'How To Start and Operate Your Very Own Home-Based Business' 'Without Losing Everything'

ANSWERING THE BIG QUESTION:

What? Who? Where? How? and How Much?

You’ve come up with a business idea. Next, consider such questions as: Are there customers for my product or service? How do I know? How will I find them? Who are my competitors? What will I charge? How will I promote my product or service? Finding the answers to these questions is the challenging and sometimes tedious homework that will help you determine your chances for success, and whatever you should look for another more marketable idea.

What is my product?

'I pick up old tires and turn them into sellable mats of all kinds.' 'I bathe and groom poodles and small dogs.' 'I design, construct, and sell roll-top desks.' 'I make dried flower arrangements.' 'I teach intermediate and advanced piano to children.' 'I make PVC Pipe Furniture.' 'I create and draw plans for kid’s projects.' 'I design and implement direct mail advertising campaigns for small businesses and nonprofit organizations.' 'I gather and recondition old batteries.'

The first step in creating a business is to decide what your product is or what you want it to be. What are you selling? Practice writing a short, specific statement describing your product or service. Getting a clear idea of a business concept is one of the most difficult tasks in creating a business. Your statement may change several times as you experiment with the market and test your skills. Instead of 'I make toys,' you may want to narrow your product line to 'I make PVC Pipe Doll Furniture.' Instead of 'I write software programs for small business needs,' you may decide to tap into a big market and 'provide training for employees of small businesses in the use of accounting packages.' See how it feels to describe your product or service to family, friends, potential customers, and fellow business people. Is your description clear and brief? Can you say it with confidence and enthusiasm?

Who Will Buy It?

To develop and test your business idea, answer the question 'Who will buy my product or service?' Make a list of potential customers: individuals, groups, segments of the population, or other businesses that need your product or service. If you are making fabric-covered lap boards for people confined to bed, how will you quickly and inexpensively find a market? Through hospitals or home nursing care organizations? Through craft stores by displaying them as gift items? In mail order catalogs? Is there a market avenue that will reach children? Ask friends and colleagues for help in brainstorming all the possible markets (customers) and uses for your product or service.

Who Is The Competition?

Your business planning must also include an up-to-date analysis of your competition. Why? Because you need to plan your market position - how you will fit into the marketplace. Will your product or service be cheaper or more expensive than that of your major competitors? Will it be more durable? Will you be open during hours that your competitors are closed? What benefits can you build into your product or service that your competitors don’t offer? Will you do rush jobs?

In planning your business, look for a unique niche that will give you freedom from strong competition or that will make your product or service more valuable than others in the market. If you plan to open a day-care center and find that none in your area is open before school, early opening might make your service more competitive. If you discover that local caterers have overlooked the office party market, you might highlight that in your brochure. The more you can learn about your competition, the better you’ll be able to decide how to position yourself in the market.

Newspaper ads and trade magazines are other good sources of market information. Check also with the Chamber of Commerce, your county office of economic development, the Census Bureau, and business and professional organizations to gather market and pricing data.

Where Are The Buyers? How Can I Find Them?

As you become more familiar with the competition, you will also be discovering where and how to find buyers. Whatever the type of home business you want to open, you will need to do market research to determine if there are buyers for your idea, where they are, and how to find them. (And in the process, you will also be gathering information on pricing.)

Visit your local library to compile local and county statistics on the size and makeup of your market. (While you are at the library, check out some books on marketing research so you will know what you are getting into.) Also, check those of the following resources that might have data about your product or service or the people who would use it:

Encyclopedia of Associates, 17th Edition. Gale Research Company, Book Tower, Detroit, MI 48226

Ayer Directory of Publications. Lists trade publications by subject matter. Contact the sales, marketing, or research departments for buying patterns among their readers.

'Survey of Buying Power.' Sales, Marketing, Management Magazine. July issue each year.

Thomas’ Register. Lists companies by product and service line, organized geographically and alphabetically.

Directory of Business, Trade, and Public Policy Organizations. U.S. Small Business Administration, Office of Advocacy.

Department of Commerce Publications. Date User Series Division, Bureau of the Census, Washington D. C. 20233

County Business Patterns. U. S. Department of Commerce, Bureau of the Census. Available for each state.

When your marketing research is completed you will have 1) identified your potential customers; 2) found out all you can about their habits, needs, preferences, and buying cycles; and 3) decided how to reach them to generate sales.

How Much Shall I Charge?

Four main factors will help you decide what to charge for your product or service: 1) your direct and indirect costs; 2) the profit you want to make; 3) your market research data on competitors’ prices; and 4) the urgency of the market demand. There is rarely an exact 'right' price but rather an acceptable price range within which you will want to fall. Avoid the common mistakes made by many new business owners - charging too much or too little. Use several approaches to arrive at a cost and 'test' the price. If your ego is too involved, your price may be too high. On the other hand, if you have the attitude that 'this is just a little something I do in my spare time' or 'anybody could do this,' then your price may be too low.

