Sewing as a Business:

A Guide for Home-Based Sewing Professionals

Contents

• Decision To Begin a Home-Based Business
• Legal Forms of Ownership
• Obtaining Financing
• Licenses and Regulations
• Insurance
• Pricing
• Sewing for Profit
• Teaching Sewing for Profit
• Financial Records
• Taxes
• Marketing
• Planning a Home Sewing Center
• Time Management
• Hiring and Employee Relations
• The Internet
• Summary
• References
• Appendices

Home-based sewing businesses are becoming increasingly popular as more people are turning skills, hobbies, and ideas into profitable ventures. A home-based business allows for flexibility because it can work around family schedules. It also gives you the independence of being your own boss, which can be a satisfying experience.

A home-based sewing business is not for everyone. 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 sewing 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 decision.

Decision To Begin a Home-Based Business

You must determine if your traits, skills, and abilities are appropriate for a home-based sewing business. Self-discipline is very 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 sewing business include a 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 sewing business include risk, loss of home space used by family, interruptions, lack of self-discipline, little opportunity to delegate tasks to others, and legal requirements.

Being committed to a business may mean lack of freedom to do other things.

Other Factors To Consider

Before making your decision to go into business, thoroughly study the situation. Search for answers to the following questions:

• How likely is it the business will be profitable?
• What is the competition?
• Is there a need for the product or service?
• Do I have the necessary sewing skills?
• Do I have the necessary business skills?
• Am I ready to make a commitment to the business?

A home-based business may cause problems within the family. You need your family's support. They need to take you and your business seriously. What help can you expect or do you need from family members? Will you have adequate time to spend with your family? Use of their money, skills, and time often makes the difference between success and failure.

Lack of planning and insufficient financial backing join poor management as main reasons businesses fail. Five out of seven small businesses fail in the first few years of operation. Improve your chance of success by careful planning and timing.

Legal Forms of Ownership

One of the early decisions for a person starting a home-based business involves choosing the best form of organization and ownership. 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 ease in organization. The business owner is responsible for all financing, management decisions, and liabilities of the business.

Advantages

• Owner in direct control (you are the boss).
• Low start-up (organizational) costs.
• Least government regulation.
• Ease of formation and simple structure.
• No double taxation.
• Business losses can offset personal income (for tax purposes).
• Owner receives all profits.

• Total (unlimited) personal liability.
• Limited financial resources (capital).
• Lack of continuity as a result of disability or death of owner.
• Owner may have limited managerial expertise.
• All profit is taxed as personal income.
• 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 partnership agreement should include: 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 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 in event of death or disability of one partner.
• Sharing of profits.
• All profits are taxed as personal income.
• Difficult to raise additional capital.
• Hard to find suitable partners.
• Divided authority (limited decision making).

Advantages

• General partner maintains control of the business.
• Limited partner can invest with a limit on personal liability.
• Easy way to secure capital.
• Business not taxed directly.

• More complex to organize.
• Limited partner has no control over the business.
• General partner has unlimited personal liability for the obligations of the business.
• Lack of continuity in event of 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, 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 stock for assets. Generally, stockholders are not liable for claims in excess of the current value of their shares. Corporate officers may be required to personally guarantee bank notes or loans and, therefore, are 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 35 or fewer stockholders.
The corporation has only one class of stock.

The "S" corporate structure allows a tax burden shift to shareholders. The election is made formally on Form 2553 filed with the Internal Revenue Service. The election can be made at any time during the previous year or up to March 15 of the year of election. By April 15, the "S" corporation also must file an informational return allocating profits or losses to shareholders.

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 like a partnership or an "S" corporation. If the LLC is not properly structured, it is taxed like a "C" corporation. Forming a LLC is more complex than forming a partnership, but 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 this state in 1994. It should be noted that the lack of precedent adds some uncertainty to adopting this form of business. However, experts predict the LLC is quickly becoming the form of choice for many small businesses.

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.

Table 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 up your business. Indicate if it is to be purchased or if it is something you have on hand. If it has to be purchased, would it be an advantage buying it new or used?

Don't make the mistake of buying a piece of new equipment that fails to provide you with all the features necessary to your business, thinking you will upgrade it in a couple of years. And do not pay for expensive features that will not be used.

