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How To Start and Operate Your Very Own Home-Based Business Without Losing Everything
ANSWERING THE BIG QUESTION:
What? Who? Where? How? and How Much?
You've come up with a business idea. Next, consider such
questions as: Are there customers for my product or service?
How do I know? How will I find them? Who are my competitors?
What will I charge? How will I promote my product or service?
Finding the answers to these questions is the challenging and
sometimes tedious homework that will help you determine your
chances for success, and whatever you should look for another
more marketable idea.
What is my product?
"I pick up old tires and turn them into sellable mats of all
kinds." "I bathe and groom poodles and small dogs." "I design,
construct, and sell roll-top desks." "I make dried flower
arrangements." "I teach intermediate and advanced piano to
children." "I make PVC Pipe Furniture." "I create and draw plans
for kid's projects." "I design and implement direct mail
advertising campaigns for small businesses and nonprofit
organizations." "I gather and recondition old batteries."
The first step in creating a business is to decide what your
product is or what you want it to be. What are you selling?
Practice writing a short, specific statement describing your
product or service. Getting a clear idea of a business concept
is one of the most difficult tasks in creating a business. Your
statement may change several times as you experiment with the
market and test your skills. Instead of "I make toys," you may
want to narrow your product line to "I make PVC Pipe Doll
Furniture." Instead of "I write software programs for small
business needs," you may decide to tap into a big market and
"provide training for employees of small businesses in the use
of accounting packages." See how it feels to describe your
product or service to family, friends, potential customers, and
fellow business people. Is your description clear and brief?
Can you say it with confidence and enthusiasm?
Who Will Buy It?
To develop and test your business idea, answer the question "Who
will buy my product or service?" Make a list of potential
customers: individuals, groups, segments of the population, or
other businesses that need your product or service. If you are
making fabric-covered lap boards for people confined to bed, how
will you quickly and inexpensively find a market? Through
hospitals or home nursing care organizations? Through craft
stores by displaying them as gift items? In mail order catalogs?
Is there a market avenue that will reach children? Ask friends
and colleagues for help in brainstorming all the possible
markets (customers) and uses for your product or service.
Who Is The Competition?
Your business planning must also include an up-to-date analysis
of your competition. Why? Because you need to plan your market
position - how you will fit into the marketplace. Will your
product or service be cheaper or more expensive than that of
your major competitors? Will it be more durable? Will you be
open during hours that your competitors are closed? What
benefits can you build into your product or service that your
competitors don't offer? Will you do rush jobs?
In planning your business, look for a unique niche that will
give you freedom from strong competition or that will make your
product or service more valuable than others in the market. If
you plan to open a day-care center and find that none in your
area is open before school, early opening might make your
service more competitive. If you discover that local caterers
have overlooked the office party market, you might highlight
that in your brochure. The more you can learn about your
competition, the better you'll be able to decide how to position
yourself in the market.
Newspaper ads and trade magazines are other good sources of
market information. Check also with the Chamber of Commerce,
your county office of economic development, the Census Bureau,
and business and professional organizations to gather market and
pricing data.
Where Are The Buyers? How Can I Find Them?
As you become more familiar with the competition, you will also
be discovering where and how to find buyers. Whatever the type
of home business you want to open, you will need to do market
research to determine if there are buyers for your idea, where
they are, and how to find them. (And in the process, you will
also be gathering information on pricing.)
Visit your local library to compile local and county statistics
on the size and makeup of your market. (While you are at the
library, check out some books on marketing research so you will
know what you are getting into.) Also, check those of the
following resources that might have data about your product or
service or the people who would use it:
Encyclopedia of Associates, 17th Edition. Gale Research
Company, Book Tower, Detroit, MI 48226
Ayer Directory of Publications. Lists trade publications by
subject matter. Contact the sales, marketing, or research
departments for buying patterns among their readers.
"Survey of Buying Power." Sales, Marketing, Management Magazine.
July issue each year.
Thomas' Register. Lists companies by product and service line,
organized geographically and alphabetically.
Directory of Business, Trade, and Public Policy Organizations.
U.S. Small Business Administration, Office of Advocacy.
Department of Commerce Publications. Date User Series Division,
Bureau of the Census, Washington D. C. 20233
County Business Patterns. U. S. Department of Commerce, Bureau
of the Census. Available for each state.
When your marketing research is completed you will have 1)
identified your potential customers; 2) found out all you can
about their habits, needs, preferences, and buying cycles; and
3) decided how to reach them to generate sales.
How Much Shall I Charge?
Four main factors will help you decide what to charge for your
product or service: 1) your direct and indirect costs; 2) the
profit you want to make; 3) your market research data on
competitors' prices; and 4) the urgency of the market demand.
There is rarely an exact "right" price but rather an acceptable
price range within which you will want to fall. Avoid the
common mistakes made by many new business owners - charging too
much or too little. Use several approaches to arrive at a cost
and "test" the price. If your ego is too involved, your price
may be too high. On the other hand, if you have the attitude
that "this is just a little something I do in my spare time" or
"anybody could do this," then your price may be too low.
Here is the formula for setting a fair price. Calculate your
price using other approaches, too, before your make your final
decision on price:
Typical Pricing Formula
1. Direct Material Costs - figure the total costs of the raw
materials you have to use to make your item. Figure the cost of
a group of items and then divide by the number of items to find
the cost per item. If you can easily and immediately determine
the material cost of a single item, fine. Some items are
produced in batches, however, and it is easier to get an item
cost by dividing the cost of a batch by the number of items
eventually produced.
