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Are you considering a home-based business?

by Patricia Tokar, CPA

Thinking of making the move from the industrial park to a home office or even self-employment at home?  Current rage gives a fantasy-like impression of the home office. In reality, it can be a perfect move for you, but there are some realistic qualities you need to have (or acquire) and some reasonable expectations you need to investigate before taking the plunge.  

Here are some questions to consider:

1)  Are you a self-starter?  

      At home, no one (except maybe your nagging spouse) is going to tell you what time to start work, how long to work, and which projects need to take priority.  Sure, these conditions sound great, but if you are unable to start and finish projects you will find yourself unable to collect any income.  

2)  Are you organized with paperwork?

      You will need to keep all of your own records, including invoices, customer files, phone call records, business receipts, and projects and research notes.  And don't forget that you will need to file tax returns.  Your bank may even request financial statements.  Excellent bookkeeping is a sign of a business owner who has a good grasp of the level of their expenses and income. In my experience, most of the businesses that fail have very poor recordkeeping systems.  Sometimes I find that a client compensates for this by assigning the paperwork and record keeping to a spouse.  This can work beautifully, but only if the spouse is organized and willing.  If necessary, consider hiring a part-time bookkeeper or secretary.  

 3)  Do you have kids at home?

       For many, if not most, a home-based business combined with small children at home can be a sticky picture.  Small children like to cry loudly in the background while you are on the phone.    They empty drawers and boxes onto the floor while you work at your desk.  They color on your client papers when you aren't looking (or worse, they spit up on them when you are looking).  Older children suddenly need you every few minutes.  You hear the call, "Mom!" or "Dad!" so often that it begins to echo in your mind while you work.  

      This is not to say that you can't mix a home-based office with kids, but you'll have more planning and scheduling of your time than a similar business sans kids.  You should carefully consider the type of business you will run from your home.  Are unscheduled phone calls an essential part of the business?  Will you need long, quiet hours to do detailed work?   Will you need a space that is absolutely off-limits to the kids? 

       One solution may be to send the kids to daycare a couple of days a week, or to have a caregiver come in for certain hours each day.   Another may be to get your kids on a regular schedule of naps and playtime.  Whatever your plan, consider it carefully.  You don't want to end up resenting your kids and you don't want your kids to end up feeling a fierce competition with your home-based business.  

 4.).  Do you have space in your home for an office?  

       You will need at least room for a desk, a phone, and a filing cabinet.  It's hard to picture a successful home business being run from someone's knees while they sit on the couch.  If you do not have a separate space for your business, you can encounter many detriments.  First, you run the risk of total disorganization.  You may have phone numbers taped to the side of the refrigerator, customer documents stuck in the closet, or important files stacked on the end table.  You may end up spending precious time getting everything out and then putting it all away each time you want to work.  Another big danger is the lack of separation of home life and business.  I find that the best run home businesses have a degree of separation from the living may be in a separate room, in the basement, or an entire corner of the den.  Just this much separation can give you a more serious attitude towards your business.  More importantly, this attitude will rub off on your spouse, your kids, and your customers.

5.) How well can you handle money?

     Running a home office will require management of expenses. This is doubly true if you will be running your own business, rather than answering to a corporate created budget. So, before you even consider a home office, take a good look at how you handle your own finances. Are your credit cards maxed out? Did you buy or lease the latest luxury car with a tiny downpayment and monthly megapayments? Do you often forget to pay the utility bills...or maybe you didn’t forget, you just misplaced the bill and didn’t find it until after the due date? Do you frequently have to pay the late charges on your monthly mortgage payment? Do you have little or no savings or personal investments?

     If you answered yes to one or more of these questions, you need to do some serious thinking before you start a home business. Regardless of how good your product or service is, if you are unable to control your expenses you are setting yourself up for disaster. Running a business requires the ability to manage cash flow - which means the ability to be sure that you will always have enough cash on hand to pay bills as they come due. It requires the ability to manage debt levels. A credit line or a credit card are both very useful tools for a small business, but they can be lethal to the business if they are mismanaged. I have consulted with clients who have charged $20,000 to $30,000 on multiple credit cards for their businesses - without planning ahead how they would pay for these charges and the high rate of interest they carried. Needless to say, most of these small businesses will have a very, very difficult time getting over this cash flow and interest expense hurdle. Running a business also requires the ability to manage expenses. Sure, it’s great to sell a product for $10.00 that only costs you $5.00, but not if you only sell 1,000 of them and have run up overhead costs of $20,000.

     Perhaps the most important cash flow item to keep in mind when starting a small business is the potential for Federal, State, County, and City taxes on your business profits and/or gross income. I call the self-employment tax combined with the Federal, State, and County taxes the “killer tax” because the rates are high and the small business owner absolutely must save and plan for the payment of these taxes. It is perfectly normal for a sole proprietor to generate a measly $10,000 in net income and find themselves with a tax bill of nearly $5,000 on this income. Be prepared, use tax planning, and make quarterly estimated tax payments. Meet with your accountant at least once in mid-year to try to project out your income, expenses, and the resulting taxes.

6.) What is your social need quotient?

     Running a home business, depending on the business you choose, can mean many quiet hours in front of a computer or at a desk shuffling papers or it can mean daily sales calls and meetings with clients (your place or theirs.) Take a look at your current social most of it work-related? Are company parties, office gossip, co-worker lunches, and other work-related activities the main part of your social life? Or do you prefer to work alone at your desk, and get most of your social activities from your family or from a group of friends totally unrelated to your present job? Do you need to chit-chat with someone on a frequent basis? Do you get a charge from meetings, sales calls, or other daily contact with co-workers? Your answers to your questions will not necessarily give you a yes or a no to whether or not you should start a home office, but they will definitely tell you what kind of a home office you should start. A chatty, outgoing, loves-to-be around people type will probably wilt and fade in a home business that requires lots of solo work with little people interaction. In fact, they may find it difficult to even work, choosing instead to make multiple phone calls and run “really necessary” errands instead of getting their work done. The reverse is true of the person who prefers to quietly and intensely work with little interruption.

The moral of this section: Choose your home business wisely and base it on your own needs and type of work you love.



     Article prepared by Patricia Tokar, CPA

Patricia has been a CPA for 20 years, working with individuals, small businesses and estates.

Patti Tokar

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