An inventory plan may resemble the following:

Business Inventory Plan
Sewing Machine	$1,200.00	New
Overlock Machine	643.00	New
Tabletop Press	500.00	New
Office Desk and Chair	150.00	Used
Filing Cabinet	on hand
Storage Chest	on hand
Answering Machine	on hand
Business Cards, Business Forms, and Stationery	100.00
Business Telephone Installation $93.00 Deposit $200.00	293.00
Remodeling bedroom for business area; shelves; lighting; opening for exterior door	1,600.00
TOTAL	$4,486.00

How much 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 percent 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 enough at risk you will go to extreme lengths of energy and 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. A flow chart for planning and developing your business for loan consideration may look something like this:

Develop a business plan

Analyze sources of capital

Prepare loan proposal

Present proposal

Step 1

Develop a business plan

In the financial community, a business plan is the tool you need. It is a typewritten report showing the lenders you have planned your business. It is designed to give them confidence in you. If you don't need very much money, say $10,000 or less, you may not need a complicated plan.

Basically, the business plan answers the following questions (in logical order):

1. What is the business?
2. What is the product or service?
3. Is there a market?
4. What is the competition?
5. How will the product or service be marketed?
6. How much money is needed?
7. How will money be repaid?

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 all business loans. It becomes the "talking tool" 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 history of yourself, including your skills, prepares the reader for your business ideas. It outlines sources of funds to be invested in your business, including the requested funds from the lending agency. The proposal also should outline the repayment plan and list references.

Step 4

Present the loan proposal

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

Regardless of whom you include in the financing of your business, whether it is a bank, friend, or relative, insist all details be in writing. This protects you and the lender and can eliminate future misunderstandings that cause permanent family 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' repayment ability. This is frequently evaluated on the basis of history, income, and credit analysis.

Capital refers to the general financial position of a 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 a 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.

Lenders look more favorably on loan applications providing necessary personal and financial information and showing the home-baser has done homework.

Licenses 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 sewing business. It doesn't have to be formal with a lot of legal terms, but it is binding and protects you and your customer. It also projects a business-like image.

A work agreement simply 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 some of 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 (include pattern number, view, changes, special details).
5. Notions supplied by the customer.
6. Notions and services supplied by the sewing professional.
7. Cost estimate.
8. Method of payment (cash, check, or credit card); never allow work to leave your home without full payment.
9. Final fitting and 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 due to theft or fire (unless covered by insurance).

A work agreement is designed to protect you and your customer and should be signed by both of you. Specific legal questions about work agreements always should be directed to an attorney.

Labeling

Federal laws require wearing apparel be permanently labeled with the following information: care procedures, manufacturer's name or registered number, and country of origin. In addition, fiber content must be labeled.

Care labeling -- The Care Labeling Rule covers all manufacturers and importers of textile wearing apparel and all manufacturers of textile piece goods sold to consumers for the making of wearing apparel.

Care labels must give instructions for regular care during ordinary use and enjoyment of the garment. They must warn against cleaning procedures that would harm the garment.

Failure to provide reliable care instructions, warnings, and reliable evidence is considered a violation of the Federal Trade Commission Act and could lead to penalties or fines.

The rule is explicit about the label itself. It must be permanently fastened, permanently legible, and available to the consumer at the point of purchase.

Manufacturer's name/Registered identification numbers -- Labels must either identify the company name or provide a registered identification number (RN) . RN's are issued by the Federal Trade Commission to qualified persons residing in the United States (can be used in lieu of the manufacturer's name on textile fiber product labels).

The number can appear any place on the label and must be used when the name of the manufacturer is not stated.

To obtain an RN apply online at www.ftc.gov/bcp/rn/index.html or write:

Country of origin labeling -- The regulation stipulates all textile, wool, and fur products, including apparel, sold in the United States must carry labels identifying their country of origin.

Each product made in the United States from U.S.-made materials must be labeled "Made in U.S.A."

Each product made in the United States but not totally from U.S.-made materials must be labeled accordingly, e.g., "Made in U.S.A. of imported fabric."

Textile fiber products identification act -- Fiber content information is required at point of purchase but is not required to be permanently affixed to the garment.

Knowing the characteristics of each family of fibers can help the consumer know something about the performance to be expected from a product. Labels must state the percentage (in order of predominance by weight) of each fiber making up five percent or more of the total weight.

Fibers making up less than five percent of the total weight need not be named and can be listed as "other fibers."

For additional information and full details, please refer to the rules and regulations published by the Federal Trade Commission.

