HOME-BASED BUSINESS MARGINALITY: A REVIEW OF HOME-BASED BUSINESS

PERFORMANCE AND ITS DETERMINANTS

Anthony M. J. Stanger

School of Commerce

Flinders University of South Australia

GPO Box 2100

Adelaide, South Australia 5001

Telephone: +61 8 8201 2764

Facsimile: +61 8 8201 2644

Email: Tony.Stanger@flinders.edu.au

SCHOOL OF COMMERCE RESEARCH PAPER SERIES: 00-17

ISSN: 1441-3906

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This paper investigates the economic marginality of home-based business (HBB) by reviewing findings on HBB

performance. The performance dimensions considered are size (employment and sales) and profitability (profit

and profit to sales). Given the evidence that considerable economic benefit is generated by HBB, the small and

medium enterprise (SME) and HBB literature is reviewed in order to identify factors that are likely to be

associated with these performance measures. These relationships are formulated as alternative hypotheses for

future empirical testing of the research question ‘what factors influence the performance of HBB?’

Empirical evidence indicates HBB in Australia employs on average between 0.6 and 0.7 persons; generates over

$80,000 in annual sales; earns a pre-tax profit of approximately $30,000; and has a profit to sales ratio of

around 25%. Based on evidence in the literature and a priori reasoning, 19 salient variables associated with the

discussed performance measures are identified. Alternative hypotheses are formulated for future empirical

testing. Key variables considered include gender, family responsibilities, Local and State government

regulations, sources of financing, uptake of information technology and networking.

A better understanding of the economic benefits of HBB and the factors influencing HBB performance is

essential in order for policy-makers and providers of assistance and advice to optimise effect of initiatives

undertaken with regard to HBB.

INTRODUCTION

Home-based business (HBB) makes up part of the approximate 680,000 micro businesses in Australia which are

recognised by the Australian Government as being important for their economic, social and regional contribution

(Department of Workplace Relations and Small Business, 1998). HBB performance is considered to be an

important factor contributing to the ability of these enterprises to deliver these economic, social and regional

benefits. This study augments previous research addressing the question of whether HBB is a marginal

economic activity, by reviewing the findings in the literature on HBB performance as well as describing findings

of a large survey recently conducted in Victoria. The dimensions of HBB performance considered are size and

profitability. The specific measures adopted in considering the size of HBBs are the number of employees and

annual business sales. The measures of profitability considered are profit and the profit to sales ratio.

This study also reviews the HBB and small and medium enterprise (SME) literature for factors that may impact

upon these HBB performance measures. The factors include access to finance, impact of government

regulations, impediments to and requirements of growth and government services and programs, consistent with

the Micro Business Consultative Group (MBCG). The MBCG was established by the Federal Government in

1996 to report to the Small Business Minister on the key issues facing micro business and develop a set of

recommendations. An empirically testable hypothesis is formulated for each of these factors.

The Australian Bureau of Statistics (ABS) identifies a home-based business as one that employs less than 20

persons and identifies two situations where a business could be considered home based:

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Where the business is operated from the home of one of the owners even though very little work might be

conducted at home e.g. trades people such as plumbers, carpenters, electricians etc.; and

Where one or more of the operators usually work more hours at home than away from home (ABS, 1995b).

The former definition may be more reliably operationalised in a survey, as in the case of HBBs with more than

one owner, it avoids having to rely on a respondent’s knowledge of the proportion of time worked at home by a

co-owner(s).

The next section of this review considers the significance of HBB. This is followed by consideration of the

performance measures commonly studied in SME research and findings on these measures in the HBB literature.

Next, a review of the SME and HBB literature in relation to the factors that are likely to influence these

performance measures in HBB is undertaken. From this review, hypotheses are formulated for future empirical

testing.

SIGNIFICANCE OF HOME-BASED BUSINESS

Home labour and HBB is not a new phenomenon. Its historical origins pre-date the industrial revolution in the

form of cottage industries. With the advent of industrialisation and capitalism, the reorganisation of production

saw a separation in the household from the workplace. In the post-industrial era, dramatic changes in

information and communication technology, corporate restructuring and down-sizing, and changing social

values legitimising home work have seen an increased recognition in the importance of HBB (Roberts, 1994, pp.

17-21). This growing recognition of the importance of HBB is consistent with that of small business generally.

The importance of HBB is evidenced by: (1) its economic and social contribution, (2) the growth in numbers of

HBBs, (3) the increased research and calls for further research in HBB, (4) increased attention paid to this sector

by governments, and (5) a significant increase in anecdotal magazine articles and “how-to” books (Roberts,

1994).

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Economic and Social Contributions of Home-Based Business

Researchers attempting to determine whether HBB is a marginal form of business activity have investigated the

economic contribution of HBB. The issues addressed include: the contribution to the local economy in terms of

employment and sales generation (Roberts, 1994; and Peacock, 1994); whether HBB owners choose to work at

home or are forced to due to an inability to participate in mainstream corporate employment (Orser and Foster,

1992); the type of work done in terms of value added to the product or service (Allen and Wolkowitz, 1987);

and, whether HBB generates income for the owner and wages for employees comparable to those working in

larger organisations or commercially based small businesses (Gritzmacher, Stafford, Smith and Koonce, 1989;

Kraut, 1988; and Christensen, 1987).

The HBB sector is a subset of the micro business and the small business sectors, and as such, is also likely to

provide the economic and social benefits that are generally credited to micro and small business. These benefits

include contribution to employment growth and innovation (Department of Workplace Relations and Small

Business, 1998; Department of Industry, Technology and Commerce, 1990 and 1992; and Pattinson, 1997).

More specifically, a considerable number of economic benefits derived from HBB have been suggested by

international and Australian studies, including: Pratt and Davis (1985); Soloman and Fernald (1989); Lowe

(1988); Carter, Van Auken and Harms (1992); Orser and Foster (1992); Roberts (1994); Alberta Economic

Development and Tourism (1996); Queensland Department of Housing, Local Government and Planning (1993);

Peacock (1994); Business Owner Research (1994); and BIS Schrapnel (1993). These studies suggest the

following economic benefits of HBBs:

The creation of self-employment opportunities for the owner and employment for employees with the wages

and salaries of owners and employees contributing to the disposable income of a community;

Stimulation of the local economy as HBBs are both customers and suppliers of local businesses.

Additionally, HBBs provide considerable commercial market potential for office communication and

information appliance suppliers, providers of insurance and banking services, and providers of business

services such as advertising, accounting and legal;

HBB acts as a micro incubator by assisting new small business generally to survive and grow through

reduced overheads, particularly with regard to new business with new ideas and concepts too expensive to

test in businesses based in commercial premises;

HBBs are also reported to have a high survival rate and therefore reduce the financial, economic and social

costs of failure;

HBBs are particularly suited to contribute to the increasing size of the services sector; and

HBB may increase the competitiveness of the economy by increasing output and reducing prices. HBB may

also bring new and unique perspectives in the delivery of goods and services and serve small and new

markets that are uninteresting, and unprofitable, to larger firms.

In addition to the economic benefits, HBB is purported to provide a number of social benefits (Pratt and Davis,

1985; Alberta Economic Development, 1996, p.13; Peacock, 1992b and 1994; Queensland Small Business

Corporation, 1992 & 1994). These include:

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Demographic shifts allowing women to work at home and raise a family;

Flexibility to balance personal and family responsibilities and lifestyle preferences;

Potential for families to increase their earnings without the financial and social costs of separating parents

from children;

The potential beneficial effects of family involvement in the business in terms of the learning of business

skills which may help prepare family members for self-employment in HBB or small business;

Access to employment opportunities to persons restricted to the home such as the aged, disabled or

handicapped, which would otherwise be restricted in their ability to be self sufficient and gainfully

employed;

Savings in public transport and parking and reduced pollution due to a decrease in the number of people

commuting to work; and

Improvement in neighbourhood security with more residents staying at home during the day.

Growth in the Home-Based Business Sector

International evidence from industrialised western countries indicates that there is a relatively high incidence of

HBB in terms of the proportion of households hosting a HBB, HBB as proportion of other businesses and

involvement in HBB by the workforce. In terms of the proportion of households hosting a home-based business,

Orser and Foster (1992) suggest 10 to 11 % of Canadian households have a self-employed person working at

home on either a full time or part-time basis. The statistics are similar for Australia. In a national random

telephone and mail survey, Business Skills Victoria (1996) reports that approximately 12 % of households host a

HBB.

Evidence on the proportion of businesses made up by HBB also supports the contention that HBB is significant.

In the US, more than 30 % of all registered businesses in 1987 and 1988 were estimated to be based in private

homes (Peacock, 1991), and approximately 63 % of the sole proprietorships were located in a household in 1980

[Pratt, 1986 (in Good and Levy, 1992)]. In Australia, Peacock (1991) concludes, based on April 1989 ABS data,

that 10 % of private sector enterprises are home-based. In February 1995, there were an estimated 182,400

HBBs which represented 23% of all small business (ABS, 1995b).

