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Session 3: Home based business

OBJECTIVE: In the past, jobs provided most everyone with a dependable pay envelope and long range security - but not anymore. An alternative is to go into business, yet most people don't have the confidence to start a full-time business. This session will review the dos and don'ts of operating a home-based business, how to pick the right business, and the common pitfalls. You will realize that these businesses still require business skills just like any other business.

      Home Based Business

What have you got to lose gain?

This session will review the do's and don'ts of operating a home based business and will also state the case for not quitting your job at all. But keep in mind that operating at home will still require business skills just like any other business. And it will be important to gain understanding in all the other sessions contained in the My Own Business course as well.

In the past, jobs provided most everyone with a dependable pay envelope and long-range security but not anymore. Along with diminishing retirement benefits, jobs are getting hard to find and hold onto. An alternative is to go into business, yet most people accustomed to working for a living do not have quite enough confidence to start a full-time business. Reasons include:

  • Being risk adverse: a deep-rooted fear of failure and losses
  • Lack of entrepreneurial zeal
  • Lack of business training and experience
But the obstacles to success are not as difficult when you start a home based business. You can even start without quitting your job--as a "moonlight entrepreneur." You don't need a high level of sales to start with because your start-up costs are small. You can then take the time to build up sales. There is less to lose and more to gain. And you will have lots of company: according to the U.S. Small Business Administration, over 50% of all small businesses are home based.

In some home businesses there is very little to lose because there is so little invested to begin with. For example here a list of Businesses Requiring Little or No Money to Start.

What are the Special Benefits of a Home Based Business?

Jeff Powlowsky Solara, Inc. Jeff Powlowsky
Solara, Inc.
Play Video
You have worked for years at large companies with many centralized support departments. What is it like now, having to do everything yourself?
Special Benefits of a Home Based Business Minimum investment
Operating from a spare bedroom or a garage, a business can be run with a minimum of investment and exited with a minimum of obligations and risks.

Maximized communication technologies
The Internet, computer and communications technologies now offer home based entrepreneurs the same tools for communications, accounting and marketing as are employed by multi-national competitors. Web-based businesses are especially appropriate for home based operations. Here is a basic list of communications tools that most home businesses will require.

Start small and grow by compounding
You can begin in a very small way, starting with one order at a time and grow by the power of compounding. For example, your first six months sales may produce only $1,000 per month. But if you can continue growing by 20% during each ongoing six month period, in five years your annual sales will be over $370,000.

A potential built-in organizational structure
While home based businesses are not just for families, a family will become closer by spending time together, sharing problems, designing challenging projects and sharing work and school lives. King Solomon put it this way: "Two can accomplish more than twice as much as one. If one fails, the other pulls him up; but if a man falls when he is alone, he's in trouble. One standing can be attacked and defeated, but two can stand back-to-back and conquer; three is even better, for a triple-brained cord is not easily broken".

Jeff Powlowsky Solara, Inc. Jeff Powlowsky
Solara, Inc.
Play Video
What is the biggest difficulty you have encountered in running your business from home?
The "all-in-the-family" approach to a home based business offers some other powerful competitive advantages:
  • Common goals pull the family together.
  • You can utilize individual and collective family skills.
  • If you are still working at a job, family members can work during hours you're on the regular job.
  • It could be a better solution to "working spouses": why not work as a team at home?
  • The kids learn the benefits of entrepreneurship.
  • The business is set up with pre-established lines of authority and responsibility.
  • Both spouses can exercise individual business capabilities.
  • When all else fails (including your job) a family working together is the best survival unit.


Family Business Open to all ages
A home based business is open to all ages and walks of life, from high school students to the growing population of retirees for whom involuntary idleness is increasingly a problem. And since there is over-whelming data to demonstrate that activity promotes longevity, for many retired people working in a home business becomes the solution in curing debilitating unproductively. Also, the wisdom and experience of maturity dovetails with the structured prudence required to successfully operate a business without risking substantial assets.

A productive activity for the out of work
Unemployed workers can gain the satisfaction of being productive by putting their skills to work in a home based business that helps defray living expenses while they search for work. The search becomes the "job" and the business becomes their moonlight activity which can include family members. A family working together during difficult times will create bonds that will last for lifetimes.