Labeling children's sleepwear (sizes >9mos - 14) -- The Consumer Product Safety Commission Code of Federal Regulations (16CFR1615) and (16CFR1616) defines standards regarding the flammability of children's sleepwear. Any garment covered by the definition must be tested and must pass the flammability requirements stipulated in the regulations.

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 living in a home used strictly as a residence. Most homeowner's insurance will not cover claims related to 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. A blanket liability insurance policy can also cover legal fees and court costs. Liability coverage of up to $1,000,000 is relatively inexpensive. Be sure it covers all risks that could happen.
• Extended coverage rider for windstorm, hail, smoke, explosion, or vandalism protection.
• Special protection to cover loss by fire or theft of business records, cash, other business documents, and property, including tools and inventory.
• Product liability insurance, especially if your home business involves clothing manufacturing.
• An endorsement or rider to your personal automobile policy for business use if the car 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.

Remember, the main purpose of insurance is to enable you to continue your business and lifestyle if a misfortune occurs. Identify and prioritize your risks to avoid being underinsured or overinsured. Consult with more than one insurance agent and compare the coverages to determine what is adequate for you and your business. Always have something in writing stating what your business coverage is. This is especially important if your business liability is being insured under a personal homeowner's or automobile policy.

Insurance risks change. Annually review your insurance coverage with your agent and the risks you face.

Pricing

The majority of people already in a home-based sewing business did not find it easy to set their prices; and those just starting out have trouble deciding, too.

Pricing is one of the most difficult problems for the sewing professional. Home sewers in Mississippi as a whole tend to set their prices too low--there are two main reasons for this:

1. They find it hard to believe that people will actually pay the price they really need to charge to make a profit.

   Sometimes this is true, but most of the time this statement is based on belief, not fact. Don't fall into this trap. Don't be the fearful businessperson who sits back and worries that no one will pay more. Smart entrepreneurs are offering the same product or service at two or three times your asking price--and they are getting it.

2. They tend to underestimate the value of their time and expertise (especially women who have stayed at home with little or no salaried job experience).

   If this happens to describe you, don't sell yourself short. It is not job experience that determines the worth of your time in a home-based business. It is what you know and what you do with the time that counts. In truth, the major products a home-based sewing business has to sell are time and expertise, and they must be valued accordingly.

   You must set your prices high enough to cover your costs and earn yourself a reasonable return, yet low enough so customers will buy your product or use your services.

   Realistic prices attract customers and build sales volume. Whether you are high-priced and only a select few can afford your product or service, or lower priced for greater appeal, you must be sure the return is enough to be profitable. You won't last long if too few come to your door or if your prices are so low you do not make a profit.

Sewing For Profit

In a home-based business, the total cost of producing a product or service is composed of three major factors: direct costs, salary, and overhead/operating expenses. This is the information that should be used for setting your prices. The more exact you figure your costs and set prices, the greater your chances for a continued and profitable business.

Direct costs -- Include all the materials and supplies that go into making a product. In a home-based sewing business, in most cases, the customer is responsible for supplying fabrics, patterns, and notions. However, there may be times when you use your own zipper, thread, interfacing buttons, etc. These costs may seem incidental, but they can add up quickly. Before you know it, you could be using a couple of dollars worth of your own supplies in every garment you make.

Labor/Salary -- You should pay yourself a set salary. After all, that's why you're in business, to make money. The following are two methods sewing professionals use to determine salary:

1. By the job -- Develop a complete list of the various sewing tasks. Determine how long it takes you to complete each task. Each sewing project can then be broken down into tasks that are added up to give a total time figure (in hours). Decide how much you want to pay yourself an hour. For each sewing project, multiply the total time figure by dollar per hour to determine your salary. (Refer to Construction Price List.)
2. By the hour -- Keep an accurate account of the total amount of time required to complete a sewing project. This means keeping a written log of what you did and the amount of time required. Decide how much you want to pay yourself an hour and multiply the total time figure by dollar per hour to determine your salary.

Overhead/Operating expenses -- Include all the business costs not directly related to the actual production of a specific product or service. In a home-based sewing business, this includes taxes, advertising, rent, demonstration materials/supplies, office supplies/equipment, business-related travel, insurance, business permits, maintenance and repair of equipment, sewing supplies/notions/equipment, utilities (electricity, telephone, etc.), professional assistance (accountant, attorney, etc.), and other costs related to the overall operation of the business.

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.

The prevailing element when setting prices is costs. An accurate accounting of all the costs that go into a business is necessary.

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.

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.

