Finding Financial Information

Preparing the Financial Statements

Cost Drivers
Pricing
Gross Profit Margin
Sales and Marketing
Operational Expenses

A Few Final Words

Step 1: Understand the costs that drive your company

What resources will affect your company’s cost of doing business the most? Will they be labor, raw materials, equipment, or something else? Are these cost drivers fixed costs or variable costs? Most importantly, what will your company pay for these resources? Investigating this area thoroughly is very important to insuring the validity of your VOSG II projections and assumptions.

Step 2: Decide how to price your product or service

The price you charge for your product, ideally, should be a decision made independent of the cost required to produce it, though this is not always possible based on the information you have about your customers, and the buying behavior of your target market. In general, there are 3 ways commonly used to price products:

• Cost-based pricing – you price the product or service based on what it cost to make or provide plus a markup
• Competitive pricing – you price your product or service based on what competitors charge
• Value-based pricing – you price your product or service based on the benefits your product or service provides the customer
• Penetration pricing – you initially price your product low to build sales volume or market share
• Skimming – you initially price your product high then drop the price later as your product ages or competitors enter your market

Keep in mind that the prices, rates, or fees you charge may be different between customers, especially if customers can negotiate the price – but strive for a supportable claim of what your average price might be based on information about your costs, what competitors charge, and what potential customers pay.

Also keep in mind the different terms and means by which your customers might pay, and how these terms can affect your income and cash flow. Will your customers pay upon receipt of the product, when the order is placed, in advance, or will they pay as they use or resell the product? Will they lease your product or service? Will there be significant transaction costs, such as mailing and processing bills, or paying a credit card processor? These and similar questions should be addressed within the assumptions of your VOSG II, if not directly in the income and cash flow statements.

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