Here is the formula for setting a fair price. Calculate your price using other approaches, too, before your make your final decision on price:

Typical Pricing Formula

1. Direct Material Costs - figure the total costs of the raw materials you have to use to make your item. Figure the cost of a group of items and then divide by the number of items to find the cost per item. If you can easily and immediately determine the material cost of a single item, fine. Some items are produced in batches, however, and it is easier to get an item cost by dividing the cost of a batch by the number of items eventually produced.

2. Direct Labor Costs - figure what you pay to employees to produce the item (whether or not you have employees now.) You must assign a wage figure, even if you are the only one producing the item. Take the weekly salary you pay someone to produce the necessary number of items and divide by the number of items. Add this figure to the Direct Material Costs total.

3. Overhead Expenses - These expenses include rent, gas and electricity, business telephone calls, packing and shipping supplies, delivery and freight charges, cleaning, insurance, office supplies, postage, payroll taxes, repairs, and maintenance. The accuracy of your costing depends on estimating logical amounts for all categories of expenses. If you are working at home, figure a portion of total rent or mortgage payment (in proportion to your work space and storage areas), or assign a reasonable, competitive rent figure for the same amount and type of space. List all overhead expense items and total them. Divide the total overhead figure by the number of items per month (or time period you used above). The answer is your overhead per item.

Overhead + Materials +Labor = Total Costs/Item

Profit - Include an amount added to the cost of each item so you won’t end up just breaking even or making the employees’ wages. Check your competition and see what they are charging. (Retails generally double the wholesale price.) If your product is comparable, price it similarly. Remember, you will get the profit from each sale, in addition to the salary figure. Add the profit figure you have chosen to the total cost per item to get your total price per item.

Profit + Total Cost/Item = Total Price/Item

Remember, the main purpose in operating a business is to make a profit. Don’t undersell your product or service just because 'I’d be baking cakes anyway' or 'I’m just starting out' or 'I work out of my home' or 'I’d be making these things as a hobby, anyhow'. If you have a new, rare, handmade product or personalized service, the demand may be so high that customers are willing to pay a little more.

Promotion Promotion is an overall, long-range plan designed to inform potential customers about what you have to sell. Advertising is usually thought of as the paid communication part of the promotion program.

To develop a total promotional campaign you must answer these questions: 1) What image or message do I want to promote? 2) What are the best media and activities for reaching my potential customers? 3) How much time and money can I spend on the effort?

Develop a long- range, consistent program for building image and reaching customers. Your image should be reflected in your business card, logo, stationery, brochure, newsletter, telephone and answering service, signs, paid ads, and promotional activities.

Word-of-mouth recommendations from satisfied customers are the very best promotion any business can have. Consider which promotional tactics will build the confidence and image you are looking for - giving speeches and interviews (often good for the counselors, teachers, lawyers, consultants), having an open house or holiday home sale (for craftspeople), holiday recitals or shows (for music and dance teachers or day-care operators), free demonstrations and samples (for retailers, decorators, caterers).

Several small ads may have more impact than one large splashy ad. Conduct a campaign rather than having a one-shot as or event. If you hire a public relations firm, look for one that can give you personal attention and develop a total marketing plan for you, not just a couple of ads. The plan should include market research, a profile of your target audience, a clear description of the image they recommend you project, the written copy, and a list of media (including cost and scheduling calendars) that are best for your type of product or service. As a new small business owner, you will probably decide to set aside a certain dollar amount per year or a percentage of past, current, or projected sales for paid advertising.

Case History Of A Successful Self-Promotion: A small town California dry cleaning firm was having difficulty obtaining customers. Since there were several similar businesses in town, the owner needed to come up with an unusual promotion. Here’s what he did;

The owner’s first thought was to reduce his initial price by $2.00 to attract first time customers. But his wife thought of a better idea. Why not obtain from the bank, a couple of thousand silver dollars and give one free coin to each customer. They would offer the coins for two days only, 'while the supply lasts.'

Was the promotion successful? You bet it was! For two days, they had customers lines up for two solid blocks. And they ended up giving away over 5,000 silver dollars. But in return, they gained 5,000 new customers for a gross income of over $35,000 in two days.

Not only that, they were smart enough to make up a list of all those new customers for future solicitations.

See how a little ingenuity can turn a ho-hum - or even failing - business around dramatically? When it comes to promoting your business, let your imagination soar.

MANAGING YOUR BUSINESS Structure, Recordkeeping, Taxes, and Insurance

You’re The Boss

A telling sign on a new businessowner’s desk read: 'Yesterday I didn’t even know how to spell Entrepreneur and now I are one!' Now that you have decided to open a home-based business, all decisions will be your responsibility, not just those you previously enjoyed because they involved your area of expertise. Of course, as a day-care operator you already knew how to soothe an upset child, but as the owner of that business, do you know when to file your taxes? As a consultant you have over 20 years’ experience advising organizations on personnel matters, but do you know if it’s to your advantage to incorporate? You are an expert at word processing, but do you know how to develop an efficient recordkeeping and billing system?

