What You Need to Know When Starting Up a Home Business
Image by StartupStockPhotos from Pixabay
Congratulations! You've decided to start a home business - good for you! Whether you're hoping to generate extra income in addition to a regular job to help make ends meet, or you want to fulfill some entrepreneurial goals, you need to understand that home businesses offer many challenges. But if you follow these 18 tips from successful home business owners, you can increase your chances of reaching profitability without spending every waking moment and every last dollar to get there.
1. Decide which area of your home you will devote to the business. Every home business requires that a certain amount of space be devoted solely to the business. A basement office, a spare bedroom, garage, or attic - any area will do as long as it has enough room for the supplies, equipment, materials, workspace and storage you will require, for the lifetime of the business.
Choose a space that is separate and apart from family usage. The workspace ideally should have walls and a door, so that family members know that when you are inside that area, you are at work and not to be disturbed.
2. Determine how much time you will need to spend on the business. Many people start a home business on a part-time basis while raising a family or working a "regular" job. But they may soon find that what they thought would be a part-time endeavour requires much more than part-time involvement to make it viable. Before you jump in, do a realistic evaluation of how many hours per week you think the business will need, and how many hours per week you can actually devote to it. Make up a weekly chart of your other work, home and family activities, and determine where (and if) your proposed home business would fit into that schedule. There's no point in starting a business if you are unable to devote the required time - that's a recipe for failure.
3. Figure out your start-up costs and where you'll get the money from. Some businesses require more cash outlay to get off the ground than others do. For instance, if your home business will be offering tax return preparation and accounting services, your biggest investments may be a computer system, accounting software and some office furniture. But if you're starting a landscaping business, your initial outlay could be much higher - lawnmower, leaf blower, snow blower, other yard care equipment, plus a vehicle to haul it all around.
There are three sources you can tap for start-up capital: (1) put your own money in, (2) get a loan, or (3) find investors, or some combination of those three. If you borrow the money from a bank or other commercial lender, the lender will have a security interest over the business' revenues and assets. If you are funded by investors, they would then receive a percentage interest in the business. The more they lend you, the more control they will have over the affairs of the business. The more you can fund it yourself, the better. This is especially true with a sole proprietorship, because if you go to a bank or finance company, you'll have to take a personal loan. And since most home-based businesses tend to be small and unproven, it's unlikely that you would qualify for a loan or be able to convince investors into putting funds into your venture.
4. Do sufficient research into the viability of the business. Before you spend your first dime, research the type of business you're planning on starting. There's no end of information available online. Check out the websites of businesses that are similar to yours, join some industry forums and ask lots of questions. Follow market trends and projections, especially as they relate to your region. If you don't have any experience in managing a business, learn the basics of business management, and learn how to set up a basic set of accounting records. A program like Quickbooks is a vital tool for small businesses and is easy to learn.
5. Check into any zoning or other restrictions in your area that might affect your ability to operate a business. If you own your home, contact municipal authorities to make sure your property is in an area zoned for both residential and business use. If you rent or lease, or if you live in a condo, check the lease or homeowner's association bylaws and rules to make sure that you're allowed to run a home business. You may need to get the written consent of the landlord or the HOA.
6. Decide on the best form of business entity. There are basically three forms of business entity: a sole proprietorship, a partnership, and a corporation. The most common form for home businesses is that of the sole proprietorship. As the name implies, a sole proprietorship is totally owned and operated by the proprietor of the business – in other words, by you. It is the least complicated form of business entity to establish and to dissolve.
You can set up a sole proprietorship without applying for a government permit or certificate, although you may be required to get a business license by the city and/or county in which you operate. You will probably also need to get a business number. If you have employees, or if you set the business up as a partnership or a corporation, you will need to get a tax number as well. A sole proprietorship means you're the boss and you own all the profits. Of course, you also are liable for all the debts of the business. But you don't pay corporate income taxes, only personal taxes. Whether or not the business succeeds will be dependent on your ability to operate and manage it, attract new customers and retain existing ones, and market your products and services. If you're not sure which structure your business should adopt, you should get the advice of an accountant and/or a corporate lawyer to pick the structure that will be the most advantageous for you.
7. Register your business name. Come up with several names that you like, and rank them in order of preference. Once you've chosen your business name, you will probably have to register it. Check with local government authorities to see which form(s) you need to file. Do this before you design a logo or order letterhead or advertising materials, because you may find out that the name is already registered by someone else.
