Home-Based Business: Basic Start-Up Guide

A home-based business can take on a variety of definitions. For some people, it is little more than supplemental income. For others, it may be the major source of family income.

If you decide to pursue a home-based business, carefully plan and consider the topics in this publication to help increase your chances of success. In some cases, the information may prevent your making an unwise or costly decision.

DECISION TO BEGIN A HOME-BASED BUSINESS

You must determine if your personal traits, skills, and abilities are appropriate for a home-based business. Self-discipline is important. Working for others means many responsibilities are shared with other employees. Being in business for yourself means you carry the whole load. Some people don't want the responsibility of licenses, regulations, taxes, insurance, record keeping, advertising, and pricing. Do you?

You may find a home-based business confining, stressful, and physically exhausting. On the other hand, being on your own can be stimulating, financially rewarding, and satisfying.

Advantages and Disadvantages

Advantages of a home-based business include: flexible schedule; integration of family and work responsibilities; less involvement with others in a regular work environment (power struggles and red tape); no commuting time (unless you travel to a customer's home or place of business); control of your own environment (temperature, light, work breaks); self-determination; and independence.

Disadvantages of a home-based business include: risk; isolation; loss of home space used by the family; interruptions; little opportunity to delegate tasks to others; legal requirements, and lack of freedom to do other things.

Other Factors To Consider

There are many issues to consider when you are thinking about starting a home-based business. A new business venture will significantly impact both you and your family. It is important to analyze carefully your reasons for starting a business and how the business will fit your family lifestyle. Begin by answering the following questions:

• Do you have a marketable skill or product to sell?

• Do you need the money?

• Are you a self-starter?

• Do you want to be your own boss?

• Do you have the self-discipline to maintain a work schedule at home?

• Do you want more flexibility in your work schedule?

• Can you take criticism and rejection?

• Can you switch from home responsibilities to work all under the same roof?

• Can you cope with the isolation of working from home?

• Have you discussed the business with your family?

• Is your family willing to support the business? To what level?

• Are you ready to treat your business as a business rather than as a hobby?

• Are you flexible when necessary?

• Do you have the money to cover a business start-up and initial operating costs?

• How will your customers/clients feel about your working from home?

• Is there adequate space in your home for your work?

• Are you ready for a challenge?

Lack of planning and insufficient financial backing join poor management as main reasons businesses fail. The majority of small businesses fail in the first few years of operation. Improve your chances of success by careful planning.

TYPES OF HOME-BASED BUSINESSES

Most home-based businesses begin with an idea based on the interests, talents, contacts, expertise, and experiences of the individual who starts the business. The business can be product-based, service-based, or a combination of both. If you do not already know what type of business you are going to start, consider the following as guidelines:

Turn something you enjoy doing, such as a hobby, into a business.
     (Examples: sewing, gardening, child care)

Turn your current job skills into a business.
     (Examples: writing, consulting, auto repair, teaching classes)

Turn a talent into a business.
      (Examples: teaching piano, singing, dancing, or exercising)

Start a business doing things other people hate to do.
      (Examples: cleaning service, income tax service, repair service)

Turn technology into a business.
      (Examples: word processing, computer programming, computer servicing)

Use your vehicle to start a business.
      (Examples: yard service, pick-up/delivery service, moving service)

Turn your kitchen into a business.
      (Examples: catering, specialty foods, canning)

Turn your property into a business.
      (Examples: herb farming, fee-fishing/hunting, organic gardening)

Turn your knowledge into a business.
      (Examples: teaching classes/workshops/seminars, planning events)

These suggestions offered are just to get your thinking started. The possibilities are limitless. For additional help on deciding what type of business to start, read the many books available. Two suggestions to get you started are "Working From Home," and "Homemade Money," which are listed under the suggested reading section of this document.

FORMS OF BUSINESS OWNERSHIP

When starting a home-based business, you must choose the best form of organization and ownership for you. The form of organization used depends on the type of business, how many owners or investors are involved, and how tax and liability issues will be handled.

Sole Proprietorship

The sole proprietorship form usually is advantageous to a new business because of its ease of organization. The business owner is responsible for all financing, management decisions, and liabilities of the business.

Advantages

• The owner is in direct control (you are the boss).
• There are low start-up (organizational) costs.
• It's the form with the least government regulation.
• This form offers ease of formation and a simple structure.
• There is no double taxation.
• Business losses can offset personal income (for tax purposes).
• The owner receives all profits.

• The owner has total (unlimited) personal liability.
• The business has limited financial resources (capital).
• There is a lack of continuity if the owner is disabled or dies.
• The owner may have limited managerial expertise.
• All profit is taxed as personal income.
• The business can expand only with after-tax dollars.

Partnership

A partnership provides the opportunity to pool the capital and management resources of two or more individuals to conduct business. Two types of partnerships are the general and the limited.

A general partnership is fairly easy to establish. A written partnership agreement drawn up by an attorney should be used to clarify business arrangements and to avoid misunderstandings. The general partnership agreement should include the following: a list of the rights and responsibilities of each partner and their heirs; the management and continuity arrangements for the business in the event of the death or disability of one of the partners; the profit and loss distribution plan; and any special conditions or arrangements that may affect any of the partners through operation of the business. When signed by all partners, the agreement is an enforceable contract.

Advantages

• Simple organization
• Additional personal resources (financial and managerial)
• The right to select partners
• Low start-up (organizational) costs
• Limited outside regulation
• No double taxation

• Unlimited liability for partnership obligations
• Lack of continuity when one partner dies or is disabled
• Sharing of profits
• All profits taxed as personal income
• Difficult to raise additional capital
• Hard to find suitable partners
• Divided authority (limited decision making)

Advantages

• The general partner maintains control of the business.
• The limited partner can invest with a limit on personal liability.
• It is an easy way to secure capital.
• The business is not taxed directly.

• This structure is complex to organize.
• The limited partner has no control over the business.
• The general partner has unlimited personal liability for the obligations of the business.
• There is a lack of continuity in the event of the death or disability of the general partner.

A "C" corporation is a separate legal entity from its owners, the shareholders. It can enter into contracts, can be liable for any obligations, and must pay taxes on income as well as dividends distributed to shareholders. A corporation attracts capital investment funds by selling shares of stock in the company to investors or by trading stocks for assets. Generally, stockholders are not liable for claims in excess of the current value of their shares. Corporate officers may be required personally to guarantee bank notes or loans; they are then personally liable for the obligation. Other creditors generally can lay claim only to the assets of the corporation.