2. Direct Labor Costs - figure what you pay to employees to
produce the item (whether or not you have employees now.) You
must assign a wage figure, even if you are the only one
producing the item. Take the weekly salary you pay someone to
produce the necessary number of items and divide by the number
of items. Add this figure to the Direct Material Costs total.
3. Overhead Expenses - These expenses include rent, gas and
electricity, business telephone calls, packing and shipping
supplies, delivery and freight charges, cleaning, insurance,
office supplies, postage, payroll taxes, repairs, and
maintenance. The accuracy of your costing depends on estimating
logical amounts for all categories of expenses. If you are
working at home, figure a portion of total rent or mortgage
payment (in proportion to your work space and storage areas), or
assign a reasonable, competitive rent figure for the same
amount and type of space. List all overhead expense items and
total them. Divide the total overhead figure by the
number of items per month (or time period you used
above). The answer is your overhead per item.
Overhead + Materials +Labor = Total Costs/Item
Profit - Include an amount added to the cost of each item so you
won't end up just breaking even or making the employees' wages.
Check your competition and see what they are charging. (Retails
generally double the wholesale price.) If your product is
comparable, price it similarly. Remember, you will get the
profit from each sale, in addition to the salary figure. Add
the profit figure you have chosen to the total cost per item to
get your total price per item.
Profit + Total Cost/Item = Total Price/Item
Remember, the main purpose in operating a business is to make a
profit. Don't undersell your product or service just because
"I'd be baking cakes anyway" or "I'm just starting out" or "I
work out of my home" or "I'd be making these things as a hobby,
anyhow". If you have a new, rare, handmade product or
personalized service, the demand may be so high that customers
are willing to pay a little more.
Promotion Promotion is an overall, long-range plan designed to
inform potential customers about what you have to sell.
Advertising is usually thought of as the paid communication part
of the promotion program.
To develop a total promotional campaign you must answer these
questions: 1) What image or message do I want to promote? 2)
What are the best media and activities for reaching my potential
customers? 3) How much time and money can I spend on the effort?
Develop a long- range, consistent program for building image and
reaching customers. Your image should be reflected in your
business card, logo, stationery, brochure, newsletter, telephone
and answering service, signs, paid ads, and promotional
activities.
Word-of-mouth recommendations from satisfied customers are the
very best promotion any business can have. Consider which
promotional tactics will build the confidence and image you are
looking for - giving speeches and interviews (often good for the
counselors, teachers, lawyers, consultants), having an open
house or holiday home sale (for craftspeople), holiday recitals
or shows (for music and dance teachers or day-care operators),
free demonstrations and samples (for retailers, decorators,
caterers).
Several small ads may have more impact than one large splashy
ad. Conduct a campaign rather than having a one-shot as or
event. If you hire a public relations firm, look for one that
can give you personal attention and develop a total marketing
plan for you, not just a couple of ads. The plan should include
market research, a profile of your target audience, a clear
description of the image they recommend you project, the written
copy, and a list of media (including cost and scheduling
calendars) that are best for your type of product or service.
As a new small business owner, you will probably decide to set
aside a certain dollar amount per year or a percentage of past,
current, or projected sales for paid advertising.
Case History Of A Successful Self-Promotion: A small town
California dry cleaning firm was having difficulty obtaining
customers. Since there were several similar businesses in town,
the owner needed to come up with an unusual promotion. Here's
what he did;
The owner's first thought was to reduce his initial price by
$2.00 to attract first time customers. But his wife thought of
a better idea. Why not obtain from the bank, a couple of
thousand silver dollars and give one free coin to each customer.
They would offer the coins for two days only, "while the supply
lasts."
Was the promotion successful? You bet it was! For two days, they
had customers lines up for two solid blocks. And they ended up
giving away over 5,000 silver dollars. But in return, they
gained 5,000 new customers for a gross income of over $35,000 in
two days.
Not only that, they were smart enough to make up a list of all
those new customers for future solicitations.
See how a little ingenuity can turn a ho-hum - or even failing -
business around dramatically? When it comes to promoting your
business, let your imagination soar.
MANAGING YOUR BUSINESS Structure, Recordkeeping, Taxes, and
Insurance
You're The Boss
A telling sign on a new businessowner's desk read: "Yesterday I
didn't even know how to spell Entrepreneur and now I are one!"
Now that you have decided to open a home-based business, all
decisions will be your responsibility, not just those you
previously enjoyed because they involved your area of expertise.
Of course, as a day-care operator you already knew how to soothe
an upset child, but as the owner of that business, do you know
when to file your taxes? As a consultant you have over 20 years'
experience advising organizations on personnel matters, but do
you know if it's to your advantage to incorporate? You are an
expert at word processing, but do you know how to develop an
efficient recordkeeping and billing system?
You are the boss now and the good health of your business
depends on your management skills.
Choosing Your Form of Business Organization
One of the most important decisions you will make is how to set
up the business as a 1) sole proprietorship, 2) partnership, or
3) corporation. Remember, the small business owner risks it
all, no matter what form of organization.