You are the boss now and the good health of your business depends on your management skills.

Choosing Your Form of Business Organization

One of the most important decisions you will make is how to set up the business as a 1) sole proprietorship, 2) partnership, or 3) corporation. Remember, the small business owner risks it all, no matter what form of organization.

The forming of a business organization depends on the following factors: * Legal Restrictions * Need for capital * Liabilities assumed * Number of people associated in the venture * Kind of business or operation * Tax advantages or disadvantages * Intended division of earnings * Perpetuation of the business

Most home-based businesses are sole proprietorships or partnerships, but a comparison of the advantages and disadvantages of each type of organization follows:

Sole Proprietorship

Advantages * Easiest to get started * Greatest freedom of action * Maximum authority * Income tax advantages in very small firms * Social Security advantage to owner

Disadvantages * Unlimited liability * Death or illness endanger business * Growth limited to personal energies * Personal affairs easily mixed with business

A partnership can be found by simply making an oral agreement between two or more persons, but such informality is not recommended. Legal fees for drawing up a partnership are higher than those for a sole proprietorship, but may be lower than incorporation. You would be wise, however, to consult an attorney to have a partnership agreement drawn up to help resolve future disputes.

Partnership

Advantages * Two heads better than one * Additional sources of venture capital * Better credit rating than corporation of similar size

Disadvantages * Death, withdrawal, or bankruptcy of one partner endangers business * Hazy line of authority * Difficult to get rid of bad partner

You can incorporate without an attorney, but you would be unwise to do so. You may think a small family corporation does not need an attorney, but an attorney can save members of a family corporation from hard feelings and family squabbles. Attorney’s fees may run high if organization problems are complex. The corporate form is usually the most costly to organize.

Corporation

Advantages * Limited liability for stockholders * Continuity * Transfer of shares * Easier to raise capital * Possible to separate business functions into different corporations

Disadvantages * Gives owner a false * Heavier taxes * Power limited by Charter * Less freedom of activity * Legal formalities * Expensive to launch

Recordkeeping

Keeping accurate and up-to-date business records is, for many people, the most difficult and uninteresting aspect of operating a home-based business. If this area of business management is one that you anticipate will be hard for you, plan now how you will cope. Don’t wait until tax time or until you are totally confused. Take a course at the local community college, ask a volunteer SCORE¿(Service Corps of Retired Executives) representative from the Small Business Administration to help you in the beginning, or hire an accountant to advise you on setting up and maintaining a recordkeeping system.

Your records will be used to prepare tax returns, make business decisions, and apply for loans. Set aside a special time each day to update your records. It will pay off in the long run with more deductions and fewer headaches.

If your business is small or related to an activity that is usually considered a hobby, it’s even more important that you keep good records. The IRS may decide that what you area doing is only a hobby, and you won’t be allowed to deduct expenses or losses from your home-produced income at tax time. So keep records of all transactions in which you spend or bring in money. Pick a name for your business and register it with local or state regulatory authorities. Call you city hall or county courthouse to find out how.

Your records should tell you these three facts: * How much cash you owe, * How much cash you are due, and * How much cash you have on hand

You should keep five basic journals:

1. Check register - Shows each check disbursed, the date of the disbursement, number of the check, to whom it was made out (payee), the amount of money disbursed, and for what purpose. 2. Cash receipts - Shows the amount of money received, from whom, and for what. 3. Sales journal - Shows the business transaction, date, for whom it was performed, the amount of the invoice, and the sales tax, if applicable. It may be divided to indicate labor and goods. 4. Voucher register - A record of bills, money owed, the date of the bill, to whom it is owed, the amount, and the service. 5. General journal - A means of adjusting some entries in the other four journals.

Choosing a Recordkeeping System

Set up your records to reflect the amount and type of activity in your particular business. There are a wide range of pre-packaged recordkeeping systems. The SBA’s pamphlet Small Business Bibliography No. 15 lists many such systems. The most useful system for a small, home- based business is usually based on what is called the 'One-Write System.' It captures information at the time the transaction takes place. These One- Write Systems are efficient because they eliminate the need for recopying the data and are compatible with electronic data processing if you should decide to computerize.

Even though you may be small and just beginning, it is probably wise to consult an accountant to help you decide which recordkeeping system is best for your business. Once it is set up, you can record the daily transactions or periodically have a bookkeeper post your daily transactions in your General Ledger and prepare your financial statements.

Be sure to establish a separate bank account for your business - even before the first sales. Then you will have a complete and distinct record of your income and expenditures for tax purposes, and you won’t have to remember which expenses were business and which were personal.

It is important to choose a recordkeeping system that you understand and will use. It will help you see how well the business is doing and is the first step in responsible financial management.

Tax Obligations and Benefits

Significant tax savings are available to the home-based business owner in the form of deductions, credits, and depreciation allowances. The time, money, and energy you put into keeping good records and keeping current on tax laws will be worthwhile and ensure that you operate within the law. You will need to plan for income tax, social security (all self-employed persons must pay a federal self-employment tax), employees’ taxes (if you hire anyone), property tax on your home and business-related taxes, such as sales tax, gross-receipts or inventory tax (in some states and localities), and excise or individual item taxes (on certain commodities).