In the United States, Pratt (1987) estimates, that between 8 and 23 % of the US workforce in 1985 worked at

home, depending on the definition of work at home used. In Canada, Orser and Foster (1992, p. 69) estimate the

national rate of self-employed working at home is between 7 and 12 %. In Australia, the ABS (1989, 1992 &

1995a) provide an estimate of the growth in the number of persons employed at home. From Table 1 it can be

seen that in September 1995, over 4.12% of persons employed worked at home. Growth in the number of

persons employed at home between April 1989 and September 1995 is almost three and one half times greater

than growth in the total number of person employed for the same period. This growth has been greatest for

employees employed at home (35.23%) and self-employed/unpaid family helper (29.65%). These figures may

be somewhat understated as they are based on a relatively conservative definition of persons employed at home

(defined at the foot of Table 1), which excludes those persons working more time away from home than at home.

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Table 1: Persons Employed at Home in Australia*

Persons EmployedApril1989

March1992

September1995

% Change 1989-95

(1) Persons Employed at Home 266,000 307,900 343,300 29.06%

(2) Total Employed Persons inAustralia

7,683,300 7,704,400 8,340,600 8.55%

(3) Persons Employed at Home as a proportion of Total Employed Persons (1) / (2)

3.47% 4.00% 4.12% 18.73%

Status of Persons Employed at HomeEmployers 31,900 31,700 36,500 14.42%

Self-employed/Unpaid Family Helper 138,600 161,600 179,700 29.65%Employees 93,100 112,400 125,900 35.23%

Payment in Kind 2,900 2,100 1,100 (62.07%)

* Defined as persons who usually worked more hours at home than elsewhere in either their main or second job, excluding farmers, farm managers, farm hands and assistants, unpaid voluntary workers and persons who work less than one hour.

Source: ABS (1995a)

Reasons for the growth of the HBB sector suggested by numerous studies (Hewes, 1981; Hakim, 1987a & b;

Lowe, 1988; Orser, 1991b; Orser and Foster, 1992; Roberts, 1994; Peacock, 1994; Pratt and Davis, 1985; Gray,

1987; Soloman and Fernald, 1989; Walker, 1987; ABS, 1989, 1992, 1995a) include:

Dissatisfaction with mainstream employment;

Unemployment, layoff or redundancy due to corporate down-sizing/ restructuring, industry/ work reform

creating an available labour supply;

Increased outsourcing or sub-contracting by larger companies and government bodies;

Change in societal values regarding lifestyle, freedom, independence and flexibility in time commitments,

increased time for family commitments and home responsibilities;

Increase in availability and affordability of information and communication technology for use in the HBB

and telecommuting;

Increasing number of women participating in the workforce;

Increase in the level of education of the workforce; and

Growth in the tertiary or services sector in competitive markets which is favoured by the structure of small

businesses, and the concomitant decline in manufacturing and resource based activities.

The Need for Further Research

Consistent with the recent growth in HBB, most research in HBB has taken place over the past 10 to 15 years. A

large proportion of this research is generally descriptive in nature, providing demographic characteristics such as

owner age and gender, industry, hours worked, sales and in some cases employment generation. Relatively little

research exists employing associative statistics in describing the sector. A small number of international studies

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have used causal analysis to determine the factors that impact upon key performance measures like sales and

employment (Kraut, 1988; Carter et al., 1992; and Heck, Rowe and Owen, 1995). A review of the Australian

literature indicates that causal studies of this nature have not been undertaken, indicating that there is a lack of

understanding of the HBB sector in Australia. The need for further research is evidenced by the considerable

number of studies calling for further research into the economic benefits generated by HBB, including

performance measures like employment generation, sales and profitability (Orser, 1991b; Orser and Foster 1992;

Roberts, 1994; Peacock, 1994; and Heck et al., 1995).

In answering the call for further research on these issues in the context of HBB, the hypothesis development is

consistent with topical issues in the SME literature, including gender and family responsibility (Heck et al.,

1995; Holmes, Smith and Cane, 1997; Christensen, 1987; and Priesnitz, 1988), financing (Heck et al., 1995) and

the provision assistance by government (Hewes, 1981, Orser, 1991b; Orser and Foster, 1992, Queensland Small

Business Corporation, 1992 and 1994).

Implications for Policy-Makers

The recent growth in HBB has brought into focus the role of Local and State Governments. There is

considerable concern in the international literature that Local and State Government regulations are outdated and

may restrict HBB operations, growth and performance (for example Orser and Foster, 1992; and Owen Heck and

Rowe, 1995). Consequently, governments have been cognisant that their actions and rules and regulations might

in fact be reducing the level of economic growth and advantage this sector might conceivably generate.

Examples of the types of regulations that may restrain HBB include the maximum number of non-family

employees permissible in the home, the maximum amount of home floor area that can be devoted to business

operations, use of signs advertising the business, customer parking concerns and the amount of materials that

may be stored outside the home. This concern has manifested itself in calls for further research into the effects

of local and state government regulations on HBB (Greenwald and Schmidt, 1984; Allen and Wolkowitz, 1987;

Orser, 1991b; Orser and Foster, 1992; Owen Heck and Rowe, 1995; Queensland Department of Housing, Local

Government and Planning, 1993). The role of Local Government has also been highlighted in relation to the

impact of the rise in HBB. These concerns relate to:

Change in the character of neighbourhoods due to traffic, parking, noise, odour and aesthetics;

Nuisance to neighbours;

Additional strain on local services; and

Unfair competition with businesses based in commercial premises due to lower overheads and possibly

stricter licensing regulations (Roberts, 1994, p. 33).

A better understanding of the factors influencing HBB performance is likely to contribute to a balanced solution

to these concerns with minimal adverse impact on the economic and social benefits generated by of HBB.

Other government bodies that may impact upon HBB performance can also benefit from an improved

understanding of the factors that influence HBB performance. For example, the study undertaken by Business

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Skills Victoria (1996) was commissioned to learn more about the training needs of HBB owners. Similarly, the

current study has its origins in research commissioned by Small Business Victoria (Department of State

Development) for the purpose of establishing a directory of services for HBB in Victoria.

MEASURES OF HOME-BASED BUSINESS PERFORMANCE

The measurement of enterprise performance has received much attention in the corporate finance and financial

management literature (Brealey and Myers, 1988; Bishop, Crapp, Faff and Twite, 1988; Foster, 1986; Van

Horne, Davis, Nicol and Wright, 1990; and Campsey, Brigham, Gilroy and Hutchinson, 1994). The

measurement of performance in SME research has also received considerable attention. For example, Murphy,

Trailer and Hill (1996) reviewed the SME research between 1987 and 1993 and identified 51 published studies

that use performance as the dependent variable. Eight dimensions of performance were considered by these

studies. The most common dimensions of performance measured were in the context of efficiency, growth,

profit and size. Each of these dimensions contained a number of performance measures, including financial

ratios. It was found that 60% of the studies reviewed examined either 1 or 2 SME performance dimensions.

In choosing the dimensions of performance to be measured in SME research, Murphy et al. (1996, p. 21) propose

that researchers ‘allow theory the freedom to guide selection of the appropriate means of addressing

performance’. The choice made should be explained and justified and multiple dimensions of performance are

preferable, subject to the objectives of the study and the type of data available. Also, the choice of performance

dimensions should allow comparison with previous studies.

The two dimensions of performance considered in this review are HBB size and profit. As outlined in Table 2

below, business size is measured by the number of non-owner equivalent full time employees and the annual

level of sales over the last 12 months. Business profit is measured by the annual pre-tax profit earned (annual

sales less annual business expenses) and the ratio of pre-tax profit to sales.

Table 2: Measures of Home-Based Business Performance

Measures of Size

1. Number of equivalent full time employees

2. Gross sales for the last 12 months

Measures of Profit

3. Gross sales less total business expenses

4. Ratio of profit to sales

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The justification for the choice of these performance measures is consistent with the recommendations of

Murphy et al. (1996) above. That is, three of these measures are commonly reported in studies of HBB, which

aids in the comparison of findings with other studies. In addition, a business owner is likely to be able to readily

ascertain the data as they are fundamental to the operations of the business and are not likely to require

preparation of financial statements nor the calculation of complex financial ratios.

Murphy et al. (1996) suggest that in order to compare performance among SMEs, a common basis for

comparison should be established through the use of control variables. The control variables they found relevant

to the majority of studies reviewed were business size, industry, age of the business and risk. The current study

takes into account the potential impact of the industry of the business and its age by including these factors as

explanatory variables in the analysis. While the business size measures of ‘number of employees’ and ‘sales’ are

the subject of the study (i.e. dependent variables), they may also be taken into account in the analysis of business

profit (sales less expenses and the profit to sales ratio) as explanatory variables. In assessing HBB performance,

it would be desirable to also take into account the risk of HBB, where possible. This is likely to be of relatively

less importance for HBB because the financial risk of HBB is relatively lower than for SMEs due to the low cost

structure and lower overheads resulting in lower capital needs.

