Starting a Home Business

by Leo Sun

 

Many of us dream of working from home, setting our own hours and being our own bosses. Often times we see advertisements online and in print media, claiming thousands of dollars per week for stay-at-home jobs. These, of course, are scams which want you to order some fairly redundant, freely available information for a hefty price. Real home businesses start small with realistic profit expectations. They often fail, but with the proper discipline and acumen, they can succeed. After all, Steve Jobs started Apple (AAPL) as a home business out of his parent’s garage. People often consider home businesses for a variety of reasons. Common ones include:

• Supplementary, side income to a primary job for a spouse
• Inability to leave the home (injury, pregnancy, etc.)
• Desire to become an entrepreneur
• Having a marketable idea, and enough free cash flow to explore it

Home Businesses are Lemonade Stands

You can start a home business selling anything. The range is only limited by your imagination and state laws. Let’s take the simplest business model for a home business, a lemonade stand. A lemonade stand has no additional real estate costs, as it is set up in your own front yard. You are responsible for controlling the production of the lemonade, and you are clear on the profit margin – what you make between the cost of a pitcher of lemonade and your asking price. You are aware that any changes to the weather – the main variable – will affect your supply and demand. You know that if you can’t sell your product in time, your product will go to waste and equal lost profits, or at least cause a surplus in your inventory. As simple as it is, this classic example has all the components of a small home-based business.

How should we go about starting a home business? Here are some things to do to prepare:

• Know your own talents
• What are you good at?
• Do you have a marketable skill?
•  Know your strengths and weaknesses
• Focus on your strengths
• Find other people who can help you complete tasks which you are weak at. These can include remote employees also looking to work from home, or your family and close friends.
• Organize your ideas
• Decide which ones are feasible
• Write down a comprehensive business plan

If you are focusing on an outsourced contract service, you may need to build a work portfolio to advertise your previous works. For example, graphic and web designers need comprehensive portfolios to show clients. Virtual assistants need testimonials and free consultations for clients.

If you wish to focus on a product based business, such as making quilts or gift baskets, you need to have a realistic production bottleneck based on your current capabilities. Assess the base cost of your product and the profit margin. If you are a one-man operation, it is not realistic to meet 100 orders daily. Start small, and don’t bite off more than you can chew. Grow slowly, and hire more people to help if you have steady orders coming in. Set order limits to avoid being swamped with orders and losing punctual credibility.

Reviewing your Business Model and Cash Flow

Now you have to see if your business model can actually be profitable. If you were previously living paycheck to paycheck with little cash savings, then starting a home business can be an incredibly stressful venture. If you have substantial savings, however, this can be far easier and allow more clarity in your decisions.

For example, if you decide to sell small handmade gifts for $20 each, and you are able to produce and sell ten per day at a materials cost of $15, you could theoretically earn $50 per day, and up to $1,500 per month. That’s an extremely optimistic example, and even working without a break 365 days through the calendar year, you would only make $18,000 annually. That seems like a lot of work for a mediocre paycheck. However, if you ramp up your production capabilities and hire some assembly line workers, you could easily double or triple your salary. Even better, you could hire on a team manager to oversee the operations and be able to take some time off as your venture runs itself. The time and effort needed to make a product is a key variable in the survivability of most home businesses.

A low-margin, high-volume approach, like the example mentioned above, is bound to be more successful than a high-margin, low-volume approach, which many home businesses attempt. For example, if you are able to produce homemade pottery for $10 each and customers are willing to pay $100 for each piece, but you are only able to produce one per week, then you would only make less than $360 monthly, or $4,320 annually, which would be impossible to live on. This is a huge obstacle for many entrepreneurs attempting to start an art-based home business such as sculpture, painting or photography, since your choice of helpers would be limited by skill and their impact on your product’s signature style.

If your home business is meant to supplement your primary income, it may be a much less stressful venture; after all, if it falls through you still have your regular job. However, if you plan to devote all your time to your home business, you have to make sure you have enough savings to make it through some rough patches, especially at the beginning, when initial setup costs, especially advertising, can be staggering and send your monthly balances deep into the red. While there are no shortcuts in home businesses, as many advertisers claim, hard work and persistence can pay off big in the long run.