Approaches to a Home Based Business

There are two approaches to starting a home based business: either as a moonlighter (while still holding a job) or as a full-time home based entrepreneur.

Asian Business Man Moonlighting
A great advantage of moonlighting is that your job can provide not only the capital for starting the business but also ongoing income and fringe benefits during the early days of getting your business started. So if you are working, it is a good idea not to quit your job. Unfortunately, many times this approach is discarded because:

  • We're fearful of a conflict of interest...but it's within your own power to avoid potential conflicts by a disciplined avoidance of them.
  • Some mistakenly assume that we must be either an employee or an employer, but not both.
  • We're fearful of not being able to handle both.

Also keep in mind that once you have established a foothold and your moonlight business is flourishing, you can quit your job and expand from the already proven home-based start. If your business doesn't work out, your job provides a fall-back to income and benefits.

But a moonlight business is constrained by conflict of interest rules you must rigidly follow to avoid potentially ruinous consequences including dismissal from your job:

  • Do not in any way compete with your employer.
  • Do not use any time on the job nor job facilities for your business.

Your moonlight business must lend itself to being completely compartmentalized well away from the job. The goal should be to create a lifestyle that completely separates your work life from your moonlight business.

Full-time home based business

Lorraine Hornby Studio 44 Jewelry Lorraine Hornby
Studio 44 Jewelry
Play Video
What kind of commitments will the owner of a home based business face?
Prospective full-time entrepreneurs need to have planning in place before quitting their jobs. One of the worst mistakes made by entrepreneurs is resigning from their jobs too soon. Your job should be considered a key stepping stone in the process of becoming a full-time entrepreneur. Too often entrepreneurial zeal will result in a job resignation before preparations have been fully accomplished. The important functions that should be in place include:
  • Decide on the business
  • Work for someone else first to learn the business
  • Prepare a one year cash flow projection
  • Personally write your business plan
  • Get the business started and evaluated
  • Have adequate accounting knowledge
  • Set up accounting software
  • Construct a Web site

Picking the Right Home Based Business

The first session of this course, "Deciding on a Business", contains techniques that will help you evaluate business possibilities and avoid the most common mistake made by entrepreneurs: Not picking the right business to begin with.

Some businesses are appropriate for moonlighting and others are not. Here are some businesses that would be good to consider because they would probably not conflict with your job:

BusinessWhy Good for Home Based
Web-based businessDirect market on your time, in your place
Family-run businessBuilt-in backup and in-place organization
A single productSpecialization reduces conflict with your employer
Hobby-based businessIT (Internet technology), jewelry, furniture, ceramics, art, etc.

Businesses that are most likely not appropriate for moonlighting:

  • Labor-intensive
  • Normally conducted during working hours
  • Requiring travel or excessively long hours

Sometimes choices can be made automatically by pre-established goals or existing know-how. Here are some considerations to keep in mind:

Lorraine Hornby Studio 44 Jewelry Lorraine Hornby
Studio 44 Jewelry
Play Video
Communication is important. What advice do you have for other home based businesses?
  • Specialists do better than non-specialists. Dedication to a single product or service will result in a high level of competence.
  • Can you enlist the support of others, including family, to carry it off?
  • Do you have the necessary experience in the business?
  • Does it fall within the limits of what you are willing to risk?
  • Will it conflict with your job?
  • The most humble business can be enormously satisfying.
  • Check out local zoning and business license requirements.
  • If possible, keep a focus on Internet-based businesses.
  • Avoid if possible a business with only one or two customers.

Here's an example of someone who picked the right home business, using the power of online marketing: Operating out of her home, Ming Friedman imports fine linen tablecloths and sells them to party rental firms. Ming doesn't need a store, a warehouse, factory or marketing organization. She has her products manufactured in China, uses her garage for storage, has a terrific web site for marketing and hires FedEx for shipping. Ming operates her business full-time but this is an example of the kind of business that can be operated either full time or as a moon light operation.

Common Pitfalls

Some pitfalls in operating a home-based business include:

Business Mistakes Failure to compartmentalize
The overall success of a home based business can be measured by how smoothly the business can be woven into your life without disrupting your job or short-changing your family. The greatest dangers lie in becoming fatigued and out of balance. You can minimize this risk by keeping your important activities (home, recreation, rest, business and job) all compartmentalized so that none become over-looked. The greatest tool to accomplish this will be your ability to delegate business responsibilities to either family members or employees.