The forming of a business organization depends on the following
factors: * Legal Restrictions * Need for capital * Liabilities
assumed * Number of people associated in the venture * Kind of
business or operation * Tax advantages or disadvantages *
Intended division of earnings * Perpetuation of the business
Most home-based businesses are sole proprietorships or
partnerships, but a comparison of the advantages and
disadvantages of each type of organization follows:
Sole Proprietorship
Advantages * Easiest to get started * Greatest freedom of action
* Maximum authority * Income tax advantages in very small firms
* Social Security advantage to owner
Disadvantages * Unlimited liability * Death or illness endanger
business * Growth limited to personal energies * Personal
affairs easily mixed with business
A partnership can be found by simply making an oral agreement
between two or more persons, but such informality is not
recommended. Legal fees for drawing up a partnership are higher
than those for a sole proprietorship, but may be lower than
incorporation. You would be wise, however, to consult an
attorney to have a partnership agreement drawn up to help
resolve future disputes.
Partnership
Advantages * Two heads better than one * Additional sources of
venture capital * Better credit rating than corporation of
similar size
Disadvantages * Death, withdrawal, or bankruptcy of one partner
endangers business * Hazy line of authority * Difficult to get
rid of bad partner
You can incorporate without an attorney, but you would be unwise
to do so. You may think a small family corporation does not
need an attorney, but an attorney can save members of a family
corporation from hard feelings and family squabbles. Attorney's
fees may run high if organization problems are complex. The
corporate form is usually the most costly to organize.
Corporation
Advantages * Limited liability for stockholders * Continuity *
Transfer of shares * Easier to raise capital * Possible to
separate business functions into different corporations
Disadvantages * Gives owner a false * Heavier taxes * Power
limited by Charter * Less freedom of activity * Legal
formalities * Expensive to launch
Recordkeeping
Keeping accurate and up-to-date business records is, for many
people, the most difficult and uninteresting aspect of operating
a home-based business. If this area of business management is
one that you anticipate will be hard for you, plan now how you
will cope. Don't wait until tax time or until you are totally
confused. Take a course at the local community college, ask a
volunteer SCORE¿(Service Corps of Retired Executives)
representative from the Small Business Administration to help
you in the beginning, or hire an accountant to advise you on
setting up and maintaining a recordkeeping system.
Your records will be used to prepare tax returns, make business
decisions, and apply for loans. Set aside a special time each
day to update your records. It will pay off in the long run
with more deductions and fewer headaches.
If your business is small or related to an activity that is
usually considered a hobby, it's even more important that you
keep good records. The IRS may decide that what you area doing
is only a hobby, and you won't be allowed to deduct expenses or
losses from your home-produced income at tax time. So keep
records of all transactions in which you spend or bring in
money. Pick a name for your business and register it with local
or state regulatory authorities. Call you city hall or county
courthouse to find out how.
Your records should tell you these three facts: * How much cash
you owe, * How much cash you are due, and * How much cash you
have on hand
You should keep five basic journals:
1. Check register - Shows each check disbursed, the date of the
disbursement, number of the check, to whom it was made out
(payee), the amount of money disbursed, and for what purpose.
2. Cash receipts - Shows the amount of money received, from
whom, and for what. 3. Sales journal - Shows the business
transaction, date, for whom it was performed, the amount of the
invoice, and the sales tax, if applicable. It may be divided to
indicate labor and goods. 4. Voucher register - A record of
bills, money owed, the date of the bill, to whom it is owed, the
amount, and the service. 5. General journal - A means of
adjusting some entries in the other four journals.
Choosing a Recordkeeping System
Set up your records to reflect the amount and type of activity
in your particular business. There are a wide range of
pre-packaged recordkeeping systems. The SBA's pamphlet Small
Business Bibliography No. 15 lists many such systems. The most
useful system for a small, home- based business is usually based
on what is called the "One-Write System." It captures
information at the time the transaction takes place. These One-
Write Systems are efficient because they eliminate the need for
recopying the data and are compatible with electronic data
processing if you should decide to computerize.
Even though you may be small and just beginning, it is probably
wise to consult an accountant to help you decide which
recordkeeping system is best for your business. Once it is set
up, you can record the daily transactions or periodically have a
bookkeeper post your daily transactions in your General Ledger
and prepare your financial statements.
Be sure to establish a separate bank account for your business -
even before the first sales. Then you will have a complete and
distinct record of your income and expenditures for tax
purposes, and you won't have to remember which expenses were
business and which were personal.
It is important to choose a recordkeeping system that you
understand and will use. It will help you see how well the
business is doing and is the first step in responsible financial
management.
Tax Obligations and Benefits
Significant tax savings are available to the home-based business
owner in the form of deductions, credits, and depreciation
allowances. The time, money, and energy you put into keeping
good records and keeping current on tax laws will be worthwhile
and ensure that you operate within the law. You will need to
plan for income tax, social security (all self-employed persons
must pay a federal self-employment tax), employees' taxes (if
you hire anyone), property tax on your home and business-related
taxes, such as sales tax, gross-receipts or inventory tax (in
some states and localities), and excise or individual item taxes
(on certain commodities).