FINDINGS ON MEASURES OF HOME-BASED BUSINESS PERFORMANCE

Employment Performance of Home-based Business

Table 3 below outlines the findings of international and Australian studies on the level of employment in HBB.

Before considering the findings, it is important to recognise a number of limitations specific to these reported

measures of employment. They include: variability in the reporting format used i.e. range of employees as

compared to averages, the definition of paid employee and the inclusion of paid owner(s) and independent

contractors, and the inconsistent weighting of part-time and full-time employees. Other more general limitations

of these studies which could impact upon the findings include the use of non representative convenience

samples, which in some cases are based on recently started HBBs as opposed to established HBBs; varying

national and international economic conditions at the time of the studies; and differences in the definition of

HBB used, which in some studies may have included non HBB employees working at home.

Notwithstanding these limitations, it can be seen from Table 3 below that international studies report

employment levels of 0 to 50 persons, with means of between 0.83 and 2.28 persons per HBB. The Australian

studies reviewed indicate a range of employment levels of 0 to more than 3 persons, with means between 0.6 and

1.66. Peacock’s (1992a) figures derived from ABS data are the most reliable indicators of HBB employment for

1989. However it should noted that the ABS does not differentiate between part-time and full-time employment.

Additionally, it excludes HBB in which the owner usually worked more hours away from home than at home

such as trades persons, thus excluding employment data for these HBB. Comparatively, the findings suggest

that levels of employment in HBB are marginally lower in Australia than the US and Canada.

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Table 3: Findings on Employment Performance of Home-Based Business

Description of Study FindingsInternational Studies

Lozano (1989)In depth interviews with 35 home-based workers (some working for ‘employers’ on a contractual basis from home) in the San Francisco Bay Area

Number of independent contractors ranged from 0 to 17, with a mean of 1.91

Orser and Foster (1992)Canadian survey of HBB owners with 404 respondents

Average number of employees:2.28 in a full-time job1.38 in a part-time job1.5 in a secondary job (not primary job)

Payne and Lebsack (1992)Survey with 253 respondents in Nebraska, US

1.6 employees per business (part-time employee counted as one-half of a full-time employee)

Roberts (1994)Random telephone survey of HBB in Calgary Canada with 455 respondents

Full-time employees (excluding respondent) – mean 2.26, median 1.0 and maximum 5.0Part-time employees (excluding respondent) – mean 0.83, median 1.0 and maximum 10.0

Alberta Economic Development and Tourism (1996)Alberta Business Start-up Study (1990 sales of HBBs started between 1987 and 1990)

82% - 0 to 4 employees15% - 5 to 24 employees 2% - 25 to 49 employees 1% - 50 or more employees

Australian StudiesPeacock (1992a)Assessment of ABS (1992) with supplemental information from the ABS. Number of employees per home-based business as at April 1989.

0.6 persons per home-based business2.86 persons per employing home-based business

Peacock (1994)Convenience sample mail survey of 200 home-based business owners in Adelaide

Average number of paid persons 1.66 (including owners, part-time/ casual, sub-contractors and outworkers)

Holmes, Smith and Cane (1997)Data from Business Skills Victoria (1996) random national telephone and mail survey with 228 respondents

Number of people assisting (paid and unpaid) by gender of respondent*.0 – male 38%, female 31%1 – male 41%, female 26%2 – male 9%, female 18%3 – male 5%, female 9%>3 – male 4%, female 12%* no response – remaining %

More recent and detailed data on HBB employment in Australia were collected by the author in a mail survey

study of 4,133 Victorian HBBs (Stanger, 1998). Useable responses were received from 758 respondents,

representing a response rate of 20.1%. The responses outlined in Table 4 below indicate that the average number

of full time equivalent non co-owner paid employees was 0.61. The average number of full time equivalent non

co-owner paid and unpaid assistants/ employees was 0.71. Therefore, the average number of full time equivalent

unpaid workers is 0.1 per HBB. It is also evident that for all respondents, the casual basis of work, both unpaid

and paid, is the most common, followed by part time and then full time. Gender comparatively, male

respondents had more part time and full time non co-owner unpaid and paid workers, while female respondents

had more persons working on a casual basis.

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Table 4: Average Number of Non Co-owner Assistants and Employees

RespondentsBasis of Work Full Time

Equivalent*Full Time Part Time CasualAverage Number of Paid and Unpaid Assistants/ Employees

Male (N = 464) 0.32 0.62 0.56 0.77Female (N=248) 0.11 0.26 1.4 0.59Total (N=712) 0.25 0.50 0.86 0.71

Average Number of Paid EmployeesMale (N = 464) 0.29 0.56 0.46 0.68Female (N=248) 0.10 0.19 1.18 0.49Total (N=712) 0.22 0.43 0.71 0.61

* Full time weighting is 1.0 or 5 days per weekPart time weighting is 05 or 2.5 days per weekCasual weighting is 0.25 or 1.25 days per week

Although the findings indicate the number of persons employed per HBB is relatively small in nominal terms, it

is important to note, given the incidence of HBB in Australia previously discussed, that a small increase in

employment per business on average could create quite a significant number of jobs. Overall, these findings

suggest that employment may be a useful measure of HBB performance as US and Canadian studies indicate

higher employment levels are possible and a marginal increase in employment per HBB could generate

considerable employment nationally.

Sales Performance of Home-Based Business

Of the performance measures adopted in this review, sales level is the most commonly reported performance

measure identified in the HBB literature. Part of its appeal is that it is well defined and understood by

respondents. The majority of studies report sales as one of a number of descriptive characteristics of the

businesses being studied. However, the direct comparison of findings is difficult as some studies report mean

annual sales and while others report a sales range. Comparison of the findings on sales is also constrained by

limitations previously discussed in relation to findings on employment. Additional limitations exist in relation to

target sampling on the basis of regions and gender; the possible effect of inflation on reported sales; and the

expression of sales in different dollar currencies.

Notwithstanding these limitations, Table 5 below provides findings on sales reported in the international and

Australian literature reviewed. It can be seen that annual sales range considerably from nil to over $500,000

(disregarding differences in currency). In regard to international findings, with the exception of Heck et al.

(1995), approximately half or more of all respondents reported annual sales of below $US20,000 or $US30,000.

Notwithstanding the limited Australian data, the average annual sales figures in nominal terms may be higher

than that for the US and Canadian studies.

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Table 5: Findings on Sales Performance of Home-Based Business

Description of Study FindingsInternational Studies

Priesnitz (1988)Annual sales of 530 Canadian women home-based business owners

33% - sales $5,000 to $15,00037% - $15,000 to $50,0007% - $50,000 to $100,000a small number above $100,000

Lozano (1989)1 1982 sales ranged from $0 to $44,000Mean $14,980

Carter, Van Auken and Harms (1992).Convenience sample, mail survey of rural HBB in Iowa, with 172 respondents. 1988 sales

41.8% - less than $5,00013.45 - $5,000 to $10,00015.1% - $10,001 to $20,00015.7% - $20,001 to $50,00014% - $750,000

Good and Levy (1992)Survey of HBB with 113 respondents in Manitoba, Canada. 1989 sales

67% - less than $25,00016% - $25,000 to $50,000 7% - $50,000 to $100,000 7% - $100,000 to $500,000 3% - over $500,000

Orser and Foster (1992)1 Approximate mean sales of $20,450

Payne and Lebsack (1992)1 Almost 25% with sales less than $1,00068% with sales $20,000 or less32% with sales over $20,000

Roberts (1994)1 Mean 1993 sales $35,30051% - sales of under $30,000

Owen, Heck and Rowe (1995)Nine state telephone survey with 899 on home-based work (employees working at home and HBB owners and operators) in 1989 & 1992 in the US

Mean 1988 sales $53,164

Alberta Economic Development and Tourism (1996)Alberta Business Start-up Study (sales for 1990 of HBBs started between 1987 and 1990)

34% - sales less than $25,00018% - sales $25,000 to less than $50,00018% - sales $50,000 to less than $100,00014% - $100,000 to less than $200,00015% - $200,00 to less than $1,000,000 1% - $1,000,000 to less than $5,000,000

Alberta Economic Development and Tourism (1996). Data provided by Small Business and Special Surveys Division, Statistics Canada 1991

Average sales of HBB with sales $25,000 to less than $36,622 - $30,300Average sales of HBB with sales $36,622 and over $213,900

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Table 5 (continued): Findings on Sales Performance of Home-Based Business