Advantages

• Limited personal liability
• Separate legal entity
• Specialized management
• Transferable ownership
• Perpetual life
• Easier to raise capital

• Closely regulated
• Most expensive to organize
• Complex organization and management
• Extensive record keeping necessary
• Double taxation

• The owners expect operating losses.
• Large dividends are anticipated.
• The owner's individual tax rates are lower than the corporate tax rates.
• There are 75 or fewer stockholders.
• The corporation has only one class of stocks.

Before deciding on a form of business ownership, consult an attorney and a certified public accountant (CPA). Their expertise can help you avoid making costly mistakes. The final decision should be based on what is best for your individual situation and business needs.

Limited Liability Company (LLC)

A limited liability company (LLC) is a business entity created by statute. It has some characteristics of a partnership and some characteristics of a corporation. A LLC has the tax advantages of a partnership and the limited liability advantages of a corporation. Properly structured, it is taxed as a partnership or an "S" corporation. If the LLC is not properly structured, it is taxed as a "C" corporation.

Forming a LLC is more complex than forming a partnership, but it is less complex than forming and operating a corporation. Forming a LLC is a formal process, contact the Mississippi Secretary of State at 601/359-1633. LLC's are a relatively new form of business in Mississippi. Legislation creating this form of business was passed in 1994. It should be noted that the lack of precedent adds some uncertainty to adopting this form of business. Experts predict however, that the LLC will quickly become the form of choice for many small businesses.

Prepared by Carol A. Schwab, J.D., LL.M., a Member of the North Carolina State Bar and a Family Resource Management Specialist for the North Carolina Cooperative Extension Service, North Carolina State University, Raleigh, North Carolina.

OBTAINING FINANCING

Most home-based businesses require start-up funds. Begin by making an inventory of necessary equipment and items needed to start your business. Indicate whether each item is to be purchased or whether it is something you already have. If it will be purchased, will there be an advantage buying it new or buying it used?

Don't make the mistake of buying a piece of new equipment that fails to provide you with all the features necessary for your business, with the thought of upgrading it in a couple of years. On the other hand, do not pay for expensive features that you will not use.

How much money do you have to invest in your business? Look at your savings, stocks, bonds, cash value of life insurance, and equity in real property. How much of your assets are you willing to commit to your business? Although this is a personal decision, you should be prepared to finance between 20 to 50 percent of your expenses. Anything less than 50 percent may be viewed as "too risky" for lender involvement. A lender wants to know you have something at risk so you will put forth the extra effort to make the business successful.

If you do not have enough start-up money, you will have to borrow. Getting someone else involved financially is a decision you must carefully consider.

If you decide to borrow money, you need to develop a written plan to submit to the lender. The steps for planning and developing your business for loan consideration may look something like the following:

Develop a Business Plan
Analyze Sources of Capital
Prepare Loan Proposal
Present Proposal

Step 1
Develop a Business Plan

Every business needs a plan, even if the business does not need financing. The better the planning, the higher are your chances of business success. In the financial community, a business plan is an essential tool. The plan should be a typewritten report showing the lender you have planned your business. It is designed to give them confidence in you. If you don't need much money, about $10,000 or less, you will not need a complicated plan.

Usually, the business plan is put together in the following order:

Part I Business Organization
     A. Business name/address
     B. Form of business ownership

Part II Business Purpose and Function
     A. Product/service description
     B. Initial start-up
     C. Reasons for success
     D. Background/experience

Part III Marketing Plan
     A. Customer profile
     B. Geographic description of trading area
     C. Economic description of trading area
     D. Size of market
     E. Competition
     F. Pricing strategy
     G. Sales plan
     H. Advertising plan

Part IV Management Plan
     A. Personnel plan
     B. Banking plan

Part V Financial Plan
     A. Source of funds schedule
     B. Cash flow projections

Step 2
Investigate Potential Sources of Capital

Local financial institutions(banks, savings and loan associations, credit unions)--Financial institutions generally are conservative and want to know your ability to repay. They thoroughly examine a loan request and the monetary amount you are willing to put at risk. For start-up expenses, loans generally are limited to 50 percent of the money needed. Loan officers look for borrowers with good credit ratings and sound business plans. Interest rates and repayment plans vary from institution to institution, so comparison shop for the loan that best suits your circumstances.

Friends and relatives--You may choose to borrow money from friends and relatives to start the business. However, many friendships and family relations have been severed by "family borrowing." If you decide to borrow within the friend or relative group, do it on a business basis. You may want to ask an attorney to develop a binding contract. Then repay the loan as agreed, just as though your friend or relative were a traditional lending agency.

Life insurance policies--Most life insurance policies (except term insurance) have a cash value amount to borrow against. The owner borrows against the cash value. The interest rate varies by company and the policy. In some cases, the interest can be deferred indefinitely. The policy loan will reduce the dollar value of the policy. In case of death, the loan is repaid first, with the remainder given to the beneficiaries. Does this jeopardize your family's security? Should you purchase term insurance in the interim?

Finance companies--Finance companies are concerned about a person's ability to repay a loan and generally are more interested in the quality of the collateral put up for the loan than in a persons history or business projections. Usually, the cost of borrowing from a finance company is several percentage points higher than the cost of borrowing from bank, a savings and loan association, or a credit union.

Credit cards--Although not considered a traditional source of money, bank credit cards are sometimes the only source for a small home-based business. Many small businesses have gotten started by purchasing needed equipment and supplies and by borrowing cash with personal bank cards. Keep in mind that interest rates can be high.

Government sponsored business loan programs--Federal and state business loan programs are available to Mississippi entrepreneurs. Contact the Mississippi Development Authority, Small Business Administration, and local Planning and Development District Offices for specifics about the program available.

Step 3
Prepare a Loan Proposal

A loan proposal is necessary and often required for business loans. It becomes the "backbone" in your negotiations for money. It should include a brief summary of your business, the service or product you plan to market, and a realistic view of your competition.

A brief personal history, including your skills, prepares the reader for your business ideas. It outlines sources of funds to be invested in your business, including funds requested from the lending agency. The proposal also should outline the repayment plan and list references.

