Money Blog

HOME BASED BUSINESS: GETTING STARTED IN A PLANNED WAY

Are you planning to start a small home-based business? Don’t start it in haste, plan it out, consider pros and cons and then take a decision. Getting into a business is a tough call, it might bring you into a temporary financial crisis, it has a gestation period, and you must have an alternate source of income until your business starts giving you profits. Here is how a small home-based business can be started and run.

Business plan
Well, planning is the most significant part of a business. A business plan must be brought down to writing, you might have experience and expertise in your proposed business, and still a business plan is a must. Project reports are also available in the market, you may buy one on your proposed business and you may incorporate some relevant points into your business plan. First your business plan should work on paper, only then it can be run physically. It should sound profitable and workable, work out all financials and discuss it with some person who has been into a similar business. If all sounds well and the project seems to be viable, go ahead.

Capital
The first requirement for setting up your own business is capital. The money and the source from where it has to be raised. Estimate your initial outlay on fixed assets required to run the business and also add at least six months expenses to it. You have to assume that for the first six months your business will not generate any revenue and all the expenses have to be borne by the initial capital. After estimating the capital requirement, you have to decide the source of raising it. You may put your own saved money or you may take a loan from bank. If possible opt for the second option. Always remember to reduce the cost of your capital from the profit margins. Never ignore cost of capital even if the capital is your own saved money because if you would not have invested it in your business it would have earned some interest. For example if you have a capital of Rs. 10 lacs, which, if not invested in business, would have earned an interest at the rate of 8 percent. And if you invest in a project which yields 20 percent profits, then actually you are making a net profit of 12 percent on your efforts to run business. Open a new bank account in the name of your new business, transfer the capital into your new bank account and get started.

Working capital
Your business will take some time to take off and then you will raise bills to your clients or customers, further they will take some time to pay them. Some of your money will always be in rotation in the form of debtors or bills receivables. Keep an estimate of it beforehand and you must have sufficient working capital so that your business is not affected due to this rotation of money.

Market research
Before jumping into the business it is always necessary to do market research. You must know the market for your proposed product or service. You should check whether there is sufficient demand of your proposed product or service, who are the players, how will you penetrate into the market, is there sufficient room for your product or service? You should get all this information beforehand so that when you start your business you have a clear marketing strategy.

Office environment
When you start a home based business, it is recommended that you have a separate office, may be within your house, but it should be separate. You should not be working from your living room. You can have discipline and office environment only when you have a separate office. You can have a small room or you may do up your garage, the point is it should be separated from your residence. It matters a lot. You should dress up as you used to do while going on your job. Some people who work from their home based office can be seen sitting in office in casual night dress and sleepers, which leaves a very bad effect on your visitors, employees and on your attitude as well. Give yourself a smart look and then go to your home based office.

Staffing
Recruit employees as per your business plan. Always try to have experienced employees instead of fresher, especially in a start up business since it is not in the interests of a new business to train new employees. The experienced ones will be costlier than the fresher, but their experience will bring more profits to your enterprise. You may hire your employees through a placement agency, newspaper ads or through websites.

Accounting and office maintenance
Record keeping and proper accounting is a must for your business to keep a check on the health of business. Whether it is in profit or loss? Is it growing or sinking? All these things can be tracked if proper accounting is done. You can work out a number of ratios to check solvency, profitability, debtors’ and creditors’ turnover, liquidity, etc. of your business. Further it is necessary for filing various statutory returns. File management is also equally important, keep separate files for all matters, it helps in management and control of business.

Marketing
Devise proper marketing techniques to promote your product or service. Your business is of no use until your customers know about it. It may be through a newspaper advertisement or through pamphlets or through door-to-door campaign or through telemarketing. Whichever technique is chosen, it should focus on your target market and it should be result oriented.

Execution
Your own responsibility should be to monitor, manage and control the business. Most of us do a mistake by trying to do most of the things ourselves. Be a good manager and delegate job responsibilities to your employees. Keep your project target based and keep ambitious targets. Try to achieve monthly, quarterly, half yearly and annual targets and keep an eye on any variations. Always have a long-term goal or objective.