A key concept to remember is that it is impossible to stay in business if prices are set lower than the "cost of doing business." Direct costs, labor, and overhead expenses are the bare minimum that must be reflected in the pricing strategy of any business.

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.

Practice calculating prices. Analyze the prices, keeping in mind location, reputation, skill level, and competition also are factors to consider when determining a pricing system for your business. Once you decide on a pricing system, use the same approach for all customers. This avoids confusion in setting rates and avoids problems with pricing differences that could occur.

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.

Itemizing your bill may help customers understand the amount of time involved in making and fitting a custom garment or home furnishing. Include the costs of materials and hours needed to complete the garment. People who do not sew do not realize the number of hours required to design, fit, and actually sew a garment or home furnishing.

Although you have determined basic rates and developed ranges, never give a final quote over the telephone. Always see the pattern or project, fabric, and the person before quoting a price.

If customers question your price by comparing your products to someone else's garments or ready-to-wear, you should stress the quality of your custom work and the skill and talent needed to produce it. You may provide personal service others do not. If they still want a lower price, politely suggest they go elsewhere. Remember, you can't sell at a price lower than your expenses or you won't be able to stay in business.

If friends and relatives expect a reduced price, explain this is your business and, just as they work for their incomes, you expect to be paid for your efforts. Some sewing professionals suggest an exchange of work in equal value, while others give a set across-the-board 10 to 15 percent discount to relatives.

Consignments

You may choose to sell on consignment where a retail store displays your products, advertises, and sells them for you. For this service, they charge a flat fee of 30 percent to 50 percent of the selling price. You may want to consider asking the consignor to pay 20 percent, 30 percent, or 50 percent up front, then you refund it if the item doesn't sell within a certain time frame. This will provide you with working capital to make more of your products.

The store generally pays its consignors once a month for merchandise sold. A consignment store should reflect a neat, friendly, yet businesslike appearance. Other merchandise in the store should be similar in quality to yours. The store owner should be able to suggest realistic selling prices for your products.

Disadvantages

Since you own the products until they are sold, the store is not responsible for theft or damage. Another disadvantage is your money is tied up in the merchandise until it is sold. It's in your inventory, not the store's. If an item does not sell, it may be returned to you in less-than-saleable condition or be out-of-date.

Inspect written agreements carefully. Be sure to include all of the details you find necessary to protect your investment.

Teaching Sewing for Profit

Teaching sewing is a business, too. You must cover costs and earn a profit. How much profit you can generate depends on how carefully you plan and promote your programs, how much you charge, and how well you control your costs.

Your profit objective will affect how much you charge for your programs. You won't be able to generate profit if you don't price aggressively. Forty-five dollars for a 6-week, 15-hour "sit and sew" course is a bargain. Ten dollars for a 2-hour seminar is reasonable.

Examples

Type Class	Student Fee	Total	Number Students	Total Revenue	Revenue/Hour Teaching
"Sit and Sew"	$45	6 lessons (15 hours)	10	$450	$ 30
Seminar	$10	1 lesson (2 hours)	20	$200	$100

At first glance, $30 and $100 per hour seem great--but in teaching you will have overhead expenses and preparation time to take into consideration.

The following is a pricing formula some successful sewing professionals use to determine student fees for courses they teach.

Begin by deciding the amount of money you want to earn monthly. Remember, this figure needs to include all direct costs and overhead expenses. Next, decide how many courses you would like to teach per month and, based on class structure and content, how many students you can handle per class.

Multiply the number of students times the number of courses. This gives you your total number of students. Next, take the amount of money you'd like to earn per month and divide it by the total number of students. The resulting figure will be how much you need to charge each student (student fee) per course in order to earn your desired monthly salary.

For example, you have decided to earn $2,000 in a peak month, and you will only teach four courses that meet once a week for 4 weeks.

These courses will be strictly lecture/demonstration classes. Thus, you can handle a maximum of 20 students per class. (The number of students you can handle for a lecture/demonstration class will vary greatly, depending on available space because you might be teaching in a home or fabric store.)

Now for the formula: number of students x number of courses = total number of students (20 students x 4 courses = 80 students per month). Then divide the desired monthly earnings by the total number of students to determine the student fee ($2,000 ÷ 80 = $25 per student).

Chances are you may not start out with full enrollments but you should be able to build to this within a year of offering exciting sewing programs.

If you are working on your own, you set the salary. However, if you are working with a retailer, discuss terms in advance. How teachers are paid varies greatly among retailers. Nevertheless, certain patterns have emerged.

