Planning A Home Based Business

Though untrained entrepreneurs have traditionally had a high rate of failure, small businesses can be profitable. Success in small home based business is not an accident. It requires both skills in a service or product area and acquisition of management and attitudinal competencies.

While the reasons for the rapid growth of home based business operations may vary from the need to supplement family income with few hundred dollars all the way to a sophisticated technical consulting service billing hundreds of thousands of dollars, there are many common characteristics and challenges to be considered in launching most home based businesses, regardless of size. Some tasks are universal to all small business startups, while others are unique to a home base.

Careful planning, based on interviews with dozens of home based operators over the past decade indicate that special planning is required to research legal and tax issues, proper space utilization and to establish time management discipline. Inadequate or careless attention to development of a detailed business plan can be costly for you and your family in terms of lost time, wasted talent and disappearing dollars.

The Entrepreneurial Personality

A variety of experts have documented research that indicates that successful small business entrepreneurs, whether male or female, have some common characteristics. How do you measure up? On this checklist, write a "Y" if you believe the statement describes you; an "N" if it doesn't; and a "U" if you can't decide:

_____ I have a strong desire to be my own boss.

_____ Win, lose or draw, I want to be master of my own financial destiny

_____ I have significant specialized business ability based on both my education and my experience.

_____ I have an ability to conceptualize the whole of a business; not just its individual parts, but how they relate to each other

_____ I develop an inherent sense of what is "right" for a business and have the courage to pursue it.

_____ One or both of my parents were entrepreneurs; calculated risk-taking runs in the family

_____ My life is characterized by a willingness and capacity to persevere.

_____ I possess a high level of energy, sustainable over long hours to make the business successful.

For both the novice and the experienced business person planning a small home based enterprise, an early concern requiring self-evaluation is Time Management.

It will be important to set aside a specific work area. For example, more than one fledgling business ledger has gone up in smoke, been chewed by the family dog, or thrown out with the trash when business records were not kept separate from family papers. Ready access to business records during work hours is essential, but they must be protected.

Check the reasons below for and against working at home that apply to you. List any additional drawbacks or obstacles to operating this business at home.

Pros  / Cons

Lower startup costs / Isolation

Lower fixed costs  / Space limitations

Tax benefits   / Zoning

Lifestyle flexibility  /  Security concerns

No commuting  /  Household

____________ /  interference

____________ ____________

____________ ____________

Note that changes in personal habits will be required. Examples:

• Self discipline to keep TV off while working.
• Limiting personal telephone calls in length and number
• Diligence in meeting work deadlines when no one is checking

Check first! Get the facts in writing. Keep a topical file for future reference. Some facts and forms will be needed for your business plan. There may be limitations enforced that can make your planned business impossible or require expensive modifications to your property

Items to be investigated, recorded and studied are:

In addition to community investigations, contact your insurance company or agent. It is almost certain that significant changes will be required in your coverage and limits when you start a home based business. When you have written a good description of your business, call your agent for help in insuring you properly against new hazards resulting from your business operations such as:

After you have gathered as much information as seems practical you may wish to evaluate a home based site vs. one or more other nearby locations. Here's a handy checklist. Using the "0" to "10" scale, grade these vital factors:

Factors To Consider Grades for each factor: Home Other

1. Customer convenience ______ ______

2. Availability of merchandise or raw materials ______ ______

3. Nearby competition ______ ______

4. Transportation availability and rates ______ ______

5. Quality and quantity of employees available ______ ______

6. Availability of parking facilities ______ ______

7. Adequacy of utilities (sewer water, power, gas) ______ ______

8. Traffic flow ______ ______

9. Tax burden ______ ______

10. Quality of police and fire services ______ ______

11. Environmental factors ______ ______

12. Physical suitability of building ______ ______

13. Provision for future expansion ______ ______

14. Vendor delivery access ______ ______

15. Personal convenience ______ ______

16. Cost of operation ______ ______

17. Other factors including how big can you get without moving ______ ______

The greater the difference between the totals of the two columns, the clearer your decision should be. In the space below. write out what your decision and the reasons that support it.