Step 4
Present the Loan Proposal

The formality of the presentation will depend on the audience for proposal. If you have done your homework, regardless of the situation, there will be no surprises. Your well-outlined plan speaks for you, whether it is formally referred to a loan committee or whether it is informally discussed over a cup of coffee.

Regardless of who you include in the financing of your business --- a bank, a friend, or a relative, insist that all details be put in writing. This agreement protects you and the lender and can eliminate future misunderstandings that may cause permanent rifts.

Credit Evaluation

Lenders usually use the five C's of credit when evaluating loan proposals: character, capacity, capital, collateral, and conditions.

Character centers on the loan applicant's integrity, trustworthiness, and attitude toward honoring outstanding credit obligations. Is he or she honest? Does he or she intend to pay?

Capacity deals with the individual's or business's repayment ability. This factor is frequently evaluated on the basis of history, income, and credit analysis.

Capital refers to the general financial position of the borrower, with emphasis on tangible net worth. A lender needs to know what is owned (assets) and what is owed (liabilities).

Collateral is represented by assets the borrower can pledge as security for the loan.

Conditions refer to how dependent a particular borrower's situation is on general economic trends and special developments. The higher the dependence on these external factors, the higher the associated credit risk is.

Lenders favor loan applications that provide necessary personal and financial information and show the home-baser has done his or her homework.

LICENSES, PERMITS, AND REGULATIONS

Federal, state, and local governments regulate and tax businesses for several reasons, such as raising revenues, protecting the public from dangerous substances and fraud, and protecting businesses from unfair or illegal competition. If you are starting a home-based business, you will want to determine in advance the licenses, permits, and filing requirements required by various agencies. Also, you may need some type of business permit or identification number to purchase supplies wholesale.

The following checklist will help you through the business start-up process in Mississippi:

Request a copy of Mississippi Reporting Requirements for Small Businesses from the Mississippi Development Authority (MDA) (601/359-3593).

Check with city/county officials on local zoning regulations for home-based businesses . When necessary, also check neighborhood covenants.

Choose a name and a logo, if desired, for the business. Protect your name and logo in Mississippi, complete an Application To Register a Trade Mark, which may be obtained from the Mississippi Secretary of State (601/359-1633).

Decide on the form of business ownership (sole proprietorship, partnership, or corporation). To be incorporated, articles of incorporation must be filed with the Mississippi Secretary of State (601/359-1633). Register with the Secretary of State if the business is a limited liability company (LLC).

Contact the IRS to obtain a federal employer identification number (EIN) (800/829-3676). An EIN is required for all partnerships and corporations, as well as for sole proprietorships if wages are paid for one or more employees.

Complete a Mississippi Business Registration Application , Form 70-001-00-1, available from the Mississippi State Tax Commission (601/923-7000).

Obtain a local business permit or privilege licenses from city/county officials.

Obtain any necessary special licenses and permits. Some businesses require special licenses and permits; others must meet additional regulations (examples: ventures that handle or process food, and child-care centers). Contact the Mississippi Secretary of State for information (601/359-1633).

WORK AGREEMENTS

A work agreement can be a help in your business. It doesn't have to be formal with a lot of legal terms, but it is binding and it protects you and your customers. It also projects a business-like image.

A work agreement states the terms under which the work will be done and the method of payment. It can be on a special printed form, handwritten, or written on a sales ticket. Make duplicate copies so you and the customer will have a copy of the agreement. You will want to include the following items on the work agreement:

1. Business name, address, and telephone number.
2. Date of agreement.
3. Customer's name, address, and telephone number.
4. Description of work to be done.
5. Supplies provided by the customer.
6. Supplies provided by the professional.
7. Cost estimate.
8. Method of payment (cash, check, or credit card); never allow work to leave your home without full payment.
9. Completion date .
10. Return clause. (You may want a time limit when work may be returned for changes and adjustments.)
11. A clause providing for sale of unclaimed work.
12. A disclaimer for loss or damage resulting from theft or fire (unless covered by insurance). Because a work agreement is designed to protect both you and the customer, it and should be signed by both of you. Specific legal questions about work agreements should always be directed to an attorney.

Copyrights -- Copyright is a form of protection provided by U.S. laws to the authors of original works of authorship, including literacy, dramatic, musical, artistic, and certain other intellectual works. Copyright protection begins from the time the work is created in a fixed form. The copyright immediately and automatically becomes the property of the author who created it.

Copyright registration is optional and generally is not a requirement for protection. However, registration provides several advantages to copyright owners. It establishes a public record of the copyright claim and is necessary before an infringement suit may be filed in court. Registration may be made at any time within the life of the copyright.

Contact the U. S. Copyright Office Public Information Office at 202/707-3000 or the Forms and Publications Hotline at 202/707-9100. These numbers may be used for general copyright information for questions relating to copyright registration.

Trademarks -- A trademark or service mark is a word, name, symbol, design, phrase, or slogan (or a combination of these items) used by individuals, groups, or organizations to identify goods or services and to distinguish them from others. Trademark registration is handled by the U.S. Patent and Trademark Office. The Copyright Office has no authority in trademark matters.

For additional information and an application form, call the U.S. Patent and Trademark Office at 800/786-9199. Mississippi also provides for registration and certificates of registration of service marks or trademarks. The $50 filing fee is valid for 5 years. To receive form F0023, write to the Mississippi Secretary of State, P.O. Box 136, Jackson, MS 39205 or call 601/359-1633.

Patents -- A patent for an invention is a grant of a property right by the government to the inventor. The right conferred by the patent grant is "the right to exclude others from making, using or selling" the invention. A patent is given only to the first inventor. If one innocently "invents" something already patented, no second patent is granted. Patents are granted for a "new and useful" process, machine, manufacture, composition of matter, or ornamental design for an article of manufacture.

For more information on patents, call the U.S. Patent and Trademark Office at 800/786-9199.

INSURANCE

As the owner and operator of a home-based business, you have more exposure to liability and property loss than if you live in a home used strictly as a residence. Most homeowner's insurance will not cover claims related to a business in your home. If a customer comes to your home and falls on the steps, your homeowner's insurance may not cover any legal action because the customer was at your house on business. If a customer's property or even your own equipment used in your business is lost or damaged by fire or theft, your homeowner's policy may not cover the loss. Some insurance companies can add a rider or endorsement to a homeowner's policy to cover home businesses. A separate policy may be needed in some cases. Consult your insurance agent to determine the most appropriate coverage for your business.