Straight salary -- Teachers who also work in the store are often paid at the same rate as other salespeople or slightly above on a weekly basis. In a few cases, teachers who also sell are paid at one rate while selling and at another higher rate while teaching.

Salary plus commission -- Some teachers are paid the same salary on an hourly basis as the other salespeople in the store. In addition, they receive a commission for each student signed up for the sewing program beyond a minimum enrollment. This helps increase participation because it puts some of the responsibility of enrollment with the teacher.

Percentage of student fees -- Some stores offer teachers a percentage of student fees. In the event of a small enrollment, the teacher would decide if the program would be held. In some cases, retailers offer 80 to 100 percent of the student fees to the teacher. In this case, the retailer is counting on the income generated from sales during and following the sewing program to support the program being held in his/her store.

Hourly wage -- Teachers who do not also work on the sales floor are paid an hourly wage. Some stores will match the "going rate" for adult education teachers in the local school system.

In summary, the main purpose in operating a business is to make a profit. Prices should be established from an accurate accounting of your direct costs, overhead expenses, and time spent. Compare several pricing methods and decide on the one best suited to your needs. Pricing is a skill you must develop if you are going to have a successful and profitable sewing business.

Financial Records

Record Keeping

Accurate financial records are essential to the smooth operation of any business. The key to an effective and efficient record keeping system is to set it up correctly in the first place. If you are unsure about how to do this, it may be worth it in the long run to seek advice from an accountant. Shop around for a good accountant who is familiar with and appreciates home-based sewing businesses.

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

Pay all business expenses by check and keep all receipts of business expenditures, noting check number and date paid on receipt. 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 and then pay the personal expense from your personal account. Do not pay personal expenses directly from the business account. Deposit all business receipts intact.

A good record keeping system consists of a minimum of a cash receipts journal and a cash disbursements journal. Inexpensive journals and business forms are sold in a variety of places. There are also some excellent computer software packages for small business record keeping.

Cash Receipts Journal

The cash receipts journal has columns for various categories of receipts with a line for each, including date, source of cash, and 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, including date, check number, payee, description of expense or purchase, and 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 year-to-date total for each month.

Taxes

As a professional businessperson, you must take responsibility for all federal, state, and local taxes required by law. A useful document titled "Reporting Requirements for Mississippi 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 and county regulations. Write to MDA, Enterprise Development Division, P.O. Box 849, Jackson, MS 39205 for a free copy.

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.

Business Use of Home

Sales Tax

Many businesses when first starting out are interested in obtaining a "tax number" in order to purchase supplies and materials wholesale. There are two tax numbers that new businesses are required to obtain. The first is the federal employer identification number (EIN). The EIN is issued by the IRS for federal tax purposes. Partnerships, corporations, and sole proprietorships (with one employee or more) are required to have an EIN. To obtain this number contact the IRS at 800/829-3676 (ask for FORM SS-4).

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

Prior to any person engaging in any business within Mississippi, a determination must be made as to whether the business to be engaged in will be subject to the provisions of the Mississippi Sales Tax Law. In some cases, Mississippi requires the collection of sales tax from most home-based businesses. Refer to the following chart for requirements for the collection of sales tax in home-based sewing businesses.

If you have any questions concerning sales tax, contact the Mississippi State Tax Commission at 601/923-7000 .

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 to the customer from the producer -- market research, advertising, promotion, pricing, customer relations, and professional image.

Target Your Market

Successful businesses "target their markets." They aim their product messages 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 is a surefire prescription to success. However, in a home-based sewing business, you need 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 a target audience. For example, try marketing career clothing sewing courses to housewives, or sew pageant gowns in an area where no one competes in pageants. Successful marketing is a combination of aiming the right product toward the right market.

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

Successful marketing consists of:

1. Researching, analyzing, and evaluating your potential market.
2. Relating and communicating your products or services to a target audience.
3. Efficiently producing marketable products or services.

Analyze Yourself

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

• What knowledge or skills do I have that others need or want?
• What experience 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 different from other similar services?
• 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?

Note the word benefit--anytime someone pays money for a product or service, he or she really is buying benefits. As a customer of a sewing professional, the benefits might be a superbly fitting dress that is unique. As a customer of a sewing course, the benefits are the satisfaction of choosing a fabric and pattern for a garment and then making it. Keep in mind a customer always pays for benefits whether tangible or intangible.