Decision:

____________________________________________

____________________________________________

Now that your research and plan development is nearing completion, it is time to move into action. If you are still in favor of going ahead, it is time to take several specific steps. The key one is to organize your dream scheme into a business plan.

What is it?

• Is written by the home based business owner with outside help as needed
• Is accurate and concise as a result of careful study
• Explains how the business will function in the marketplace
• Clearly depicts its operational characteristics
• Details how it will be financed
• Outlines how it will be managed
• Is the management and financial "blueprint" for startup and profitable operation
• Serves as a prospectus for potential investors and lenders

Why create it?

• The process of putting the business plan together including the thought that you put in before writing it, forces you to take an objective, critical, unemotional look at your entire business proposal
• The finished written plan is an operational tool which, when properly used, will help you manage your business and work toward its success
• The completed business plan is a means for communicating your ideas to others and provides the basis for your financing your business

Who should write it?

• The home based owner to the extent possible
• Seek assistance in weak areas, such as:

• accounting
• insurance
• capital requirements
• operational forecasting
• tax and legal requirements

When should a Business Plan be used?

This outline is suggested for a small proprietorship or family business. Shape it to fit your unique needs.

cover Page:

A. Business Name: _______________

Street Address: __________________

Mailing Address: _________________

Telephone number: _______________

Owner(s) Name(s): _______________

Inside Pages:

B. Business Form: __________________

(proprietorship, partnership, corporation)

Include copies of key subsidiary documents in an appendix. Remember even partnerships require written agreements of terms and conditions to avoid later conflicts, and to establish legal entities and equities. Corporations require charters, articles of incorporation and by-laws.

Part II. - Business Purpose and Function

In this section write an accurate yet, concise description of the business. Describe the business you plan to start in narrative form.

What is the principal activity? Be specific. Give product and/or service description(s):

• retail sales?
• manufacturing?
• service?
• other?

How will it be started?

• a new startup
• the expansion of an existing business
• purchase of a going business
• a franchise operation
• actual or projected start up date

Why will it succeed? Promote your idea!

• how and why this business will be successful.
• what is unique about your business
• what is its market "niche"

The marketing plan is the core of your business rationale. To develop a consistent sales growth a home based business person must become knowledgeable about the market. To demonstrate your understanding, this section of the home based business plan should seek to concisely answer several basic questions:

Describe the profile of your typical customer

Age:

Male, female, both:

How many in family:

Annual Family Income:

Location:

Buying patterns:

Reason to buy from you:

Other:

Geographically describe your trading area: (i.e. county, state, national, etc.)

____________________________________________

____________________________________________

Economically describe your trading area: (single family, average earnings, number of children, etc.)

Total units or dollars:

Growing: __________ Steady: __________ Decreasing: ___________

If growing, annual growth:

____________________________________________

Who is your competition? No small business operates in a vacuum. Get to know and respect the competition. Target your marketing plans. Identify direct competitors (both in terms of geography and product lines), and those who are similar or marginally comparative. Begin by listing names, addresses and products or services. Detail briefly but concisely the following information concerning each of your competitors:

• Who are the nearest ones?
• How are their businesses similar or competitive to yours?
• Do you have a unique "niche"? Describe it.
• How will your service or product be better or more salable than your competitors?
• Are their businesses growing? Stable? Declining? Why?
• What can be learned from observing their operations and/or talking to their present or former clients?
• Will you have competitive advantages or disadvantages by operating from home? Be honest!

Remember your business can become more profitable by adopting the good competitive practices and by avoiding their errors.