Description of Study FindingsAustralian Studies

Peacock (1992b)Convenience sample of 44 post-startup workshop attendees in Adelaide in 1991

Low financial returns reported for 36% of men and 60% of women

Peacock (1994)1 Of the 47 responses to question on business size mean annual sales was $101,060 (excluding 7 atypical businesses with turnovers from 0.5 to 2.5 million dollars)

Business Owner Research (1994)Convenience sample of 50 interviews with HBB owner-operators in Sydney and Melbourne-1992-93 sales

16% - upto $20,00016% - $21,000 to $40,0006% - $41,000 to $60,00024% - $61,000 to $100,00018% - $101,000 to $150,00010% - $151,000 to $300,0002% - $301,000 to $500,0006% - over $500,0002% - no responseAverage approximately $120,000*

McInnes and Stanger (1996)Convenience sample, mail survey of targeted women owned small businesses in regional areas of South Australia with 163 respondents

Approximately one-third of businesses were home-based (including primary producers) and of these, 26.6% had business earnings before interest and tax in 1994-5 of over $50,000 (or 15.4% excluding primary producers)

* Mid - point of ranges used except for over $500,000 range where $600,000 used.1 A description of the research is provided in Table 3

More recent and comprehensive findings by Stanger (1998) in Table 6 below indicate that 30% of respondents

attained annual sales of over $105,000. The next most common ranges were $5, 001 to $15,000 (11%) and

$15,001 to $25,000 (9.7%). Gender comparatively, 73.3% of females attained sales of up to $75,000 compared

to 43.7% of males. The mean level of sales was $87,062 (male $101,823 and female $57,682)

The findings on sales performance indicate that while some HBBs have very low sales, others generate a

significant level. This suggests considerable economic benefit may be generated by this segment of the

community and supports the contention that the investigation of factors that impact upon HBB sales and thus the

economic benefits generated by HBB is worthwhile.

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Table 6: Home-Based Business Sales

SALES1 MALE (%)2

(N = 410)

FEMALE (%)2

(N = 206)

TOTAL (%)2

(N = 616)

$5,0002 or less 6.6 14.1 9.1

$5,001 to $15,000 7.6 18.0 11.0

$15,001 to $25,000 8.5 12.1 9.7

$25,001 to $35,000 6.3 11.2 8.0

$35,001 to $45,000 5.6 7.3 6.2

$45,001 to $55,000 5.6 6.8 6.0

$55,001 to $65,000 3.4 3.9 3.6

$65,001 to $75,000 5.4 4.4 5.0

$75,001 to $85,000 4.9 3.4 4.4

$85,001 to $95,000 3.9 1.0 2.9

$95,001 to $105,000 5.4 1.5 4.1

Over $105,000 36.8 16.5 30.0

AVERAGE3 $101,823 $57,682 $87,062

1 Australian dollars2 Figures may not total 100 due to rounding3 Average calculated using mid point of structured response ranges and coding the

Over $105,000 response category as an estimated $200,000

Profit Performance of Home-Based Business

Despite a small number of studies reporting both annual sales and business expenses, very few of these studies

reported the annual profit generated by HBB. Alberta Economic Development and Tourism (1996) provides

sufficient data to determine the profit earned by HBB in Canada. These calculations, outlined in Table 7 below,

indicate that HBB with sales in the range of $25,000 to less than $36,622 (average $30,300) had an average

annual profit before tax of $7,100. HBB with sales of $36,622 and over (average $213,000) had an average

annual profit before tax of $11,500.

In Australia, Peacock (1994, p. 42) reports that 74% of respondents indicated they were profitable (75% female,

73% male), 8% were breaking even (4% female and 10% male), 15% were not profitable (17% female, 14%

male) and 3% did not respond. Business Owner Research (1994) provides detailed figures on the profit earned

by HBB. It was found that 22% of respondents reported profit for 1992-93 of breakeven or less; 20% $1 to

$10,000; 10% $10,001 to $20,000; 2% $21,000 to $40,000; 2% $41,000 to 60,000; and 2% $100,000 to

$150,000 (42% no response).

14

Table 7: Findings on Profit Performance of Home-Based Business

HBB with Sales $25,000 <

$36,622 (averages)

HBB with Sales $36,622 and

over (averages)

Sales $30,300 $213,900

Costs 18,900 188,000

Purchases/ supplies/ materials 3,100 12,000

Advertising 800 1,200

Professional fees 400 1,200

Total Expenses* 23,200 202,400

Profit* 7,100 11,500

Profit to sales ratio* 23.4% 5.4%

Expense to sales ratio* 76.6% 94.6%

Source: Alberta Economic Development and Tourism (1996) (Small Business and Special Surveys Division, Statistics Canada 1991)

* Figures calculated from the data provided by the study

Findings by Stanger (1998) in Table 8 below indicates that 3.2% of respondents made a loss, 31.6% broke even

and 38.9% made up to $40,000 profit in the year prior to the survey. Gender comparatively, 5.4% of females

made losses compared to 2.2% of males; 32.7% of males broke even compared to 29.2% females; 47.5% of

females made a profit less than $40,000 compared with males 34.8%; and 17.8% of males made a profit of

$40,000 or more compared with 10.3% of females.

The limited findings on HBB profit indicate that the profit earned is generally not large and is likely to be less

than that of SMEs. However, when this finding is considered in light of the generally smaller scale of operations

and the potential for less than full time involvement by the owner, the profit earned can be a significant

supplement to other household income. Given the potential contribution of HBB profit to household income and

the fact that very little is known about the factors that influence the profit generated by HBB, it is suggested that

HBB profit is also a measure of economic benefit worthy of investigation.

15

Table 8: Home-Based Business Profit

PROFIT1 MALE (%)2

(N = 382)

FEMALE (%)2

(N = 185)

TOTAL (%)2

(N = 567)

-$80,0003 < -$60,000 0.3 0 0.2

-$60,000 < -$40,000 0.3 0 0.2

-$40,000 < -$20,000 0.3 0 0.2

-$20,000 < $0 1.3 5.4 2.6

$0 32.7 29.2 31.6

$1 < $20,000 17.3 28.6 21.0

$20,000 < $40,000 17.5 18.9 17.9

$40,000 < $60,000 9.4 4.9 7.9

$60,000 < $80,000 2.9 1.6 2.5

$80,000 < $100,000 0.5 0 0.4

$100,000 < $120,000 5.0 3.8 4.6

$120,000 < $140,000 4.7 4.3 4.6

$140,000 < $160,000 4.5 0.5 3.1

$160,000 < $1800,000 2.9 1.1 2.3

$180,000 < $200,000 0.5 1.6 0.9

AVERAGE4 $35,013 $24,838 $31,693

1 Profit = annual sales – annual expenses (Australian dollars)2 Figures may not total 100 due to rounding3 Australian dollars4 Average calculated using mid point of ranges and coding Over $105,000 response

category as $200,000 for both sales and expenses

Profit to Sales Ratio Performance of Home-Based Business

The profit to sales ratio provides an indication of the economy and efficiency with which sales are generated by

business operations. While no studies were identified that report the profit to sales ratio of HBB, this

performance measure could be calculated from the data provided in Table 7 above. As can be seen in Table 7,

the average profit to sales ratio calculated for HBB with annual sales of $25,000 to less than $36,622 (average

$30,300) is 23.4%. For businesses with annual sales of $36,622 and over (average $213,900), the profit to sales

ratio is 5.4%. This compares to Stanger (1998) who found that with average sales of $87,062, the average profit

to sales ratio was 26.1%. Females had a marginally higher average of 28.0% compared with 25.2% for males

(Table 9). Lozano (1989) provides a different measure of performance by considering the ratio of sales to

capital invested in the business. She reports a range of 0% to 100%, with a mean of 10.05%

Based on this limited data, the profit to sales ratio was found to vary considerably for HBB. As with the

performance measure profit, very little is understood by researchers about the factors that influence the profit to

sales ratio performance measure and the reasons for this relatively large variation. This suggests the study of

16

this performance measure is warranted. The above review supports the contention that HBB is not a form of

marginal economic activity, and that it indeed generates considerable economic benefit. This gives rise to the

general research question

What factors influence the performance of home-based business?

In addressing this research question, it is noteworthy that the performance measures reviewed above and the

factors that influence them have generally received considerable attention in the SME literature. It is likely that

some of the relationships identified will also exist in the context of HBB. An example of this is the findings of

Stanger (1998) which indicate a possible association between gender and performance may exist, consistent with

SME literature (Roffey et al., 1996).