The Internal Revenue Service supplies the following free booklets (and runs free workshops) to give you details on your specific obligations:

* Your Federal Income Tax (Publication 17) * Tax Guide for Small Business (Publication 334) * Business Use of Your Home (Publication 587) * Employer’s Tax Guide (Circular E) * Self-Employment Tax (Publication 533) * Tax Information on Retirement Plans for the Self-Employed (Publication 560) * Tax Information on Depreciation (Publication 534) * Information on Excise Taxes (Publication 510) * Tax Withholding and Estimated Tax (Publication 505)

There are various federal and state forms you will need to fill out to start a small business. The federal government requires you to fill out several forms including the following:

* Application for Employers Identification Number (Form SS-4)(If you have employees or are subject to excise tax) * Employer’s Annual Unemployment Tax Returns (Form 940) * Employer’s Quarterly Federal Tax Return (Form 941) * Employer’s Withholding Allowance Certificate (W-4) * Employer’s Wage and Tax Statement (W-2) * Reconciliation/Transmittal of Income and Tax Statements (W-3)

As a home-based business owner you should be aware the every business decision - each purchase and transaction you make - has tax implications or built-in tax advantages or disadvantages. Deductions may be available for home maintenance and improvements; automobile expenses; telephone expenses; office and work space; inventory space; major purchases, such as a computer; and a wide variety of other items like uniforms, coffee service, trademarks, a safe deposit box, credit bureau fees, and business cards.

Each Business situation is different and tax laws change, so consult up-to- date references, a trusted attorney, and an accountant who can advise you on your particular obligations and benefits.

Insurance

Insurance helps to safeguard your business against losses from fire, illness, and injury. You cannot operate without it. Talk with an insurance representative about your business needs. Check with the insurance carriers on your home policy and make sure business use of your home is compatible with your homeowner’s policy. In addition to homeowner’s policy (personal plan), now that you have a business, you will need a commercial policy for full protection. Discuss these other possible needs with your agent:

* Product Liability Coverage - to protect you in case your product causes injury to the user * Auto Liability and 'Non-owned' Auto Liability Insurance - if a car is ever used to support the business in any way. * Medical Payments Insurance - payable if someone is injured in your home whether or not it was your fault. * Worker’s Compensation - if you have employees * Business Interruption Insurance or Earnings Insurance - in case you business is damaged by fire or some other cause and you must totally or partially suspend operations. * Disability Income Protection - a form of health insurance in case you become disabled. * Business Life Insurance - to provide funds for transition if you die.

Be sure to keep all your insurance records and policies in a safe place - either with your accountant or in a safe deposit box. If you keep them at home for convenience sake, then give your policy numbers and insurance company names to your accountant or lawyer or put it in your safe deposit box.

Final advice for the wise business person is to read and understand the fine print in all policies and to reevaluate business insurance needs about every six months.

Other Considerations

Another aspect of planning is sheltering tax dollars through a Keogh Plan or corporate pension and profit-sharing plans, if your business is incorporated, or a retirement plan.

If you have a partnership, consider making a Buy/Sell Agreement with your partner(s). This agreement requires the surviving partner(s) to buy, and the heirs to sell, the deceased partner’s interest. The surviving partner(s) then become the sole owner(s) and the heirs receive cash for their share of the business.

DEALING WITH LAWS:

Zoning, Licensing, Permits, and Others

Unfortunately, many home-based business people try to 'slide' into business, saying 'I’ll just try it for a few months and see how things go' or 'It’s not really a business. I have only ten clients.' This attitude can lead to a lack of planning and big disappointments. If you set up your studio, print business cards and flyers announcing classes, and then find that regulations make it illegal to operate out of your home, you may have to start all over.

Zoning

Before you start your home-based business, do a thorough investigation of the zoning laws in your community. Zoning regulations spell out activities permitted and prohibited in specific portions of a city or county. Call your town hall, zoning office, or local library to get a copy of zoning laws. Find out the structure of your local zoning groups. Most areas have Planning, Zoning, and Appeals Boards.

If the home business you are planning conforms to zoning regulations then all you need to do is keep abreast of new proposals that may affect your situation. It’s a good idea to stay in touch with others operating from their homes by joining business organizations or neighborhood groups in case you ever need to band together to propose or oppose new regulations. Maintaining a low profile and friendly relations with your neighbors will result in more support from them should adverse regulations affecting your business ever be proposed.