To help you evaluate how successful your product or service will be. go down. the following list of standard characteristics (you may want to add more from your knowledge of your field) and make a candid evaluation of your competitive "edge" On a scale of "0" (theirs puts mine to shame) to 10 (mine puts their to shame) indicate the potential for you and a total score:

Feature

Price ______

Performance ______

Durability ______

Versatility ______

Speed/accuracy ______

Ease of operation or use ______

Ease of maintenance or repair ______

Ease or cost of installation ______

Size or weight or color ______

Appearance or styling or packaging ______

Total Points __________

A Total Points score of less than 60 indicates that you might reconsider the viability of your product or service and/or think about how you can improve it. Over 80 points indicates a clear competitive edge.

What percent of the market will you penetrate?

1. estimate the market in total units or dollars

2. estimate your planned volume

3. amount your volume will add to total market

4. subtract 3 from 2

Line 4 represents the amount of your planned volume that must be taken away from the competition.

What pricing and sales terms are you planning? The primary consideration in pricing a product or service is the value that it represents to the customer, If on the previous checklist of features, your product is truly ahead of the field, you can command a premium price. On the other hand, if it is a "me too" product, you may have to "buy" a share of the market to get your foothold and then try to move price up later. This is always risky and difficult. One rule will always hold: ultimately the market will set the price. If your selling price does not exceed your costs and expenses by the margin necessary to keep your business healthy you will fail. Know your competitors pricing policies. Send a friend to comparison shop. Is there discounting? Special sales? Price leaders? Make some "blind" phone calls. Detail your pricing policy:

____________________________________________

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What is your sales plan? Describe how you will sell, distribute and or service what you sell? Be specific. Below are outlined some common practices:

Direct sales by telephone or in person. The tremendous growth of individual sales representatives who sell by party bookings, door to door and through distribution of call back promotional campaigns suggests that careful research is required to be profitable.

Mail Order. Specialized markets for leisure time or unique products have grown as more two income families find less time to shop. Be aware of recent mail order legislation and regulation.

Franchising

a. You may decide to either buy into someone else's franchise as a franchisee or

b. Create your own franchise operation that sells rights to specific territories or product lines to others. Each will require further legal, financial, and marketing research.

Distributors. You may decide to work as a local or regional distributor for several different product lines.

Outline your sales plan below:

____________________________________________

____________________________________________

What is your advertising plan? Each product or service will need its own advertising strategy as part of the total business marketing plan. Before developing an advertising campaign for your business plan, take time to review a few basic assumptions. By definition, advertising is any form of paid, non-personal promotion that communicates with a large number of potential customers at the same time. The purpose of advertising is to inform, persuade and remind customers about your company's products or services. Every advertising activity should have specific goals. Common examples are:

• To bring in sales orders or contracts
• To promote special events such as sales, business openings, new products
• To bring in requests for estimates or for a sales representative to call
• A special goal at the outset may be to use special media to establish yourself even before startup and to get potential customer "feedback"

These might include one or more of the following:

• Purchase and distribution of business cards to potential clients
• Posting notices on free bulletin boards in area supermarkets or office complexes
• A telephone survey of potential clients to alert them to your startup plans.

To assist in determining what types of advertising are appropriate and within company budget projections, it will be necessary to carefully review your customer profile.

From this review, establish a clear statement of advertising goals. Write down what you want your advertising to accomplish:

The next step will be to develop answers to the following crucial questions:

Q. What should be said about the business and how should it be stated?

A. ____________________________________________

Q. What media should be used?

A. ____________________________________________

 Q. How much can be afforded?

A. ____________________________________________

 Q. How can the advertising program be implemented?

A. _______________________________________

 Q. How can its effectiveness be measured?

A. ____________________________________________

The basic criteria for selecting specific types of media will include concise answers to the following:

Trading Area - Do you plan to serve or sell to an industrial market, a national market, a neighborhood or specialized market? Describe yours:

____________________________________________

____________________________________________

Customer Type - What does your potential customer read or listen to? Where? How often? What image does the media you are considering suggest? Does it fit your customer? Describe your customer:

