Q. I've been looking to make a little extra cash on the side and am thinking about starting a home-based business. I know some friends who've made money doing this, but I also know some who have struggled and even lost money. How do I know whether it will work for me?
A. Becoming your own boss is a thrilling prospect, but the excitement of entrepreneurship can fade quickly when you put more money into your business than you're getting out of it. Here is a blueprint for helping you take the plunge (or not).
1. Do your research. One of the best places to start is score.org, a site in which successful small business owners volunteer their time and expertise to fledgling entrepreneurs. Along with getting free advice, you can also research different business opportunities. Check out books like Making Money from Home and blogs like The Work at Home Woman. Above all, talk to people who have been successful in the field that interests you.
2. Start the right kind of business. There are three different classifications to consider.
- Service If you do something well—like painting, decorating, writing, social-media marketing, cutting hair, or programming computers—this is the best option for you. It's the easiest kind of business to set up and usually requires the smallest initial investment and the simplest bookkeeping. Plus, it tends to be the most manageable to run from home. However, it is more likely to be subject to state licenses and regulations than some others.
- Sales This can take many different forms—retail or wholesale, storefront, mail order, or direct sales (like storage containers or beauty products). You can also sell products on consignment and via Internet sites like eBay. Or maybe caring for your baby has inspired you to create a product that didn't exist before. Bookkeeping tends to be more complex in a sales business. The hours, though, are more flexible, since you can work when it's convenient for you (read: when your baby is napping). Keep in mind that you'll need to bear the expense of maintaining product inventory, and that there's likely to be a higher startup cost for supplies and materials. Tax laws and banking issues are also more complicated in a sales-based business.
- Manufacturing For the majority of home-based entrepreneurial businesses, this involves crafts of some kind: jewelry, leather, clothing, pottery, furniture, home décor, and so forth. Crafts offer the opportunity to create something you enjoy and get paid for it as well. The key is to offer a product that others value as well.
3. Establish a business plan Once you figure out the kind of business you want to start, crunch the numbers. What are the startup costs? How much inventory do you need? What percentage do you get of sales? How much do friends make doing something similar (if they won't disclose financials, that's a red flag!)? Based on these numbers, calculate how long it will take you to recoup your investment. Then make an informed choice based on the facts—not a pipe dream of prosperity. For example, if you have to invest $3,000 in sample product and licensing fees and an average product-selling party is likely to yield $300 in sales with a 50-percent commission, you'll need to host 20 events before you start making a profit. For a free file on owning a home business that doesn't own you, email email@example.com and put "Home-based Business" in the subject line. Good luck!
Woman running her business from home via Shutterstock
Ellie Kay is a family financial expert, the author of The 60-Minute Money Workout, and a mom of seven. Read more of her advice at elliekay.com.