A to Z Checklist for Starting a Home Business
~ Special Start-Up Guide to Home-Based Success
By Sandy Larson
It starts with a dream. Then the courage to take the first step toward realizing that dream. And then the next.
Before you know it, you will have transformed into the envy of all your cubicle chums, a shining example of a self-starting superhero, the fearless captain of your own destiny, the embodiment of rugged determination, a do-ten-jobs-at-once-multi-tasking-whiz — in other words, a home-based entrepreneur.
This transformation may not occur overnight, but it doesn’t take long. By reviewing the steps outlined in this issue of Home Business® Magazine, we hope that you will be inspired to begin your entrepreneurial journey today. As for those who are already a part of the exploding $1 trillion home-based sector, we hope this cover story provides you with some insight on achieving even greater success.
Please join us as we run through the checklist of steps to running a home business, from A to Z. Areas discussed include: choosing the right business structure, naming your business, developing a business plan, raising money, taking advantage of home office tax deductions, setting up a productive home office, dealing with legal issues, properly insuring your business, creating a professional image, setting the right price for your products and services, sales and marketing, working with employees, establishing a Web presence, generating publicity for your home business, and more.
√ Aptitude
Home-based entrepreneurs come from many different walks of life, but all share several personality traits in common. These traits include being highly motivated, self-confident, goal-oriented, willing to take risks, and hard working. Home-based entrepreneurs also possess both the ability and desire to work independently, without anyone looking over their shoulder, and they accept full responsibility for managing every aspect of their business, even on days when they don’t feel like going to work. Read Coping With Sick Days as a Home-Based Business Owner on page 86 of this issue for more information on this topic.
√ Basic Types
When devising a plan to start your home business, keep in mind that there are two basic types: those that provide products and those that provide services. Home businesses that provide products either produce the products themselves or purchase the products from a distributor or manufacturer. Examples of the different kinds of products a home business might sell include: books, cookware, cosmetics, health and fitness items, hobby materials, jewelry, household products, and toys. As for the other type of home businesses, they provide services both at their home office and at their customers’ locations. Examples of home-based service providers include: advertising agents, astrologists, accountants, childcare providers, computer technicians, pet sitters, business consultants, financial advisors, photographers, publicists, and virtual assistants.
√ Category Understanding: “Home-Based”
The above product and service providers are representatives of the hundreds of different home business categories, covering every possible interest and investment capability. Read through this issue to get a better feel for all the unique opportunities available.
Many businesses fall under the category of “home-based” in that they are operated both at and from the home. It is important to understand that for many of these businesses, only the administrative work is completed from home, while the business’ core function is performed off-site, such as at a client’s home or office. Examples of these types of mobile businesses include: auto detailing, home repair, window cleaning, and delivery services. Refer to this issue’s article starting on page 32, Gain Your Home Office Edge, for more information.
√ Distinguish Between Business Options
When it comes to starting a home business, you can either draft up your own blueprint for managing future operations or subscribe to a pre-formatted process. Below are your options:
Invest in a Franchise. As a franchise owner, you (the franchisee) would pay a company (the franchisor) for the right to sell its trademarked products or services. Investment requirements and royalty fees are often high, and company restrictions sometimes cumbersome, but franchises generally offer high levels of training and support. The average start-up costs for a franchise exceed $25,000.
Buy into a Business Opportunity. Like franchises, business opportunities clearly lay out instructions for starting and operating a business. Labeled as “business packages” and “network marketing opportunities,” these programs offer varying levels of support and typically require lower levels of investment than a franchise. Start-up costs for some business opportunities are under $100.
Start a Business from Scratch. This option does not require you to adhere to a pre-defined business model or pay any initiation or royalty fees. On the downside, there is no one offering you guidance, outlining what works and what doesn’t. You make all of the decisions, but you also reap all of the benefits.
√ Evaluate the Investment
Before waltzing into your boss’ office to drop off your two-week’s notice, carefully calculate how much money you will need to both operate your business and keep food on the table. First, consider all of the start-up costs associated with setting up a home office, advertising your business, obtaining appropriate licenses, consulting with professionals, and purchasing inventory. Next, estimate the ongoing costs, such as utility, payroll, and maintenance expenses. Don’t forget to add in living expenses. After you evaluate the total investment, you may find that you need to save up more money or hang onto your full-time job for a little longer.