The Internal Revenue Service supplies the following free
booklets (and runs free workshops) to give you details on your
specific obligations:
* Your Federal Income Tax (Publication 17) * Tax Guide for Small
Business (Publication 334) * Business Use of Your Home
(Publication 587) * Employer's Tax Guide (Circular E) *
Self-Employment Tax (Publication 533) * Tax Information on
Retirement Plans for the Self-Employed (Publication 560) * Tax
Information on Depreciation (Publication 534) * Information on
Excise Taxes (Publication 510) * Tax Withholding and Estimated
Tax (Publication 505)
There are various federal and state forms you will need to fill
out to start a small business. The federal government requires
you to fill out several forms including the following:
* Application for Employers Identification Number (Form SS-4)(If
you have employees or are subject to excise tax) * Employer's
Annual Unemployment Tax Returns (Form 940) * Employer's
Quarterly Federal Tax Return (Form 941) * Employer's Withholding
Allowance Certificate (W-4) * Employer's Wage and Tax Statement
(W-2) * Reconciliation/Transmittal of Income and Tax Statements
(W-3)
As a home-based business owner you should be aware the every
business decision - each purchase and transaction you make - has
tax implications or built-in tax advantages or disadvantages.
Deductions may be available for home maintenance and
improvements; automobile expenses; telephone expenses; office
and work space; inventory space; major purchases, such as a
computer; and a wide variety of other items like uniforms,
coffee service, trademarks, a safe deposit box, credit bureau
fees, and business cards.
Each Business situation is different and tax laws change, so
consult up-to- date references, a trusted attorney, and an
accountant who can advise you on your particular obligations and
benefits.
Insurance
Insurance helps to safeguard your business against losses from
fire, illness, and injury. You cannot operate without it. Talk
with an insurance representative about your business needs.
Check with the insurance carriers on your home policy and make
sure business use of your home is compatible with your
homeowner's policy. In addition to homeowner's policy (personal
plan), now that you have a business, you will need a commercial
policy for full protection. Discuss these other possible needs
with your agent:
* Product Liability Coverage - to protect you in case your
product causes injury to the user * Auto Liability and
"Non-owned" Auto Liability Insurance - if a car is ever used to
support the business in any way. * Medical Payments Insurance -
payable if someone is injured in your home whether or not it was
your fault. * Worker's Compensation - if you have employees *
Business Interruption Insurance or Earnings Insurance - in case
you business is damaged by fire or some other cause and you must
totally or partially suspend operations. * Disability Income
Protection - a form of health insurance in case you become
disabled. * Business Life Insurance - to provide funds for
transition if you die.
Be sure to keep all your insurance records and policies in a
safe place - either with your accountant or in a safe deposit
box. If you keep them at home for convenience sake, then give
your policy numbers and insurance company names to your
accountant or lawyer or put it in your safe deposit box.
Final advice for the wise business person is to read and
understand the fine print in all policies and to reevaluate
business insurance needs about every six months.
Other Considerations
Another aspect of planning is sheltering tax dollars through a
Keogh Plan or corporate pension and profit-sharing plans, if
your business is incorporated, or a retirement plan.
If you have a partnership, consider making a Buy/Sell Agreement
with your partner(s). This agreement requires the surviving
partner(s) to buy, and the heirs to sell, the deceased partner's
interest. The surviving partner(s) then become the sole
owner(s) and the heirs receive cash for their share of the
business.
DEALING WITH LAWS:
Zoning, Licensing, Permits, and Others
Unfortunately, many home-based business people try to "slide"
into business, saying "I'll just try it for a few months and see
how things go" or "It's not really a business. I have only ten
clients." This attitude can lead to a lack of planning and big
disappointments. If you set up your studio, print business
cards and flyers announcing classes, and then find that
regulations make it illegal to operate out of your home, you may
have to start all over.
Zoning
Before you start your home-based business, do a thorough
investigation of the zoning laws in your community. Zoning
regulations spell out activities permitted and prohibited in
specific portions of a city or county. Call your town hall,
zoning office, or local library to get a copy of zoning laws.
Find out the structure of your local zoning groups. Most areas
have Planning, Zoning, and Appeals Boards.
If the home business you are planning conforms to zoning
regulations then all you need to do is keep abreast of new
proposals that may affect your situation. It's a good idea to
stay in touch with others operating from their homes by joining
business organizations or neighborhood groups in case you ever
need to band together to propose or oppose new regulations.
Maintaining a low profile and friendly relations with your
neighbors will result in more support from them should adverse
regulations affecting your business ever be proposed.
If, through your research, you discover that the home business
you are planning would violate the zoning code, there are
several possible ways to proceed. You might wish to check with
an attorney who specializes in zoning law to look for a legal
way around the regulation. You might decide to apply to the
Zoning Board for a variance or exception. Or you may be able to
change your business enough to make the operation fit the law.
If the regulation outlaws businesses that employ people other
than the owner at home, maybe you can have employees take work
to their own homes. If your business will create too much
traffic, consider another strategy for product distribution. If
your business will create too much noise, maybe you can
soundproof your house. At last resort, ask yourself. "Is it
worth it to organize a drive to change the law?" Considering the
rapid growth in the number of home-based businesses, you just
might find other entrepreneurs who are also interested in
submitting a change in the regulations to the Zoning Board. Go
to meetings of the Board and try to identify the person who
appears most active and most sympathetic to your position.