If, through your research, you discover that the home business you are planning would violate the zoning code, there are several possible ways to proceed. You might wish to check with an attorney who specializes in zoning law to look for a legal way around the regulation. You might decide to apply to the Zoning Board for a variance or exception. Or you may be able to change your business enough to make the operation fit the law. If the regulation outlaws businesses that employ people other than the owner at home, maybe you can have employees take work to their own homes. If your business will create too much traffic, consider another strategy for product distribution. If your business will create too much noise, maybe you can soundproof your house. At last resort, ask yourself. 'Is it worth it to organize a drive to change the law?' Considering the rapid growth in the number of home-based businesses, you just might find other entrepreneurs who are also interested in submitting a change in the regulations to the Zoning Board. Go to meetings of the Board and try to identify the person who appears most active and most sympathetic to your position.

In the unfortunate and unlikely (most zoning officers don’t have time to chase people who aren’t bothering anybody) event that you are issued a 'cease and desist' order, you should: 1) file an appeal immediately with the Appeals Board (if you interpret the regulations differently than they do); or 2) submit a change in the regulation to the Zoning Board to allow your business, which may enable you to continue to operate without fines until the Board reaches a decision. You may need a lawyer if you are not entirely familiar with the regulations and the workings of the Board.

Cultural and national trends point in the direction of zoning regulations that allow quiet, nonpolluting, low-traffic kinds of home businesses. More and more corporations are employing people to work at home. Most neighborhoods will adopt a 'live and let live' attitude if you keep your premises neat and quiet and don’t create traffic and parking problems.

Keeping Up With Zoning Legislation

There are two ways to keep up with zoning legislation in your community (and with other topics of interest to home-based entrepreneurs). One way is to read local newspapers, especially the business section and the local or 'neighborhood' sections. Be sure you notice local items about such things as proposed subway stations or the county’s plan for revitalization. Changes like these could eventually influence zoning in your area. The other way to keep abreast of trends and zoning issues is to join the local chapter of a business group, such as the Rotary Club, the National Association of Women Business Owners, your local Chamber of Commerce, the National Family Business Council, or a Business and Professional Women’s Club. Through newsletters, meetings, and friendships that you develop, you will hear all the latest local (and national) issues discussed while you learn valuable business skills and make useful contracts.

Working With Professionals

Even the smallest and newest business needs help from at least two kinds of specialists: an attorney and an accountant. Depending on your type of business and your skills you may, from time to time, ask the advice of other professionals, such as a direct mail or marketing specialist, an insurance representative, management consultant, a computer specialist, a Realtor, a public relations expert.

Several guidelines will hold true no matter what type of expert you are dealing with: 1) Interview professionals to see if you will be comfortable working with them. Make sure they have served other small businesses similar to yours. Find out ahead of time exactly what service you are buying, what the working relationship will be and what fees will be charged. 2) Be completely honest about your business situation. Advice based on partial or incorrect information is no advice at all. If you are having problems, don’t be embarrassed. If your sales are down, give the experts all the information you have and work as a team to solve the problem. If business is good, don’t be afraid that professionals will steal your idea or expect a raise. Build a trusting, businesslike relationship. 3) Expect the professionals you hire to spend at least some of their time teaching you and explaining complex concepts. But don’t expect to be spoon-fed or delegate all decisions to them. Take a course at the local community college in recordkeeping and taxes or public relations to develop more skills in areas where you are inexperienced. 4) Keep your appointments and pay your bills promptly.

Your Lawyer

To find a lawyer who is familiar with business of your size and type, ask for a referral from a business colleague, your accountant, the local Chamber of Commerce, your banker, or some other trusted source. Some local bar associations run a lawyer referral and information service. Some just give you names; other actually give information on experience and fees to help you match your needs to the lawyer’s background and charges.

A Lawyer can help you decide which is the most advantageous business structure (sole proprietorship, partnership, or corporation). He or she can help you with zoning, permit, or licensing problems; health inspection problems; unpaid bills; contracts and agreements; patents, trademarks, copyright protection; and some tax problems. Because there is always the possibility of a lawsuit, claim, or other legal action against your business, it is wise to have a lawyer who is already familiar with your business before a crisis arises. A lawyer experienced with your type of venture should also advise you on laws, programs, and agencies - federal, state, and local - that help small businesses through loans, grants, procurement set-asides, counseling, and other ways. He or she will tell you about unexpected legal opportunities and pitfalls that may affect your business.

In choosing a lawyer, experience and fee should be related. One lawyer may charge an hourly rate that, at first, looks cheaper than another lawyer’s. However, because of a lack of experience in some area, the less expensive lawyer may charge a larger fee in the long run. Ask for a resume and check references. If you feel overwhelmed, take a trusted friend to the initial meeting to help you keep track as you interview the lawyer about services and fees.

If you retain a law firm, be sure you understand who will work on your case and who will supervise the work. If junior lawyers handle the work, the fees should be lower. That’s fine as long as you know an experienced attorney will be reviewing the case periodically.

Let your lawyer know that you expect to be informed of all developments and consulted before any decisions are made. You may also want to receive copies of all documents, letters, and memos written and received in your case or have a chance to read them in the lawyer’s office.

Ask the attorney to estimate the timetable and costs of your work. You may wish to place a periodic ceiling on fees, after which he or she would call you before proceeding to do work that would add to your bill. Always have a written retainer agreement, describing just what you and the lawyer expect of each other.

