Planning a Home Based Business Homework has taken on new meaning recently. The drive for economic self-sufficiency has motivated large numbers of persons to market their skills and talents for profit from home. Our increasingly service oriented economy offers a widening spectrum of opportunities for customized and personalized small business growth.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. The purpose of this guide is to help you take stock of your interests, aptitudes and skills. Many people have good business ideas but not everyone has what it takes to succeed. If you are convinced that a profitable home business is attainable, this guide will provide step by step guidance in development of the basic written business plan. Information Gathering 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. While not every successful home based business owner starts with a "Y" answer to all of these questions, three or four "N"'s and "U"'s should be sufficient reason for you to stop and give second thought to going it alone. Many proprietors who sense entrepreneurial deficiencies seek extra training and support their limitations with help from a skilled team of business advisors such as accountants, bankers and attorneys. Selecting a Business Perhaps you have already decided what your home based business will be. You know how you will serve your market and with what. If not, but you are determined to establish a home based source of income, then you need to decide exactly what business you will enter. A logical first step for the undecided is to list potential areas of personal background, special training, educational and job experience, and special interests that could be developed into a business. Time Management 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 is very difficult for some people to make and keep work schedules even in the disciplined setting of an employer's office. At home, as your own boss, the problem can be much greater To determine how much time you can devote to your business, begin by drafting a weekly task timetable listing all current and potential responsibilities and the blocks of time required for each. When and how can business responsibilities be added without undue physical or mental stress on you and your family? Potential conflicts must be faced and resolved at the outset and as they occur Otherwise, your business can become a nightmare. During the first year of operation, continue to chart, post and check off tasks on a daily weekly, monthly basis. Distractions and excuses for procrastination abound. It is important to keep both a planning and an operating log. These tools will help avoid oversights and provide vital information when memory fails. To improve the quality of home work time, consider installation of a separate telephone line for the business and attach an answering machine to take messages when you do not wish to be distracted or are away from home. A business line has the added advantage of allowing you to have a business listing in the phone book and, if you wish to buy it, an ad in the classified directory Is a Home Based Business Site Workable?
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:
Ask family members to comment on pros and cons. Their concerns may require reconsideration of some specifics. Is a Home Based Business Site Allowable? Now you will want to investigate potential legal and community problems associated with operating the business from home. You should gather read and digest specialized information concerning laws and regulations concerning home based business operations.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:
Is the Home Based Business Site Insurable? 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:
Overall Home Site Evaluation 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: ____________________________________________ ____________________________________________ Writing the Business Plan 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?
Why create it?
Who should write it?
When should a Business Plan be used?
Proposed Outline For Home Based Business Plan This outline is suggested for a small proprietorship or family business. Shape it to fit your unique needs. Part I. - Business Organization 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):
How will it be started?
Why will it succeed? Promote your idea!
What is your experience in this business? If you have a current resume of your career include it in an appendix and reference it here. Otherwise write a narrative here and include a resume in the finished product. If you lack specific experience, detail how you plan to gain it, such as training, apprenticeship or working with partners who have experience. The Marketing Plan 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: Who is your market?
Age: Male, female, both: How many in family: Annual Family Income: Location: Buying patterns: Reason to buy from you: Other:
____________________________________________ ____________________________________________
____________________________________________ ____________________________________________ How large is the market? 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:
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: ____________________________________________ ____________________________________________ 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:
These might include one or more of the following:
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: ____________________________________________ ____________________________________________ 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: ____________________________________________ ____________________________________________ Management Plan Who will do what? Be sure to include four basic sets of information:
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? To establish a credit rating, it is necessary to secure credit with a number of businesses and to use it. Your rating will be based upon your record for paying for goods and services based upon the agreed terms. If your prior credit rating is poor discuss with your lawyer accountant and banker options for improvement before seeking and being refused business credit. Operational Plans Summary 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: ____________________________________________ ____________________________________________ The Financial Plan 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.
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 Use the form below to create your own Profit and Loss Projection 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 Advertising ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ Car and delivery ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ Bad debts ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ Administrative Outside labor ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ Miscellaneous 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. Even though you may plan to stags the purchase of some assets through the year for the purposes of this pro forma Balance Sheet, assume that all assets will be provided at the startup. 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? What you do depends on the situation. For example, the need may be for bank credit to tide your business over during the lean months. This loan can be repaid during the fat sales months when expenses are far less than sales. Adequate working capital is necessary for success and survival. A Final Word 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. Begin a planning cycle that expands this first year plan into one that spans three or five years out. Update it at regular intervals. Set your goals and live by them. Your success is in your hands. Good planning and good execution! |