In starting a home business, the importance of the “Matching Concept”, “Cashflow” and “Profitability” from the accounting point of view, cannot be over-emphasized and is the subject of this article.
Probably because I am a professional (Chartered Accountant) versed in that field, I notice a rampant non-adherence in home business online to this accounting concept, “Matching”. There is also a thorough lack of understanding of the meaning of Cashflow and Profitability all of which ultimately are major causes of failure of most home businesses.
The Matching Concept in accounting simply states that revenues earned in any accounting period must be matched with the expenses incurred in that same accounting period.
Cashflow is basically the expression of cash/funds that are received as against cash/funds that are spent within the same time period.
Profitabilty involves a matching of revenues(not cash) with expenses(not cash) incurred within the same time period.
Let us first start with “Cashflow”
Applying this to a home business, it is important that if anybody starting a home business wants to succeed, he should ensure that the cash/funds he receives from all sources he has decided to apply to the home business in any time period is at least equal to the amount he disburses on the home business in the same time period, which may be most appropriately, monthly,
Simple, it sounds? In reality, it beats me hollow to see many “Gurus” running training programs recommend to “newbies” many tools, resources, subscriptions which obviously? at the stage the newbies are in, in most cases, they should not be incurring such expenditure. And poor “newbies”, in the belief that they are being “shepherded” correctly, follow hook, line and sinker, the “recipe” of these “Gurus” much to their own peril.
Some “Gurus” do this out of mischief (to sell products/services) but you will be surprised at how many do this out of ignorance of the extreme importance of “Cashflow”.
“Cashflow” is the most important in the short run as a home business making profit in the short run can run out of business with inappropriate cashflow management. On the other hand, a home business making an actual accounting loss in the initial period can survive and ultimately turn around to making profit in the long run.. In fact most businesses start out making an accounting loss in their initial year of operation and turn this round to a profit in subsequent years.
Next to “Profitability”.
This becomes crucial more in the long run as anyone starting a home business must ultimately ensure his revenues exceed expenses otherwise he will run out of business.
A common misconception however is that the home business must pay for itself almost right from the outset. You will loose a lot of home based business opportunities this way. What is crucial is the ultimate income potential of the home business. In fact only “get rich quick schemes” come this way.
Now to “Matching”
This in the accounting parlance is actually more related to “Profitability” in that it determines the way any profit you earn in your home business will be deemed accrued. Anyone starting a home business must know that the initial outlays in your first few months should not simply be “written off” but should be noted as an initial expense which should be amortised over a reasonable length of time periods and should not be simply “loaded” into any one time period.
What deductions can those starting a home business make from all these accounting terminologies?
– Do not spend more than you have realistically earmarked and is indeed available(budget) on any home business in any time period. In fact borrowing to start a home business is like signing your death warrant as the expected revenues/cash is not likely to come in as fast as you expect.
– The yardstick for determining the success of any home business is not in the speed with which you start earning as indeed you do not start reaping very fast with many successful home businesses while you in fact yield initially very fast with some “get rich quick schemes” and ultimately loose much more later.
– You are the architect of your own fortune or misfortune and you should not leave your fate entirely in the hands of any marketing guru purporting to train you in internet marketing but wisely apply the breaks in spending as appropriately explained in this article.
– The decisions to be takan by each one involved in starting a home business is dependent on his particular financial situation. As “Cashflow” is most important, anyone with good cash base should in fact make informed purchase decisions even if he would be making an accounting loss initially as this will fasttrack his business while someone with a poor cashflow should bid his time by applying FREE tools which are indeed plentiful on the internet. I say “informed purchase decisions” because availability of cash is no license to go on a spending spree without basis since in internet marketing, you still need time to acquire the necessary training which involves reading relevant materials very widely, browsing forums etc
– You must get out of that home business if within a reasonable length of time you are now not covering all your costs, including the ones you had capitalized which you are amortising over a number of time periods.
– Quantify exactly how much cash is required to “survive” in any home business within the first six months to one year by which time you should hopefully have turned into profit and incorporate this in your cashflow projection to determine if available earmarked funds will be able to finance this
– Be rest assured that spending much more than comes in initially is not a sign of the failure of an home business or indeed any business for that matter.
You can now make many more other deductions from the explanation of the above terminologies to guide you in starting a home business.