U.S. Small Business Administration                       MP-31





                 HANDBOOK FOR SMALL BUSINESS





By SCORE Chapter 225

Hyannis, Mass.





                Management and Planning Series

_________________________________________________________________



Copyright 1989, by SCORE Chapter 225, Hyannis, Massachusetts.

All rights reserved.  This publication is protected under

copyright.  No part may be reproduced, transmitted or transcribed

without the permission of the author. SBA retains an irrevocable,

worldwide, nonexclusive, royalty-free, unlimited license to use

this copyrighted material.



While we consider the contents of this publication to be of

general merit, its sponsorship by the U.S. Small Business

Administration does not necessarily constitute an endorsement of

the views and opinions of the authors or the products and 

services of the companies with which they are affiliated.



All of SBA's programs and services are extended to the public on

a nondiscriminatory basis.

_________________________________________________________________



                      TABLE OF CONTENTS



PREFACE



INTRODUCTION



STARTING A BUSINESS



NAMING A BUSINESS



LEGAL STRUCTURE OF A BUSINESS

     Sole Proprietorship

     Partnership

     Corporation

     Subchapter "S" Corporation



LICENSES AND PERMITS



MANAGING A BUSINESS

     Management by Objectives

     Keeping Records

     Reviewing Records

     Taking Action

     Getting Help

     Essential Management Practices



FINANCING A BUSINESS

     Sources of Funding

     The Loan Proposal



THE BUSINESS PLAN



RECORD KEEPING



PRICING SERVICES PROFITABLY

     Types of Costs

     Calculating the Cost of a Service



PRICING PRODUCTS PROFITABLY

     Types of Costs

     Competition

     Markdowns

     Price Lining

     Markup

     Break-Even Analysis



ADVERTISING

     Reasons for Advertising

     Objectives of Advertising

     Advertising Media

     Help in Advertising



MARKETING

     Marketing Before Opening

     Marketing for an Existing Business



LOCATING A BUSINESS

     Selecting a City or Town

     Selecting an Area Within a City or Town

     Selecting a Specific Site



INSURANCE



RETAILING TIPS

     Image

     Customer Relations

     Credit Cards

     Markdowns

     Loss Leaders

     Pricing Policy

     Leases

     Protecting Against Crime

     Competitors

     Employees

     Suppliers



EMPLOYEES AND INDEPENDENT CONTRACTORS

     Classes of Employees

     Independent Contractors

     Casual Labor



MANAGING HUMAN RESOURCES

     Recruiting

     Interviewing

     Wages and Working Conditions

     Training

     Supervision

     Terminating Employment



COMPUTERS IN SMALL BUSINESS

     What a Computer Can Do

     Areas a Computer Can Improve

     What a Computer Cannot Do

     Buying a Computer



FRANCHISES

     Definition

     Advantages

     Disadvantages

     Disclosure Document

     Other Considerations



MANUFACTURING COST ACCOUNTING



INVENTORY

     Inventory Record Keeping

     Inventory Control

     Inventory Strategies



APPENDIXES

     A. Useful IRS Tax Publications

     B. Information Resources



_________________________________________________________________



PREFACE



SCORE, an acronym for Service Corps of Retired Executives, is an

independent, voluntary, nonprofit association. Although SCORE is

sponsored by, and receives financial aid from, the U.S. Small

Business Administration (SBA), it is not a constituent of that or

any other government agency.



The primary purpose of SCORE is to render a community service by

providing, without charge, the expert assistance of its volunteer

counselors to small businesses. Counselors receive no pay for

their services.



SCORE began in 1963 when certain groups of retired persons,

almost spontaneously, began offering assistance to owners and

operators of small businesses in various localities, such as

Worcester, Massachusetts; Wilmington, Delaware; and St. Louis,

Missouri. Later in the year, the SBA began to use these

volunteers to supplement its own small business assistance

programs and to recruit more volunteers for that purpose.



The response was so enthusiastic, and the potential of these

volunteers so enormous, that the SBA began to organize local

SCORE chapters and administer the program. Today, there are more

than 400 SCORE chapters in the United States and more than 12,000

volunteers.



While its counselors derive tremendous personal gratification

from assisting small businesses, SCORE exists solely for the

benefit of the small business community. For anyone in, or

considering entering into, a small business, SCORE offers many

services. These services include private, individual,

confidential counseling; training through specialized seminars,

workshops and conferences; information from books, pamphlets and

SBA publications; and advice on how to approach regulatory

organizations, local authorities, lawyers, accountants, town

officials, etc. Also, SCORE cooperates closely with other

volunteer organizations, government agencies, chambers of

commerce, colleges and universities, and other nonpolitical civic

associations to enhance the quality of life for the entire

community.



To locate the nearest SCORE chapter, call your area SBA office.

The number is found in the blue pages under "U.S. Government." 

You can also call SBA's Answer Desk at 1-800-8-ASK-SBA.

