Basic Principles of

Livelihood Business

Helping Entrepreneurs

Earn a Living

2002 © Marjorie Blizard

 

 

 

 

What Is A Livelihood Business?

A livelihood business is a small business in which the owner's primary goal is to earn a living.  Livelihood business is the type many people have in mind when they say "I want to have my own business and be my own boss".  They want to work at the business and earn their living from it. 

Livelihood businesses are fundamentally different from other types of small business, and they require a different approach to start-up and management to be successful.  The most significant difference is financial, in that the owner expects or needs to take a certain amount of cash out of the business every month.  This is contrary to most business advice, which assumes the business owner is able and willing to invest both time and money in the business without expecting income during the start-up period.   Another difference is that the owner has important personal goals, which are one of the reasons for starting the business.  Most business advice assumes the owner is able and willing to make personal sacrifices to pursue the business, but for livelihood business owners, the opposite is more likely to be true. 

Most of the small business advice available treats a small business as an investment and is not suited to livelihood business.  As a result, livelihood business owners who try to take advantage of the many sources of small business advice are often frustrated and feel their goals are not respected.  This paper describes a newly developed approach better suited to the needs of livelihood business owners.

Usually, businesses are defined by their size (micro, small, large) or their industry (retail, service, manufacturing).  In contrast, livelihood business is defined by the owner's goals.  Since livelihood businesses are owner-operated, they do not usually fit into the "large business" category, but they are found in every industry and many sizes.  Often, livelihood business falls into the category of microbusiness, but defining a business by its size overlooks some important points.  A livelihood business is defined by the owner's financial goals.  Since a livelihood business owner depends on the business to support the household, the financial management needs to be handled differently than for other types of business. 

Types of Owner-Operated Businesses

There are several different types of small business, as defined by the owner's financial and personal goals:

.         Livelihood business - business income supports household.

.         Supplemental Livelihood - business income supplements other income to support household.

.         Supplemental Lifestyle - income improves lifestyle but is not necessary to support household.

.         Investment - owner invests money and time to build future value of business as an investment. 

.         Hobby - business activity improves lifestyle but does not contribute income.

Combinations of these types are common; many businesses will provide income now and a return on investment later, or improve lifestyle with added income while providing an enjoyable activity.  When there is a combination of goals, efforts should be focused on the highest priority goal.

Identifying a business as a livelihood business is important because livelihood business need a different approach to start-up and management.  The owner of a livelihood business cannot afford as much risk as other types, and should strive for steady and sustainable cash flow rather than other financial goals.

Why the Difference Is Important

Livelihood business is fundamentally different from the type of business for which most business advice is available.  Most business advice is aimed at building a business as an investment.  In a livelihood business, the owner's financial goal is different - steady income sufficient to support the household.  This affects nearly every aspect of the business.  Since most advice for small business is intended for business as an investment, it may be inappropriate for livelihood business.  This increases the difficulty and risk of livelihood business, and the frustration of the business owners.

This is not to say that advice and support designed for business as an investment is wrong for the type of business it is intended for.  It is very good for that type of business.  However, it is not well suited to livelihood business, which has a goal different from the goal of business as an investment. 

Since, by definition, a livelihood business supports the family, a livelihood business owner has much more at risk than just the business.  Because the family depends on the success of a livelihood business, it is especially important that livelihood business owners get the best possible advice.

Who Needs A Livelihood Business?

Livelihood business owners are people who need to earn a living, and who, for any reason, cannot or do not want to hold a regular job.  Reasons might include family responsibilities, a disability, a lack of suitable jobs in the area, a conviction record, visa issues or a lack of opportunity to use their skills or education.  In addition, there are people who prefer self-employment in spite of the risks, often because of a burnout experience in a previous job.  People choose a livelihood business for compelling reasons. 

Often, individuals who want to start a livelihood business have a very low tolerance for financial risk.  They and their families will depend on the income from the business for their day-to-day survival.  In many cases, they do not have the alternative of getting a job if the business fails, because they have already explored the option of a job and found that it did not meet their needs. 