8. Write a business plan. A good business plan is essential to set out your goals, mission statement and plan of action for the business. You will need a business plan if you are seeking start-up financing from a bank or looking for investors in your idea. Your business plan should include a clear description of your business model, your products and services, your background, qualifications and business experience, your target markets, a marketing plan, and financial projections for the next 3-5 years.
9. Obtain all the necessary licenses and permits. Check with the city, county and state or province you live in to find out what licenses, permits or approvals they require for your business. Your local Chamber of Commerce can also provide information.
10. Get a sales tax / GST number. If the product or service you sell is taxable, you will need a sales tax number (or GST number). Contact the tax department to find out if you are required to collect sales tax and if so, what forms you need to complete to get your tax number. You will also use your tax number when you purchase items for resale. For countries with GST, you will use your GST number to claim GST rebates on goods and services you purchase for the business.
11. Set up a bank account and business merchant accounts. Check with your current bank to find out what services they offer for small businesses, and in particular what their services charges are. If your current bank does not have a suitable solution, try another until you find one that fits your needs. If you plan to allow customers to pay by credit card, you will need a merchant account for each credit card that you are authorized to accept. You should also try to obtain a business credit card to pay for your business expenses. This may be difficult when you're first starting out. You may have to use a personal credit card to begin with. If you do use a personal card, reserve that card strictly for business use.
12. Find out what your allowable tax deductions are. You may be able to deduct a portion of your household expenses, such as a percentage of your utilities, mortgage costs, etc, as an allowable business expense. Contact your local tax authority for information, and to find out which forms and schedules you will need and what backup documentation you will need to submit with your tax return.
13. Set up your accounting and recordkeeping systems. You should definitely install a simple but comprehensive small business accounting package, such as Quickbooks. You will also need a paper filing / tracking system to keep your receipts, bank account records, invoices and other financial records.
14. Determine what other large purchases you will have to make in order to get started. List everything you will need - such as computers, office furniture and equipment, inventory, etc. Then start sourcing it out to get the best price. See what you can find online and through local newspapers, auctions, second hand outlets, and wholesalers. Some things will need to be purchased new, but there are numerous opportunities to purchase good quality used items for much less than you would pay for the same item off the showroom floor. Put off purchasing any items that can wait until you have a revenue stream coming in.
15. Set up business contact accounts - phone, fax, email, snail mail. Your customers need to reach you, so a phone number is vital (and probably a fax number as well). You may find it easier to have a cell number instead of a land line for your phone, but make sure the package you get is cost-effective and has all the features you will need for business use. You will also need email. If you don't have a website yet, at least set up a separate business email so that your business and personal emails are not getting intermingled. This is important because the levels of spam filtering you use for personal emails will typically be much higher and more restrictive than those you would set for your business emails. You should consider using a post office box as your mailing address, especially if your business involves mail order. Putting your home address on business cards, correspondence, etc. raises security concerns, including an increased risk of identity theft.
16. Design and print business stationery and promotional materials. If you have a flair for designing logos and business marks, design your own logo. If not, it's best to pay a professional design firm to do it for you. Choose the colors and designs carefully, because they will often be a potential customer's first impression of you and your business. Don't "cheap out" on the paper you choose for the printed materials. And unless you have a professional quality color laser printer, choose a reputable printer to print the final versions.
17. Make sure you have adequate insurance. Find out if your homeowners insurance will cover the replacement costs for equipment, computers and electronics, and furniture owned by the business. Talk to your insurance agent about a rider for your existing policy, or whether you need to obtain a separate business policy. Also make sure you have adequate personal and product liability coverage.
18. Get organized. You will need to juggle business and family time to make sure you have enough time and energy to devote to both. Sit down with your family members and devise a plan to divide household chores among all family members. Simplify your life wherever possible. Use scheduling apps to keep track of appointments, to-do's, errands, calls and call-backs, etc. Set up your work schedule for those hours when you are least likely to be interrupted by family, neighbors, personal phone calls and other distractions. Whenever you can, outsource certain jobs if it's cost-effective to do so (such as writing website copy, invoicing customers, mailouts, etc). It will free up your time to concentrate on the essential aspects of the business.