How To Budget For Success
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In her book due out this month, Bringing Home The Business (Perigee), our "S.O.S." columnist Kim T. Gordon reveals 30 "truths" every homebased business owner must know, from marketing your business to living and working under the same roof. This exclusive excerpt discusses a particularly important part of entrepreneurship: start-up marketing capital.
Truth: Most homebased business owners use their own money to get started and often undercapitalize critical areas like marketing.
Imagine your same business, but in a different location--a leased office space. What would your rent be? What would you do to win business? Anything you're not doing now? The only real difference between your homebased business and any other small business is location. But because many people consider home a safe haven, it's easy to become comfortable and complacent. You forget to run your homebased business like any other, with established budgets for key programs, including marketing.
The SBA tells us that two of the principal reasons for small-business failure are undercapitalization and lack of effective marketing programs. That's not surprising, because the two go hand in hand. You should be willing to spend at least $5,500 to set up a bare-bones home office. That includes a computer with a modem, a backup zip drive, a monitor, a printer, a fax machine a telephone, plus basic furnishings. You'll need a desk and filing cabinet, plus a comfortable, ergonomic chair and a lamp or two. Any additional software and equipment will add to this basic cost.
Develop A Marketing Budget
You should also expect to spend at least $5,500 on marketing programs in your first year in business. Some homebased business owners undercapitalize marketing because they don't see themselves as "running a business." Do you fit this description? If so, you've adopted a dangerous mindset. Without some form of marketing, sooner or later you'll find yourself out of a "job." You see, nothing in the business world remains static for long. You may have a contract from a major company today, but your contract can dry up, that business may be acquired by an even larger one or your contact there may change, leaving you, an independent contractor, scrambling for more work.
Your actual budget will depend on:
- The size and location of your market. If you plan to sell a consumer product nationwide, for example, your marketing costs will be dramatically higher than if you market a business service in your hometown.
- The type of marketing tactics required. Some marketing tactics require a larger budget than others. For instance, it will cost more to mount a TV campaign to market a consumer product than it will to send four-color sell sheets to business-to-business prospects.
- How difficult your prospects are to reach. Some target audiences will require greater resources and efforts to penetrate. For example, you can expect to pay more for a direct mail list of information services managers at technology companies (which is more difficult to create and update) than for a list of all residents in a particular zip code.
- The sales tools you'll need to compete. No matter what kind of business you're in, your tools must be of the highest quality. But the types of tools your business requires will dictate the budget that must be allocated. For instance, a contractor meeting with homeowners might require a four-panel color brochure, pre-printed estimate sheets, and an attractive photo album with examples of completed jobs, while a high-technology marketer will need expensive equipment to make the sale, including a laptop computer, LCD projector with screen and presentation software.
- The level of competition in your market niche. It costs more to mount a campaign to effectively break through competitive clutter than it does to communicate with your target audience in an environment relatively free of competing messages. If your market niche is filled with well-established and entrenched competitors, you'll have to employ a wider range of marketing tactics and fight hard for positioning and top-of-mind awareness.
Did you fund your start-up with a traditional business loan? Probably not. Typically, home businesses seek smaller start-up loans than are profitable for financial institutions. Simply put, lenders can't make enough money from a $5,000 or $10,000 loan to make the risk worth their while. Home business start-ups also have difficulty securing traditional small-business loans due to their lack of significant tangible assets, such as equipment, real estate and receivables, to use as collateral. The SBA offers a MicroLoan Program primarily for start-ups owned by women and minorities in inner cities and rural areas. But most homebased business owners fund their own start-ups using their savings, personal loans and lines of credit, loans from family and friends, and credit cards.
If you've started your business using your own funds, you may be tempted to cover the cost of your equipment and overlook other critical components to success, including sales and marketing programs. Businesses that use bank financing to cover their start-up costs rarely make this mistake, because to obtain a bank loan you must have an effective business plan that details important information such as who you'll market to, why they'll want to buy from you, your sales and marketing strategies and marketing budget.
Set Financial Goals
Did you know that homebased business owners have higher household incomes than the average American worker and that a large percentage earn six-figure incomes? Marketing is an investment in the future success of your homebased business and should be considered an operating expense to be factored into your pricing structure. Set strong financial goals, and use sales and marketing programs to generate leads and sales that will get you where you want to go.
One rule of thumb is that you'll need to earn at least one-third more as an independent home business owner than you did as an employee to realize the same salary. (And, of course, as your business grows and you hire independent contractors or employees, the amount you project in earnings must increase proportionately.) In many cases, you can expect your marketing costs to draw against a higher percentage of your gross income during the start-up phase of your homebased business.
That was clearly the case for Ken Norkin of Takoma Park, Maryland, a successful advertising agency copywriter who decided to strike out on his own. When Norkin started his business in 1991, he wanted to position himself as a business-to-business, high-technology copywriter who could make short work of complex assignments. He targeted advertising agencies, design studios and select local corporations and associations in the Washington, DC, area. Norkin decided his best marketing tool would be oversized postcards. For a start-up investment of about $1,500, he created 5-by-7 cards that were creative, clever and funny, with a different card for each target audience. He sent an initial mailing of several hundred cards, and then repeated the process periodically throughout the year.
Norkin's investment was amply rewarded. Two days after his first mailing, Norkin got a response from an advertising agency that became a client--and has been ever since. Over the past eight years, that client alone has generated hundreds of thousands of dollars in sales for Norkin.
But what if your start-up marketing program requires more than several thousand dollars? What if you need half a million or more to reach your market? That was the challenge for the founders of Atomic Web Inc., which created a turnkey Web site development tool for businesses and individuals called website 2 Go, which includes e-mail, a complete statistical package of tracking tools and support, and Web site hosting. The four partners, Steve Chambers, Lynn Van der Veer, Don Dailey and David Dear, who each work from their own home offices in the Washington, DC area, needed half a million to a million dollars to work on their service full time and test a major marketing program.
The partners were initially turned down for loans by several banks. But they had two things going for them. Their product was unique in the market--a drycleaning business, for example, could use their service and have a custom site up in hours without having to write its own content--and they were in a high-tech industry, which made them attractive to entrepreneurs with venture capital. They enlisted the services of an investment broker who helped them define their goals and arranged meetings for the team with potential investors. Ultimately, the partners secured their start-up funds by signing an agreement with an investor who was starting an incubator. The investor and the broker received stock in Atomic Web in exchange for the funding, and the partners also received stock in the other companies in the incubator. This encourages all members of the incubator to contribute to each other's success. With their funds in hand, the Atomic Web partners are taking website 2 Go to select markets in anticipation of a successful national roll out.
Find Funds For Growth And Expansion
Once your homebased business is up and running, you'll find there are more funding options available to you. Say you've been successfully marketing your company on a regional basis for two years, and you need additional funding for growth and expansion to reach national audiences. You'll find a warmer reception from traditional funding sources, provided you're prepared to look beyond your local bank. Contact the SBA (800-827-5722) or visit their Web site (http://www.sba.gov) for information on SBA-backed loans. You can also search the archives of Entrepreneur magazine (https://www.entrepreneur.com) for its annual feature on the best banks for small businesses, which includes information on banks that make the largest number of loans to small businesses.
No matter whether you have outside loans or are financing your business on your own, don't let limited funds stand in your way. I know one successful home business owner who had to borrow subway fare from her babysitter to visit her first prospect. There are all kinds of creative marketing strategies that will take your business to the next level.
Bringing Home The Business can be found at major bookstores nationwide.