____________________________________________

____________________________________________

Budget Restrictions - How will the amount of money you have to spend limit the media you can use? How can you spread your budget out over a year to give a repetitive, continuous message? While you may have to spend more at the start, a good ongoing guideline is that advertising should not exceed one or two percent of sales. Set forth how much you are willing to invest in advertising in the first year: __________

Break into months or quarters:

____________________________________________

____________________________________________

Continuity of Message - How will the type of product or service, customer profile and seasonal buying patterns affect your choice of media and the frequency with which you advertise? Explain your message here:

____________________________________________

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Past Performance - What is the track record for use of the medium you are considering for your type of business? What do your competitors use? What does your trade association suggest? Enter appropriate comments here:

____________________________________________

____________________________________________

Who will do what? Be sure to include four basic sets of information:

• State a personal history of principals and related work, hobby or volunteer experience (include formal resumes in Appendix).
• List and describe specific duties and responsibilities of each.
• List benefits and other forms of compensation for each.
• Identify other professional resources available to the business: Example: Accountant, lawyer, insurance broker, banker, etc. Describe relationship of each to business: Example: "accountant available on part time hourly basis, as needed, initial agreement calls for services not to exceed x hours per month at $ xx.xx per hour".

To make this section graphically clear, start with a simple organizational chart that lists specific tasks and shows, who (type of person is more important than individual name) other than for principals will do what indicated by arrows, work flow and lines of responsibility and/or communications.

Concisely answer the following questions:

Q. What are your personnel needs now?

A: ____________________________________________

____________________________________________

Q. What skills must each key person have?

A: ____________________________________________

____________________________________________

Q. Are the people needed available? Name them, indicate full or part time and salary rates:

A: ____________________________________________

____________________________________________

Detail a proposed work schedule by week, and month for at least the first year.

If you have identified any gaps in personnel skills, state how these will be overcome by training, purchase of outside services, or subcontracting. Check with the nearest state employment service office for assistance. Write your plan:

____________________________________________

____________________________________________

What is your banking plan?

What will be the location and type of bank accounts opened for the business. A word of caution, keep business accounts separate from personal or family accounts. These vital records will be necessary for future tax and accounting purposes. Describe your banking plan:

____________________________________________

____________________________________________

How Is Your Credit Rating?

There may be several partial answers to this question. All will be of importance to the future of the business. First, what is your personal history of paying debts?

The purpose of this section is to summarize from previous sections, the various operations of your business and link them to the finance section of your business plan. In addition you will want to summarize the advantages and disadvantages of a home based business operation. Refer to your earlier checklist. Write your summary here:

____________________________________________

Clearly the most critical section of your Business Plan Document is the Financial Plan. In formulating this part of the planning document, you will establish vital schedules that will guide the financial health of your business through the troubled waters of the first year and beyond.

Before going into the details of building the Financial Plan, it is important to realize that some basic knowledge of accounting is essential to the productive management of your business. If you are like most home business owners, you probably have a deep and abiding interest in the product or services that you sell or intend to sell. You like to do what you do, and it is even more fulfilling that you are making money doing it. There is nothing wrong with that. Your conviction that what you are doing or making is worthwhile is vitally important to success. Nonetheless, the income of a coach who takes the greatest pride in producing a winning team will largely depend on someone keeping score of the wins and losses.

The business owner is no different. Your product or service may improve the condition of mankind for generations to come, but, unless you have access to an unlimited bank roll, you will fail if you don't make a profit. If you don't know what's going on in your business, you are not in a very good position to assure its profitability. Most home based businesses will use the "cash" method of accounting with a system of recordkeeping that may be little more than a carefully annotated checkbook in which is recorded all receipts and all expenditures, backed up by a few forms of original entry (invoices, receipts, cash tickets, etc.)

If your business is, or will be, larger than just a small supplement to family income, you will need a something more sophisticated. Stationery stores can provide you with several packaged small business accounting systems complete with simple journals and ledgers and detailed instructions in understandable language.