Because the family depends on the business, and because their options may be limited, it is especially important that livelihood business owners get advice suited to their needs.  If they receive management advice meant for other types of business, they may increase their risk by following inappropriate advice, or they may recognize that the advice does not suit their needs and become alienated from sources of business advice. 

It is also worth noting that while livelihood business owners are likely to support the idea of building up the business as a source of future wealth for the family; this goal is secondary to the very compelling goal of providing support for the family.  It is only after the family is financially secure that any other goals can even be considered. 

Real Estate Analogy

Real estate provides a helpful analogy, which makes it easier to understand the concept of livelihood business. 

Starting a livelihood business is similar to buying a home for the family.  Starting a business as an investment is like buying investment property.  They are both real estate transactions, and in some ways both deals have a lot in common.  However, they have several important differences:

Home Buyer Wants:	Investment Buyer Wants:
.         A large yard with a garden to save on groceries.	.         A small yard to save on maintenance.
.         A good school in walking distance.	.         Away from schools, to avoid vandalism, noise and litter.
.         A woodstove to save on heat.	.         Separate utilities so tenants pay their own heat.
.         Room for a dog.	.         No pets.
.         On a dead end street for privacy.	.         On the bus line, for higher rents.
.         A property that will appreciate in value over time.	.         A property that will appreciate in value over time.

In many ways, the real estate analogy carries over to the difference between livelihood business and business as an investment.  

In a livelihood business, as in an owner-occupied home, the owner assumes a high level of responsibility for day-to-day oversight and management.  In a home, this makes a garden and a woodstove an advantage.  In an investment property, as in a business for investment, the assumption is that others will be handling day-to-day management, so ease of management is important.  An investment property will not be treated with the same loving care a family home will receive.  In both cases, resale potential is important, but for a family home it is less of a priority than in an investment property, where the top priority is to make money.  

Basic Principles of Livelihood Business

 

The Owner Sets the Goals

Most business advice is based on the assumption that every business owner's goal is to earn as much money as possible and grow the business as large as possible.  In fact, sometimes business owners are told they should aim for this goal, whether they want it or not.  Naturally, business owners feel they are entitled to choose their own goals, and they want business advice and assistance that helps them achieve those goals. 

Business and Personal Synergize

In a livelihood business, the owner's personality traits and family situation should be taken into account.  Unlike a business where the intention is eventually to sell the business, for a livelihood business, it is important to consider personal factors.  Since so much depends on the business, it is important to use every possible advantage.  Also, since an owner's reason for pursuing a livelihood business is so often based on personal factors, it is vitally important to plan a business that will meet those personal needs. 

In many cases, the entire point of self-employment is to meet personal goals, so the business must be planned to satisfy those personal needs or there is no point in having a business.  Sometimes business sacrifices must be made for the sake of personal needs.  For some livelihood business owners, this is the whole point of having a business.  It may be possible to have a more modest business and still make some money, while it may not possible to scale down a job to meet personal needs.

In a business treated as an investment, the objective is to keep the owner's personality separate from the business, because it could interfere with the eventual sale of the business.  There is also a feeling that it is unprofessional to allow family responsibilities to affect the business.  While this approach may be good for some businesses, in a livelihood business it may be counterproductive. 

For a livelihood business owner, there are business advantages gained by stamping the owner's personality on the business, either because of the owner's special skills or personal relationship and trust built up with the customers.  Until there is a reason to separate the business from the owner, the best advice is to make to most of the owner's personality in the business. 

Owner's Time and Energy are Valuable

In a livelihood business, the owner is likely to be doing most of the work of the business as well as managing the business and coping with family responsibilities.  This means that the owner's time and energy is the scarcest and most valuable resource in the business. 

In a business as an investment, the focus is on making the most effective use of capital and credit, which are the scarcest and most important resource.  There is usually an unspoken assumption that the business can devote as much time and energy as necessary to maximizing the return on capital and credit. 

