies by situation, but the benefits of outsourcing often include: increased efficiency, increased focus on strategy / core competencies, lower costs, access to skills or resources, increased flexibility to meet changing business and commercial conditions, lower on-going investment in internal infrastructure, and accelerated time to market.
Most entrepreneurs have great talents but many times they think they can do it all. That can really stall the growth of the business. By outsourcing the day to day back-office tasks, the business owner has more time to focus on generating income, and core business activities.
Entrepreneurs have long seen outsourcing as a strategy reserved for big businesses, but technology has made it a more accessible tool for small and medium businesses and for them, outsourcing has made a powerful impact on their growth, productivity and bottom lines.
When to outsource:
For every company, the right time to outsource is different. Some businesses have in-house staff to handle daily activities, but may need outside help to undertake new projects that don't warrant another full time employee. When you and your current employees are unable to manage the day-to-day business of your company and build the business satisfactorily, it may be time to consider outsourcing. When entrepreneurs want their business to grow, but have no time left in the day to pursue that growth, is the time to outsource.
Business owners, sometimes, feel they are the only person who could do the work efficiently, effectively, and want to control everything. But for a business to grow they have to let go of some control and start delegating. Taking the first steps toward outsourcing can be time-consuming, but figuring out how to build your business with help from outside professionals can offer increased efficiencies and economies of scale.
What to Outsource:
The types of tasks that are best outsourced fall into three general categories:
o Highly skilled, Executive, Expertise: You may not need to pay a CFO’s (Chief Financial Officer) salary, but could have a CFO-level person to come in a few times each month to provide financial analysis and ensure that the book-keeper is handling the books well.
o Highly repetitive tasks: Accounts Payable, Data Entry, and Shipping inventory could fall into this category.
o Specialised Knowledge: IT (Information Technology) support for your accounting system or network. Instead of hiring and paying a full time IT person, it is easier and economical to outsource to someone with the right skill set as your needs change.
These days almost any task can be outsourced. Before choosing which tasks you can farm out, take a hard look at your business and determine your strengths and values. It is important to identify core competencies and focus and those areas.
How to outsource:
o Finding the right one: Before handing over the reins, be sure you’re working with the right partner. There must be a good match between what the business wants and what the provider specialises in. A good starting place for finding the right one is your own network, a good recommendation from friends, acquaintance.
o Getting it to work: The work isn’t over after finding the right one. Communicate your expectations, requirements, and steps included in the job clearly. You will also have a responsibility as an outsourcer to step back, relinquish control, and allow the providers to do the job you’ve hired them to do. If an entrepreneur micro-manages all of the outsourcing, the savings in management time, attention, and cost is lost. The whole point of outsourcing is lost.
o Facing the challenges: While outsourcing can yield great advantage, it’s not without challenges. Just as when you hire a new employee or employees, there are security risks involved when handing tasks over to a provider. Outsourcing cannot be a solution for finishing up a task or tasks with an unattainable deadline.
o Reap the benefits: Although there are risks, outsourcing ultimately offers business owners great advantages. The process allows you to build a team of skilled professionals without adding the expense of full-time employees, and to avoid getting bogged down with tasks that can be completed without your attention. Defining a process flushes out inefficiency. When you outsource, you can focus time, attention, resources on your company’s core competencies, and spend your time setting new goals and finding ways to achieve them.
One of the top issues keeping your business from growing the way you would like is its financial management. That is, you just can't get the numbers together to tell you where your biggest risks and opportunities are going forward, let alone the roadmap to growth and sound financial health. Your book keeping staff is doing a bang-up job, but just lacks the experience and knowledge to generate the kind of reports and numbers you need to push your business to the next level.
Where are you struggling?
This is a biggie as your company is looking to grow or expand. You feel like you are constantly making decisions in the dark because you lack a true financial picture. In the best case, you're getting incomplete information that doesn't allow you to track each aspect of your operation. In the worst case, the information rendered is useless by inaccuracies as a result of faulty data entry and classification.
