Understand How Your Money Works

One thing I see in many new entrepreneurs, especially in the world of Internet Marketing and Multilevel Marketing, is a lack of understanding of what money really is how it works and how to manage it effectively.

Today I'll clear up a few things about money, starting with what it really is and moving on to a few basics about how to manage it.

First of all, money is purely an invention of humanity's. The earliest examples of money were rare or valuable items like beads, shells or minerals used to represent some other item for convenience. Before money, one would end up having to carry a cart full of barley to the miller to get flour for the blacksmith to get a knife for the butcher to finally get a side of beef. With money you now could take your barley to the miller and get a little pouch of beads, coins or some such material and take that straight to the butcher to get the beef, cutting out the need for the extra, unnecessary bartering along the way.

To manage your money, you need to know a few basic terms you will come across, either as you talk with an accountant, or try to learn bookkeeping yourself. I'll start you off with a few very basic terms you will need to know:

Asset: The most basic definition is the one Robert Kiyosaki presents in his series of Rich Dad books, “An asset is something that puts money into your bank account.”

Liability: Robert also gave a very simple definition in his books for this too: “A liability is something that takes money out of your bank account.”

Income/Revenues: These terms can be used somewhat interchangeably and refer to making money. This can come from selling a product or service, or an investment, for example.

Expense: This is money spent on something. This can be taxes, services or products, to name a few examples.

Net Income: This is your actual profits, after all expenses. You can get this by following the equation: Income – Expenses = Net Income. If this number is above 0, you made a profit, if it's below 0, you took a loss.

Now, armed with these basic terms, we can delve into how you can keep track of whether your business is making money or losing money. What I am covering here is not accounting, but it is a start. You will see how to do some basic tracking of your revenues and expenses, plus how to keep track of what assets and liabilities you have.

First, let's delve into how to determine if you're making a profit or not. To do this, in the simplest terms, you need to make a list of all money your business made, and all money it spent, each in a separate list. I'd recommend using a spreadsheet for this. The basic info you will need on these lists is the date of the transaction, the amount, and some basic info about it (just a few words so you know what the transaction was).

For your revenues, you could include different categories such as different affiliate (or MLM) programs, products or services you offer so you know which ones are the real money makers. To keep track of the money you're spending (expenses), follow the same format as for your revenues, but your comments should cover what category of expense it is. Are you buying more training? Are you spending money on traffic or PPC ads (advertising)? Did you just pay your taxes? These are just a few examples of different types of spending and each should be kept track of separately as well as together as a whole. Once you have these lists, add them up (a spreadsheet can do this automatically for you) and then use the formula I mentioned above (revenues – expenses = income).

Now you know whether you're making money or losing money, what's making you the most money, what's making you the least money, and what you're spending the most on.

You should also keep receipts or invoices of everything you do so you have some way of confirming these lists. Now you have some basics of what money is and how to keep some basic track of where it's coming from and where it's going to.

I'd still recommend that you seek out an accountant as soon as you have the money to pay for one though, they can give you much more detailed information on this much faster then you could, and really, your time is better spent on making money then keeping track of it. Yet if you don't keep track of it and manage it, soon enough you're money will be managing you!

Add new comment

You must have Javascript enabled to use this form.