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
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
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.
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
_____ 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
_____ 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
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 .
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 checkoff 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?
- Where in the home will the business be
- What adjustments to living arrangements will
- What will be the cost of changes?
- How will your family react?
- What will the neighbors think?
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:
- Self discipline to keep TV off while working.
- Limiting personal telephone calls in length and number
- Diligence in meeting work deadlines when no one is checking
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
Items to be investigated, recorded and studied are:
- County or city zoning code restrictions
- Necessary permits and licenses for operation
- Laws and codes regarding zoning
- Deed or lease restrictions such as covenants and restrictive conditions of purchase
- Parking and customer access; deliveries
- Sanitation, traffic and noise codes
- Signs and advertising
- Code requirements for space, ventilation, heat and light
- Limitations on the number and types of workers If not, check with the local Chamber of
- Reservations that neighbors may have about a business next to or near them
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:
- fire, theft and casualty damage to inventories and equipment
- business interruption coverage
- fidelity bonds for employees
- liability for customers, vendors and others visiting the business
- workmen's compensation
- group health and life insurance
- product liability coverage if you make and/or sell a product; workmanship liability for
- business use of vehicle coverage
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
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?
- Is written by the home based business owner with outside help as needed
- Is accurate and concise as a result of careful study
- Explains how the business will function in the marketplace
- Clearly depicts its operational characteristics
- Details how it will be financed
- Outlines how it will be managed
- Is the management and financial "blueprint" for startup and profitable
- Serves as a prospectus for potential investors and lenders
Why create it?
- The process of putting the business plan together including the thought that you put in
before writing it, forces you to take an objective, critical, unemotional look at your
entire business proposal
- The finished written plan is an operational tool which, when properly used, will help
you manage your business and work toward its success
- The completed business plan is a means for communicating your ideas to others and
provides the basis for your financing your business
Who should write it?
- The home based owner to the extent possible
- Seek assistance in weak areas, such as:
- capital requirements
- operational forecasting
- tax and legal requirements
When should a Business Plan be used?
- To make crucial startup decisions
- To reassure lenders or backers
- To measure operational progress
- To test planning assumptions
- As a basis for adjusting forecasts
- To anticipate ongoing capital and cash requirements
- As the benchmark for good operational management
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
A. Business Name: _______________
Street Address: __________________
Mailing Address: _________________
Telephone number: _______________
Owner(s) Name(s): _______________
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
- retail sales?
How will it be started?
- a new startup
- the expansion of an existing business
- purchase of a going business
- a franchise operation
- actual or projected start up date
Why will it succeed? Promote your idea!
- how and why this business will be successful.
- what is unique about your business
- what is its market "niche"
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
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?
Describe the profile of your typical customer
Male, female, both:
How many in family:
Annual Family Income:
Reason to buy from you:
Geographically describe your trading area: (i.e. county, state, national, etc.)
Economically describe your trading area: (single family, average earnings, number of
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:
- Who are the nearest ones?
- How are their businesses similar or competitive to yours?
- Do you have a unique "niche"? Describe it.
- How will your service or product be better or more salable than your competitors?
- Are their businesses growing? Stable? Declining? Why?
- What can be learned from observing their operations and/or talking to their present or
- Will you have competitive advantages or disadvantages by operating from home? Be honest!
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:
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
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
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
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:
- To bring in sales orders or contracts
- To promote special events such as sales, business openings, new products
- To bring in requests for estimates or for a sales representative to call
- A special goal at the outset may be to use special media to establish yourself even
before startup and to get potential customer "feedback"
These might include one or more of the following:
- Purchase and distribution of business cards to potential clients
- Posting notices on free bulletin boards in area supermarkets or office complexes
- A telephone survey of potential clients to alert them to your startup plans.
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?
Q. What media should be used?
Q. How much can be afforded?
Q. How can the advertising program be implemented?
Q. How can its effectiveness be measured?
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:
Who will do what? Be sure to include four basic sets of information:
- State a personal history of principals and related work, hobby or volunteer experience
(include formal resumes in Appendix).
- List and describe specific duties and responsibilities of each.
- List benefits and other forms of compensation for each.
- Identify other professional resources available to the business: Example: Accountant,
lawyer, insurance broker, banker, etc. Describe relationship of each to business: Example:
"accountant available on part time hourly basis, as needed, initial agreement calls
for services not to exceed x hours per month at $ xx.xx per hour".
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?
Q. What skills must each key person have?
Q. Are the people needed available? Name them, indicate full or part time and salary
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
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
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.
Date of startup:
Sales buildup ($):
Gross profit margin:
Equipment, furniture and fixtures required:
Payroll and other key expenses that will impact the financial plan:
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
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 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
Operating supplies ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
Gross wages ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
maintenance ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
Advertising ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
Car and delivery ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
Bad debts ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
and legal ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
Outside labor ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
expenses ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
Total controllable exp ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
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
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
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
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!