PRINCIPLES

EFFICIENCY RATIOS

Days Inventory Outstanding (Days)

(365 ) ( Inventory Turnover )∗¿ ¿

term obligations or those due within one year

A working capital management ratio that measures the average number of days that a company holds inventory for before turning it into sales

Days Payable Outstanding (Days)

(365 ) ( Payables Turnover )∗¿

Days Sales Outstanding (Days)

( 365) ( Receivables Turnover )∗¿∗¿ ¿

SOLVENCY RATIOS

A working capital management ratio that measures the average number of days that a company takes to pay its creditors

A working capital management ratio that measures the average number of days that a company take to collect payment on a sale

Debt to Equity

(Total Liabilities) ( Shareholders ' Equity )

A measure of the degree to which a company is financing its operations through debt versus wholly owned funds; it reflects the ability of shareholder equity to cover all outstanding debts in the event of a business downturn

*Note: Where Inventory Turnover = (Cost of Sales / Average Inventory) **Note: Where Payables Turnover = (Cost of Sales / Average Payables) ***Note: Where Receivables Turnover = (Sales / Average Accounts Receivable)

Note to Reader: RENEW uses two industry standards to estimate the profitability of an investment - the Return on Capital and the Internal Rate of Return:

● Return on Capital (ROC) is the net gain or loss of an investment over a specified time period, expressed as a percentage of the investment’s initial cost

○ Calculation: (Current ∨ Expected Value −Original Value) (Original Value) x 100

● Internal Rate or Return (IRR) is a discount rate that makes the net present value (NPV) of all cash flows equal to zero in a discounted cash flow analysis

T ○ Calculation: 0 = NPV =∑

t = 1 (¿ (1 C t + IRR)t )−C 0 ¿

○ Where C t = Net cash inflow during the period t; C 0= Total initial investment costs; IRR = The internal rate of return; t = The number of time periods There are a number of third-party tools, templates and instructional videos on how to calculate an investment’s IRR that we recommend investment firms / fund managers use to evaluate the performance of an investment (e.g., Investopedia’s article on Calculating the Internal Rate of Return with Excel or the Journal of Accountancy’s article on Microsoft Excel: 3 Ways to Calculate Internal Rate of Return in Excel). It is important to remember that the M&E activities require portfolio companies to work in partnership with the fund/investment manager to track and report on agreed upon financial and impact indicators, thereby allowing both parties to monitor whether financial, operational, and/or impact milestones are being met; and to determine whether the outcomes agreed upon preinvestment have been achieved. This is notably important since the accomplishment of certain milestones/outcomes may determine if additional financing is deployed depending on the agreed upon terms and/or investment closing legal agreements. It has been RENEW’s experience that unless the investment/fund manager is able to work with the target company either prior to closing the investment (if they will let you, and you want to risk the sunk costs), or immediately after the investment close to build the portfolio company’s internal M&E systems (i.e., accounting and finance systems, other operational KPI tracking, impact tracking, collection systems via frameworks and/or dashboards, etc.), the investment/fund manager will spend a considerable amount of time waiting and/or training to obtain accurate information from their portfolio - or worse, trying to figure out why the numbers look wrong and fixing holes in the faulty systems that are causing major reporting issues in the first place. The lesson here is to invest a sizable amount of upfront work to build the M&E systems at the portfolio company-level, which directly feeds into your M&E system, and therefore reducing time and costs in the future and may even allow you to flag issues well before they become uncorrectable problems.

SCOPE OF STAGE

Note to Reader: the pages below, you will find both a high-level overview and detailed instructions, deliverables and deadlines of sample internal M&E processes that an investment firm’s / fund manager’s IM Division team could follow for its portfolio, in general, and when compiling quarterly and annual financial and impact reports - also known as investor reports (IRs). This is simply a recommended process, one that can and should be tailored to the investment firm’s / fund manager’s PPM and obligations to external stakeholders.