In the unfortunate and unlikely (most zoning officers don't have
time to chase people who aren't bothering anybody) event that
you are issued a "cease and desist" order, you should: 1) file
an appeal immediately with the Appeals Board (if you interpret
the regulations differently than they do); or 2) submit a change
in the regulation to the Zoning Board to allow your business,
which may enable you to continue to operate without fines until
the Board reaches a decision. You may need a lawyer if you
are not entirely familiar with the regulations and the workings of the Board.
Cultural and national trends point in the direction of zoning
regulations that allow quiet, nonpolluting, low-traffic kinds of
home businesses. More and more corporations are employing
people to work at home. Most neighborhoods will adopt a "live
and let live" attitude if you keep your premises neat and quiet
and don't create traffic and parking problems.
Keeping Up With Zoning Legislation
There are two ways to keep up with zoning legislation in your
community (and with other topics of interest to home-based
entrepreneurs). One way is to read local newspapers, especially
the business section and the local or "neighborhood" sections.
Be sure you notice local items about such things as proposed
subway stations or the county's plan for revitalization.
Changes like these could eventually influence zoning in your
area. The other way to keep abreast of trends and zoning issues
is to join the local chapter of a business group, such as the
Rotary Club, the National Association of Women Business Owners,
your local Chamber of Commerce, the National Family Business
Council, or a Business and Professional Women's Club. Through
newsletters, meetings, and friendships that you develop, you
will hear all the latest local (and national) issues discussed
while you learn valuable business skills and make useful
contracts.
Working With Professionals
Even the smallest and newest business needs help from at least
two kinds of specialists: an attorney and an accountant.
Depending on your type of business and your skills you may, from
time to time, ask the advice of other professionals, such as a
direct mail or marketing specialist, an insurance
representative, management consultant, a computer specialist, a
Realtor, a public relations expert.
Several guidelines will hold true no matter what type of expert
you are dealing with: 1) Interview professionals to see if you
will be comfortable working with them. Make sure they have
served other small businesses similar to yours. Find out ahead
of time exactly what service you are buying, what the working
relationship will be and what fees will be charged. 2) Be
completely honest about your business situation. Advice based
on partial or incorrect information is no advice at all. If you
are having problems, don't be embarrassed. If your sales are
down, give the experts all the information you have and work as
a team to solve the problem. If business is good, don't be
afraid that professionals will steal your idea or expect a
raise. Build a trusting, businesslike relationship. 3) Expect
the professionals you hire to spend at least some of their time
teaching you and explaining complex concepts. But don't expect
to be spoon-fed or delegate all decisions to them. Take a
course at the local community college in recordkeeping and taxes
or public relations to develop more skills in areas where you
are inexperienced. 4) Keep your appointments and pay your bills
promptly.
Your Lawyer
To find a lawyer who is familiar with business of your size and
type, ask for a referral from a business colleague, your
accountant, the local Chamber of Commerce, your banker, or some
other trusted source. Some local bar associations run a lawyer
referral and information service. Some just give you names;
other actually give information on experience and fees to help
you match your needs to the lawyer's background and charges.
A Lawyer can help you decide which is the most advantageous
business structure (sole proprietorship, partnership, or
corporation). He or she can help you with zoning, permit, or
licensing problems; health inspection problems; unpaid bills;
contracts and agreements; patents, trademarks, copyright
protection; and some tax problems. Because there is always the
possibility of a lawsuit, claim, or other legal action against
your business, it is wise to have a lawyer who is already
familiar with your business before a crisis arises. A lawyer
experienced with your type of venture should also advise you on
laws, programs, and agencies - federal, state, and local - that
help small businesses through loans, grants, procurement
set-asides, counseling, and other ways. He or she will tell you
about unexpected legal opportunities and pitfalls that may
affect your business.
In choosing a lawyer, experience and fee should be related. One
lawyer may charge an hourly rate that, at first, looks cheaper
than another lawyer's. However, because of a lack of experience
in some area, the less expensive lawyer may charge a larger fee
in the long run. Ask for a resume and check references. If you
feel overwhelmed, take a trusted friend to the initial meeting
to help you keep track as you interview the lawyer about
services and fees.
If you retain a law firm, be sure you understand who will work
on your case and who will supervise the work. If junior lawyers
handle the work, the fees should be lower. That's fine as long
as you know an experienced attorney will be reviewing the case
periodically.
Let your lawyer know that you expect to be informed of all
developments and consulted before any decisions are made. You
may also want to receive copies of all documents, letters, and
memos written and received in your case or have a chance to read
them in the lawyer's office.
Ask the attorney to estimate the timetable and costs of your
work. You may wish to place a periodic ceiling on fees, after
which he or she would call you before proceeding to do work that
would add to your bill. Always have a written retainer
agreement, describing just what you and the lawyer expect of
each other.
Your Accountant
Most businesses fail not for lack of good ideas or good will,
but rather for lack of financial expertise and planning. Look
for an accountant as you would an attorney. Get referrals from
trusted friends, business associations, or professional
organizations. Discuss fees in advance and draw up a written
agreement about how you will work together. Your accountant
(along with your lawyer) can advise about initial business
decisions, such as the form of the business. Your accountant
will help set up your books, draw up and analyze profit and loss
statements, advise on financial decisions (e.g., buying a
computer), and give advice on cash requirements for your
start-up phase. He or she can make budget forecasts, help
prepare financial information for a loan application, and handle
tax matters.