Wherever your company falls in this spectrum, you cannot be expected to make the best decisions about the direction your company moves when you don't have the data to back up those decisions.
As your business has grown, so has the complexity of the financial situation and sheer volume and types of transactions. Do you have adequate financial information security, division of responsibilities, job performance standards? Early on, a bookkeeper may have handled all of the bookkeeping and accounting duties. But as your business grows and staff expands, the challenge becomes to create a system of checks and balances to ensure: first, that tasks are accurately completed in a timely, lawful manner and, second, that no one person has too much control, opening your company up to risk of fraud. A controller might be responsible for the day-to-day operations, but the CFO owns the design and ultimate performance of the accounting process, systems and controls, and systems.
Chances are pretty good you didn't start your company or get involved in a small business because you love to crunch numbers, handle accounting. This can put you at a disadvantage when managing your bookkeeping and financial staff purely because you're a little intimidated by what they do all day. But you also know that your business will not survive and thrive if invoices are not sent on time, payments are not received and processed on time, and bills are not paid on time. And someone needs to guide your team so they're continuously arming you with financial and operating insights required to fuel your decisions en route to hitting your growth and performance objectives.
Accurate and timely financial information - along with practical interpretation and guidance on how best to leverage it - is invaluable in driving strategy formulation and evolution. Without it, you're shooting from the hip. You can't know where you are going without knowing where you have been. And knowing where you have been and how you got to where you are now, also creates a guidepost for how you can get to where you want to go next. In other words, your financials should tell you - on a segmented basis - what has succeeded, what has failed and also help you use that information to develop and refine your strategy.
• Raising Capital:
Investors, financial institutions, banks are only going to come on board if you can present a compelling, substantive financial picture. Having complete and accurate financial history and projections - coupled with a credible financial story - is vital to secure capital your business needs to grow.
If you see your company with any or all of these issues, you know it's time to take action to get your financial house in order. You not only won't be able to grow your company without addressing these issues, but you could actually slide backward.
Working capital represents what a company currently has to finance for its immediate operational needs, such as obligations to its vendors, inventory, and accounts receivable. This can affect an organisation’s long-term investment effectiveness and its financial strength in covering short-term liabilities. It is a measure of how well a company is able to manage its short-term financial obligations. Working capital is calculated as the difference between current assets and current liabilities. The amount may not always be a positive number. It can be a zero, or even negative! As a result, different amounts of working capital can affect a company’s finances in different ways.
Positive Working Capital:
When a company has more current assets than current liabilities, it has a positive working capital. Having enough working capital ensures that a company can fully cover its short-term liabilities as they come due in the next twelve months. This is a sign of a company's financial strength.
However, having too much working capital in unsold and unused inventories, or uncollected accounts receivables from past sales, is an ineffective way of using a company's vital resources. The additional funds parked in inventories or receivables are financed by short-term liabilities and in most cases by long-term capital, which should be used for longer-term investments to increase investment effectiveness. The key is thus to maintain an optimal level of working capital that balances the needed financial strength with satisfactory investment effectiveness. To accomplish this goal, working capital is often kept at 20% to 100% of the total current liabilities.
Zero Working Capital:
Zero Working Capital is an interesting concept, but it usually is not a practical implementation. Still, if a company can improve upon its working capital on key areas like receivable and payable terms, and production based on demand it can atleast reduce its investment in working capital, which is certainly a worthy goal.
When a company has exactly the same amount of current assets and current liabilities, there is zero working capital in place. This is possible if a company's current assets are fully funded by current liabilities. Having zero working capital, or not taking any long-term capital for short-term uses, potentially increases investment effectiveness, but it also poses significant risks to a company's financial strength. Certain current assets may not be easily and quickly converted to cash when liabilities become due, such as illiquid inventories. Keeping some extra current assets ensures that a company can pay its bills on time.
