Whether your home-based business is by choice or necessity, you need to focus on three keys to have a winning game plan:
– Define what success looks like
– Choose simplicity for organization structure
– Count the cost by paying vendors and taxes before you take money out of the business
As the owner, you get to make the iniTIAl decisions on how things will work. However, you have to understand the IRS defines tax implications and “business physics” will define your economic outcome so choose your course wisely!
Passion over profit – This is the entrepreneur that loves the idea of a product or service they have personally Experienced and they want to share it with all the people they know. It is great to have passion, but you will need profits to make the business sustainable unless you like working for free and have other sources of funds to keep plowing into the business. The IRS may have something to say about whether losses will be deductible if you fail to meet the general rule of profits 2 out of 5 years. It is expensive to argue your point with the IRS if you do not meet the guidelines so your argument had better be valid and worth it!
Profit to support family – With current unemployment rates, there are record numbers of home businesses being formed. While it does provide a great opportunity to be your own boss, you still need to treat it like any business startup and follow sound business principles. The early stage will be to make a profit to replace your wages. As we will cover later, the profits you hope to live on will sometimes be in conflict with other expenses that the business needs to pay. This will add to the complexity of managing cash flows as you and the business compete for use of the same dollar. As you gain stability and success, you can make your market wage plus make a profit on top of that.
Tax write-off business – This is the business I recommend staying away from. You probably heard someone on the radio telling you how you could deduct these expenses to not pay taxes. Repeat after me, “to spend a dollar to save 15 to 35 cents in tax is dumb!” Deduct the legitimate business expenses you spend to produce your income, but you will never build wealth (without cheating) unless you have taxable income AND spend less than your after tax income to live on. I know this is not what you want to hear, but this is how my wealthy clients did it and they can sleep well at night not fearing an audit.
Choose Simplicity for Organization Structure:
Complex is many times the code word for expensive! Here are the guidelines for home-based businesses to use when you are consulting with your tax advisor:
Count the Cost!
Most home-based business owners hate accounting but this is especially the kind of business you need to keep your hand on the cash. The smaller you are, the less likely you have any room in your costs to pay an outside bookkeeper. Quickbooks has made many entrepreneurs functional (i.e. “good enough”) in accounting. Take a class in Quickbooks and take charge of your numbers to avoid surprises. As you get bigger, then you can transition the role to a part-time outside bookkeeper when it makes financial sense.
You need to know the “Four Forces of Cash Flow” to stay out of trouble managing your cash. If you are not profitable, cash flow is just a calculation of “days until death”. Fix profitability first and now we deal with the “4 Forces”:
These principles apply to all businesses, big or small and they will help you run a successful business!