Dubai: If you're thinking about launching a new microbusiness at home, you may not know where to start with your finances.
A home-based business is a venture – whether full time or run as a side hustle – that you can start and operate using your own home as your base of operations.
A few home-based businesses, especially those that sell online and don’t buy and hold lots of inventory, can even be run on the go, without the need to be bound to your home.
There are perks and risks to consider when deciding whether a home-based business is right for you. While weighing those, let’s also figure out how much you'll need to launch your business.
Fewer overhead costs is a plus, but there are still other costs
A low-investment business has fewer overhead costs (such as warehousing fees) and it gives you the option to sell products or services locally or internationally. All you need is a trade license and a suitable space in your home to operate.
You can apply for a home-based business license in Dubai, UAE by paying a registration fee of Dh1,070 and the licence needs to be renewed annually. Read to know how here.
Often classified as microbusinesses, these are ventures with fewer than nine employees and a turnover of less than Dh9 million in the trading sector, or fewer than 20 employees and a turnover of less than Dh10 million in the services sector.
However, you may need to convert space in your home to support the needs of your business, like holding inventory, creating a home office, or storing equipment.
Keep in mind, you still have to comply with any regulations that pertain to the business you want to start. For instance, you may need to rent a commercial kitchen if you plan to sell food products or a license or permit to hold inventory.
One factor to keep in mind is that your business may outgrow your home and require you to rent additional space and hire employees.
How much is a home-based business estimated to cost?
According to multiple global statistics and surveys, most microbusinesses on average cost around $3,000 (Dh 11,018) to start, while most home-based franchises cost $2,000 (Dh7,345) to $5,000 (Dh18,364) worldwide.
While every type of business has its own financing needs, experts have some tips to help you figure out how much cash you'll require.
Serial entrepreneurs estimate that an entrepreneur will need six months' worth of fixed costs on hand at start-up. They advise to have a plan to cover your expenses in the first month and to identify your customers before you open the door so you can have a way to start covering those expenses.
When planning your costs, don't underestimate the expenses, and remember they can rise as the business grows, experts note, while adding that it may be easy to overlook costs but you should be precise when planning for your fixed expenses.
Underestimating costs can decimate your business – however small it is
Research show that one of the key reasons most home or other small businesses fail is that they run out of cash. So when planning your costs, don't underestimate the expenses, and remember that they can rise as the business grows.
Writing a business plan without basing your forecasts on reality often leads to an often unnecessary, business failure. Without the benefit of experience or actual historical financials, it's easy to overestimate a new business’ revenue and underestimate costs.
So what types of costs will I come across when I start my microbusiness?
There are various types of expenses to consider when starting your business. You need to differentiate between these costs to properly manage your home business' cash flow for the short and long term.
Here are a few types of costs for new business owners to consider.
• One-time versus ongoing costs
One-time expenses will be relevant mostly in the start-up process, such as the expenses for incorporating a home or any small microbusiness.
If there's a month when you must make a one-time equipment purchase, your money going out will likely be greater than the money coming in. This means your cash flow will be disrupted that month, and you will need to make up for it the following month.
Ongoing costs, by contrast, are paid on a regular basis and include expenses such as utilities. These generally do not fluctuate as much from month to month.
• Essential versus optional costs
Essential costs are expenses that are absolutely necessary for your home business' growth and development. Optional purchases should be made only if the budget allows.
If you have an optional and non-urgent cost, it may be best to wait until you have enough cash reserves for that purchase, entrepreneurs reiterate.
• Fixed versus variable costs
A fixed cost is a cost that doesn't change much in value regardless of factors like sales revenue or output. Fixed costs tend to be ongoing costs, like insurance, salaries, depreciation, rent and interest.
However, variable expenses depend on the direct sale of products or services. Fixed costs may eat up a high percentage of revenue in the early days, but as you scale up, their relative burden becomes negligible.
It’s crucial to project your home business’ cash flow initially. But how do I do it?
Another important aspect of a micro-business’ financial planning is to project the business's cash flow. New microbusiness owners are advised to project their cash flows for at least the first three months of the business's life. Add up not only fixed costs but also the estimated costs of goods and best- and worst-case revenues.
If you borrow money for your home business, make sure you know not only how much you borrowed but also the interest you owe. Calculating these costs puts a floor on the revenues needed to keep the business viable and provides a good picture of the cash necessary to start it up.
This is an essential step in maintaining your home business’s financial health. Without being realistic about your cash flow and debt, you won't be able to get your business off the ground, especially as other costs begin to build.
When it comes to small businesses, ensure personal assets are not at stake
When it comes to small businesses, it’s often observed that personal assets are also on the line. So experts recommend starting a business without borrowing at all, if possible, as borrowing puts a lot of pressure on any business and its owners, as it leaves less room for error.
Do your best to explore all of your funding options. If borrowing is your only option, work closely with your lender to ensure your business is financially able to handle the commitment. Keep in mind that when it comes to small businesses, personal assets are also often on the line.
Verdict: Proven home businesses start small, grow nimbly, and invest conservatively
The best home business really depends on your goals. Do you want a strong work-life balance or do you want to hustle to achieve success quickly? How much capital do you have to start up? What skills are already in your arsenal that you can tap into?
A home-based business in today’s world is simply a remote-friendly business where technology can close the gap between you, your suppliers, your employees, and your customers. Altogether, this is a home business opportunity to start small, grow nimbly, and invest conservatively – especially when you can cut out the costs of renting an office.