How the world has changed in just a few short years. The Internet is bringing people and places together at a pace that was unimaginable just a few years ago. It is now possible to start a business in the back room of your home and use the Internet to make that business as visible to the world as if you had a million dollar advertising budget.
Today, it's not uncommon for writers, consultants, and software developers to set up shop in their spare bedroom, and successfully offer their services to customers around the world. It’s also possible to start a business where you manufacture products in your basement, store the inventory in your garage, sell via a website, and distribute to customers around the world.If you are setting up a “home-based business” it’s important to recognize that the key part of this phrase is “business,” not “home-based.” You are setting up a business, and the objective of any business is to make money for its owners. A home-based business is no exception. It should be set up from the outset to be profitable and to generate a salary for the owner.
The key to profitability in any business is selling products or services for more money than it costs to provide those products and services.
In order to understand if your home-based business will be profitable, it’s important at you research the price at which you can sell the products or services: how many of each product or service you're going to sell; and the costs of providing these products and services and operating the business.
Price
Let’s start by looking at price. In setting the price for your products, it's important that you understand how much the customers are willing to pay for your products, and how much the competition charges for similar products. It doesn't really matter what you would like to charge for the product, what matters is what you get customers to pay and how much your competition is charging for similar products.
So how do you find out what the customers will pay and what the competition is charging? You need to do a little bit of research. You can analyze your competitors by visiting their stores or websites, looking at the products they are offering, and see how much they're charging.
If you want to know what the customer is willing to pay for particular product, you can either look at the products they're buying from your competition and what they're paying, or you can ask them.
I have found that asking some simple questions of customers and potential customers is a great to find out what they think products currently on the market and what they think about the product you are planning on offering.
If you're selling to other businesses, call up some of those businesses and talk to them about your products and ask them how much they typically pay for similar products. If you're selling to consumers, talk to some potential customers or conduct a simple survey to see how interested they would be in your product and what they would be willing to pay. Once you have done this, you will know how to price your product or service.
Let’s look at some examples. If you're in a resort area, and plan to set up an adventure travel business where you pick up guests at the resorts and take them on caving trips, jungle expeditions, or river adventures, it's important you understand the price points for these trips. For instance, if the going rate for a half day jungle expedition tour is $150, you are either going to have to price your tours at this rate or offer some great additional value for which the customer will pay a premium.
Likewise, if you have set yourself up in your home as a website designer, and the going rate for website designer is $75 per hour, chances are you're going to have to set your prices at or near $75 an hour, or find some way to convince the customers that your service is worth a higher price.
Sales Volume
The next element to consider is sales volume – the number units you'll be able to sell. If you are selling your time, such as you would do as a website designer, you have to consider the time you will spend on non-revenue generating activities such as dealing with billing and accounting, fielding prospective customer inquiries, or marketing the business.
It’s very typical in professional services business to find that only half your time is purchased by customers and the rest is spend on marketing and other activities. If you are estimating sales for a professional services business, your weekly billable hours will probably be closer to 20 hours than they will to 40 hours.
Likewise, if you're running an adventure travel business, the revenue the business can earn is limited by the number of tourists you can fit on any one of your tours. Sometimes you will have a full load, and at other times you may be running a tour at half capacity. Additionally, the peak tourist season in many resort areas less only a few months, so while you may be running many tours during the peak season, you may find yourself running fewer tours during the off-season. Instead of being at full capacity for all tours 52 weeks a year, you will probably find that you average 50% capacity or less over the course of a full year.
When you multiply your estimated prices times your estimated sales volume, you’ll get the estimated revenue for your business.
Costs
When you plan your home-based business, its important that you estimate the expenses of operating the business and the costs of providing the products and services.
If you're selling products that you manufacture, you'll need to estimate the raw material costs and labor time needed to manufacture the products. If you're reselling products you purchase from other suppliers, you'll need to know how much it will cost to buy the products.
In the case of our adventure travel business, even though each customer pays $150 per tour, it’s not all profit. There are some costs associated with each sale. The tour guide has to be paid. The driver has to be paid. The bus needs gas. There may be an admission charge for the park or a commission due the resort. Some of the $150 is must be paid as the costs of the tour.
Even if the business is based in your home, chances are you'll have some operating expenses. While you may not be paying rent or utilities expenses, you'll need Internet access, a phone, toner and paper for the printer, software for the computer, and perhaps an account with the post office or shipping company.
Our adventure travel business will not only have office expenses, but will also have costs associated with marketing the business, buying or leasing a tour bus, purchasing safety equipment, and perhaps paying the government for necessary licenses and permits.
Our web designer will need a portfolio of websites to show prospective customers as well as an up-to-date computer, the latest software, and also may need to pay for training to keep his or her skills current.
One final expense that must be included in the plan for any business, including a home-based business, is the salary to be paid to the owner.
If the owner is working in the business, the owner should get paid. If the owner is not getting paid, chances are he is going to have trouble paying his own bills, and if he is working, but not able to pay his bills, he's going to lose interest in working for free very quickly.
If the business is only profitable when the owner doesn't get paid, it's not really a profitable business.
Profits
Once you've estimated your revenue, and you know your costs, you can subtract your costs from revenue. If revenue exceeds your costs, the business is profitable. However, if your costs exceed your revenue, you're designing a business that will lose money. A business that is losing money, be it in a home or in an office tower downtown, is not viable and is not going to be around very long.
In order to design a profitable home-based business, it's critical to understand price levels in the market, have an accurate estimate of unit sales, and have accurate and complete estimates of the costs of operating the business, including money to pay the owner’s salary.
Bill Hettinger, Ph.D.
Institute for Finance and Entrepreneurship
[LINK=billh@financewithoutfear.com]billh@financewithoutfear.com[/LINK]
860-456-4477
About the Author:
Bill Hettinger, Ph.D. is an internationally known consultant, educator, and thought leader who has trained numerous students, business owners, and managers in finance, entrepreneurship and small-business creation.
Source http://cmvlive.com/money/
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