Table 9: Home-Based Business Profit to Sales Ratio1

PROFIT TO SALES

RATIO

MALE (%)2

(N = 382)

FEMALE (%)2

(N = 185)

TOTAL (%)2

(N = 567)

< -100% 1.6 2.7 1.9

-100% < -80% 0 1.6 0.5

-80% < -60% 0 0 0

-60% < -40% 0.3 0 0.2

-40% < -20% 0.3 1.1 0.5

-20% < 0% 0 0 0

0% 32.7 29.1 31.6

1% <20% 2.9 3.8 3.2

20% < 40% 8.3 9.2 8.6

40% < 60% 19.1 16.8 18.3

60% < 80% 26.7 24.9 26.1

80 % < 100% 8.1 10.8 9.0

AVERAGE3 25.2% 28.0% 26.1%

1 (annual sales – annual business expenses) / annual sales2 Figures may not total 100 due to rounding3 Average calculated using mid point of ranges and coding Over $105,000 response

category as $200,000 for both sales and expenses

FACTORS INFLUENCING HOME-BASED BUSINESS PERFORMANCE AND HYPOTHESIS

DEVELOPMENT

Gender

17

Considerable research on SME has been devoted to comparing and contrasting the characteristics of owners and

their businesses on the basis of gender. Roffey, Stanger, McInnes, Forsaith, Petrone, Symes and Xydias (1996)

reviewed over 425 items of literature on women in small business across an array of areas including major

factors influencing business performance. While most studies on small business performance are not gender-

comparative (Birley, Moss and Saunders, 1987), many studies indicate that businesses owned by women

underperform those of men (Roffey et al., 1996). Underperformance has been found in relation to lower

remuneration (Allen and Truman, 1991); lower sales (Hisrich and Brush, 1984; and Hisrich, 1989); and lower

profit (Miskin and Rose, 1990). Findings on gender-comparative employment are mixed (Hisrich and Brush,

1984; and Birley, Moss and Saunders, 1986, p. 215).

Roffey et al. (1996) do not identify any associated determinants of performance between the genders, however

factors positively correlated with performance (variably defined as sales, number of employees and profitability)

included prior experience in the industry, finance and management skills and networking.

In relation to HBB, data on gender-comparative performance in the context of employment generation is very

limited. Of the HBB studies reported in Table 3 above providing data on the level of employment in HBB, only

Peacock (1994) and Holmes et al. (1997) provide gender-comparative data on the number of persons employed

in HBB. Peacock (1994) reports that 19% of female respondents had paid employees compared to 36% of

males, however, details of the number of employees are not provided. Holmes et al. (1997) found that HBB

owned by women had a greater number of people assisting than those owned by men. However, they do not

differentiate between paid and unpaid assistance and whether the assistance was provided on a full time, part

time or casual basis.

A number of studies reporting gender-comparative performance in the context of sales found that male HBB

owners had greater sales than females. In Canada, for example, Orser and Foster (1992) report that the average

annual sales for male-owned HBBs was $25,180 compared to $17,850 for female-owned HBB. Roberts (1994)

found a gender effect on annual sales between HBB owners with 27% of women having annual sales below

$20,000 compared to 15% for men. The converse was true for higher revenue ranges, with 6% of men operating

businesses with sales over $100,000, compared to 25% of women. In the US, Payne and Lebsack (1992) found

businesses with annual sales of $20,000 or less, tended to be female or male and female owned, while those with

sales greater than $20,000 tended to be male only owned. Heck et al. (1995) also found that males generate

more sales than females. They suggest this occurs as women may tend to restrict their activity to certain

products like selling cleaning products and cosmetics that limit the sales that can be generated.

Gender-comparative data on the profit and profit to sales ratio of HBB is not generally reported. Therefore of

relevance, is the whether the gender effect noted in relation to employment and sales performance also apply to

profit and profit to sales measures of performance.

18

Family Responsibilities

SME research suggests one of the difficulties faced by women in operating their own small business is family

responsibility (Kallenberg and Leicht, 1991; and Goffee and Scase, 1983). There is prima facie evidence that

women have primary responsibility for child care and household duties. US research of women that work (both

as employees or self-employed) indicates that they spend more time caring for children and doing housework

than their husbands do (Szalai, 1972). Allen and Truman (1991) suggest that women spend fewer hours working

in their small businesses than men probably due to the extra demands of caring for children, the sick and the

elderly. Cannon, Carter, Rosa, Baddon, and McClure (1988) also report that in relation to domestic

commitments and family support, unlike many male business owners, female proprietors cannot expect support

from their spouses in the daily running of the business. In addition, female proprietors were expected to

continue with domestic duties as well as operate businesses.

HBB research has found that working at home for family reasons is an important motivation for starting a home-

based business (Roberts, 1994; Allen and Wolkowitz, 1987; Peacock, 1994; and Queensland Small Business

Corporation, 1994). The literature suggests that the importance of family responsibility in establishing a HBB is

greater for women. This is because more women are leaving corporate employers because of a lack of work

flexibility and family-friendly practices (Catalyst, 1993). Additionally, women may be finding it difficult to re-

enter the workforce after they have had children (Gooch, 1994; and Schwartz, 1996). As a result, it is suggested

that some of these women will turn to self-employment (Smith and Hutchinson, 1994; Cromie and Hayes, 1988;

and Smith, 1993). It is reasonable to expect that many of these self-employment opportunities will be based in

the home, given the restraints imposed by family responsibilities.

International research is consistent with the view that family responsibility is a more important motivation for

women starting a HBB. Christensen (1987) found women who had at least one child and had life partners chose

to work at home, as they were able to minimise conflict between family and work. Kraut (1988) reports that

among women, married women with resident children (especially young children) were overrepresented among

homeworkers, while among men, unmarried men with no children were over-represented. Kraut (1988, pp. 36-

7) states ‘this association of homework with family structure is consistent with the hypothesis that women, but

not men, use homework as a mechanism to combine family responsibilities with paid employment’. Heck et al.

(1995) concur with these findings.

Australian research also supports the contention that that advantage of HBB in relation to family responsibilities

is greatest for women. Holmes et al. (1997) found significant differences between the genders in the life stage of

owners with 60% of women operating their business while having children at home compared to 37% for males.

ABS (1989, 1992 & 1995a) report that one of the main reasons for staying at working at home is due to ‘children

too young/ decided to look after children’ and is a significantly more important motive for women. Peacock

(1994) found family reasons for starting a business at home was the most important reason for women, and the

least important for men.

19

Despite the convenience of working at home and the proximity to the family, it is suggested the main

disadvantage of operating a business from home is the difficulty in separating work and personal life, which

includes interruptions from family and the need to undertake household duties (Good and Levy, 1992; Pratt and

Davis, 1985; and Business Skills Victoria, 1996). This view is supported by Peacock (1994) who found that the

most important piece of advice for starters offered by those surveyed by was to obtain family support.

The impact of family responsibilities on employment performance in HBB has received almost no attention in

the literature. Peacock (1994) considers the use of unpaid labour, particularly family and relatives, in HBB.

However, unpaid labour is not employment per se. He recommends further research on the effect of family

responsibilities on the propensity to use paid and unpaid assistance. In terms of the effect of family

responsibility on HBB sales, Kraut (1988) suggests that the flexibility offered to mothers may be gained at the

expense of reduced sales. Heck et al. (1995) found the effect on sales of having a child under 6 years of age in

the home was positive for males and negative for females. They also found that having children reduces the

likelihood of having a large-scale business for both genders. This suggests that there may be a trade-off between

sustainable growth in business and the quality of home life. Although family responsibility is a relatively broad

term encompassing both household chores and child rearing, it could be operationalised as a variable in an

empirical study as whether a resident child(ren) exists in the household of the HBB.

From the discussion above on gender and family responsibilities, it would appear that the influence of family and

gender on performance could be independent as well as co-dependent. These factors are likely to be independent

in the case of an owner of either gender without family responsibilities, or a male owner with family

responsibilities. These factors are likely to be co-dependent in the case of a female business owner with family

responsibilities.

Financing

The financing decision is concerned with the types of finance used to invest in the assets of the business. This

involves a balance between long and short term financing and between debt and equity financing. It has been

long recognised that a significant impediment to the fostering and development of small enterprise is the

apparent limited access to debt and equity finance and the undercapitalisation that results (Tamari, 1980;

Hutchinson and Ray, 1986; Hutchinson and Mengersen, 1989; and Keasey and Watson, 1991). The financing

decision impacts upon the profitability of the enterprise as well as its risk (McMahon, Holmes, Hutchinson and

Forsaith, 1993). More specifically, Keasey and Watson (1991) suggest the use of external financing by SMEs is

associated with higher business performance.

