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Most frequently asked financial questions from start-ups

Conclusion

Should I pay myself?

I continue in this second part of my column my advice to the start-ups on concerns of building up their business.

For sure! Do your company a favor and record the right expenses for your business. Paying yourself right helps you understand the real bottom line of your company. While we know that you plan to pay yourself through dividends, do make sure you are properly compensated in salaries.

Seeing the impact of your salary on your start-up’s net income will hurt, but it’s a good wake-up call for you to start working to drive the gross margin up. And, of course, compensating yourself allows your company to save on taxes as well, as these are deductible expenses.

Should I join more pitching competitions?

If you’ve got excess time, go for it. Every opportunity for you to introduce your idea or product is an opportunity to sell and improve.

Winning is not everything in a pitch competition. In most cases, it’s not the best idea that wins but the one that best fits the competition or the sponsoring organization. Your goal is to create brand recognition for your idea or product. You’ll never know, a potential investor might be sitting somewhere in the panel or audience.

How should I price my product?

There are a lot of models that you can use to sell and price your product, none of which are foolproof. Some examples are the cost-plus-margin model and the subscription model. The first is usually used for products, while the second is used for services.

Whichever model you choose, remember to recover your costs. Here are some costs that you might incur:

  • Cost of investment

Your cost to create the product should be recovered in the long run. Think of how long you plan to
recover your investment—that’s your denominator. The output is your amortized cost of investment. This is the amount you plan to recover annually from sales to cover your cost of investment.

  • Fixed costs

These are your continuing costs to operate the product (e.g., server costs, rental expenses, maintenance, etc.). This is the cost you need to cover with your contribution margin to at least break even.

  • Variable costs

These are the expenses that change depending on the level of output.

So, to calculate for your product pricing, divide the total of your annual amortized cost of investment and your annual fixed costs by your annual sales target. The result is your target contribution margin in local currency. Last, add the variable costs per unit of your product to the contribution margin, and that’s your target price.

It’s a simple concept, but it’s a bit more difficult in practice. Give your company’s chief financial officer or accountant a ring to give you that number.

I hope that this will give a broader perspective to our start-up owners who needd to know the challenging environment that they constantly will be engaged in.

Filbert Tsai has his own consulting firm, the UpSmart Consulting Inc. His key areas of interests are start-ups and micro, small, medium enterprises (MSMEs). His blog and page, “Ask the Accounting Advisor,” provides relevant insight for start-ups and MSMEs in the Philippines.

 This column accepts contributions from accountants, especially articles that are of interest to the accountancy profession, in particular, and to the business community, in general. These can be e-mailed to [email protected]

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