Accounting firms offer a variety of services. If this is not an
easy area for you, the fees you pay will be well worth it. Most
firms will maintain books of original entry, prepare bank
reconciliation statements and post the general ledger, prepare
balance sheets and income statements on a quarterly or
semi-annual basis, and design and implement various accounting
and recordkeeping systems.
They will also get your federal and state withholding numbers
for you, give instructions on where and when to file tax
returns, prepare tax returns, and do general tax planning for
the small business person.
Your accountant is your key financial advisor. He or she should
alert you to potential danger areas and advise you on how to
handle growth spurts, how to best plan for slow business times,
and how to financially nurture and protect your business future.
State and Federal Laws That May Apply to Your Business
Most localities have registration and licensing requirements
that will apply to you. A license is a formal permission to
practice a certain business activity, issued by a local, state,
or federal government. You may have the type of business that
requires a permit from the local authorities. There is often a
small fee for licenses and permits (usually $15-$25). A license
may require some kind of examination to certify that the
recipient is qualified. Your business name must be registered
and a sales tax number must be obtained. Separate business
telephones and bank accounts are usually required. Of course,
you will want to have the latter anyway for accurate bookkeeping
purposes. If you have employees, you are responsible for
withholding income and Social Security taxes. You must also pay
worker's compensation and unemployment insurance and comply with
minimum wage and employee health laws.
If your operations are intrastate, you will be concerned
primarily with state and local, rather than federal, licensing.
Businesses frequently subject to state or local control are
retail food establishments, drinking places, barber shops,
beauty shops, plumbing firms, and taxi companies. They are
primarily service businesses and are subject to regulations for
the protection of public health and morals. Your attorney can
help you make sure you have complied will all licensing and
permit requirements. Depending on your type of business you may
have to comply with building and safety codes, too.
Think twice about the liabilities of operating without proper
licenses and registrations. If you begin to advertise or are
fortunate enough to "make the news" in some way, you will
probably hear from a local official. You will pay with
embarrassment, time, and money if your business is not properly
licensed.
If you find legal regulations, permits, and licenses confusing,
make sure you find some way to get the information you need to
operate legally. Get help from your lawyer, accountant,
business partner, or even your local librarian. This is not an
aspect of business operations that can be delayed until you "get
around to it." Your business reputation and financial standing
are at stake.
UNDERSTANDING THE FINANCIAL SIDE
Who needs financial planning? You do! All businesses run on
money for the purpose of making money. A major reason for
business failure is the lack of financial planning. Although it
is nearly impossible to make exact estimates, approximate ones
will help. The very process of thinking through these financial
questions will develop your business acumen and lead to solid
planning. Get your accountant involved in reviewing your plans
and advising you, too.
Estimating Start-Up Costs
Begin your financial planning be estimating your initial or
start-up costs. Include all items of a nonrecurring nature such
as fees, licenses, permits, franchise fees, insurance, telephone
deposit, tools, equipment, office supplies, fixtures,
installation of fixtures and equipment, remodeling and
decorating, funds for your opening promotional event if you plan
to have one, signs, and, of course, professional fees for your
attorney and accountant.
Depending on your type of operation, the amount of money you
invest, and the energy you expect to put in (part-time to
full-time) can determine how much working capital you will need.
Many business experts say if you expect a profit in six months,
double that time and be ready to operate without profits for
twelve months to give yourself a cushion in case of
unanticipated expenses or delays. Study growth patterns of
other similar business and ask for advice from your accountant
and attorney.
Projecting Operating Income and Expenses
Next, estimate the "working" capital you will need to keep
operating for six to twelve months. Operating expenses include
salaries; expenses for telephone, light, heat, office supplies,
and other supplies or materials; debt interest; advertising
fees; maintenance costs; taxes; legal and accounting fees;
insurance fees; business membership fees; and special services
expenses, such as secretarial, copying, and delivery
service.
It is a good idea to obtain typical operating ratios for the
kind of business in which you are interested. Among the sources
for such ratios are Robert Morris Associates, Dun & Bradstreet,
Inc., the Accounting Corporation of America, your bank, trade
associations, publishers of trade magazines, specialized
accounting firms, industrial companies (for example, National
Cash Register Co.), and colleges and universities. The typical
ratios for your type of business combined with your estimated
sales volume will service as benchmarks for estimating the
various items of expense. However, do not rely exclusively on
this method for estimating each expense item. Modify these
estimates through investigation and quotations in the particular
market area where you plan to operate.
In addition to business operating capital, you will need to plan
for reserve capital to cover your personal expenses. This
estimate will include all you normal living expenses, such as
food, household expenses, car payments, rent or mortgages,
clothing, medical expenses, entertainment, and taxes for you and
your family.
After you have estimated start-up costs, working or operating
capital needed for six to twelve months, and personal expenses
and obligations, you may see that you need more start-up capital
than you thought. What will you do? Discuss this with your
accountant, attorney, and trusted business associates and
family. Entrepreneurs secure needed capital in a variety of
ways. You can:
* Get loans or gifts from family members or friends. Make
businesslike, written agreements and be sure to disclose fully
the potential risk as well as the possible profit.
* Apply for a bank loan. For this you will need a comprehensive
statement of your personal financial condition and a business
plan with your financial projections to present to the loan
officer. If you need help in preparing your loan application,
take a course for small business people at a local community
college or visit your nearest SBA office to get assistance from
a SCORE¿ counselor.