In a livelihood business, the situation is reversed.  The emphasis should be on making the most of the owner's time and energy, and should take into account the non-business demands on the owner.  This may mean combining business and personal activities, or even limiting the growth of the business to let the owner devote time and energy to personal and family goals.  Plans to grow the business should make sure time and energy will be available without sacrificing the needs of either the business or the family. 

Aim for Steady & Secure Income

The goal of a livelihood business is to provide income, not equity.  While it is important to avoid using up equity without replacing it, the emphasis must be on income.  Investment in building the business must be secondary to investment in maintaining steady income. 

Since steady income is the priority, cash flow is a major concern.  This means that a livelihood business may be better off with customers who pay on time even if they are less profitable than slower-paying customers are.  In addition, since growth usually has a negative impact on cash flow, it may be best to put off investment in growth until the business has the cash flow to sustain it.

Optimum Size

A livelihood business needs to be large enough to meet the owner's goals, and no larger.  Once the owner's goal size has been reached, there is no need to grow the business beyond that point unless the owner decides to set new and larger goals. 

This size consideration has a number of implications.  The business only needs a market large enough to meet those goals, and enough internal organization to sustain a business of that size.  Unlike businesses that are meant to continue to grow, there is no point in setting up systems to support that growth, or developing markets larger than can be served at the goal size. 

Also, the business can use practices that are useful or convenient at a small size, but that would be detrimental to a larger organization.  This can include special personal treatment for certain valued customers, special treatment for employees, and very flexible routines and policies. 

Minimize Risk

Livelihood business owners usually prefer to avoid risk to their business and income.  As a result, they are usually cautious about their business and financial management. 

In particular, livelihood business owners are likely to avoid debt and installment payments, both in their business and their personal lives.  Since business income can be unpredictable, monthly payments can be a burden.  For this reason, it may be better to pay up front whenever possible, even though this eliminates the tax advantage of deducting interest. 

It is also wise to build and maintain a cash reserve for business needs and another for personal needs, to get though periods of slow business or cover unexpected expenses.  

Exit Strategy

In planning a livelihood business, an exit strategy is not normally a concern.  Most livelihood business owners will simply make a decision to close their business.  Sometimes there will be assets to sell, and occasionally the business itself can be sold.  More often, the owner simply decides to do something else. 

Closing a livelihood business usually is the result of the owner deciding to retire or change occupations, rather than a failure of the business. 

Because livelihood businesses normally have minimal capital investment, there is no need to recoup a return on investment.  This is different from the model of business as an investment, in which capital is raised at start-up and a return on that investment is expected in time.  Also, in many cases livelihood businesses have no debt, so there is no need to repay the debt from the proceeds of the sale of the business.  

Planning and Management

Livelihood businesses are different from business as an investment, and they need a different approach to planning and management.  The basic principles of livelihood business should be applied in planning and managing a livelihood business.

The Owner Sets the Goals

"If you don't know where you want to go, how will you know when you get there?"  Clearly stated goals are the first step in working toward those goals.

Financial and personal goals must be clearly defined.  Goals such as "earn enough to live on" or "time for my family" are not specific enough.  The financial goal should be a specific dollar amount, and should be accurate and realistic.  Personal goals should also be specific and realistic.  These goals should be kept clearly in mind at every stage of the growth of the business. 

The owner should take a realistic look at the feasibility of the business in light of the goals.  Not every business is profitable, not every profitable business can support a family, not every family has the same needs, and not every business owner can duplicate another successful business.  If the business will not work, it is better to find out during the planning stage, rather than after money, time and effort have been invested in starting the business. 

Each livelihood business owner has different goals, and will need a different approach to their business to satisfy those goals.  As a minimum, look at these points:

.         Is it steady?  Do customers buy the product or service over and over, or just once?  Is the business seasonal or dependent on the ups and downs of the economy?  How will the business provide a living during slow times? 

.         Is the market large enough to meet income goals?  What about present or future competition? 

.         Does it make sense that the owner can earn enough money with the amount of time and energy available to devote to the business?  Supporting a family takes a full time effort even with a job.  A business requires even more.  If the owner will not be able to work full time, is it possible to scale down the financial needs? 

