Have the bare instrumental tracks of your song that you want to record completely figured out. You want to be able to play through the whole song without messing up or getting stuck on any part. It helps to have all lyrics, vocals and other instrument parts ready before creating the demo. The demo track won't be the official track, so if you want more instrument parts in the song, they can be added at a later time.
Record a rough demo of your song using computer software or a four-track player. For computers, you can use Audacity, GarageBand or Pro Tools for the best results. The downside of using these programs will be the temptation to add effects and extensively edit the tracks. You want to make sure that you don't do much editing yet. The best tool for creating a demo is a four-track player that will capture the live sound of your tracks (see Resources).
Make a master copy of your demo to present. The demo that you record is basically like an outline of how the well-produced song will sound. If you have the demo song on your computer, burn it to a high-quality CD-R. If you have a cassette tape, you need to transfer the audio to your computer because some record labels will not accept a cassette.
Find a fairly cheap but professional recording studio near you. Some of the cheaper recording engineers can be hard to find. Myspace is a great tool to use for searching for low-key recording companies near you. Also, you should check with other bands that have had demos and ask where they recorded their material. Sometimes all it takes is a little word of mouth to find the best producer with cheap rates.
Send your homemade demo to who you want to record your official demo. This will give the recorder an idea of your song and what sounds he'll be working with. Set up a date to record the demo, and have everything prepared, including having the song as ready as possible to your liking. This might seem like a repetitive process to record again, but this is the best way to record a professional demo. A professional will be beneficial, especially if you have multiple tracks and instruments. You might need to do several takes and work with the producer after recording for the editing process. You'll then have your demo and be ready to send it to record labels.