√ Full- or Part-Time Decision
One of the truly great advantages of being a home-based entrepreneur is being able to start and grow your business at your own pace. If you want to jump in full force and devote all of your waking hours to the rapid development of your business, you can. However, if you want to take things slow and gradually ease into business ownership, you can take the part-time route as well. In fact, many entrepreneurs choose this second option, because it enables them to maintain a steady income while securely testing the waters of self-employment.
√ Get the Facts
Before launching a business, carefully study the market for your product or service. Determine if there is enough demand to support your decision to compete. Additionally, if you decide to buy into a home business opportunity or franchise, research the offering thoroughly before signing any contract or bringing out your checkbook. Complete the following:
• Investigate the company’s history and review the credentials of its upper management.
• Perform a background check on the company through the Better Business Bureau and appropriate chamber of commerce.
• Contact at least three other people who have invested in the opportunity.
• Verify the investment amount required to start and operate the business.
• Review the company’s earnings statement.
• Obtain terms and conditions in writing.
• Consult with an attorney if necessary.
√ Home Business Structure
After choosing a home business, you must decide how you want to structure it, taking into consideration both liability protection and tax implications. Below are your different options:
Sole Proprietorship: As a sole proprietor, you and your business are the same entity. Since a sole proprietorship provides no liability protection, separate insurance is required to protect personal assets.
Partnership: Two or more entrepreneurs share work responsibilities — and thus, profits — in this type of business structure. Each partner is also responsible and liable for business actions (i.e. debts incurred) of other partners. Partnerships are easier to start than corporations and are subject to fewer government regulations.
Corporation: Incorporating allows home business owners to free themselves from most financial and legal liability. With incorporating fees, legal filing fees, and annual costs, corporations are more expensive to create and maintain than other types of business structures. They are also more closely regulated by the state and the IRS. A limited liability corporation (LLC), which must have a minimum of two owners, offers the tax benefits of a partnership, yet the personal asset protection of a corporation. An S-Type corporation is also a good option for a home business owner because it allows one to pay income tax only on personal income, and not on corporate income — thus eliminating double taxation.
√ Insurance
It is critical to obtain adequate insurance coverage for your home business, above and beyond your existing personal and homeowner’s insurance. In some cases, you may only need to get a business rider added to your existing homeowner’s insurance. However, you may need to get separate policies. You will need to obtain worker’s compensation insurance if you have any employees. You will also need special liability insurance if you plan to invite clients to your home. Other types of business insurance to consider are business interruption, business property, disability, health, and partnership insurance. For more information on the coverage you need, turn to page 36 and read Most Home-Based Businesses Not Properly Insured in the Newsstand section of this issue.
√ Jumpstart Your Telecommunications
Home-based entrepreneurs rely heavily on the telephone to conduct a major portion of their business communications. Because of this, it’s worth investing in a professional phone system right from the start. Select a multi-line phone which offers useful features, such as call forwarding, caller I.D., conference calling, call pick-up, call return, and voice mail. A cordless telephone and separate fax line will also keep your communications running smoothly. If you choose not to invest in a professional phone system, consider hiring a virtual assistant to manage your phone calls and give your business a more professional image. Virtual assistants, who perform a wide variety of administrative tasks beyond answering phones, have become increasingly popular among home businesses in recent years. Read Establish Your Expertise (and Make Money Too!) with Teleclasses on page 62 and Hire a Home-Based Secretary on page 90 of this issue for more information on telephone support.
√ Know Your Niche
Finding a “niche” for your product or service will enable you to concentrate your marketing efforts on reaching a specific market segment. Niches are determined by evaluating the unique needs of your prospective customers, where they live, what appeals to them, and which marketing methods work best on them. Since a niche attracts fewer competitors, it’s in a home business owner’s best interest to clearly identify one before attempting to compete with the already established companies for a tiny share of a broader market.
√ Legal Issues
There’s no time like the start-up phase of your home business to enlist the help of an attorney. By spending money upfront to obtain the legal support you need, you will avoid encountering potentially devastating problems in the future. Once you are in business, it’s also wise to seek legal help before entering into any type of a business relationship. Your attorney can help you create a Memorandum of Understanding (MOU) that will clarify such ambiguities as how people will be paid, what level of investment is required, who is responsible for what, how key decisions will be executed, and how one party can exit the partnership. Getting everything in writing will help you avoid lawsuits and other difficulties that may arise from entering a business partnership.