Consider the following insurance coverages when exploring your business insurance needs with your agent:

• Liability insurance to cover the property of others, bodily injury, damages such as libel and slander, and operations of hired independent contractors for which you are held liable. Be sure you have a policy that covers all risks that could happen.
• Extended coverage rider for wind storm, hail, smoke, explosion, or vandalism protection.
• Special protection to cover loss by fire or theft of business records, cash, and property, including tools and inventory.
• Product liability insurance.
• An endorsement or rider to your personal automobile policy for business use if the vehicle is used to make deliveries or for other business purposes.
• Other types of insurance, including sign coverage, life insurance, disability insurance, health insurance, and a retirement plan.

Insurance risks change. Review annually with your agent, your insurance coverage and the risks you face.

PRICING

Pricing products and services is a challenging process for most new home-based business owners. Often entrepreneurs will underestimate the value of their time and expertise and find it difficult to believe that customers will actually pay the price they need to charge to make a profit. The bottom line of any business is profit. If a business is going to be successful and maximize profits, accurate pricing is critical. Prices must be high enough to cover costs and earn a reasonable return, yet attractive enough so customers will purchase the product or service.

Many factors must be considered when developing a pricing strategy for a home-based business. Pricing decisions should be based on an orderly analysis rather than on an educated guess. By taking a systematic, step-by-step approach, you can make pricing a simple task.

Costs

The prevailing element when setting prices is costs. An accurate accounting of all the costs that go into a business is necessary. In a business, the total costs to be considered include three factors: direct costs, labor, and overhead expenses.

These are the three basic or minimum factors that should be used for setting prices. The more exact the figures used for setting prices, the greater the chance for success.

• Direct Costs -- Include all the materials, parts, and supplies that go into the actual production of the product or service. Direct costs should be exact, figured to the penny.
• Labor -- Includes all wages paid to employees. Many times, new business owners make the mistake of not paying themselves. Be careful not to fall into this trap. Labor costs are calculated by multiplying the number of hours worked by the hourly wage. Be sure to include fringe benefits either in the hourly wage calculation or in overhead expenses. Fringe benefits can range from 15 percent on up, depending on the benefits included.
• Overhead Expenses -- Include all the business costs not directly related to the actual production of the product or service. Overhead expenses include taxes, advertising, rent, office supplies/equipment, business-related travel, insurance, business permits, maintenance and repair of equipment, utilities (electricity, telephone, etc.), professional assistance (accountant, attorney, etc.), and any other costs related to the overall operation of the business.

  Overhead expenses can be determined as a percentage of direct costs plus labor. To determine the overhead percentage for the business, add up the total overhead expenses for a year. Next, divide the total amount of direct costs + labor for the year into the first figure.

  Overhead Expenses/(Direct costs + Labor) = Overhead Percent

  For example, if direct costs plus labor for a year added up to be $10,000 and overhead expenses for the year added up to $2,000, that would be $2,000 divided by $10,000 for an overhead of 20%. Once you determine the overhead percentage for the business, you can use it in calculating prices for the business. The overhead percentage should be re-evaluated on an annual basis.

Profit

Profit is the income left after all direct costs, labor, and overhead expenses have been paid. For there to be money left over, a profit factor or profit margin must be calculated in initial pricing. After the total costs are calculated, the profit factor is added to get the final price.

Generally, adding a 15 to 20 percent, or more, profit margin is standard for most home-based businesses. An initial mistake many home-based business owners is not adding in a profit margin to their pricing strategy. If this is not done, there will be no money for growth or expansion of the business.

Retail Pricing

While the basic principles for pricing a product or a service are essentially the same, there are some differences that should be considered when you are wholesaling a product to a retailer. Up to this point, when pricing a product the pricing formula results in the wholesale price. To arrive at the retail price for a product, a retail margin must be added, which is usually two to three times the wholesale price.

The percentage a retailer adds to the wholesale price it pays for an item is called the markup. For example, a product that is wholesaled for $10 (Direct costs + Labor + Overhead Expenses + Profit = $10), will be marked up at least 100 percent or two times to a retail price of $20 (Wholesale Price x Retail Margin or $10 x 2 = $20). A retailer will mark up items using the best pricing strategy developed for that business.

A wholesaler also may cross over and be a retailer at times. When this happens, the wholesaler must be careful not to compete with or undercut his or her wholesale customers. An example is an artisan who wholesales pottery to gift shops and also sells pottery directly to customers at art shows or craft fairs must be careful when it comes to pricing. The artisan should sell the pottery at retail prices at the art shows and craft fairs --- the same prices the gift shops charge. If the artisan retails directly to customers at a substantially lower price than the gift shops, the artisan will lose the wholesale accounts.

A word of caution to small home-based businesses that are wholesaling to retailers or selling to retailers through a distributor or "sales rep." Many times a retailer will ask for discounts when buying in bulk and distributors will ask for a percentage of what they sell. Both of these are overhead "costs" that must be incorporated into the original pricing formula.

Breakeven Analysis

Prices charged must exceed total costs or there is no reason to be in business. A method business owners use to look the big picture for pricing is breakeven analysis.

Defined in its simplest form, the breakeven point is the point at which sales (revenues) are exactly equal to costs (expenses). At this point, zero profit is made and zero losses are incurred. This approach is helpful in determining the number of units of a product or the dollar amount of sales necessary to cover all costs. This makes it possible to determine how much of a product must be sold to cover costs.

The basic equation used for determining the breakeven point is:

Since profit is defined as zero at the break-even point, sales must, by definition, be equal to total expenses. For example, let X represent the number of units to be sold to break even (zero profit). Suppose the cost per unit of X is $.45, the selling price per unit is $1.00, and there is a fixed cost of $275 to manufacture product X. How many units of X must be sold to break even? Going back to the equation and listing the known values results in:

In this case 500 units of X must be sold to cover all costs. In dollar terms, the breakeven point is $500 in sales of product X (500 units @ $1.00 per unit).

Using the same example, suppose you want a profit of 20 percent of sales. What effect would this have on the breakeven volume? Since profit is defined as a percentage of sale, the initial equation changes to include the profit calculation:

where .20(1.00X) is the profit term, since profit is defined as 20 percent of sales (1.00 per unit times the number of units). The equation then becomes:

To cover all costs associated with product X and to make a 20 percent profit on sales, 786 units must be sold. Total sales volume in this case will now be $786 ($1.00 times 786).