.         If the proposed business is similar to other businesses, do those businesses earn enough to meet the owner's goals?  In other words, do the businesses support a family of similar size and with similar needs? Many business owners have other income such as retirement income or a spouse's salary.  If other business owners need a second income to back up the business income, that business probably is not sufficient to support the household.  

Business and Personal Synergize

Because, in a livelihood business, the owner has both personal and business goals, personal factors must be considered in planning the business.  Personal financial goals should be considered in financial projections for the business, and personal and family responsibilities should be included in operational planning. 

Also, the owner's personality, reputation and personal relationship with customers may be a vital asset for the business.  This asset should not be overlooked or minimized, because it may provide the edge the business needs to succeed.  Advice to avoid having the "owner be the business" is only useful when the intention is to sell the business.  For a livelihood business owner, that advice may be counterproductive. 

Personal financial management also affects the business.  Living frugally is a benefit to the business -minimizing the regular household expenses reduces the financial demands on the business and helps it survive slow times.  During good times, when the business may earn substantially more than the minimum the household needs, money should be set aside for future needs and for major purchases.  Personal savings are important for two reasons.  First, savings serve as a financial cushion for times when business is slow.  Secondly, savings are a way to build up the resources for major purchases that are usually bought on installments.  Self-employed individuals often find it difficult to qualify for financing, so they may not be able to finance vehicles or other items for which wage-earners at a similar income level would qualify.  Also, installment payments increase monthly expenses, and can make it harder for a business owner to weather a cash flow problem.

Owner's Time and Energy are Valuable

Business plans often overlook the time and energy required to implement the plans, while focusing on the financial requirements.  In a livelihood business, the owner's time and energy should be considered in the business plan, and the time frame should allow the owner to complete the business start-up tasks while also taking care of essential family responsibilities. 

As the business grows, often the owner's goal is met in stages - barely surviving, getting by, and doing well.  Alternatively, the business may earn enough profit at the cost of leaving no time for the family.  The next step in developing the business should to better meet the goals. 

This is one of the situations in which livelihood business owners find they are frustrated when the seek business advice.  Most business advisors will suggest marketing to bring in additional customers.  This can be counterproductive, because it requires an investment of time and money to reach a goal of a business that may still take more time.  A better approach is to work toward steady customers, steady cash flow and higher profit margins. 

Aim for Steady and Sufficient Income

In a livelihood business, steady income is important.  Planning should target markets that are steady rather than seasonal or variable.  Cash flow should also be considered.  If customers that pay slowly are part of the target market, the resulting cash flow issues should addressed in the planning stage.  Slow paying customers may not be worth the trouble, even if they are profitable.  If there is a large enough market of promptly paying customers, many livelihood business owners prefer to avoid slower-paying customers to save time and effort.

Sometimes the owner finds that the profit is not sufficient to meet the owner's needs.  Then the owner will need to determine how much the business can realistically be expected to provide in order to decide whether to invest in improving the business or not.  Sometimes it becomes clear that a business will not meet the owner's goal.  There are several options, including adding another profit center to the business, finding a non-business source of income, or reducing the income goal.  If none of these are feasible, it is a signal to cut losses and move onto other ideas.  Not every profitable business will meet the goals of a livelihood business.  If this is the case, the sooner the owner recognizes this and moves on, the better. 

Optimum Size

A livelihood business will have an optimum size based on the owner's goals.  This can simplify planning, because there is no need to plan for growth beyond the size the owner wants.  Since a livelihood business needs a market that is large enough to meet the owner's goals, it is not necessary to know the total size of the market, just whether it is large enough to meet the sales goals.  Similarly, there is no need to develop policies for a larger organization. 

Often, a livelihood business owner wants a business the right size to meet their personal goals.  Advice and help for building the business should be aimed at the owner's goal and not at a larger business.  Strategies that are intended to build a larger business may be overkill for a livelihood business.  This can consume time and money, and overwhelm the business owner. 

For example, advertising should be sufficient to bring in the number of customers the business needs.  Attracting more customers than the business can handle is counterproductive and a waste of advertising dollars.  Another example of overkill would be developing an elaborate human resource policy for a business that will have only a few employees. 