Comparability of the findings on the sources and amount of financing used by HBB is limited due to the

diversity in the way this is reported. With regard to the sources of finance used at startup, international research

indicates that the majority of respondents (between 50% and 82%) financed their businesses from personal

savings. Respondents indicating they had used bank financing in the form of a loan, overdraft or home mortgage

were in the range of 10% to 43% (10% Priesnitz, 1988; 34.8% Carter et al., 1992; 31% Payne and Lebsack,

1992; and 43% Good and Levy, 1992). Similar findings have been reported in Australia. The ABS (1995b)

20

reports that ‘personal savings/ borrowings’ accounted for 54.1% of the sources used at startup. Peacock (1992b

& 1994), who allowed multiple responses on the sources of finance used at startup, found that between 61% and

82% of respondents used personal savings, 30% to 31% bank loan/ overdraft, and between 11% and 23% used

other sources. In comparison to SME, HBB use less debt with an average gearing ratio of 47.8% and 58.3%

respectively (Queensland Small Business Corporation, 1992).

The total amount of financing used at startup is relatively low compared to SMEs. Internationally, Priesnitz

(1988) and Lozano (1989) found that between 12% and 18% of HBB required no funds at all, and approximately

28% required less than $US1,000, and between 39 and 53% required $US1,000 to $US10,000. The highest

reported amount was $US53,000. Carter et al. (1992) found at the time of survey (rather than startup), over 40%

of respondents had less than $US5,000 invested in the business; and only 6.4% had over $US50,000 invested.

Payne and Lebsack (1992) report that of the 31% of respondents who borrowed money at start-up, the amounts

were from $US50 to $US100,000, median $US6,000 with 54% of business loans ranging from $US1,000 to

$US10,000.

The Australian literature also indicates that HBB start with relatively small amount of financing. The ABS

(1995b) found that almost 32% of respondents used less than $1,000. Peacock (1992b) found 48% of

respondents used $0 to $5,000, and 23% $5,001 to $10,000 and 15% used more than $20,000 at startup.

Similarly, Peacock (1994) reports 17% of HBB required no funds, almost 60% needed less than $5,000 and 13%

using $20,000 or more at startup.

No studies were identified that suggest the amount of finance used at startup influences HBB performance.

Empirical evidence suggests that a relatively small amount of financing is needed to start a HBB as one of the

main reasons for starting a HBB is the low setup costs and overheads (Hewes, 1981; Greenwald and Schmidt,

1984; Roberts, 1994, Priesnitz, 1988; Queensland Small Business Corporation, 1994; Business Owner Research,

1994; Peacock, 1994; ABS, 1995a). However, a number of studies question whether the low amount of financing

used, and in particular the low amount of external financing provided by banks, is due to the fact that relatively

little financing is needed or whether owners have had, or perceive they would have, difficulty in raising finance,

particularly from banks (Good and Levy, 1992; Priesnitz, 1988; Orser, 1991b; and Business Owner research,

1994). Conversely, Hewes (1981) suggests HBB may have an advantage in securing finance relative to SMEs

because of their relatively low setup costs and overheads.

The only study identified that considers the association between financing and performance is that conducted by

Carter et al. (1992). They regressed profitability (measured by how long the firms were operating before a profit

was earned) against sources of finance (measured by dummy variable indicating whether external sources of

funds were primarily used at startup) and other variables. They found HBBs relying primarily on outside

financing at startup do not perform (in terms of profit) as well in the early years as firms where financing is

primarily from the owner’s personal savings.

21

Source of financing is considered to be important for small business. Myers’ (1984) “pecking order hypothesis”

implies that different sources of finance affect the cost of funding for the business overall and consequently the

mode of financing may matter. Given the above discussion, financing may be operationalised as a variable in an

empirical study using variables representing bank external financing, other sources of external financing and

owner financing derived from personal savings, family and friends. These variables should also indicate the

amount of financing provided by the respective source. Information on the amount of financing provided by

each source could be useful in differentiating between HBB that relied on the same source(s) of financing, but in

varying amounts.

Local and State Government Regulations

Local and State Government regulations are important to HBB because the households from which they operate

usually fall under residential zoning regulations or by-laws. These restrictions relate to maintaining the amenity

of a residential area and are concerned with the impact on immediate neighbours, other residents, and the

municipality as previously discussed. In addition, they may also regulate the maximum number of non-family

employees that may work in the home as well as the maximum floor area of the home that may be devoted to the

business. The impact of Government regulation on HBB is likely to be less for HBB operating in agricultural or

commercial zones due to differences in zoning regulations (Sheedy, 1990, p. 28). The impact of government

regulation on SMEs is likely to be less generally, as they are usually based in commercial premises in areas that

have commercial or industrial zoning regulations.

Researchers are in general agreement that Local and State Government regulations are likely to cause problems

for HBB, of which zoning regulations and registration requirements are considered the most important (Good

and Levy, 1992; Owen et al., 1995, Queensland Department of Housing, Local Government and Planning, 1993;

and Greenwald and Schmidt, 1984). The general concern is that these regulations limit the scope of the business

and the activities that can be performed in the home.

These restrictive effects are due to the failure of governments to keep up to date with the growth in HBB. As

Orser (1991b, p. 14) states in relation to Canada, ‘there is little directional government policy on home-based

work; most policy and programming is and has been demand driven. Municipal regulations may be outdated and

bias certain types of home businesses. This may discourage those who attempt to operate their businesses

lawfully’. This view is supported in Australia by the Queensland Small Business Corporation (1992) which

believes that local governments are not responding quickly enough to the fast growth of home businesses. Gome

(1996) provides anecdotal evidence that HBB are being sidelined by Local and State Governments and Gome

(1994) discusses how there may be inconsistency between State and Local Government regulations.

Research suggests HBB owner awareness of Government regulation relating to HBB is not very great. Orser and

Foster (1992) found that in Canada 40% of respondents who work full time in their HBB were not aware of the

regulations affecting their business. It was also found that awareness of regulations did not improve very much

with the time in operation. Of businesses in operation for less than one year, 46% were not aware of relevant

22

regulating by-laws compared to 49% of businesses in operation for 10 or more years. In addition, it was found

that only 24% of respondents perceive municipal zoning law, and 14% perceived the attitude of neighbours, as

important in operating their business.

The research on the impact of government regulations suggests that the impact is not considerable. In terms of

whether Local and State Government regulations had affected HBB owners in any way, in Australia Peacock

(1994) found 70% of respondents replied in the negative. Heck et al. (1995) report that most owners did not cite

legal issues such as zoning as barriers to their HBB in the US. Owners were not too concerned about community

ambience, traffic and pollution and internal residential workspace. Despite the findings on the relative low

impact of regulations on HBB, international researchers have called for further research on the impact of Local

and State Governments on HBB in Canada (Orser, 1991a & b), the United Kingdom (Allen and Wolkowitz,

1987) and Australia (Peacock, 1994). Additionally, researchers have been considering alternative forms of

housing and land subdivision suited to the needs of HBB (Wilkes and Associates, 1994).

The effect of Local and State Government regulations on HBB performance has not been explicitly researched in

the literature reviewed. Orser and Foster (1992) state that HBB does create employment, despite many

municipal by-laws limiting or prohibiting employment. However, limits on the number of employees working in

the home may restrict the total work done by the business, and could lead to outsourcing or the use of

independent contractors rather than employees (Hewes, 1981). Gome (1994) provides anecdotal evidence that

the attitudes of councils and governments restrict the growth of HBB.

Technology

With the increasing availability and affordability of information and communication technology, more small

businesses are able to utilise this technology. Yellow Pages Australia (1995 & 1996) considers the extent of use

of information and communication technology by small business and the intended future use. Findings from

Yellow Pages Australia (1996) indicate 74% of respondents use a desktop computer. Data indicate a steady

increase in the use of desktop computers with 68% in 1994 and 71% in 1995. Furthermore, 7% said they would

purchase a desktop and 7% a laptop computer for the first time within 12 months. Also reported is that:

Small businesses with higher turnover were considerably more likely to have various items of technology-

based equipment; and

Businesses with growth plans are significantly more likely to use technology in the business than businesses

with no growth aspirations (desktop 82% to 60 % respectively and lap top 18% to 11% respectively).

Other studies of SME suggest the use of information and communication technology has a beneficial effect on

performance. For example, Brooksbank, Kirby and Kane (1992) found that an increase in use of computers in

the retail newsagency sector resulted in improved financial management with regard to cashflow. Fuller (1996)

reports small businesses that use information technology have a strategic advantage. Bonk (1995) discusses the

information revolution and its impact on small firms in terms of increasing access to world markets.

23

In relation to HBB, the increased availability and affordability of information technology has been suggested as

one of the main reasons for the growth in HBB (Pratt and Davis, 1985; Gray, 1987; Orser, 1991b). Empirical

evidence on the use of computers in HBB is consistent with this view. Internationally, Christensen (1987) found

that in clerical and professional occupations, one in three home-based workers (defined as employees working at

home and the self-employed) use computer technology in doing their work. Good and Levy (1992) found that

45% of HBBs surveyed use computers. In Australia, Business Skills Victoria (1996) reports that 41% of

respondents personally used a personal computer in operating their HBB.