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 to see if you have a market.

Who are your potential customers? (For example: custom dressmakers--brides, disabled persons, preemies, pageant participants, children, pregnant women; teachers--teens, children, brides, pageant participants, pregnant women, career women--the two can overlap.)

• What benefits are they looking for? Do they match the benefits you have to offer?
• Where are they located? -- urban versus 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?

Each potential customer is a target market with distinct needs you can address; for example, housewives, corporate vice presidents, young marrieds, retirees. Learn everything you can about each market's buying motives--what they buy? why they buy? how they buy? where they buy? A successful marketing campaign strives to meet the needs of its target market.

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

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 of the effort required to attain it? Determine if there is room for you and your competitors, as well as 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.

Advertising and Promotion

Advertising relates and communicates 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.

Decide what form of advertising you need. The advertising you choose should project the kind of image you want for your business. Professionally printed business cards suggest a quality product. A handwritten note tacked on a bulletin board suggests less-than-professional work.

Regular, steady, targeted advertising attracts more customers than do splashy, appeal-to-no-one advertisements. Zero in on your specific target audience with cost-effective advertising. Plan an appropriate advertising theme using the name of your business and featuring a logo (if you have one). People tend to remember catchy (not overly cute) names, slogans, and logos.

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

Word-of-mouth. Word-of-mouth advertising is the very best advertising for a home-based business, because it is free, sincere, believable, and unsolicited. Be sure the "word" is favorable by building up a good reputation. Be professional, meet deadlines, keep appointments, and do not accept more work than you can deliver.

Good business practices and friendly hospitality 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 may refer someone to you at a later time. Many times home-sewing professionals use their business cards as hang-tags on their finished garments. This is done by punching a hole in the business card and attaching it to the garment with a ribbon.

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 also is 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 also may 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 complements yours. For example, a fabric shop or dry-cleaning store may be willing to let you advertise for alterations. Cooperative advertising 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. For example, if you specialize in making pageant gowns, an ad during a beauty pageant may be well worth the expense.

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.

The emphasis in networking is on exchange, matching needs with resources. For example, if you have more garments to complete than you have time, you would refer some customers to another sewing professional with whom you have a reciprocal agreement. Or perhaps you need to know the name of a good supplier for a certain type of fabric, so you would call up a business peer for a suggestion--and she knows she can call on you in the future.

Network relationships are based on mutual respect for the other's ability to help when needed, as 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 sewing business owners should strive to convince the customers they are genuinely interested in them. Providing a good product or service reinforces this. Work failing to satisfy 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 or 10 other people. Some may tell as many as 20 others.

By solving complaints promptly, these customers may not only come back but will have something positive to talk about. Customers who have had good experiences with a business will tell an average of five other people, some of whom may become new customers.

Professional Image

Developing a professional image may be difficult when you work out of your home. Projecting a businesslike image is an important part of building credibility with your customers and contributes to your professional self-image.

First, consider yourself and your personal appearance -- be neat and well-groomed when clients call at your home (includes clothing, hair, and make-up). As a sewing professional, you should look professional and set an example. Wear clothing you have made. Sew distinctive clothing for yourself and family members. Attractive, well-made, and well-fitted clothing is constant advertising as you interact with people in your community and clients in your home.

If your interests are in home furnishing (window treatments, slipcovers, or reupholstery), your home should be an example of your work. Keep the room designs in your home current, attractive, and distinctive. Whatever kind of sewing you do, keep in order rooms the customers view. Ten minutes a day spent tidying up will give rooms a neat look and customers a positive impression. Cluttered areas look bad and can be hazardous.

Subscribe to professional and trade publications to keep up-to-date. Build a small reference library. A good basic sewing reference is necessary. Consider some books on special topics, such as sewing with imitation suedes, sewing with natural suede or leather, or energy-saving window treatments. A reference on wardrobe planning, personal color selection, or interior design will broaden your background and help you provide more service to clients.

Enroll in update classes, seminars, and workshops to learn what's new. Always be aware of new opportunities -- you will feel more confident and competent and offer a better service to clients. Being a sewing professional is not just sitting at home and sewing; it also is knowing what is fresh and new in the areas relating to your business.

In summary, 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, your advertising methods, or update your skills.

Remember, perseverance and flexibility can keep you in business when your competitors fail. If you establish the fact people need and will pay for your product or service, identify the appropriate market, and appeal to those customers' particular needs, then you should have a successful business.

Planning a Home Sewing Center