Breakeven analysis permits the business owner to look at the pricing strategy using different combinations and variations of variables to determine necessary productions levels, unit pricing, costs, and desired profit.

Other Pricing Strategy Considerations

• Competition -- Determine what the competition is charging for its product or service. The prices charged may be lower, higher, or about the same. If customers question a price by drawing comparisons to the competition, point out the quality of the work, the uniqueness of the product or service, and other features or selling points. Do not let customers change prices that are based on sound pricing strategy.
• Discounts/Markdowns -- Discount prices only when necessary to generate business to increase cash flow. Limit discounts for family and friends.
• Estimates -- Provide the customer with a written estimate to help avoid possible misunderstandings later. The estimate should reflect the maximum charges. Final charges to the customer may be less but should not be more unless there are circumstances explained to and accepted by the customer.
• Exclusivity -- Custom, original, or one-of-a-kind products or services can command higher prices. Customers are willing to pay more for items or services that are limited in availability and less for items and services that are readily available.
• Expertise -- In general, the higher the skill level or level of expertise, the more willing customers are to pay higher prices. Those with better skills can often produce more or provide more services in less time without sacrificing quality, and time is money.
• Inflation -- Prices must adjust as the cost of doing business rises. It is best to anticipate rising costs when setting prices so that frequent price changes are not necessary.
• Itemizing -- Sometimes, itemizing the final bill may help customers understand the amount charged. Frequently customers do not realize the amount of time involved and costs of materials.
• Location -- Regional differences can affect prices. Generally, prices in urban, suburban, and high-income areas can be higher than prices in rural and low-income areas.
• Professionalism -- Businesses that look and act professional are usually worth to the customer.
• Quality -- In most cases, the higher the quality, the more customers are willing to pay for a product or service. Top-of-the-line products and services can command top-of-the-line prices.
• Seasonality -- Some products or services sell better at certain times of the year (for example, holiday items).
• Volume -- Increased sales volume may or may not warrant lower prices. Sometimes it is more economically efficient to produce multiples of the same product. Any added savings gained through efficiency must be weighed against the expense of selling more items (for example, extra employees may be needed as volume increases).
• What The Market Will Bear -- What the market will bear for price can be critical. In some cases, the cost of producing the product or service is too high. No matter how great it is, the market is not willing to pay the price a business needs to charge to make a profit. On the other hand, there are times when the market will pay a much higher price than the actual cost of producing the product or service. Understanding the market and what customers will or will not pay directly impacts pricing.

The primary purpose in operating a business is to make a profit. Prices should be established from an accurate accounting of direct costs, labor, overhead expenses, and profit margin. In addition, careful thought of all factors that may have an impact on the business should be considered as a pricing strategy is established. Pricing is a skill that must be developed and continuously monitored for a business to be successful and profitable.

RECORD KEEPING AND TAXES

Accurate financial records are essential to the smooth operation of any business. It is important for the record-keeping system to be user-friendly so that the "health" of the business can be checked at any time. The key to an effective and efficient record-keeping system is to set it up correctly initially. If you are unsure how to do this, it may be worth seeking advice from an accountant. Seek an accountant who is familiar with and appreciates home-based businesses.

Begin with a separate bank account for the business. Do not combine personal and business receipts and expenses. The combination causes confusion and the inability to account properly for the business operations.

Pay all business expenses by check and keep all receipts of business expenditures, noting on the recepit the check number and the date paid. If you wish to use business funds for personal expenses, make a "withdrawal"(write a check payable to you) and deposit it in your personal account, then pay the personal expense from your personal account. Do not pay personal expenses directly from the business account. Deposit all business receipts intact.

In your record-keeping system, maintain a cash receipts journal and a cash disbursements journal. Inexpensive journals and business forms are sold in a variety of places. There are also several good accounting and recordkeeping software packages available at reasonable prices if you choose to maintain records on your computer.

Cash Receipts Journal

The cash receipts journal has columns for various categories of receipts, with separate lines each entry, to record the date, the source of cash, and the total amount. All columns of the cash receipts journal should be totaled each month, followed with year-to-date totals.

Cash Disbursements Journal

A cash disbursements journal has columns for various categories of expenditures with a line for each expenditure and spcae to record the date, the check number, the payee, a description of the expense or purchase, and the total amount. The column categories may be merchandise for resale, supplies, interest, utilities, taxes, wage or salary expenses, owner's withdrawals, and other common purchases or expenditures. All columns of the cash disbursements journal should be totaled each month, with a year-to-date total for each month.

Taxes

As a professional business person, you must take responsibility for paying all federal, state, and local taxes required by law. A useful document titled Mississippi Reporting Requirements for Small Businesses provides a summary of regulations governing the establishment and operation of businesses in Mississippi. The document is divided into three sections: federal regulations; state regulations; and city/county regulations. Request a copy of Mississippi Reporting Requirements for Small Businesses from the Mississippi Development Authority (MDA) (601/359-3593).

Take advantage of all tax deductions allowed for home-based businesses. The cash receipts journal and the cash disbursements journal provide convenient means of collecting required tax information for all cash transactions.

Self-Employment Taxes

You are a self-employed person if you have a trade or business as a sole proprietor, are a member of a partnership or an independent contractor, or you are otherwise in business for yourself.

You do not have to carry on regular full-time business activities to be self-employed. Part-time work, including work you do on the side in addition to your regular job, may also be self-employment.

If you are self-employed, you must file a return if you had net earnings of $400 or more from self-employment. Net earning from self-employment generally is the net income from your business or profession. For more information, see IRS Publication 533, Self-Employment Tax.

The $400 net earnings figure applies to self-employed persons of any age.

If you must file a return because you meet the gross income requirements for taxpayers in general, you must include your net self-employment income in your gross income even if your net self-employment income is less than $400.

You must pay self-employment tax on your net earnings from self-employment. This tax is comparable to the social security tax withheld from an employee's wages.