Should you feel that your accounting knowledge is so rudimentary that you will need professional assistance to establish your accounting system, the classified section of your telephone directory can lead you to a number of small business services that offer a complete range of accounting services. You can buy as much as you need, from a simple "peg-board" system all the way to computerized accounting, and monthly profitability consultation. Rates are reasonable for the services rendered and an investigative consultation will usually be free. Look under the heading, "Business Consultants", and make some calls. Be sure to let them know the size of your business so you get to the ones who specialize in home based operations. Many of them are home-based entrepreneurs themselves and know what you will be going through.

Let's start by looking at the makeup of the Financial Plan for the business.

The Financial Plan includes the following:

1. Financial Planning Assumptions - these are short statements of the conditions under which you plan to operate.

Market health:

Date of startup:

Sales buildup ($):

Gross profit margin:

Equipment, furniture and fixtures required:

Payroll and other key expenses that will impact the financial plan:

2. Operational Plan - Profit and Loss Projection - this is prepared for the first year broken into twelve individual months. It should become your first year's Budget.

3. Source of Funds Schedule - this shows the source(s) of your funds to capitalize the business and how they will be distributed among your fixed assets and working capital.

4. Pro Forma Balance Sheet - "Pro forma" refers to the fact that the balance sheet is before the fact, not actual. This form displays Assets, Liabilities and Equity of the business. This will indicate how much Investment will be required by the business and how much of it will be used as Working Capital in its operation.

5. Cash Flow Projection - this will forecast the flow of cash into and out of your business through the year, It helps you plan for staged purchasing, high volume months and slow periods.

Creating the Profit and Loss Projection

                   Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total

Sales ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___

(-) Cost of sales ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___

(=) Gross profit ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___

Controllable expenses

Operating supplies ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___

Gross wages ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___

Repairs and
maintenance ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___

Advertising ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___

Car and delivery ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___

Bad debts ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___

Administrative
and legal ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___

Outside labor ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___

Miscellaneous
expenses ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___

Total controllable exp ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___

Fixed expenses

Rent ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___

Utilities ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___

Insurance ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___

Taxes and licenses ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___

Interest ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___

Depreciation ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___

Total fixed expenses ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___

Total expenses ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___

Net profit ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___

Source of Funds Schedule

To create this schedule, you will need to create a list of all of the Assets that you intend to use in your business, how much investment each will require and the source of funds to capitalize them.

Before you leave your Source of Funds Schedule, indicate the number of months (years x 12) of useful life for depreciable fixed assets. (In the example, the pickup truck, the packaging machine and the furniture and office equipment would be depreciable.)

You will need this data to enter as monthly depreciation on your Profit and Loss Projection. All of the data on the Source of Funds Schedule will be needed to create the Balance Sheet.

Creating the Pro Forma Balance Sheet

Here is a Balance Sheet form. There are a number of variations of this form and you may find it prudent to ask your banker for the form that the bank uses for small business. It will make it easier for them to evaluate the health of your business.

Cash Flow Projection

An important subsidiary schedule to your financial plan is a monthly Cash Flow Projection. Prudent business management practice is to keep no more cash in the business than is needed to operate it and to protect it from catastrophe. In most small businesses, the problem is rarely one of having too much cash. A Cash Flow Projection is made to advise management of the amount of cash that is going to be absorbed by the operation of the business and compares it against the amount that will be available.

Is Additional Money needed?

Suppose at this point you have determined that your business plan needs more money than can be generated by sales. What do you do?

In completing this worksheet, you have put in a great deal of time and effort. You should now have all of the elements needed to present as simple or sophisticated a prospectus for your enterprise as you desire. More important, you have created the management tools to guide you in your venture. Once the business opens its doors, you will be inundated by the details, problems, challenges and joys of going it alone. It will be difficult to hold to your course through the rough seas ahead, but don't forget this "chartbook", it will see you through to "Port Profit" It should be a living document, referred to regularly massaged constantly and revised to reflect your experience.