It takes money to make money. The old adage is right “money begets money”. You must have observed that the rich are becoming richer and the poor remain poor. This market is such that more money you pump in, more money you can take out from it. The banks, the financial institutions, the venture capitalists, they all want to give money to those who have it. Only large projects launched by large companies get big loans and that too on best terms. Does a bank give loan to a start up? No, he has to borrow private money at very high cost, the bank will come to him after he has been established, and he has continuous profitability.

Now let us take an example where this fundamental can be proved. Two persons say X and Y invest their money in stock markets. Mr. X is a small retail investor and Mr. Y is a high net worth individual who invests huge amounts of money in stock markets. Now Mr. X buys 200 shares of a stock at a price of Rs. 500 per share, making a total investment of Rs. 1,00,000. Mr. Y buys ten lots of 200 shares each at different prices with an average price of Rs. 485 per share, making a total investment of Rs. 10,00,000. After some days the price of the stock falls to Rs. 450. Mr. X, a small investor panics and, thinking that his small portfolio may not come down further, sells his shares and books a loss of Rs. 10000. whereas Mr. Y having a strong financial backup takes a different view and buys 10 lots of 200 shares more at different prices till the stock falls to Rs. 420 averaging his total price to Rs. 445. After some days the stock being oversold bounces back and retraces to Rs. 470. Mr. Y now sells his whole lot of 2000 shares at a profit of Rs. 25 per share. Here since Mr. Y had the backup of money he could translate his loss into profit. In another scenario if the stock price after being bought by Mr. X and Mr. Y runs to Rs. 550 and they both sell their lot at this price, Mr. Y still makes a profit 10 times higher than Mr. X as the money invested was ten times higher. Thus in both the cases, one who puts in more money makes more money. More you invest; more secure is your return. Further, consider yet another person Mr. Z, having much more money than Mr. Y. Mr. Z might be able to influence the price of the stock, in case he buys or sells very huge quantity of that stock, thus he is in a still better position to make money than Mr. Y or Mr. X. 

Now let us examine another situation. Mr. A and Mr. B start a new business of supply of office stationery. Mr. A invests a capital of Rs. 10,00,000 and Mr. B also having a capital of Rs. 10,00,000 takes a bank loan of an equivalent amount and invests Rs. 20,00,000. Mr. A purchases a stock of office stationery of Rs. 5,00,000 and employs 4 marketing executives at a salary of Rs.10,000 to each one of them and Mr. B also purchases a stock of Rs. 5,00,000 but employs 10 marketing executives because he has extra working capital of Rs. 10,00,000. The result is obvious, Mr. A gets orders of of Rs. 8,00,000 and Mr. B gets orders of Rs. 20,00,000. More money you put into the business more profits you can make.
Most of the new businesses fail because of lack of working capital. And that is the reason why a number of people, wanting to switch from job to business are not able to do it throughout their career. More money you have in your kitty, lesser are the chances of failure and the banks or institutions would like to lend their money to the one who has a proven track record and standing and his chances of failure are much less. The banks try to reduce their risk by choosing financially strong borrowers. 

Big companies are able to eliminate their small competitors on the power of money. Big companies can operate under losses for years together whereas small players will not be able to withstand losses for long. You would have seen mushroom growth of small inverter manufacturers 3-4 years back who used to assemble inverters and their cost used to be almost half of the branded ones. Then brands like Su-Kam, Microtek, Luminous, etc. slashed their prices to eliminate these small players and within 2 years most of the newly opened small inverter assembling units were closed down. After eliminating small competitors the big companies would again increase their prices and turn their losses into profits. You need money to sustain through the periods of recession. Only those businesses survive recession, which are financially strong.

The money is generated by running an enterprise, which can be created and developed by investing money. The profitability of an enterprise depends on its resources, which are bought by money again. Quality of employees depends on the package paid to them and better quality employees generate more business, which translates into more profits. You need some fuel to run a machine and money is the fuel to run a business. Thus a direct relation can be established between money invested and money returned by the business, which is directly proportional.