* Apply for an SBA loan guarantee. The SBA is not a bank, but
it does extend guarantees and may rarely participate in a loan
when the bank is unable or unwilling to provide the entire
financing itself. The SBA loan officer will ask you the same
hard questions as a loan officer in a commercial bank and
require the same carefully considered data on your personal
finances, start-up costs, and business projections.
* Search for some sort of venture capital. For start-up
entrepreneurs some prior managerial or entrepreneurial track
record is usually necessary in order to get venture capital.
The main disadvantage of venture capital is that you will
probably have to give up between 50 to 90 percent ownership of
the new business in return for the capital. A home business is
extremely unlikely to attract venture capital.
Understanding Your Balance Sheet
Your Balance Sheet is a summary of the status of your business -
i.e., its assets, liabilities, and net worth - at an instant in
time. By reviewing your Balance Sheet along with the Profit and
Loss Statement and Cash-Flow Statement, you will be able to make
informed financial and business planning decisions.
The Balance Sheet is drawn up using the totals from the
individual accounts kept in your General Ledger. It shows what
you have left when you pay all you creditors. Assets less
liabilities equal capital or net worth. The assets and
liabilities sections must balance - hence the name Balance
Sheet. It can be produced quarterly, semi-quarterly, or at the
end of each calendar or fiscal year.
While your accountant will be most helpful in drawing up your
Balance Sheet, it is you who must understand it. Current assets
are anything of value you own such as cash, inventory, or
property that the business owner can convert into cash within a
year; fixed assets are things such as land and equipment.
Liabilities are debts the business must pay. They may be
current (such as amounts owned to suppliers or your accountant)
or they may be long-term (such as notes owed to the bank).
Capital (also called equity or net worth) is the excess of your
assets over your liabilities.
Prepare a Balance Sheet for your new business during the
planning phase to estimate its financial condition at that time
and also a projected one for the first year of business. This
will help you decide on the feasibility of your venture and make
modifications to ensure profitability. You can also use these
statements as part of the documentation in a loan application.
Understanding Your Profit and Loss Statement
Your Profit and Loss Statement is a detailed, month-by-month
tally of income from sales and the expenses incurred to generate
the sales. It is a good assessment tool because it shows the
effect of your decision on profit. It is a good planning tool
because you can "try out" decisions on paper before actually
going ahead.
The Profit and Loss Statement includes four kinds of
information:
* The Sales information lists the number of units sold and the
total revenues generated by the sales.
* The Direct Expenses category includes the cost of labor,
materials and manufacturing overhead (but not normal overhead)
* Indirect Expenses are the costs you have even if the product
is not produced or the service is not delivered. They include
the fixed costs (or normal overhead) of salaries, rent,
utilities, insurance, depreciation, office supplies, taxes, and
professional fees for your lawyer and accountant.
* Income or Profit is the last category on the Profit Loss
Statement. It is shown both as your pre-tax and after-tax or
net income. The IRS will look at your pre-tax figure, whereas
your loan office and you are more concerned with your after-tax
figure.
Your Profit and Loss Statement should be prepared at the very
minimum of once a year - and more often in the beginning or
growth stages of your business. It is a key document from which
the economic health of a business can be determined. Make
certain you do it properly and understand its meaning.
Understand Your Cash Flow Statement
Your business must have a healthy cash flow to survive. Cash
flow is the amount of money available in your business at any
given time. To keep tabs on cash flow, forecast the funds you
expect to disburse and receive over a given period of time.
Then you can predict deficiencies or surplus in cash and decide
how to respond.
A cash flow projection serves one other very useful purpose in
addition to planning. As the actual information becomes
available to you, compare it to the monthly cash flow estimates
you previously made to see how accurately you are estimating.
As you do this, you will be giving yourself on-the-spot business
training in making more accurate estimates and plans for the
coming months. As your ability to estimate improves, your
financial control of the business will increase.
The creative business owner works with his or her accountant to
use the information gleaned from all of these financial tools to
make a variety of managerial decisions - decisions on buying
supplies, expansion, when to hire more employees, how to get the
best tax breaks, and many other important steps that will shape
the future of the business.
MAKE IT EASY ON YOURSELF
Successful home-based business owners learn from experience -
their own and that of others. In Jeffry A. Timmon's study of
entrepreneurial personality characteristics (New Venture
Creation: A Guide to Small Business Development), he notes that
entrepreneurs are disappointed but not discouraged by failure.
They use failures as learning experiences and try to understand
their role in causing the failure in order to avoid similar
problems in the future. Furthermore, Timmons asserts,
entrepreneurs seek and use feedback on their performance in
order to take corrective action and improve.
How To Learn From Experience
You can learn from experience in several ways:
First, work closely and creatively with professional advisors,
such as your lawyer and your accountant. As you continually
review your business records, you will see "mistakes," but you
will also begin to develop skill in planning and managing.
Second, continue to learn about all areas of business
operations, constantly acquiring new ideas. Most community
colleges have short, inexpensive, practical courses for business
owners in topics like "Financing a Small Business," "Choosing a
Small Business Computer," and "Starting and Operating a
Home-Based Business."
Third, get to know other business owners with similar needs or
problems. Talking with others may be a way to avoid repeating
mistakes they have made and you can benefit from their
experience. Local and national organizations you can often
advertise your product or service to other business owners.