Inside Negative Working Capital:
Negative capital is when a company’s current liabilities exceed its current assets. In other words, there are more short-term debts than there are short-term assets. It is closely tied to the current ratio, which is calculated as a company's current assets divided by its current liabilities. If a current ratio is less than 1, the current liabilities exceed the current assets and the working capital is negative.
If working capital is temporarily negative, it typically indicates that the company may have incurred a large cash outlay or a substantial increase in its accounts payable as a result of a large purchase of products and services from its vendors.
However, if the working capital is negative for an extended period of time, it may be a cause of concern for certain types of companies, indicating that they are struggling to make ends meet and have to rely on borrowing or stock issuances to finance their working capital.
The amount of a company's working capital changes over time as a result of different operational situations. Thus, working capital can serve as an indicator of how a company is operating. When there is too much working capital, more funds are tied up in daily operations, signalling the company is being too conservative with its finances. Conversely, when there is too little working capital, less money is devoted to daily operations — a warning sign that the company is being too aggressive with its finances.
Gold prices shot up after the government in Budget 2019 proposed to increase import duty on gold and other precious metals to 12.5%, making the yellow metal and jewellery expensive in the domestic market. India is one of the largest gold importers in the world, and the imports mainly take care of demand from the jewellery sector. Gold prices have hit new highs in India. If you are looking to cash in on higher prices, you should know the income tax implications.
Apart from physical forms like jewellery, coins and bars, gold can also be held in electronic forms like gold ETFs or exchange traded funds (ETFs), gold mutual funds and sovereign gold bonds. Income tax rules levied on sale of gold also depends on the form of gold holding and time period of holding.
The most common form of gold holding in India is gold jewellery. There is no income tax levied on inheritance. But subsequent sale of the inherited gold is taxable. It is suggested that proper documentation should be maintained to show that the gold was received under an inheritance. The taxpayers should maintain the documentation like invoice, receipt, etc. for purchase of gold by self and copy of inheritance documents like will, etc. for the gold which is inherited.
Tax on gains from selling physical gold:
Profits on sale of physical gold and gold jewellery purchased by you or received under an inheritance become taxable under “Capital Gains". If the gold is held for more than 36 months it is considered as long term, long term gains are taxed at 20.80% (including cess) with indexation benefits. Else, they are taxed as short term capital gains. It is added to your gross total income and taxed at the income tax rates applicable to your income slab. The period of holding is taken from the date it was purchased by you. For gold inherited from parents, the cost shall be the price they had paid to purchase the same. The income tax implications remain the same for gold jewellery purchased by you. If the period exceeds 36 months, the gain shall be long term and if it 36 months or less, it shall be short term and taxed accordingly.
Tax on gains from Gold MF, Gold ETFs:
Gold ETFs invest its corpus in physical gold, aiming to track the price of the metal passively. Gold mutual funds in turn invest in gold ETFs. So, if gold prices go up, value of gold ETF or fund goes up, and vice versa. Short-term capital gains on units held for less than 36 months is added to investor's income and taxed according to the applicable slab rate. Long-term capital gains on units held for more than 36 months are taxed 20% with indexation benefits.
While calculating long-term capital gains, the seller gets the benefit of indexation. Or, in other words, the cost of acquisition is adjusted according to inflation, according to Cost Inflation Index (CII) as notified by the tax authority, which helps to bring down your capital gains.
For gold that purchased by you or originally by your parent before April 1, 2001, you have the option of taking the Fair Market Value (FMV) of the jewellery as on April 1, 2001, instead of actual costs incurred to purchase the asset. The Fair Market Value can then be indexed to determine your cost of acquisition. This helps to get the benefit of indexation.
Gains from sale of gold ETFs or gold mutual funds or digital gold (offered by banks, Fintech and brokerage companies, in partnership with MMTC) are taxed in the same way as physical gold. Sovereign gold bonds, which are denominated in grams of gold, are issued RBI on behalf of the Government of India from time to time. Capital gains arising from redemption of sovereign gold bonds have been exempted from tax. Sovereign gold bonds have a maturity period of eight years.