Once a livelihood business is solidly established, the owner may want to think about new goals.  Transitioning from a livelihood business means a shift in focus.  The owner's goals are still the driving force, but now there are new goals.

For a livelihood business, management strategies should respect the owner's goals and be tailored to meet those goals. Attempting to apply strategies suited to a different type of business is less likely to achieve the owner's goals.  

Minimize Risk

Business is always risky.  When the business provides the family's livelihood, more is at stake than if the business is an investment, so livelihood business owners have a greater need to minimize their risks. 

There are several risk reduction strategies that can be helpful to livelihood business owners.  This can include avoiding dependence on any one major customer, minimizing fixed expenses, and avoiding debt. 

A large number of smaller customers minimize the impact of any single customer, so losing one customer would have a smaller impact on the business.  The mix of customers can be influenced by the products or services offered, and by the choice of target markets.  Small businesses are often encouraged to seek large government and corporate contracts.  This can be a good strategy for growth, but for a livelihood business it can present a substantial risk unless there are enough other customers to sustain the cash flow of the business. 

Steady cash flow is essential for a livelihood business, so the focus should be on customers that pay promptly, and on products and services that have a steady market.  The owner should be cautious about pursuing seasonal or variable markets until the business has steady, adequate profit and cash flow.  Also, the owner is wise to avoid customers that tend to be slow to pay until the business can handle the cash flow issues. 

Frequently Asked Questions

Livelihood businesses are just for disadvantaged people, aren't they? 

No, not at all.  Many self-employed professionals operate livelihood business (dentists, psychologists, lawyers, accountants) and earn very good livings at it.  Because their services are in demand and command high prices, they can be fairly confident of their earnings.  These businesses are livelihood businesses because the owner's primary goal is to earn a living, and their household is dependent on the income.  The principles of livelihood business still apply to these businesses.   

The question of disadvantaged business owners comes up because many people with obstacles to ordinary employment choose to start a business.  This includes people with disabilities, people living in areas without suitable employment, and people with family responsibilities that make it hard for them work a regular schedule or to be away from home.  For some of these people, a business may be the best option.  Since they have so many obstacles to overcome, these individuals need more help starting a business, and therefore they get more attention and are more visible. 

Are all livelihood businesses service businesses?

Many are.  Service businesses are very good choices for livelihood business, because they tend to provide steady income for a minimal capital investment.  However, livelihood businesses are found in the retail, food service, and manufacturing sectors also. 

Isn't a livelihood business just "Buying a Job"?

Yes, it is.  This is exactly what the owner wants.  In some ways, starting a business to have a better way to earn a livelihood is no different than investing in education to have a better opportunity. 

"Buying a job" has been looked down on by people who are focused on building an investment.  And yes, "buying a job" would be the wrong approach for them.  Livelihood business owners are primarily interested in that livelihood.  If the business is their best opportunity, then it is worth it to them to invest in it. 

However, with a livelihood business, the owner has more opportunities than in a job.  They have the "job" they have invested in, and also the opportunity to build up the business by adding new products or services, reaching a new market, or adding employees.  Many businesses start as a livelihood business, and over time grow into an investment because of careful management by the owner. 

People should aim to build assets when they start a business.

There are sometimes concerns that a livelihood business will earn income, but will not accomplish anything to build lasting assets. 

Actually, people who start a livelihood business do so because they have a more pressing need for income than for asset building, so the focus is on income.  However, once the business achieves financial stability, with adequate steady income, it becomes possible to start building assets. 

Livelihood business owners have many options for building assets.  The most obvious is simply to invest some of their income, as they would if they earned a salary.  In addition, they have other options.  The business can be expanded as cash flow becomes available.  In addition, the owner can invest in assets related to the business.  For example, a building contractor may invest in a handyman-special house.  During slow times, they can work on the house, increasing its value so it can eventually can be sold or rented, becoming an asset. 

 

 

Marjorie Blizard
MCB Associates
Norwich CT
860-892-1231
admin@mcbassociates.com
www.mcbassociates.com