A full-time employee who earns $400 or more from self-employment normally has to pay self-employment tax. The self-employed tax rate for 2002 is 12.4 percent of the first $84,900 of net business income and an additional 2.9 percent of net business income, with no ceiling on earnings subject to the tax. Thus, the total tax is usually 15.3 percent of net business income. However, a self-employed person can claim one half of the self-employment tax as an income tax deduction. Use Schedule SE (Form 1040), Computation of Social Security Self-Employment Tax, to figure your tax. The amount of earnings subject to the tax and the rate of the tax are subject to periodic increases.

Estimated Tax

Estimated tax is the method you use to pay taxes on income not subject to withholding. This includes income from self-employment, interest, dividends, alimony, rent, capital gains, and prizes. You may also have to pay estimated tax if enough tax is not being withheld from your salary, pension, or other income. Estimated tax is used to pay income tax and self-employment tax (as well as other taxes reported on Form 1040). If you do not pay enough of these taxes through withholding or by making estimated tax payments, you may be charged a penalty.

For tax years beginning after December 31, 1997, you generally have to make estimated tax payments if you expect to owe taxes, including self-employment tax, of $1,000 or more when you file your return. For more information about estimated tax, refer to IRS Publication 334 – Tax Guide For Small Business.

Form 1040-ES includes a worksheet to help you figure your estimated tax. Keep the worksheet for your records. For estimated tax purposes, the year is broken down into four payment periods. Each period has a specific payment due date. The following chart gives the payment periods and due dates.

For the Period:

January 1 - March 31 - Due date: April 15
April 1 - May 31 - Due date: June 15
June 1 - August 31 - Due date: September 15
September 1 - December 31 - Due date: January 15 next year

If you are making federal estimated tax payments, you also may need to make tax payments for Mississippi income tax to avoid a possible state underpayment penalty.

Sales Tax

Initially, many businesses are interested in obtaining their "tax number" in order to purchase supplies and materials wholesale. To obtain a Mississippi Sales Tax number contact the Mississippi State Tax Commission at 601/923-7000 and ask for the Mississippi Business Registration Application (FORM 70-001-00-1). This is the "tax number" most wholesalers will require from businesses in order to purchase from them. In Mississippi, most home-based businesses are required to put up a $300 bond upon submission of the application. If you are in a business that is required to collect Mississippi sales tax , this is the number you will collect and report under.

In some cases, Mississippi requires the collection of sales tax from home-based businesses. Contact the Mississippi State Tax Commission at 601/923-7000 for information regarding the collection of sales tax for your specific type of business.

Home Office Expenses *

If you own a business, you may be using part of your home as an office or other work area. You may deduct the expenses of using your home for business on your federal income tax return if you qualify for the deduction. To qualify, you must use the space exclusively and regularly

• as your principal place of business, or
• as a place where you meet or deal with patients, customers or clients in the ordinary course of business, or
• in connection with a trade or business if the space is a separate structure not attached to your home.

You must use your home office in connection with a trade or business to take a deduction for its business use. Investment activities do not qualify for a home office deduction. If you are an employee, you may take a home office deduction if you use part of your home exclusively and regularly for the convenience of your employer.

Other limitations also apply. Claiming the home office deduction requires special tax planning. Consult a professional to ensure that you meet all of the requirements.

You must set aside a room or space in your home to use exclusively for business. This space may be in your home or in a separate dwelling belonging or attached to your home. If you use this area for personal reasons, you may not qualify for the home office deduction. Keep only business furniture, supplies and equipment in the business area of your home. Clear the business area of all personal items.

The exclusive use requirement has two exceptions. You may use the business area of your home for personal use under the following conditions.

• You use your home to store inventory or product samples, and the following requirements are met.
• You keep the inventory or product samples for use in your trade or business.
• Your trade or business is the wholesale or retail selling of products.
• Your home is the only fixed location of your trade or business.
• You use the storage space on a regular basis.
• The space you use is a separately identifiable space suitable for storage.
• You use your home to provide day care services, and the following requirements are met.
• You must be in the trade or business of providing day care for children, for persons age 65 or older, or for persons who are physically or mentally unable to care for themselves.
• You must have applied for, been granted, or be exempt from having a license, certification, registration, or approval as a day care center or as a family group day care home under applicable state law.

You must use the business part of your home on a regular and continuing basis. The occasional use of a part of your home for business does not meet the regular use requirement even if you use that part of your home for no other purpose.

The business area in your home must be your principal place of business, except as noted below. Generally, if you have a place of business away from your home where you do most of your work, you may not meet the "principal place of business test." Whether your home office is your principal place of business depends upon the facts and circumstances.

Note: The part of your home that you use exclusively and regularly to meet patients, clients, or customers does not have to be your principal place of business. Also if you use a separate, free-standing structure exclusively and regularly for your business, you may take a home office deduction even though it is not your principal place of business.

The Soliman Test.

Currently, the IRS uses the Soliman test to determine whether a taxpayer's home office is his or her principal place of business. The Soliman test requires consideration of two factors.

• The relative importance of the activities performed at each business location, and
• The amount of time spent at each location.

To illustrate the application of the Soliman test, consider Sam, a self-employed plumber. He uses his home office regularly and exclusively to phone customers, decide what supplies to order, and review trade journals. He employs a full-time secretary who works in his home office answering the phone, scheduling appointments, ordering supplies, and keeping the books. Sam spends about 40 hours per week at his customers' homes and offices and approximately 10 hours per week in his home office. The work Sam performs in his home office, although essential, is less important than the work he performs in his customers' homes and offices. Therefore, his home office is not his principal place of business, and he cannot take a home office deduction. The fact that his secretary works there full-time does not change the result.

Principal Place of Business Test Beginning January 1, 1999.

The Taxpayer Relief Act of 1997 eliminated the Soliman test for tax years beginning after December 31, 1998. Beginning January 1, 1999, the term "principal place of business" will include a place of business which is used by the taxpayer for the administrative or management activities of a trade or business if there is no other fixed location of the trade or business where the taxpayer conducts substantial administrative or management activities. Under the new test, Sam the Plumber will be allowed to take a home office deduction.

If you qualify for a home office deduction, you must divide the expenses of operating your home between personal use and business use. You must determine what percentage of your home is used for business. Divide the area used for business by the total area of your home. For example, if your home measures 2,500 square feet and you work in a room measuring 500 square feet, the business area is 20 percent of your home. [500/2500 = .20]. Or, if your home has five rooms of equivalent size and you work in one room, the business area is 20 percent of your home. [1/5 = .20]. Special rules may apply if you use your home to provide day care services and you use the area for personal use.