Your Accountant

Most businesses fail not for lack of good ideas or good will, but rather for lack of financial expertise and planning. Look for an accountant as you would an attorney. Get referrals from trusted friends, business associations, or professional organizations. Discuss fees in advance and draw up a written agreement about how you will work together. Your accountant (along with your lawyer) can advise about initial business decisions, such as the form of the business. Your accountant will help set up your books, draw up and analyze profit and loss statements, advise on financial decisions (e.g., buying a computer), and give advice on cash requirements for your start-up phase. He or she can make budget forecasts, help prepare financial information for a loan application, and handle tax matters.

Accounting firms offer a variety of services. If this is not an easy area for you, the fees you pay will be well worth it. Most firms will maintain books of original entry, prepare bank reconciliation statements and post the general ledger, prepare balance sheets and income statements on a quarterly or semi-annual basis, and design and implement various accounting and recordkeeping systems.

They will also get your federal and state withholding numbers for you, give instructions on where and when to file tax returns, prepare tax returns, and do general tax planning for the small business person.

Your accountant is your key financial advisor. He or she should alert you to potential danger areas and advise you on how to handle growth spurts, how to best plan for slow business times, and how to financially nurture and protect your business future.

State and Federal Laws That May Apply to Your Business

Most localities have registration and licensing requirements that will apply to you. A license is a formal permission to practice a certain business activity, issued by a local, state, or federal government. You may have the type of business that requires a permit from the local authorities. There is often a small fee for licenses and permits (usually $15-$25). A license may require some kind of examination to certify that the recipient is qualified. Your business name must be registered and a sales tax number must be obtained. Separate business telephones and bank accounts are usually required. Of course, you will want to have the latter anyway for accurate bookkeeping purposes. If you have employees, you are responsible for withholding income and Social Security taxes. You must also pay worker’s compensation and unemployment insurance and comply with minimum wage and employee health laws.

If your operations are intrastate, you will be concerned primarily with state and local, rather than federal, licensing. Businesses frequently subject to state or local control are retail food establishments, drinking places, barber shops, beauty shops, plumbing firms, and taxi companies. They are primarily service businesses and are subject to regulations for the protection of public health and morals. Your attorney can help you make sure you have complied will all licensing and permit requirements. Depending on your type of business you may have to comply with building and safety codes, too.

Think twice about the liabilities of operating without proper licenses and registrations. If you begin to advertise or are fortunate enough to 'make the news' in some way, you will probably hear from a local official. You will pay with embarrassment, time, and money if your business is not properly licensed.

If you find legal regulations, permits, and licenses confusing, make sure you find some way to get the information you need to operate legally. Get help from your lawyer, accountant, business partner, or even your local librarian. This is not an aspect of business operations that can be delayed until you 'get around to it.' Your business reputation and financial standing are at stake.

UNDERSTANDING THE FINANCIAL SIDE

Who needs financial planning? You do! All businesses run on money for the purpose of making money. A major reason for business failure is the lack of financial planning. Although it is nearly impossible to make exact estimates, approximate ones will help. The very process of thinking through these financial questions will develop your business acumen and lead to solid planning. Get your accountant involved in reviewing your plans and advising you, too.

Estimating Start-Up Costs

Begin your financial planning be estimating your initial or start-up costs. Include all items of a nonrecurring nature such as fees, licenses, permits, franchise fees, insurance, telephone deposit, tools, equipment, office supplies, fixtures, installation of fixtures and equipment, remodeling and decorating, funds for your opening promotional event if you plan to have one, signs, and, of course, professional fees for your attorney and accountant.

Depending on your type of operation, the amount of money you invest, and the energy you expect to put in (part-time to full-time) can determine how much working capital you will need. Many business experts say if you expect a profit in six months, double that time and be ready to operate without profits for twelve months to give yourself a cushion in case of unanticipated expenses or delays. Study growth patterns of other similar business and ask for advice from your accountant and attorney.

Projecting Operating Income and Expenses

Next, estimate the 'working' capital you will need to keep operating for six to twelve months. Operating expenses include salaries; expenses for telephone, light, heat, office supplies, and other supplies or materials; debt interest; advertising fees; maintenance costs; taxes; legal and accounting fees; insurance fees; business membership fees; and special services expenses, such as secretarial, copying, and delivery service.

It is a good idea to obtain typical operating ratios for the kind of business in which you are interested. Among the sources for such ratios are Robert Morris Associates, Dun & Bradstreet, Inc., the Accounting Corporation of America, your bank, trade associations, publishers of trade magazines, specialized accounting firms, industrial companies (for example, National Cash Register Co.), and colleges and universities. The typical ratios for your type of business combined with your estimated sales volume will service as benchmarks for estimating the various items of expense. However, do not rely exclusively on this method for estimating each expense item. Modify these estimates through investigation and quotations in the particular market area where you plan to operate.

