For your business to succeed, you need to understand the truth or proposition that serves as the foundation for cost, revenue, scalability and financial modeling. Ignoring the professional or commercial procedures that are generally accepted as most effective is the easiest way to fail. Today we will discuss the principles and best practices associated to cost, revenue, scalability and financial modeling and how they are important to your business.
The cost principle
The cost principle requires assets to be recorded at the cash amount at the time when an asset is acquired. For instance, if an asset is acquired for £500, it will be recorded at £500. The asset’s market value or replacement cost does not affect the cost principle.
The cost principle does not require valuable logos or brand names that were developed through advertising to be reported on the balance sheet. Consequently, company’s most valuable assets may fail to appear in the company’s asset amounts.
The cost principle is important to your business because it does not give room for manipulation and the data is backed by evidence such as receipts and invoices.
The Revenue Recognition Principle
This principle states that you should record revenue after an entity has substantially concluded a revenue generation process.
If you have doubt in regard to whether customer will make payments, then you ought to recognize an allowance for doubtful accounts. If your business receives payment in advance, then you should record these payments as a liability.
The revenue recognition principle is very important in accrual accounting. It helps to determine the period of accounting, in which expenses and revenue are recognized. It is also important for professional service companies who recognize revenues when services are offered no matter when payment is made.
Best Practices for Scalability
Scalability is the ability of businesses to handle increased demands. The best practices of scalability are:
- Decrease processing time. This means that for a business to increase rate of production, the process of making the products or offering services should be reduced.
- Scalability is about concurrency. This mean doing more work at the same time or offering different services concurrently.
- Know all the requirements. In order to create a successful business, you need to know your goals and aims.
Principles of financial modeling
First, financial modeling must be flexible and adaptable. It should allow making modifications when new information becomes available. Flexibility does not mean that the model has an option switch for all eventualities. It should be born of simplicity.
Second, models should be appropriate and reflect main business assumptions directly without being cluttered with unnecessary details. It should be a representation of reality.
Third .financial model should be well structured. Rigorous consistency in model organization and layout is important to retain logical integrity of model over time. A steady approach to structuring formulas, worksheets and workbooks saves time when learning and maintaining the model.
Finally, financial models should be transparent. They should rely on simple and clear formula that can be well understood by non-modelers and other modelers. So think about these when setting up a FinTech business. If you are not good with accounting, it will be best to higher professional accountants.