Cost – Volume – Profit
Cost refers to total expenses that are incurred to manufacture your products. Volume, dependent on demand (based on market conditions) and supply (restricted to your capacity), refers to sales volume. Profit is the difference between your total sales revenue and total cost.
As a starting point in profit planning, Cost Volume Profit (CVP) analysis helps to determine the maximum sales volume to avoid losses, and the sales volume at which the profit goal of the firm will be achieved. As an ultimate objective it helps management to find the most profitable combination of costs and volume.
It is like a number line where it starts with negatives, then comes to 0, and then positives. With the increasing level of sales (volume), first - we will see a phase of losses, second - a break even, and finally where we make profits.
CVP analysis provides management with profitability estimates at all levels of production in the relevant range. It provides an insight into the effects and inter-relationship of factors which influence the profit of the organisation. The factors that influence the profit structure of the organisation are cost and volume.
CVP analysis helps you to take certain decisions like:
Setting product prices
Introducing a new product or determine an optimal mix
Compare make or buy options
What are your most profitable products, or services? (so that your sales team can really push those)
What will happen if your sales volume drops?
How far can sales drop before the red ink?
How much you need to sell to earn a certain amount of profit?
If you lower your prices in order to sell more, how much more will you have to sell?
If you take a loan and your fixed costs rise because of the interest on loan, what sales volume will you need to cover those increased costs?
Understanding fixed and variable costs:
Almost all of your business costs will fall under two categories: variable costs and fixed costs. Variable costs increase or decrease directly in proportion to your level of production output. (E.g.) raw materials, labour directly associated with production output. Fixed costs remain the same regardless of your level of production output. (E.g.) rent, fixed salary paid to full time employees paid to them irrespective of hours worked.
Contribution Margin (CM) is the amount remaining from sales revenue after deducting all variable expenses. CM = Sales minus Variable costs. This margin is called contribution margin because it contributes to cover fixed costs and whatever remains after, is profit. This implies, more volume of products sold the more amounts left to cover fixed cost. The fundamental cost – volume – profit relationship can be derived from profit equation:
Profit = Revenue – Variable costs – Fixed costs.
A dynamic management, therefore, uses CVP analysis to predict and evaluate implications of its short run decisions about fixed costs, variable costs, sales volume, and selling price for its plan on a continuous basis.
Running a start-up requires persistence, patience and above all, proficiency. Other than proficiency in your core business, quotidian needs obligate knowledge of certain subjects which form part of running your company. Tax Deducted at Source or TDS is one such subject.
You make certain payments wherein tax at a prescribed rate needs to be deducted by you. Similarly, you receive income which is tax deducted by the payer. The obligation to deduct tax at source is upon the person responsible for paying the income/ amount which is subject to TDS. Here’s how you can understand TDS for your start-up.
Payments subject to TDS
There is a list of 31 items from which tax is deducted at source. We have enlisted some items relevant to your start-up.
If you are paying a salary to an employee in excess of ₹ 250,000 per annum, such payment is subject to TDS under Section 192. To calculate the monthly deduction of tax at source, the total estimated tax liability of the employee is divided by number of months of his employment during that financial year.