In addition to business operating capital, you will need to plan for reserve capital to cover your personal expenses. This estimate will include all you normal living expenses, such as food, household expenses, car payments, rent or mortgages, clothing, medical expenses, entertainment, and taxes for you and your family.

After you have estimated start-up costs, working or operating capital needed for six to twelve months, and personal expenses and obligations, you may see that you need more start-up capital than you thought. What will you do? Discuss this with your accountant, attorney, and trusted business associates and family. Entrepreneurs secure needed capital in a variety of ways. You can:

* Get loans or gifts from family members or friends. Make businesslike, written agreements and be sure to disclose fully the potential risk as well as the possible profit.

* Apply for a bank loan. For this you will need a comprehensive statement of your personal financial condition and a business plan with your financial projections to present to the loan officer. If you need help in preparing your loan application, take a course for small business people at a local community college or visit your nearest SBA office to get assistance from a SCORE¿ counselor.

* Apply for an SBA loan guarantee. The SBA is not a bank, but it does extend guarantees and may rarely participate in a loan when the bank is unable or unwilling to provide the entire financing itself. The SBA loan officer will ask you the same hard questions as a loan officer in a commercial bank and require the same carefully considered data on your personal finances, start-up costs, and business projections.

* Search for some sort of venture capital. For start-up entrepreneurs some prior managerial or entrepreneurial track record is usually necessary in order to get venture capital. The main disadvantage of venture capital is that you will probably have to give up between 50 to 90 percent ownership of the new business in return for the capital. A home business is extremely unlikely to attract venture capital.

Understanding Your Balance Sheet

Your Balance Sheet is a summary of the status of your business - i.e., its assets, liabilities, and net worth - at an instant in time. By reviewing your Balance Sheet along with the Profit and Loss Statement and Cash-Flow Statement, you will be able to make informed financial and business planning decisions.

The Balance Sheet is drawn up using the totals from the individual accounts kept in your General Ledger. It shows what you have left when you pay all you creditors. Assets less liabilities equal capital or net worth. The assets and liabilities sections must balance - hence the name Balance Sheet. It can be produced quarterly, semi-quarterly, or at the end of each calendar or fiscal year.

While your accountant will be most helpful in drawing up your Balance Sheet, it is you who must understand it. Current assets are anything of value you own such as cash, inventory, or property that the business owner can convert into cash within a year; fixed assets are things such as land and equipment. Liabilities are debts the business must pay. They may be current (such as amounts owned to suppliers or your accountant) or they may be long-term (such as notes owed to the bank). Capital (also called equity or net worth) is the excess of your assets over your liabilities.

Prepare a Balance Sheet for your new business during the planning phase to estimate its financial condition at that time and also a projected one for the first year of business. This will help you decide on the feasibility of your venture and make modifications to ensure profitability. You can also use these statements as part of the documentation in a loan application.

Understanding Your Profit and Loss Statement

Your Profit and Loss Statement is a detailed, month-by-month tally of income from sales and the expenses incurred to generate the sales. It is a good assessment tool because it shows the effect of your decision on profit. It is a good planning tool because you can 'try out' decisions on paper before actually going ahead.

The Profit and Loss Statement includes four kinds of information:

* The Sales information lists the number of units sold and the total revenues generated by the sales.

* The Direct Expenses category includes the cost of labor, materials and manufacturing overhead (but not normal overhead)

* Indirect Expenses are the costs you have even if the product is not produced or the service is not delivered. They include the fixed costs (or normal overhead) of salaries, rent, utilities, insurance, depreciation, office supplies, taxes, and professional fees for your lawyer and accountant.

* Income or Profit is the last category on the Profit Loss Statement. It is shown both as your pre-tax and after-tax or net income. The IRS will look at your pre-tax figure, whereas your loan office and you are more concerned with your after-tax figure.

Your Profit and Loss Statement should be prepared at the very minimum of once a year - and more often in the beginning or growth stages of your business. It is a key document from which the economic health of a business can be determined. Make certain you do it properly and understand its meaning.

Understand Your Cash Flow Statement

Your business must have a healthy cash flow to survive. Cash flow is the amount of money available in your business at any given time. To keep tabs on cash flow, forecast the funds you expect to disburse and receive over a given period of time. Then you can predict deficiencies or surplus in cash and decide how to respond.

A cash flow projection serves one other very useful purpose in addition to planning. As the actual information becomes available to you, compare it to the monthly cash flow estimates you previously made to see how accurately you are estimating. As you do this, you will be giving yourself on-the-spot business training in making more accurate estimates and plans for the coming months. As your ability to estimate improves, your financial control of the business will increase.

The creative business owner works with his or her accountant to use the information gleaned from all of these financial tools to make a variety of managerial decisions - decisions on buying supplies, expansion, when to hire more employees, how to get the best tax breaks, and many other important steps that will shape the future of the business.

MAKE IT EASY ON YOURSELF

Successful home-based business owners learn from experience - their own and that of others. In Jeffry A. Timmon’s study of entrepreneurial personality characteristics (New Venture Creation: A Guide to Small Business Development), he notes that entrepreneurs are disappointed but not discouraged by failure. They use failures as learning experiences and try to understand their role in causing the failure in order to avoid similar problems in the future. Furthermore, Timmons asserts, entrepreneurs seek and use feedback on their performance in order to take corrective action and improve.