√ Money Sources
Don’t let a lack of financing deter you from starting or expanding your home business. You have many options for raising the funds you need to reach your goals. Sources include: loans from family, bank loans, withdrawals from your personal savings or retirement savings account, SBA loan, short-term credit card financing, and borrowing against home equity. Other ways to improve your cash flow situation are applying for supplier credit and factoring your accounts receivable — a strategy that entails selling off your accounts receivable to a third party at a discount. For detailed information on your options for raising money, read Fueling Your Start-Up With Cash on page 72 of this issue.
√ Naming Your Business
The name you select for your home business will have a tremendous impact on how the market perceives you. If your name does not adequately describe the product or service you are selling, potential customers may not take the time to learn about your home-based company. Strive to create a name that is both descriptive and memorable. Consider registering your name, logo, or other identifying mark with the U. S. Patent and Trademark Office (www.uspto.gov).
√ Office Set-Up
Designing a high-efficiency home office will give a heavy-duty boost to your productivity level. First, concentrate on layout. Set up your home office in a location of your home that is not subjected to a lot of foot traffic or household noise. A spare bedroom, basement, garage, and attic are some good choices. Make sure there are several storage options, good lighting, and proper ventilation.
Next, focus on equipping your home office with appropriate furniture and equipment. In addition to choosing an ergonomically designed chair and desk, look into purchasing a computer, monitor, printer, copier, fax machine, credit card processing machine, and possibly computer networking supplies. To conserve space, you might consider investing in an all-in-one printer/copier/fax machine. You should also sign up for high-speed Internet access and purchase the essential word processing, desktop publishing, spreadsheet, database management, anti-virus, and financial management software programs. For complete information on setting up your home office, read Equip Your Office for Maximum Productivity starting on page 82 of this issue.
√ Planning Your Home Business
A good business plan will clearly outline your business objectives and how you plan to reach them. Although a business plan is helpful when pitching to investors, it primarily serves as a personal roadmap for launching and operating your home business. Your business plan should include: a summary and overview/history of your company; market analysis; sales and marketing plan; revenue, expense and profit projections; and your financing plan. Keep your business plan flexible and straightforward so that you can quickly make changes as necessary. Read How to Write a Business Plan on page 24 of this issue.
√ Quality Pricing
Pricing is a subjective process that requires continual trial and error. Factors influencing price include: your competitive advantages, what the competition is charging for the same product or service, level of demand, and what customers are willing to pay for your type of offering. To get a general idea of what you should charge, start off by establishing a baseline price (Baseline Price=Direct Costs+Overhead+Profit). You can then perform a break-even analysis to find out the number of sales you need to make to cover all of your costs. This will let you know exactly how much of the product or service you must sell. For more information on pricing, read Focus on a Trade, Not a Discount on page 44 and The Art of Pricing on page 100 and of this issue.
√ Record Keeping
Being a home business owner requires one to keep accurate and up-to-the-minute records of virtually every aspect of a business, including inventory, expenses, payroll, profits, cash flow, sales tax, and accounts receivable. Try doing your record keeping on the computer so you can easily update your information and generate reports. It’s also important to stick with just one accounting method: “cash” or “accrual.” With cash basis accounting, you report sales when you receive payment and report expenses when you pay a bill. Alternatively, with accrual basis accounting, you report sales and expenses when they actually occurred, not when money has been exchanged.
√ Sales & Marketing
It’s easy to get caught up in the day-to-day grind of running your home business and lose focus on what should be your two main priorities: Sales and Marketing. Here’s what they entail:
Advertising.Build brand recognition and generate sales by advertising in magazines, newspapers, Yellow Pages, on the Internet, and on the radio.
Networking. Through successful networking, you can easily convert existing contacts into customers. Potential customers include family, friends, business associates, and fellow members of the community and political organizations you are involved in.
Public Relations. There are several ways to generate free publicity for your home business. Examples include sending out press releases to members of the media, teaching a seminar, and being a guest on a radio talk show.
Direct Marketing (DM). DM involves using targeted mailing lists to send mail pieces, sales brochures, flyers, newsletters and product samples to prospective customers.
For thorough sales and marketing information on these areas, read this issue’s articles, titled Quick Start-Up Marketing Plan (page 40), A Supporting Cast for Direct Marketing (page 46), and Those Magic Phrases (page 50).
√ Tax Deductions
One of the understated perks of being a home-based entrepreneur is being eligible for a myriad of tax deductions. These deductions apply to fuel and auto expenses, office furniture and equipment, office supplies, professional membership dues, and telephone expenses. You may also be eligible to deduct a percentage of your mortgage interest, rent, real estate taxes, insurance, utilities, and household repair costs.