For example, Uthra pays Raj a salary of ₹ 500,000 per annum and his estimated tax liability considering all his deductions is ₹ 10,500. The monthly TDS to be deposited by Uthra would be ₹ 875 calculated as follows:
Total estimated tax liability of the employee ÷ Months of employment during the financial year: - ₹ 10,500 ÷ 12 = ₹ 875
If you have entered into a lease, sub-lease, tenancy or any other agreement for use of land or building or both, such payment of rent shall be subject to TDS. Applicable TDS rates on rent:
Any person, other than individual or HUF, paying rent (e.g. Companies, Firms): Deduct TDS @ 10% if rent in excess of ₹180,000 per annum
Any Individual or HUF under the scope of Tax audit, paying rent: Deduct TDS @ 10% if rent is in excess of ₹180,000 per annum
Any Individual or HUF not under the scope of Tax audit, paying rent: Deduct TDS @ 5% if rent is in excess of ₹50,000 per month
Any person, other than individual or HUF not under the scope of tax audit, paying rent for plant & machinery: Deduct TDS @ 2% if the total rent is in excess of ₹180,000 per annum
In case PAN is not quoted by the payee: 20%
For example, Uthra paid ₹ 60,000 per month to a co-working space. The monthly TDS to be deposited by Uthra will be 5% of ₹ 60,000 = ₹ 3,000 per month
If you are liable to pay a person for professional or technical services, royalty or any other fee / commission not in the nature of salary, such payment shall be subject to TDS under Section 194 J. However, no deduction shall be made if the aggregate fee during the year does not exceed ₹ 30,000. This threshold limit does not apply in case Director’s fees. Applicable TDS rates on professional fees:
In case of payee engaged in business of operation of call centre: 2%
In case PAN is not quoted by the payee: 20%
Commission and Brokerage:
If you have paid any commission (other than insurance commission) or brokerage (other than transactions related to securities) for services rendered, such payment shall be subject to TDS. However, no deduction shall be made if the aggregate commission during the year does not exceed ₹ 15,000. Applicable TDS rates on commission and brokerage:
In case PAN is not quoted by the payee: 20%
For example, Uthra sells her products through her website and she paid an annual commission of ₹ 20,000 to a payment gateway. Such payment shall be subject to TDS under section 194H.
If you have paid a resident contractor for carrying out any work such as advertising, broadcasting, telecasting, carriage of goods or passengers by any mode of transport other than railways, catering, and manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer, such payment shall be subject to TDS under section 194C.
However, no deduction shall be made if the contract amount does not exceed ₹ 30,000 for one time or ₹ 100,000 in the aggregate during a financial year. Applicable TDS rates on contract:
Payment to an Individual or HUF: 1%
Payment to any other entity: 2%
In case PAN is not quoted by the payee: 20%
For example, Uthra paid ₹ 120,000 in courier charges during the year. Since carriage of documents, letters etc. is in the nature of carriage of goods, such payment would be subject to TDS
The difference between capital gains and other types of investment income is the source of profit. Understanding the difference is important in terms of everything from filing taxes to planning a retirement strategy. Capital refers to the initial sum invested. A capital gain, therefore, is the profit realized when an investment is sold for a higher price than the original purchase price. Investment income is profit that comes from interest payments, dividends, capital gains collected as a result of the sale of a security or other assets, and other profits made through an investment vehicle of any kind.
A capital gain is an increase in the value of a capital asset—either an investment or real estate—that gives it a higher value than the original purchase price. An investor does not have a capital gain until an investment is sold for a profit.
For example, let's assume an investor has purchased 100 shares of company ABC at ₹10 per share. The capital expenditure (capex), therefore, is ₹10 x 100, or ₹1,000
Now assume the value of each share increases to ₹20, making the total investment worth ₹2,000 (₹20 x 100 = ₹2,000). If the investor sells the shares at market value, the total income is ₹2,000. The capital gain on this investment is then equal to the total income minus the initial capital (₹2,000 - ₹1,000 = ₹1,000)
Individuals earn income through employment income, business income or professional income and investing in the financial markets can also yield additional income, called investment income. Some investment income is attributable to capital gains. However, the income that is not a result of capital gains refers to earned interest or dividends
Unlike capital gains, the amount of return for these investments is not reliant on the initial capital expenditure. In the capital gains example, assume company ABC pays a dividend of ₹2 per share for each of the 100 shares that the investor purchased. If dividends are paid before the sale of shares, the investment income generated is ₹2 x 100, or ₹200
Using a different example, a savings account totalling ₹5,000 with a 6% annual interest rate will generate investment income totalling ₹300 (₹5,000 x 0.06 = ₹300) in its first year.