The importance of information and communication technology for HBB is also reflected by anecdotal studies in

the US concerning the need for a computers and appropriate software (Reynolds, 1994; O’Dell, 1994; and Hisey,

1996); and in Australia (Robotham, 1993; Sheedy, 1990; and Trevor, 1996). Additionally, a number of studies

have also considered the commercial market potential of HBB for suppliers of office equipment and

communication and information technology internationally (Orser and Foster, 1992), and in Australia (Business

Owner Research, 1994 and BIS Schrapnel, 1993).

No empirical research on the effect of the uptake of information and communication technology on business

performance was identified in the literature reviewed. However, anecdotally, Orser and Foster (1992, p. 101)

suggest the use of information technology may enable HBB to operate without hiring outside help. This stems

from the finding of Good and Levy (1992) that HBB owners are likely to use a computer for more applications

(word processing, file maintenance and desktop publishing) than other small business (mainly bookkeeping). A

priori reasoning would suggest that the use of information and communication technology in HBB might

increase the efficiency of operations, which could result in greater sales, profit and profit to sales ratio. This

increased activity may also have the effect of increasing employment levels.

Business Expenses

Although a small number of studies reviewed report the expenses incurred in operating HBB, none have related

this to business performance. However, from Table 7 above, it can be seen that higher expenses are associated

with higher sales and higher profit. Expenses as a proportion of sales increased as sales increased, resulting in a

declining profit to sales ratio. While the data on the effect of expenses on performance is limited, the

relationships observed are considered to be consistent with a priori reasoning.

Proportion of Business Expenses Spent on Labour

No data on the proportion of business expenses spent on labour costs were identified in the literature reviewed.

However, based on a priori reasoning, HBB that spend a greater proportion of their total business expenses on

labour costs may be likely to employ more persons, all things being equal. The employment of more persons is

likely to result in greater sales as the operating capacity of the business is increased. And assuming the goal of

profit maximisation, HBB owners will only employ labour when it increases the profit generated by the firm.

Conversely however, businesses that have higher sales through the use of employees, are likely to have a lower

24

profit to sales ratio. This may occur, as while the labour of the owner(s) does not contribute to business

expenses, the labour provided by any employees will contribute to business expenses.

Hours Worked

The literature commonly differentiates between full-time and part-time work in the HBB (Orser and Foster,

1992; and ABS, 1989, 1992, 1995a & 1995b). It is likely that the more time worked in the HBB, the less time

available for working in another job, and therefore the greater the reliance on the income produced from the

HBB. A positive relation between sales performance and the hours worked in the HBB is evident in the literature

(Orser and Foster, 1992; Priesnitz, 1988; and Heck et al., 1995). A similar relationship may be reasonably

expected between the hours worked and both the profit generated and the profit to sales ratio as the size of the

business increases and economies of scale are created over a sales range.

There is some evidence to suggest that the hours worked in the business is positively associated with the level of

employment. Orser and Foster (1992) found that the HBBs that were full time occupations employed the greatest

average number of employees, compared to HBBs classified as part time and secondary jobs. Similarly, Peacock

(1994) found that 45% of respondents in both full time and part time HBBs had a paid spouse, other owner or

other worker, compared to 20% of part time businesses. Owners involved full time with their HBB are likely to

be more reliant on the income generated and thus may have larger scale operations with more employees.

Degree of Formal Planning

The business plan is one of the most important steps in establishing a small enterprise as it helps the owner to set

objectives, provides a means of attaining them and establish objective criteria against which to measure

performance (Burns, 1996). Its usefulness can be ongoing, especially when the business is growing and

experiencing financial pressures and is considered to be important when applying for finance from banks or

other sources (McMahon et al., 1993).

Data on the use of business plans in HBBs is limited. In Australia, the ABS (1995b) provides data on the use of

a business plan by HBBs, however the association with business performance is not investigated. In the US,

Good and Levy (1992) compared HBBs and SMEs and were surprised to find that the former had a higher

failure rate. They suggest the reason for this is the statistically significant finding that HBB undertake a lower

degree of formal business planning than SME, both at startup and on an ongoing basis. It is likely that firm

failure will be preceded by poor performance. The use of a business plan for ongoing operations may help

reduce the likelihood of failure and the poor performance that precedes it.

Outsourcing or Sub-Contracting

There is little empirical data on the extent to which HBBs outsource or sub-contract work, and even less on the

effects on business performance. Sub-contractors as a form of casual labour provide greater benefits to HBBs,

and unlike a full-time salaried employee, the labour cost is only paid when services are rendered and the

payment of non-salaried on-costs are often avoided as sub-contractors often have their own personal and liability

25

insurance, which results in HBBs incurring less cash expenditure, all other things being equal. The use of

outsourcing or sub-contracting is expected to have a positive impact on profitability and performance of HBBs.

Roberts (1994) found that 15% of respondents contracted out part time and full time work as needed. Lozano

(1989) found HBB owners did not employ anyone, but received assistance from either co-owners or paid

independent contractors. Outsourcing may be used where the legal maximum number of persons are employed in

a HBB (Hewes, 1981) or where it is more profitable to outsource than to employ (Trevor, 1996).

Outsourcing or sub-contracting may occur where a HBB owner either does not have the necessary skill,

operating capacity or desire to provide a service or good to a client or customer. A business without excess

capacity may be required to outsource as it may already be employing the maximum legal number of employees.

As such, outsourcing may be related to a higher level of employment within the business. Given this, it is likely

that outsourcing will also be related to higher sales and higher profit. The effect of outsourcing on the profit to

sales ratio may be negative, as owners may be willing to accept a lower profit margin on work that is outsourced,

than when performed by the owner.

Age of Business

In a study of small business, Cuba, Decenzo and Anish (1983) found a positive correlation between the number

of years in business and annual sales and other performance measures (business income, income per employee,

income per owner and sales per employee). The HBB literature also indicates that business age is positively

related to performance. With regard to employment, Orser and Foster (1992) found that the longer the time in

operation, the greater the average number of employees working at home and elsewhere. It was found that

HBBs less than one year old had on average 1.51 employees, businesses 1 to 3 years old had 1.66 employees,

and businesses 3 to 10 years in age had 1.92 employees. Anecdotally, business age is also correlated with higher

employment. The age of the HBB has also been found positively related to sales (Priesnitz, 1988; Orser and

Foster, 1992; and Heck et al., 1995).

While there is no data on the effect of business age on profit and the profit to sales ratio, the relationship is likely

to be positive. This is because older businesses are more likely to have attained diminishing costs of production

over some range of sales. That is, they are likely to be operating more economically and efficiently than recently

established HBBs.

Industry Sector

Few studies have considered the effect of the industry sector of HBBs and performance. The limited findings

indicate an ambiguous effect on performance. Priesnitz (1988) found those businesses offering professional and

business services (tertiary industry) generally reported significantly higher sales. Conversely, Orser and Foster

(1992) found on average that HBB in primary industry generated marginally more sales than those in tertiary

industry, with HBB in secondary industry generating significantly lower sales than both.

Location of Household

26

The only study identified that compared performance between rural and urban HBBs is Orser and Foster (1992).

They found a positive relationship between sales and being located in an urban area, as compared to a farm or

non-farm rural location. The positive correlation may be explained by higher population densities providing

more prospects for increasing sales. Additionally, profit may be higher as concentrated markets would suggest

that the distribution costs of selling and/ or providing services to the market would be lower in percentage terms.

Usefulness of Networking Organisations

Participation in business networks has found to be positively associated with business profitability and is one of

the main practices contributing to performance in small business generally (Roffey et al., 1996). In relation to

HBB, Carter et al. (1992) found that owners with an interest in networking became profitable sooner after

startup, than those with little interest in networking. Anecdotal evidence suggests that networking can help to

reduce the isolation of owners and assist with marketing the business and making business contacts (Pratt and

Davis, 1985; and Seedsman, 1995). Despite the potential benefits of networking, Mallet (1994) suggests that

HBBs do not tend to belong to business organisations because of their low profile. The potential importance of

networks to HBB performance is reflected through recommendation for further research on the effect of

networks (Peacock, 1994) and calls for support from policy-makers to encourage the establishment of networks

for business support and owner training purposes (Dawson and Turner, 1989; Roberts, 1994; Greenwald and

Schmidt, 1984; and Enterprise Training, 1993).

Owner Self-Funded Superannuation Coverage

There are a small number of studies that provide findings on the extent of HBB owners that have related

superannuation, however the effect on HBB performance is not discussed. The ABS (1989) found that

approximately 31% of the self-employed and employers in HBBs had superannuation. The Queensland Small

Business Corporation (1992) suggests this relatively low rate of self-funded superannuation amongst owners

could be expected due to the part-time and possibly temporary nature of employment at home. However,

somewhat incongruent to this view, is the assessment by Australian studies that the commercial potential of

HBB to insurance and superannuation providers is considerable (BIS Schrapnel, 1993; and Business Owner

Research, 1994). The importance of self-funded superannuation is highlighted by the recommendation for

further research into the needs of HBB owners (Peacock, 1994). It has been suggested that HBB owners that

have self-funded superannuation policies are likely to depend more on the income derived from their business

and thus have larger operations. Therefore, employment, sales and profit are likely to be higher for these

businesses. However, as business size increases beyond a certain range, the profit to sales ratio may decline.