To qualify for these deductions, your office must be in an area of your home that is designated for business purposes only. Be sure to keep good records of your expenses and consult with your accountant. Read Did You Overpay Your Taxes? on page 76 of this issue for more tax deduction information.
√ Utilizing Employees and Contractors
In addition to assuming the responsibilities of CEO, home-based entrepreneurs must often juggle the roles of receptionist, accountant, marketing director, and head salesperson. This is a reality for many home business owners who lack the budget to hire a large staff.
One day, you may find that your home business generates more work than you can physically handle. At this point, it is wise to bring in back-up support. You have several options, including: hiring a full- or part-time employee, outsourcing tasks to another company, partnering with another company on a project-by-project basis, or linking up with an independent contractor. For more information on this topic, check out Why Every Business Needs an A-Team on page 56 and Hire a Home-Based Secretary on page 90 of this issue.
√ Verify Where You Stand Financially
Keeping track of your financial well being is a challenge for many home-based entrepreneurs. Fortunately, there are many financial management software programs on the market that help you do just that. Programs, such as Quicken®, make it easy for you to track your accounts payable and accounts receivable, as well as prepare for tax time. You will be able to better manage your cash flow and accurately measure your business’ profitability. Although setting up a financial management system takes some time initially, the long-term benefits are worth the investment.
√ Web Presence
In today’s competitive market, it’s mandatory for home businesses to take up occupancy on the Web. Failing to create a web presence transmits the negative message that you are not willing to accommodate those who prefer to conduct business online. It also implies that your company is not well established. In this respect, not having a web address is akin to not having a Yellow Pages listing in the ‘90s.
Demonstrate to your customers that your business is on solid ground and that you are able to compete with the big guys. Build a web site (or hire someone to build a web site) that informs customers what your business is all about, and give them the opportunity to make secure purchases online. Make it easy for customers to get a hold of you and give them a chance to “opt-in” for weekly or monthly newsletters. For great web site design tips, turn to page 28 of this issue and read Is Your Web Site Attracting Customers — Or Driving Them Away?
√ Xtra Profits
Once your home business is running smoothly, consider the different ways you can augment your revenue stream. For instance, if you have accumulated a large list of qualified leads, you might choose to sell the names and addresses to others targeting the same group. By doing so, you will effectively generate “ancillary profits,” or revenue above and beyond what you have already created by performing your core business operations. The best part is that generating this extra income requires you to make only a small additional investment. For more information on this topic, please read Start a Home Business and Use Space Outside the House to Grow on page 60 and When Do You Expand? Or Do You? on page 66 of this issue.
√ Your Professional Image
Establishing credibility starts with projecting the right image. Unless new customers have received a referral from a trusted source, they do not have much to judge you on. Knowing nothing about your work ethic or the quality of your products, new customers must rely on other indicators, like how you answer the phone or how quickly you respond to incoming e-mails. Projecting a professional image is not about showing up for a lunch date in an Italian sports car; it’s about paying close attention to the details. For instance, put extra effort into designing your letterhead and business cards, or hire a qualified individual to do the job. Create a professional-looking cover letter for all outgoing faxes. Proofread every piece of business correspondence that goes in the mailbox. When you pay close attention to these kinds of details, you will build not only a professional image, but also credibility.
√ Zoning
Investigate the neighborhood, city, and state laws that impact your future home business. These restrictions are in place to control the type of businesses conducted out of the home, as well as the volume and frequency of visitors. In general, they are designed to protect the interests of your neighbors, who do not want cars parked all over their street or potential problems with noise or pollution.
If you encounter an unreasonable municipal restriction, try applying for a variance or petitioning for an amendment to the zoning ordinance. Your local planning commissioner or city council member will be able to help you in this area. If it’s your homeowners’ association that’s placing the restriction, voice your concerns at a board meeting. Read the bylaws carefully, and be prepared to deliver a compelling argument for overturning the restriction.
Ultimately, make sure you have the appropriate licenses to operate your business, and stay abreast of the latest restrictions placed on home businesses in your area. For more details, contact your City Clerk.
√ As Easy as Learning Your ABCs
From a distance, starting a home business appears to be a daunting undertaking. But when you take a closer look and break the whole process down into to manageable pieces, you’ll find it’s not so overwhelming after all. We hope that our A to Z checklist provides you with a good foundation for starting the home business of your dreams. Keep in mind that there are plenty of home and small business resources at your disposal — especially on the Internet — so continue to read up on the latest business news, ask plenty of questions, and study the strategies of other successful entrepreneurs. Now, roll up your sleeves and get to work! HBM
