Managing
Your Home Based Online Business: Part 3 of 7
by: Roy Thomsitt
When you have your own home
based business, whether it is online or offline, financial management
is one of the key "departments". You really do need
to keep on top of your finances if you want your own little
business to have long term success, and you can do that by being
a manager rather than by adopting the role of a low rank employee.
Why do you need to manage the
home business finances?
It is so easy to allow things
to drift when you're working at home, and concentrate merely
on totting up the sales revenue. Remember, this is what may
happen if you do not positively manage your business finances:
1. You will experience cash
flow problems. Allowing cash to flow in and out at its own will
almost ensures a failed business. If you are blessed with masses
of sales income in the early days, then you will have time to
put things right. If you don’t, then you may run out of time.
Cash flow will bring you down. One of the most common causes
of business failure is cash flow, and many of those businesses
could have flourished with better financial management.
2. It is inevitable your business
will be less profitable than it could otherwise be. Financial
alertness, which financial management will bring, ensures you
are making better and more timely decisions. That results in
more profits and better cash flow, and ultimately the survival
of your home business.
3. If you are not watching your
finances closely, it is easy for you to continue with unprofitable
activities, programs and products. For example, you may be an
affiliate for 3 products. The one bringing you the highest commission
each month may be unprofitable without you even knowing it,
if you are not tracking the spend on advertising that product.
4. Your business may not grow
as it otherwise could. If you do not manage your finances, how
will you ensure that part of the profit is put into growing
the business, for example with more advertising or other forms
of marketing. Also, you need to budget for increasing your knowledge.
How do you manage the home business
finances?
If you own a very small online
business your financial management will not take up much time.
The best time to set things up to keep the right sort of records
is at the very beginning, when you first set up the business.
This is a massive subject if
you want to go into fine details, it would require a large manual.
I will cover here just a few points. Bear these points in mind
in the context of your own home business and circumstances,
and you should get your business onto a sound footing, from
which you can develop more sophisticated systems if you need
them.
It is very likely that your
records will only need to be very simple at first, but it makes
sense to get some sort of information structure in place right
at the start, then as things expand for you, there will no need
to play catch up. Your home business will flourish if you have
your finger on the pulse of its finances at all times. Here
are a few suggestions:
1. Just as a CEO calls for regular
finance reports in a company, you, as CEO of your own online
business, need to ensure that your finance director, also you,
provides all the necessary information to satisfy your needs
for statutory returns (eg your country's tax department) and
for monitoring the different elements of your business. In effect,
you have 2 separate but integrated sets of records. The first
is for the true financial accounts, which are for your statutory
needs. The other is your set of management accounts. In other
words, you also want a management information system that helps
you make decisions that will improve the profitability of the
business.
Management information system
sounds very grand, but it need not be. It should just provide
you with enough information to make timely and sound decisions,
such as when to drop a particular program from your portfolio.
I have dropped a number of affiliate programs in the past because
their return, if any, did not justify the amount of time and
expense being dedicated to them. I was only able to do that
because I had enough information to make the decision, sometimes
very soon after joining a program.
2. Try to set aside a time each
week or month to review your finances. Prepare a monthly profit
and loss account covering the whole business to see the overall
position. Also, try to break that down in a way that helps you
see the profit and loss of each product or online program which
you may be marketing. Use that as a time, but not the only time,
to consider decisions about increasing activity in, or dropping,
a program or product, or to alter their marketing mix.
3. When setting up your expenditure
records, consider which costs will be fixed each month, and
which are variable. A fixed cost is an overhead such as power
for your home office, or your internet and computer expenses.
A variable cost is more under your control in the short term,
for example advertising costs.
4. If your business comprises
more than one online program or product, (for illustration A
and B) try to allocate as much expenditure as possible to either
A or B. This becomes part of your management information. You
can use it to see if A and B are profitable. If you cannot allocate
the expenditure precisely between A and B, use your best guess.
If you cannot do so, then consider if the expenditure is really
a fixed cost.
5. Ensure your income records
keep track of where income has come from. This will be used
with the expenditure records in 4. to track profitability of
different products.
6. If you are dividing your
time between A and B, try to jot down each day the time spent
on each in particular. This information may one day help you
to make an important decision. Time is a limiting factor. You
need to make use of it. If your time comes under pressure, there
will come a day when you will need to decide how your time is
most profitably spent.
You may find some surprising
results. I once had an advertising sales business, and my partner
and I sold space in 7 specialist magazines. One of them only
brought in a few hundred pounds each month, and my partner wondered
if we should drop it. When I checked back a year for the times
spent on that and other magazines, the one she wanted to drop
actually brought in the most revenue per hour of all of them.
So we kept the magazine going, and it later expanded. Without
those time records, we would have made a bad decision without
ever knowing.
7. From the start of your business
activity, try to formulate a plan and a budget. This will help
structure your financial management. Do not worry if your first
forecasts are wildly out. As you gain knowledge of your business
and its market environment, your forecasts should improve. The
important thing is to keep in the management way of thinking.
That will help you keep your finger on the financial pulse.
Your business will be more profitable in the long run.
8. In conjunction with 7. prepare
a cash flow plan and keep it updated. This could be a saviour
for your business, and avert unnecessary pressure on yourself
later.
The above has only really been
an introduction to the subject of financial management of your
home business. You will be doing yourself a great favour if
you try to learn bit more each month about the different elements
mentioned.
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About The Author:
Roy Thomsitt is
the owner, webmaster and author of http://www.change-direction.com,
a new website in late 2004, about working online in a home based
business. He has a background in offline advertising, with practical
experience of working from home in marketing since 1995, plus
2 years of experience with online marketing. Professionally,
he was trained as a management accountant and has substantial
background in financial and project management, implementing
new office, accounting, computer and management systems.
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