How To Learn From Experience

You can learn from experience in several ways:

First, work closely and creatively with professional advisors, such as your lawyer and your accountant. As you continually review your business records, you will see 'mistakes,' but you will also begin to develop skill in planning and managing.

Second, continue to learn about all areas of business operations, constantly acquiring new ideas. Most community colleges have short, inexpensive, practical courses for business owners in topics like 'Financing a Small Business,' 'Choosing a Small Business Computer,' and 'Starting and Operating a Home-Based Business.'

Third, get to know other business owners with similar needs or problems. Talking with others may be a way to avoid repeating mistakes they have made and you can benefit from their experience. Local and national organizations you can often advertise your product or service to other business owners. They also provide a way to learn about services you may need, such as accounting, public relations, or a responsible secretarial service. These organizations offer updates in such areas as taxes and zoning in their newsletters and workshops.

Finding and Using Resources, Network, and Support Groups

Start out with the attitude 'Whatever my current business problem, I can find the solution. Somewhere there is information, a book, a person, an organization, or a government agency that can help.' A word of warning though: finding resources and building networks can be very time- consuming. Joining organizations can turn out to be expensive, especially if you are too busy to use their services and support once you join. So use this list to organize your search for resources useful to you, then pick and choose carefully what you decide to read, join, buy, or attend.

Your Public Library: Visit you local library. Get to know its resources. In addition to books, many libraries offer free workshops, lend skill- building tapes, and become a central place to pick up catalogs and brochures describing continuing education opportunities for business owners. Ask the librarian for current copies of zoning regulations. Get familiar with new books resources in your field (computers, health care, crafts, etc.) as well as in business skills (advertising techniques, financing, etc.). Look for magazines such as In Business, Black Enterprise, Venture, Inc., Entrepreneur, Extra Income, Success, or The Journal of Small Business Management. Reading selectively is free. Subscribing to too many magazines can be expensive.

Organizations: A wide variety of local and national organizations have sprung up to serve the informational, lobbying and networking needs of business entrepreneurs. Through meetings, services, or newsletters, groups such as the National Association of Women Business Owners, American Entrepreneurs Association, Business and Professional Women’s Club, National Alliance of Homebased Businesswomen, and the National Association for Cottage Industry offer members everything from camaraderie to valuable 'perks,' such as group rates on health insurance. David Gumpert’s book, The Insider’s Guide to Small Business Resources, has addresses of many of the groups and other information on such resources.

Government Resources: Contact your local or district office of the U.S. Small Business Administration (SBA) to learn about SBA service and publications. The SBA also offers free or inexpensive workshops and counseling through SCORE¿. SCORE¿ is a volunteer sponsored by the SBA through which retired executives who have management expertise are linked with owners/managers of small business or prospective entrepreneurs who need help.

The Department of Commerce, Bureau of the Census, Department of Defense (procurement), Department of Labor, IRS (ask for the free 'Business Tax Kit'), Federal Trade Commission, and the Government Printing Office all have publications and services to inform and support you. Local and state government offices may also have services to help you. Addresses will be available in your telephone book, under U.S. Government, at your public library, or at the SBA office near you.

Community Colleges: Most community colleges now have short, inexpensive, noncredit programs for entrepreneurs. The classes usually are convenient to business owners and are taught by experienced owners and managers.

As a home-based business person you can overcome feelings of isolation and give and receive valuable information if you tap into networks and resources. Being active in professional and trade association will help to build a good marketing network for you service or product. Take the time and invest money for memberships. Then continually evaluate which organizations and resources best serve your business information and networking needs.

Managing Time and Stress

Expect to encounter stress and time problems similar to those of other business owners but accentuated by the fact that you work at home. Follow these guidelines to make it a little easier on yourself:

1)Plan your time and establish priorities on a daily 'to do' list. Decide what your 'primetime' is and do your most important or difficult tasks then. Set 'business hours,' specific times when you are at work and times when you turn on the answering machine because your are 'on duty but off call.' You, your customers, and your family will appreciate knowing your set routine, even though you know that for special events or emergencies you can break that schedule.

2) Notice what your four or five big time-wasters are and learn techniques to eliminate them or compensate for them. Some common ones are: telephone interruptions, visitors, socializing, excessive paperwork, lack of policies and procedures, procrastination, failure to delegate, unclear objectives, poor scheduling, lack of self-discipline, and lack of skill in a needed area. 3) Stay in contact with people. Even though you prefer to work at home, you should plan work-related or social activities that provide frequent contact with others. This will help your morale if you feel isolated. Even for home-based business owners who like feeling isolated, keeping up with social, business and professional contacts is a must.

4) Build a fitness program into your day. Many successful entrepreneurs exercise in order to think creatively because physical activity sends oxygen to the brain and helps the mi