How to Determine the Cost of a Home Based Business

Deciding to leave your current employment and go on your own takes more than a good idea and a commitment. You need to find out what your expenses will be during that critical first year, not only to sustain yourself but to cover the needs of your business. Here are some ideas to help you determine the costs of beginning your home-based business.

Instructions

Difficulty: Challenging

1. Think of your costs first. Figure your own personal expenses for the first full year while you get your business underway and then figure how those expenses will be paid. Ideally, you have saved an amount that’ll be sufficient to cover those costs. If not, you need to be sure that you can borrow what’s needed until your company is in a position to contribute.
2. Calculate what you will need to operate the business during the first year? That figure will contain not only the one-time expenses of setting up your company, but also expenses such as advertising, inventory purchases, insurance and all other expenses you will incur. As a rule, you will surely underestimate those costs, so add 30 to 40% to that total.
3. Will your company have employees? If so, their salaries are only the beginning of the expenses you will incur. To cover the cost of Social Security, health insurance and workman’s compensation and other employment costs, add about 50% to the amount of their salaries.
4. Establish bank credit for your business. Unless your business is well funded, you will need to cover expenses whether there is money in the company checking account or not. Banks realize this and are in a position to help, presuming that you have established the business for the right reasons and are operating it in a sensible way.
5. If your company purchases products to resell, see what terms are offered by your suppliers. Quite often, if the sales cycle is short, you will be able to purchase product and resell it before payment to the suppliers are due. By doing so, you have reduced your cash flow and a major reason to tap your credit at the bank.

Tips & Warnings

• Regardless of how good your idea was, there are many reasons why your business will fail. If you have established benchmarks and your company has failed to achieve them, it is far better to end the venture early before it has taken its toll on you both financially and emotionally. Only about 10% of all new business see their fifth year, so you should not be blamed for a timely retreat.