Business Risk Failure to limit liability
Playing it safe should be the essence of a home based business. For example, there will be no obligations for leasing a store. There will be risks but you can limit them. Here's how:

  • At the outset, set a limit on how much to risk in the business.
  • Avoid any personal guarantees
  • Start by buying from hand to mouth
  • Don't hesitate to deal on a COD-only basis
  • If you do extend credit, check out each customer carefully. Your banker will help.
  • Start small, with small obligations, and grow the business over time through retained earnings. Carefully manage your cash flow projection. See Session 11, Accounting and Cash Flow.

Lorraine Hornby Studio 44 Jewelry Lorraine Hornby
Studio 44 Jewelry
Play Video
Sometimes, home based businesses have certain market perceptions. How can a home based business gain respect?
Zoning limitations
IRS rules and local zoning ordinances impose restrictions from both federal and local regulators and it will be your responsibility to determine what rules and permits will be required. For a one-page summary visit: http://www.sba.gov/advo/press/04-07.html.

Physical limitations
There is a risk of becoming physically exhausted through lack of adequate rest and relaxation. A highly disciplined and balanced lifestyle is an important business requirement.

Failure to be adequately licensed. Under the "better to be safe than sorry" rule, see session 6 for a partial list of potential licenses and permits that maybe required of a home business.

Work at home schemes
Unfortunately, the popularity of home based businesses has led to many unscrupulous schemes. The U.S. Federal Trade Commission points some out on their website: http://www.ftc.gov/bcp/menus/consumer/invest/workhome.shtm

Disregarding rules for business deductions.
The Internal Revenue Service has carefully defined what business deductions can be taken by home based businesses. For a summary, visit: www.irs.gov/businesses/small/article/0,,id=109807,00.html

References

There are numerous helpful books on the subject of operating a home based business. Here is the page from Amazon.com of a recommended selection: http://www.amazon.com/

Top Ten Do's and Don'ts

THE TOP TEN DO'S
  1. If possible, specialize in a single product or service.
  2. Get your family involved with your business.
  3. Go to work first for someone in your intended business.
  4. Install a credit card purchasing function on your Web site.
  5. Complete your written business plan before you start.
  6. Prepare a 12-month cash flow projection before you start.
  7. Take classes on your shortcomings such as accounting or the Internet.
  8. Start small to gain credentials and experience.
  9. Consider starting as a moonlighter (don't quit your job).
  10. Avoid get-rich-quick schemes.
THE TOP TEN DON'TS
  1. Overlook a hobby as a potential home business.
  2. Quit your job until all preparations are complete.
  3. Compete with your employer.
  4. Conduct business on your employer's time.
  5. Overlook a small and humble beginning.
  6. Overlook zoning and permitting requirements.
  7. Be in a rush to get started: use a start-up check list.
  8. Incur unreasonable liabilities in financial obligations and dealings.
  9. Think it's too late to start.
  10. Neglect importance of selling, servicing and finding new customers.
Business Plan for Session 3: Home based business

We heartily recommend that you download the individual business plan template for this session and complete it now:

Section 3: Home Based Business
doc MS Word

Instructions on filling in the business plan template:

  1. Each box has a permanent title in CAPITAL LETTERS.
  2. Below each title is a sentence starting with an "Insert here" sentence. This will suggest information to insert. The boxes will expand as you take up more room so use all the space you need.
  3. After completing each box, delete the "Insert here" sentence, which will leave only the permanent title of the box and the information you have inserted.
We suggest that you fill in each section of the business plan
as you proceed through the course.

The full template for all sessions 1-15 can also be downloaded into your computer as a single document:

Section 1-15: (Full Business Plan Template)
doc MS Word

Include sufficient research findings and background materials. Make it interesting by the use of background data, your biography, charts, demographics and research data. When your business plan is completed, print off and assemble the 15 sections.

Many other business plan formats are available in libraries, bookstores and online.

Session 3 Feedback:

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Exclaimation Note: To receive credit toward a Certificate of Completion either log in to your account or create a new account then take the quiz. If you wish to contine without credit, Submit feedback and proceed to Session Quiz below.

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