Direct expenses. Expenses that benefit only the area used exclusively for business are fully deductible. For example, the costs of painting your home office are fully deductible against your business income and against income from other sources.

Indirect expenses. Expenses that benefit the entire home may be partially deductible, subject to some limitations. The limitations do not apply to expenses that are deductible by all home owners, such as mortgage interest, real estate taxes, casualty losses, etc. These expenses remain fully deductible for business owners who operate out of their home.[Note: If your total mortgage debt is more that $1,000,000 or your home equity debt is more than $100,000, your deduction may be limited.] However, these deductions must be divided between business use and personal use if you qualify for the home office deduction. For example, if you use 20 percent of your home for business, 20 percent of your mortgage interest may be a business expense deduction.

Indirect expenses that may be partially deductible because of the home-based business include maintenance, insurance, utilities, and depreciation. Generally, homeowners may not deduct these expenses. Businesses, on the other hand, may deduct these expenses. The home office deduction allows businesses that operate out of someone's home to take the same deductions allowed businesses that do not operate out of someone's home. However, if you run your business out of your home, you may not be able to deduct these expenses as easily as you could if you had an office or work place outside your home.

The deductibility of these expenses is limited by the percentage of your home you use for business and the deduction limit. For example, if you use 20 percent of your home as an office, you may deduct 20 percent of the costs of maintenance, insurance, utilities and depreciation. This deduction is limited further by the deduction limit.

You can deduct all of your expenses for the business use of your home if your gross income from your home-based business is equal to or exceeds your total business expenses. If not, your deduction for certain expenses is limited. The deduction is limited for otherwise nondeductible expenses, such as utilities, maintenance, insurance, and depreciation (with depreciation taken last). You may deduct these expenses to the extent

• you have income generated by the business activities conducted in your home (or income generated from rental activity of your home)
• which exceeds the amount of certain deductions you are entitled to take regardless of the business use of your home.

The deductions you are entitled to take regardless of the business use of your home fall into two categories. Expenses in the first category include the business percentage of mortgage interest, real estate taxes, casualty losses, etc. You are entitled to take these deductions as a homeowner. Expenses in the second category include all other business (or rental) expenses, such as materials, supplies, and equipment. You are entitled to take these deductions as a business owner.

Expenses not ordinarily deductible to a homeowner, such as maintenance, insurance, utilities, and depreciation, fall into a third category. Your home office deduction for category three expenses may not exceed the amount of your gross income limit. Your gross income limit is the gross income from your home-based business minus your category one and two expenses.

If your home office expenses in category three are greater than your gross income limit, the excess amount may not be deducted in the current tax year. Any excess amount not allowed in the current tax year may be carried forward to a later tax year. This amount may be deducted in a later tax year only to the extent you have a sufficient gross income limit for that tax year.

Business owners. If you are self-employed, you may deduct the expenses allowable for the business use of your home from your gross income as a trade or business expense.

Employees. If you are an employee and use part of your home regularly and exclusively as your principal place of business for the convenience of your employer, the unreimbursed expenses from the business use of your home may be deducted as a miscellaneous itemized deduction to the extent that your aggregate miscellaneous itemized deductions exceed 2 percent of your adjusted gross income. Other rules may apply if your employer reimburses you for these expenses.

If you are using your home for business and you have claimed a home office deduction, you may have tax consequences when you sell your home. Some of these tax consequences may be avoided if you no longer qualify for the home office deduction or if you stop using your home for business before you sell. You may disqualify yourself from claiming a home office deduction by simply using the space for personal use. Timing is important, so check with your attorney or accountant for details.

If you used any part of your home for business, you must adjust the basis of your home for any depreciation that was allowable for its business use, even if you did not claim it. If you used an accelerated method for figuring depreciation, some of the gain on the sale of the business part of your home may have to be treated as ordinary income. Check with your accountant for more information.

The Internal Revenue Service closely monitors income tax returns claiming a home office deduction. Taxpayers claiming a home office deduction must keep complete records and comply with all requirements. For further information, consult Internal Revenue Service Publication 587, Business Use of Your Home.

Tax Assistance Publications

If you are an employee or self-employed, you can use the worksheet in Publication 587, Business Use of Your Home, to figure your deduction. If you are self-employed and file Schedule C, you figure your deduction using Form 8829. If you are an employee, you must itemize your deduction on Schedule A (Form 1040) to claim expenses for the business use of your home. Publication 587 has detailed information on the business-use-of your-home deduction.

For assistance in determining other business related expenses (such as employee's pay, fringe benefits, retirement plans, rent expense, interest, insurance, bad business debts, etc.) refer to IRS Publication 535, Business Expenses. To order publications and forms, call 1-800-829-3676, or download them from the IRS Web site.

MARKETING

Marketing is the process of determining what customers want or need and providing it at a profit to the seller. Marketing includes all activities involved in getting goods and services from the producer to the customer, including market research, advertising, promotion, pricing, customer relations, and professional image.

Target Your Market

Successful businesses "target their markets." They aim their product message toward a certain "type" of person. All advertising, promotions, and public relations are devoted to attracting that type.

A classic error commonly made when starting a business is trying to make your business appeal to everyone -- to be all things to all people. Typically, new businesses think appealing to the widest range of consumers assures success. However, the best approach for a home-based business, is to narrow your focus and target your market.

The first step in targeting your market is to know your product and its potential audience. Nothing can kill a business faster than marketing the wrong product to the wrong target audience. Some examples are marketing career clothing to women who do not work or sewing pageant gowns in an area where no one competes in pageants. Successful marketing is a combination of aiming the right product at the right market.

The basic principles of targeting your market are simple. Surprisingly, these techniques are the same whether you run a multi-million dollar corporation or a home-based business.

Successful marketing consists of the following:

• Researching, analyzing, and evaluating your potential market.

• Relating and communicating your products or services to a target audience.

• Efficiently producing and delivering marketable products or services.

Before you begin analyzing your potential market---analyze yourself. Ask the following questions:

• What knowledge or skills do I have that others need or want?

• What experiences do I have to offer others and can they benefit from them?

• Are my knowledge and experience put to use outside my business and are they visible in my market place?

• How is my service or product different from my competition's?

• What are my strengths? At what am I best?