HBB owners that work predominantly or solely in their HBB are likely to be more dependent on the income it

generates, both presently and in the future. These owners would be more likely to have a self-funded

superannuation policy in relation to their HBB activity. Such businesses are also more likely to have better

performance.

Bartering

27

A small number of studies have suggested that HBBs may barter some of the goods or services produced (Orser

and Foster, 1992; Roberts, 1994; and Lowe, 1988). Orser and Foster (1992) suggest that underreporting of the

extent of HBB activity is likely to occur where a business operates, at least partially, on a barter system. It is

likely that such transactions, for example where an owner helps out a neighbour, are not recorded. Additionally,

a bartering system (along with cash transactions) may consciously be used as a way of circumventing taxation.

It is therefore possible that sales may be understated where bartering takes place. It is also possible that profit

and the profit to sales ratio may also be underreported if any expenses incurred in relation to the bartered goods

or services are not excluded from reported figures. In terms of employment, the effect may be marginal where

bartering is conducted on a relatively small scale. The overall effect on performance measures is likely to be

negligible where a relatively small proportion of the total goods or services produced are bartered.

Similarity of Previous Work Experience

The SME literature suggests that business performance and expansion is positively related to the owner having

prior experience in the industry (Roffey et al., 1996). While no empirical evidence has been identified that links

prior work experience with HBB performance, it is likely to also be the case for HBBs. Common to both SMEs

and HBB, prior work experience may be obtained working as an employee in another business. In addition,

HBB owners may also gain experience by way of a hobby that that has been turned into a profitable HBB

activity.

Sales

Although sales is a measure of HBB performance, it may be useful as an explanatory variable in relation to the

other measures of performance. With regard to profit and the profit to sales ratio, the justification is that sales is

a component in the calculation of each of these variables i.e. profit is the difference between sales and expenses,

and profit to sales is the ratio of sales less expenses, to sales. Little evidence of this relation is documented in the

literature, however, Carter et al. (1992) found that HBBs with larger sales tend to outperform businesses with

smaller sales (i.e. become profitable sooner after startup). The relationship between sales and the profit to sales

ratio is predicted to be positive because of the law of diminishing costs of production over some range of sales.

Beyond this range, sales is likely to be negatively related to the profit to sales ratio. With regard to employment,

no direct empirical evidence of an association between employment and sales was identified in the literature

reviewed. However, a priori reasoning might suggest larger sales increase the likelihood of the need for

employees, thus supporting for the contention that higher sales are associated with higher employment.

Employment

Although employment is itself a measure of performance, it could be useful as an explanatory variable in relation

to other measures of performance. Unfortunately, no empirical evidence of the influence of employment level

on sales, profit and the profit to sales ratio in HBB has been identified in the literature. A priori reasoning might

suggest that business owners who work either full or part time in their business wish to employ labour in order to

28

increase sales and profit. However, increasing employment is likely to have a negative effect on the profit to

sales ratio.

Other Possible Explanatory Variables

Small enterprise and to a lesser degree HBB research indicate there are numerous factors that could influence

HBB performance. The investigation of all possible factors identified in the literature is beyond the scope of this

review, and of any individual empirical study. Notwithstanding this, factors found in prior studies to have a

possible association with performance (particularly sales) that should be considered in future studies include:

Education of the owner-respondent (Roffey et al., 1996; and Kraut, 1988);

Age of the respondent-owner (Kraut, 1988; and Orser and Foster, 1992);

The number of other co-owners (if any) assisting with the business (Orser and Foster, 1992);

The legal structure of the business (Orser and Foster, 1992);

Business income as a proportion of household income (Heck et al., 1995; BIS Schrapnel, 1993; and

Business Skills Victoria, 1996);

Whether the respondent-owner had a marital or de facto partner (Peacock, 1994); and

The proportion of expenses spent on professional services (e.g. Accountant and lawyer) and advertising

(Orser and Foster, 1992).

Non-Financial Objectives

In considering the factors that influence HBB performance it is important to recognise that small business

owners may have objectives other than the maximisation of wealth which can adversely impact on business

performance. In his review of the literature on self-employment earnings in Canada, Mallet (1991, p. 16) states

that most entrepreneurs place high importance on subjective benefits such as independence, quality of life,

building an organisation, challenge and recognition for a job well done. Some may trade off money in exchange

for these benefits. In addition, owners may wish to financially manage their businesses in a way to reduce

accountability and the dilution of control, and maintain flexibility and liquidity (McMahon and Stanger, 1995

and 1996; and Le Cornu, McMahon, Forsaith and Stanger, 1996).

Given the above discussion, it is likely that some HBB owners may have non-financial objectives. The effect of

such objectives may be partially captured through some of the explanatory variables included in this review

which, in effect, proxy for the existence of non-financial objectives. These variables include the number of hours

worked per week, gender of the owner and the existence of family responsibilities.

Home-Based Business Performance Hypotheses

The earlier discussion and evidence of the economic benefits of HBB gave rise to the research question ‘What

factors influence the performance of home-based business?’ The review above has highlighted 19 salient factors

likely to affect HBB performance. The relationship of these factors with the HBB performance measures

29

employment, sales, profit and profit to sales is outlined below in Table 10 in the form of testable alternative

hypotheses.

30

Table 10: Home-Based Business Performance Hypotheses

Explanatory Variable Alternative Hypothesis1. Gender of respondent-owner

HA1: The gender of the HBB owner will influence HBB performance.

2. Existence of a resident child(ren) in household

HA2: Having a resident child(ren) will be negatively correlated with HBB performance.

3a. Total bank external financing used at startup1

HA3a: The use of external bank sources of financing will benegatively correlated with HBB performance.

3b. Total other external financing used at startup1

HA3b: The use of external other sources of financing will benegatively correlated with HBB performance.

3c. Total private financing used at startup1

HA3c: The use of internal owner sources of financing will bepositively correlated with HBB performance.

4. Restrictiveness of Local and State Govt. regulations

HA4: The HBB owner’s perception of the restrictiveness of Local and State Government regulations will be negatively correlated with HBB performance.

5. Use of information and communication technology

HA5: The use of information and communication technology will be positively correlated with HBB performance.

6. Total business expenses for the last 12 months

HA6: The level of business expenses incurred will be positively correlated with HBB employment, sales and profit; and negatively correlated with the profit to sales ratio.

7. Percent of total expenses spent on non-owner labour

HA7: The proportion of business expenses spent on labour will be positively correlated with HBB employment, sales and profit; and negatively correlated with the profit to sales ratio.

8. Average total hours worked per week for business

HA8: The number of hours worked by the owner-respondent will be positively correlated with HBB performance.

9. Use of a written business plan at startup and currently

HA9: The use of a written business plan will be positively correlated with HBB performance.

10. Percent of sales outsourced or sub-contracted

HA10: Outsourcing or sub-contracting will be positively correlated with HBB employment, sales and profit; and negatively correlated with the profit to sales ratio.

11. Age of business HA11: Business age will be positively correlated with HBB performance.12. Industry sector of business

HA12: The industry sector in which a HBB operates will influence performance.

13. Location of home from which business operated

HA13: The degree of urbanisation of a HBB will be positively correlated with performance.

14. Usefulness of networking organisations

HA14: The usefulness networking organisations will be positively correlated with HBB performance.

15. Owner self-funded superannuation coverage.

HA15: Owner self-funded superannuation coverage will be positively correlated with HBB performance.

16. Frequency of bartering in the last 12 months

HA16: The frequency of bartering of goods or services will be negatively correlated with HBB performance.

17. Similarity of prior work experience

HA17: Similarity of the respondent-owner’s previous work experience will be positively correlated with HBB performance.

18. Gross sales for the last 12 months

HA18: The level of sales will be positively correlated with HBB employment, sales and profit; and negatively correlated with the profit to sales ratio.

19. Number of equivalent full time employees

HA19: The level of employment will be positively correlated with HBB employment, sales and profit; and negatively correlated with the profit to sales ratio.

31

CONCLUSION

Given the considerable economic benefits of HBB previously identified, these testable hypotheses provide an

agenda for future research into HBB employment, sales, profit and profitability performance. The key factors

considered include gender, family responsibilities, Local and State government regulations, sources of financing,

uptake of information technology and networking. A better understanding of the factors influencing these

dimensions of HBB performance is likely to assist policy formulation and providers of assistance and advice to

this relatively fast growing micro business sector.

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