One key difference between capital gains and other types of investment income is the rates at which they are taxed. Tax rates vary depending on the kind of investment, the amount of profit generated, and the length of time the investment is held.
Capital gains are classified as short-term if they are realized on an asset that was held for less than a year. In this case, short-term capital gains would be taxed as ordinary income for that tax year. Assets held for more than a year, before being sold, would be considered to be long-term capital gains upon sale.
The tax is calculated only on the net capital gains for that tax year. Net capital gains are determined by subtracting capital losses—income lost on an investment that was sold at less than what it was purchased for—from capital gains for the year. Most investors will pay a capital gains tax rate of less than 15%.
Capital gains and other investment income differ based on the source of the profit.
Capital gains are the profits earned when an investment is sold for more than its purchase price.
Investment Income is interest, dividends, capital gains, and any other profits made through an investment vehicle.
Capital gains taxes have either a short-term or long-term classification depending on the holding of the asset
Provident fund (PF) schemes are popular in India as they provide low-risk stable returns and help in building a substantial retirement corpus. There are three types of PF schemes: Employee Provident Fund(EPF), Voluntary Provident Fund (VPF), and Public Provident Fund (PPF) schemes, where individuals can save money for their retirement.
The three schemes differ in terms of interest rate, deposit, and withdrawal options. Let us look at what these enclose so that you can decide which one is the best for you.
Employee Provident Fund (EPF) :
Employers in India with an employee base of 20 or more employees are required to comply with the Employee Provident Fund schemes run by the government. Under this scheme, an employer contributes some portion (generally 12%) of the basic monthly salary towards employee's retirement benefit. A small part (from the 12% itself) is also contributed towards the pension scheme. This is a business expense which the employer contributes to EPF account from their own pocket. The amount of PF that is mentioned on the CTC letter is actually employer-contributed PF. This amount is tax-free for an employee and is not included in the yearly tax rebate amount for investments. The EPF scheme also mandates an employee to contribute an equal portion (generally 12%) to his PF account monthly. So the amount on his monthly salary payslip as a deduction is actually this amount and not the employer-contributed PF. The employer PF is neither added to income nor deducted. Hence, it is not reflected in his pay slip but is shown on CTC letter.
Voluntary Provident Fund (VPF) :
As the name suggests, this is a voluntary contribution from employee to his provident fund account. This is beyond employee EPF contribution of 12%. However, there is no compulsion from the employer to contribute to VPF. The maximum amount an employee can contribute is 100% of his basic salary and dearness allowance. This investment would be credited to the same EPF account and would carry the same rate as the EPF. Since VPF is taken out of an employee's pocket, it is shown on the deductions side of his salary slip. VPF is an expense for the employee and not the employer. This amount is considered as an investment by the employee and forms part of the yearly tax-rebate investment. He can withdraw EPF/VPF partially or completely and this amount can be withdrawn in cases of retirement, or if he remains unemployed for a period of two months or more. At the time of switching from one job to another without remaining unemployed for two months or more, one just needs to transfer their accumulated EPF/VPF contributions from their old account to the current account. One can also partly withdraw the EPF/VPF under certain situations at any given point.
Public Provident Fund :
It is a government scheme meant for people from unorganized sector/non-salaried employees. However, anyone can open and contribute to a PPF account. It is basically a personal provident fund account that you can open with any of the designated banks like SBI, PNB, HDFC Bank, etc. Investors can invest minimum ₹ 500 to maximum ₹ 1.5 lakh in one financial year and can get an attractive return on investment that is fully exempted from income tax under Section 80C. Partial premature PPF withdrawals can be made every year from the seventh year. But a complete withdrawal of funds can be made only at maturity, i.e. at the end of 15 years.
So, if you are salaried employee, you anyway have to contribute to EPF, as this is a mandatory provident fund scheme. However, if you are looking for secure returns for retirement savings along with liquidity, you can contribute to VPF, considering limitations like the lock-in period for PPF. If you are a non-salaried employee, you should invest in PPF for high tax-free returns.