The advantages of working at home are accompanied by certain problems. This Financial Guide reviews some of the special considerations of the home-based business.
Up until recently, going to work meant traveling from home to a plant or office. Today many people do some or all of their work at home. A private market-research firm estimates that as many as 13 million people squeeze extra hours into their work week by taking work home from their full-time jobs, while some 9 million people work exclusively at home.
Many people find that working at home is an ideal arrangement and decide to formally set up businesses there. The Small Business Administration estimates that more than 3 million home-based businesses are now operating throughout the country.
Every day, people are striking out and achieving economic and creative independence by turning their skills into dollars. Garages, basements and attics are being transformed into the corporate headquarters of the newest entrepreneurs - home-based businesspeople. And with recent technological advances and a rising demand for "service-oriented" businesses, the opportunities seem to be endless.
This Financial Guide will discuss some of the basics you should consider in starting a home-based business. It does not attempt to explore the many issues in depth, but only to alert you to the need to consider them. Moreover, they are general in nature and may not apply to your specific situation. For these reasons, professional guidance is suggested before setting up a home-based business.
Is A Home-Based Business Right For You?
Choosing a home business is like choosing a spouse or partner-your decision must be approached with a great deal of care. You need to learn as much about the market for any product or service as you can. Before you invest your time, effort, and money, take a few moments to answer the following questions. They'll help separate sound ideas from those with a high potential for failure.
- Can you identify and describe the business you plan on establishing?
- What will be your product or service?
- Is there a demand for your product or service?
- Do you have the talent and expertise needed to compete successfully?
Before you dive head first into a home-based business, it's essential that you know why you are doing it and how you will do it. To succeed, your business must be based on something greater than a desire to be your own boss: an honest assessment of your own personality, and understanding of what's involved, and a lot of hard work. You have to be willing to plan ahead, then make improvements and adjustments along the road. While there are no "best" or "right" reasons for starting a home-based business, it is vital to have a very clear idea of what you are getting into and why. Ask yourself these questions:
- Are you a self-starter?
- Can you stick to business if you're working at home?
- Do you have the necessary self-discipline to maintain schedules?
- Can you deal with the isolation of working from home?
Working under the same roof that your family lives under may not prove to be as easy as it seems. It is important that you work in a professional environment; if at all possible, you should set up a separate office in your home. You must consider whether your home has the space for a business, and whether you can successfully run the business from your home.
Possible Legal Requirements
A home-based business is subject to many of the same laws and regulations affecting other businesses - and you will be responsible for complying with them. There are some general areas to watch out for, but be sure to consult an attorney and your state department of labor to find out which laws and regulations will affect your business.
Be aware of your city's zoning regulations. If your business operates in violation of them, you could be fined or closed down.
Restrictions On Certain Goods
Certain products may not be produced in the home. Most states outlaw home production of fireworks, drugs, poisons, sanitary or medical products, and toys. Some states also prohibit home-based businesses from making food, drink, or clothing.
Registration And Accounting Requirements
You may need the following:
- Work certificate or a license from the state (your business's name may also need to be registered with the state)
- Sales tax number
- Separate business telephone
- Separate business bank account
If your business has employees, you are responsible for withholding income and social security taxes, and for complying with minimum wage and employee health and safety laws.
Money fuels all businesses. With a little planning, you'll find that you can avoid most financial difficulties. When drawing up a financial plan, don't worry about using estimates. The process of thinking through these questions helps develop your business skills and leads to solid financial planning.
Related Guide: For guidance on setting up a business plan, please see the Financial Guide BUSINESS PLANS: How To Prepare An Effective One.
Estimating Start-Up Costs
To estimate your start-up costs, include all initial expenses such as fees, licenses, permits, telephone deposit, tools, office equipment and promotional expenses.
Business experts say you should not expect a profit for the first eight to 10 months, so be sure to give yourself enough cushion.
Projecting Operating Expenses
Include salaries, utilities, office supplies, loan payments, taxes, legal services and insurance premiums. Don't forget to include your normal living expenses. Your business must not only meet its own needs, but make sure it meets yours as well.
It is essential that you know how to estimate your sales on a daily and monthly basis. From the sales estimates, you can develop projected income statements, break-even points and cash-flow statements. Use your marketing research to estimate initial sales volume.
Determining Cash Flow
Working capital-not profits-pays your bills. Even though your assets may look great on the balance sheet, if your cash is tied up in receivables or equipment, your business is technically insolvent-in other words, you're broke.
Make a list of all anticipated expenses and projected income for each week and month. If you see a cash-flow crisis developing, cut back on everything but the necessities.
Remember, preparation is the foundation of success. Learn how to strengthen your home-based business. Success doesn't just happen-you have to make it happen.