They also provide a way to learn about services you may need,
such as accounting, public relations, or a responsible
secretarial service. These organizations offer updates in such
areas as taxes and zoning in their newsletters and workshops.
Finding and Using Resources, Network, and Support Groups
Start out with the attitude "Whatever my current business
problem, I can find the solution. Somewhere there is
information, a book, a person, an organization, or a government
agency that can help." A word of warning though: finding
resources and building networks can be very time- consuming.
Joining organizations can turn out to be expensive, especially
if you are too busy to use their services and support once you
join. So use this list to organize your search for resources
useful to you, then pick and choose carefully what you decide to
read, join, buy, or attend.
Your Public Library: Visit you local library. Get to know its
resources. In addition to books, many libraries offer free
workshops, lend skill- building tapes, and become a central
place to pick up catalogs and brochures describing continuing
education opportunities for business owners. Ask the librarian
for current copies of zoning regulations. Get familiar with new
books resources in your field (computers, health care, crafts,
etc.) as well as in business skills (advertising techniques,
financing, etc.). Look for magazines such as In Business, Black
Enterprise, Venture, Inc., Entrepreneur, Extra Income, Success,
or The Journal of Small Business Management. Reading
selectively is free. Subscribing to too many magazines can be
expensive.
Organizations: A wide variety of local and national
organizations have sprung up to serve the informational,
lobbying and networking needs of business entrepreneurs.
Through meetings, services, or newsletters, groups such as the
National Association of Women Business Owners, American
Entrepreneurs Association, Business and Professional Women's
Club, National Alliance of Homebased Businesswomen, and the
National Association for Cottage Industry offer members
everything from camaraderie to valuable "perks," such as group
rates on health insurance. David Gumpert's book, The Insider's
Guide to Small Business Resources, has addresses of many of the
groups and other information on such resources.
Government Resources: Contact your local or district office of
the U.S. Small Business Administration (SBA) to learn about SBA
service and publications. The SBA also offers free or
inexpensive workshops and counseling through SCORE¿. SCORE¿ is
a volunteer sponsored by the SBA through which retired
executives who have management expertise are linked with
owners/managers of small business or prospective entrepreneurs
who need help.
The Department of Commerce, Bureau of the Census, Department of
Defense (procurement), Department of Labor, IRS (ask for the
free "Business Tax Kit"), Federal Trade Commission, and the
Government Printing Office all have publications and services to
inform and support you. Local and state government offices may
also have services to help you. Addresses will be available in
your telephone book, under U.S. Government, at your public
library, or at the SBA office near you.
Community Colleges: Most community colleges now have short,
inexpensive, noncredit programs for entrepreneurs. The classes
usually are convenient to business owners and are taught by
experienced owners and managers.
As a home-based business person you can overcome feelings of
isolation and give and receive valuable information if you tap
into networks and resources. Being active in professional and
trade association will help to build a good marketing network
for you service or product. Take the time and invest money for
memberships. Then continually evaluate which organizations and
resources best serve your business information and networking
needs.
Managing Time and Stress
Expect to encounter stress and time problems similar to those of
other business owners but accentuated by the fact that you work
at home. Follow these guidelines to make it a little easier on
yourself:
1)Plan your time and establish priorities on a daily "to do"
list. Decide what your "primetime" is and do your most
important or difficult tasks then. Set "business hours,"
specific times when you are at work and times when you turn on
the answering machine because your are "on duty but off call."
You, your customers, and your family will appreciate knowing
your set routine, even though you know that for special events
or emergencies you can break that schedule.
2) Notice what your four or five big time-wasters are and learn
techniques to eliminate them or compensate for them. Some
common ones are: telephone interruptions, visitors, socializing,
excessive paperwork, lack of policies and procedures,
procrastination, failure to delegate, unclear objectives, poor
scheduling, lack of self-discipline, and lack of skill in a
needed area. 3) Stay in contact with people. Even though you
prefer to work at home, you should plan work-related or social
activities that provide frequent contact with others. This will
help your morale if you feel isolated. Even for
home-based business owners who like feeling isolated, keeping up
with social, business and professional contacts is a must.
4) Build a fitness program into your day. Many successful
entrepreneurs exercise in order to think creatively because
physical activity sends oxygen to the brain and helps the mind
function better. With regular exercise your health will
improve, your stress level will go down, and your trim look will
inspire people to have confidence in your abilities.
5) Give your home business as much of a separate and distinct
physical identity as possible. Although you might save a few
dollars by using the ironing board as a bookshelf and a
cardboard box as a file cabinet, the stress and strain of
operating without proper space and supplies will take its toll.
have a separate room or area for your business, with a separate
entrance if customers or suppliers visit. Consider
soundproofing so your family won't be bothered by your noise and
vice-versa. (In addition to the psychological and physical
comfort of having a separate office, the IRS requires it in
order for you to make a legitimate claim for tax deductions.)
6) Take care of your major business asset: YOU. Being the boss
can be exciting, fulfilling, and rewarding. It can also be
lonely, stressful, and demanding. Learn to balance your
professional life. Go on vacation. get a weekly massage. Join a
health club. Take a class in meditation. Attend a business
owner's breakfast club.
Your business depends on you to be at your best.
Business Start-Up Fact Finder Manual
Work at Home - work at home jobs - home based business
Copyright 2003 Work-at-Home.org
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