• What are my weaknesses? At what am I not good?

• What tangible results or benefits do my products or services produce for potential customers?

Analyzing yourself brings into focus your strengths and your weaknesses. Begin now to emphasize what you do best and improve or eliminate your weaknesses.

Analyze Your Market

Once you've decided on a product or service, what you are good at, and what you would like to do, analyze your market:

• Who are your potential customers? (Are they male or female? How old are they? Where do they live?)

• What benefits are they looking for? Do they match the benefits you have to offer?

• Where are they located? - urban or rural.

• What are their income levels?

• What price will they pay?

• How can you reach them?

• Are their needs being met successfully by an existing business?

• How many different types of potential customers do you have?

• Why will they buy what you have for sale?

One aspect of determining the market for your product or service is to identify your competition, if any. Are similar products or services already being offered? Compare the quality, features, and value of your product or service to the competition's.

Identify the attributes you should emphasize to create a unique need or to be most appealing to the customer. You may have to offer special services, such as delivery, to increase the appeal of your product.

Determine what share of the market is realistic for you to reach. Would that market share be worth all the effort required to attain it? Determine if there is room for you and your competitors, as well as the potential for expanding the market.

If there is no competition, find out whether your product or service can be promoted successfully to create a demand for it.

Marketing is a continuous process, and you should not neglect it once your business is launched. You need to be aware of trends and changes in your market so you can respond to them. If your product or service is not selling, consider changing it, the price, the name, or its function. You may also want to change the materials you use, the customers you sell to, and your advertising methods. You may need to update your skills. Remember, perseverance and flexibility can keep you in business when your competitors fail. If you establish the fact that people need and will pay for your product or service, if you identify the appropriate market, and if you appeal to those customers' particular needs, then you should have a successful business.

ADVERTISING AND PROMOTION

Advertising communicates and relates your products or services to potential customers so they will want or need what you have to offer. Advertising is not difficult once you have identified your customers and targeted your market. This helps you determine when, where, what, and how to advertise. Advertising lets your prospective customers (target market) know about your product and makes them want to buy from you. The advertising you choose should project the kind of image you want for your business.

Choose the forms of advertising that work best for your business.

Word of Mouth

Word-of-mouth advertising is the best advertising for a home-based business because it is free, sincere, believable, and unsolicited. Be sure the "word" is favorable by building a good reputation. Be professional, meet deadlines, keep appointments, and do not accept more work than you can deliver. Good business practices and friendliness will enhance your business and make people want to return. Building a reputation takes time, so you will have to use other forms of advertising as well.

Business Cards

A professionally printed card is an asset to almost any business. Include your name, business name, address, phone number, products or services you provide, and an attractive logo, if you have one. Give cards to interested people you meet. They may not buy your product or service now, but they may refer someone to you at a later time.

Letterhead and Envelopes

Printed letterhead shows your customers you are a professional business person. You may want to announce the opening of your business by mailing notices to prospective customers. Letterhead stationery is often necessary when purchasing materials and equipment from wholesalers and suppliers for your business.

Brochures

A brochure can be small, inexpensive, and attractive. Get advice from a printer. You may want to hire a graphic designer to help with the layout of pictures, text, and lettering. Even though brochures can be moderately expensive, they may be a good choice for marketing your particular business.

Direct Mail

Mailing brochures or letters to businesses or people likely to become customers may be helpful when you first open your business. Mailing again at regular intervals throughout the year may also help. Mailing can be expensive and should be weighed with the other options when you decide on your advertising campaign.

Bulletin Boards

Post professional-looking brochures, flyers, or business cards on public bulletin boards in restaurants, grocery stores, laundromats, apartment complexes, schools, or anywhere visible to your target market.

Newspapers

Contact local editors and tell them about your new service or product. An editor may want to do a feature story, especially about your grand opening. An article can be free advertising and may be more effective than a large, paid ad. Be sure to thank the editor if he or she runs the story. Getting space in a newspaper may be easier if you can tie into the activities of a charitable organization or a community activity. Include a black-and-white picture and news release.

Classified Ads

Ads in local newspapers and shoppers guides are appropriate for many home-based businesses.

Portfolio

Put together a collection of your best work. Many people take photographs of every project. You may want to include a resume and list the advantages or special features of your business. Include letters from satisfied customers, and be prepared to suggest several past customers as references.

Shows or Displays

Displaying some of your work in a public library or bank may be appropriate. Have business cards available for people to take. Be sure the display is secure so you do not lose valuable merchandise.

Other Businesses

You may want to advertise in a business that compliments yours. Cooperative advertising usually benefits both businesses.

Telephone Book

Check with the phone company for the time of printing for the next book. Be sure to get your business name in the white pages. A listing in the Yellow Pages may also be helpful, especially for service businesses.

Local Radio and Television Stations

Some radio stations have local talk shows. Call the directors to see if they are interested in discussing your home-based business. A purchased radio or television ad may be expensive, but it is worth looking into when tied into some news feature or special event.

Local Organizations

Joining local organizations provides a good opportunity to make valuable contacts. By participating in community activities, you increase the visibility of your business.

Networking

A network is a collection of acquaintances and business peers you depend on for information, services, support, and access. Network relationships are based on mutual and professional respect for the other's ability to help when needed.

World Wide Web

Small businesses are using the Internet to create new markets, provide information about products/services 24 hours a day, service customers, get customer feedback, and sell products. Sites that create a presence on the web and are what some term a "brochure" site. They serve as an advertising/promotional tool for the business, providing information about the business but not actually selling products online. The Internet has significantly reduced the cost associated with obtaining information about products, and many people use the Internet to research products and then purchase them off line. A website may provide a telephone number and/or fax number for actual ordering.

CUSTOMER RELATIONS

Good customer relations are essential for any business. Money spent on advertising and promotion could be wasted if the customer is not treated appropriately. Business people should deal with customers in a manner that neither offends them nor allows them to take advantage of you or your business.

Before you open for business, establish policies on dealing with customers. Try to anticipate problems, objections, or special situations that may occur, and determine how you want to deal with them. Home-based business owners should strive to convince the customer they are genuinely interested in them. Providing a good product or service reenforces this confidence. Work that fails to satisfy either you or the customer is a poor advertisement for your business. According to consumer surveys, a person who has had an unpleasant experience with a business will tell 9 to 10 other people. Som