_________________________________________________________________



INTRODUCTION



In this final decade of the 20th century, small business owners

continue to demonstrate their extraordinary capacity to mobilize

resources and generate new jobs. There are more than 20 million

small businesses in the United States, and each year nearly a

quarter of a million new ones are started. Small business employs

six out of every ten people, accounts for the majority of new

jobs, is more flexible than big business in responding to

shifting markets and is able to bring new products and services

to market much faster than larger companies.



Realizing that small business is the backbone of this country's

competitive free enterprise system, Congress, in 1953, created

the U.S. Small Business Administration. SBA defines a small

business as one independently owned and operated, and not

dominant in its field. SCORE is part of the SBA's business

development program.



To start a new business and remain in business profitably, one

must be able to adapt to changes in the population, work force

and technology, and to the demands of a global marketplace. To

address these changing conditions, sound management and

organizational practices are more important than ever before. The

necessity of increasing productivity of employees, the

difficulties in recruiting qualified workers from a shrinking

labor force and the importance of devising ways to meet workers'

benefits will challenge managers of all small businesses.



America's future depends on the continued emergence of successful

small businesses. To be successful, those who start a new

business must be prepared. It is the purpose of this Handbook for

Small Business to provide information in the simplest terms to

help new and existing businesses to be successful. The mission of

SCORE is to help people get into business, stay in business and

make a profit.



More detailed information on the various facets of operating a

business is available. Much is contained in the publications and

video/audiotapes listed in the SBA booklet, The Small Business

Directory, available from SCORE or the SBA.



Handbook for Small Business is designed as an extension of the

SCORE concept of service to the small business community. It is a

comprehensive presentation of general information. To a

considerable extent, its contents reflect the personal and

practical experience, which is the hallmark of the SCORE

counseling procedure.



Handbook for Small Business is not offered as a substitute for

in-person counseling, but rather as an enhancement of counseling.

It is published with the understanding that the publisher is not

engaged in rendering legal, accounting or other professional

service.



Although this publication has been prepared by competent,

knowledgeable and experienced contributors, it should not be used

as a substitute for professional or other authentic sources in

specific situations. As pointed out repeatedly in the book, legal

or other expert assistance should be sought when required.

_________________________________________________________________



STARTING A BUSINESS



Some of the reasons people start new businesses are



   *  For financial independence



   *  To be one's own boss



   *  For creative freedom



   *  To fully use one's skills



   *  To be free of other people's policies and procedures



   *  For personal recognition





Perhaps the most important reason is to make a profit.



Whatever the business, to be successful there must be a need for

the particular products or services offered. To determine if your

intended business will fill a need, you must first address the

who, what, why, where, when and how of your proposed venture. The

following questions will help you:



   *  Is the business practical?



   *  What is the competition?



   *  What is the market for my product or service?



   *  What is the advantage of my business over existing similar

      businesses?



   *  Can I furnish a higher quality product?



   *  Can a demand be created for my product or service?



   *  What price will I charge, and how will I determine the best

      price?



   *  Am I prepared?



   *  Do I know where I can get help and information?



   *  What is an accurate description of the business?



   *  Where will I locate and why?



   *  Can I get an affordable lease at the best location?



   *  Are there zoning or fire regulations or other restrictions

      that must be considered when choosing a location and 

      opening the business?



   *  Will I need a permit or license?



   *  What will be the legal structure of the business?



   *  What will the business be named?



   *  What equipment and supplies will I need?



   *  What insurance will I need?



   *  What skills or experience do I have?



   *  What are my financial resources?



   *  What finances are necessary to start and maintain the

      business?



   *  How will I compensate myself?



   *  How will the business be managed day to day?



   *  How will I identify customers and how will I reach them?



   *  How will I hire and pay employees?



   *  How will I best serve the needs of my customers?



Because going into business is a risk, careful preparation is

essential. A business plan is critical to determining if the risk

of entering into a business is worth taking. Various chapters of

this Handbook discuss preparation in much greater detail. Once

the decision has been made to open the business, the remaining

steps are quite simple.



If the business is to be operated as a sole proprietorship, and

you use your name, it is usually unnecessary to register the

business with your city, town or state. (See "Naming a 

Business"). If you do not use your own name, the business may 

need to be registered with the municipal or town clerk.

Partnerships must be registered locally and corporations with the

state.



If you are to have employees, or will be a partnership or

corporation, you must obtain a business identification number

from the Internal Revenue Service (IRS) by filing Form SS-4.

Also, all businesses that have employees must register with their

state division of employment and training, and must pay

unemployment insurance taxes to the state as well as to the

federal government.

_________________________________________________________________



NAMING A BUSINESS



Every business needs a name. Because a name is an important asset

to a business, it should be selected carefully.



Before choosing a name, it is advisable to look at the types of

names in use by businesses similar to yours. To prevent choosing

a name already in use, check lists of business names available in

telephone books, libraries, city and town halls, and trade

journals. Names of corporations can also be checked at the

corporate division of the office of the Secretary of State. To

guarantee availability of your intended corporate name, contact

your state's corporate division for an application and fee

details.



There are different categories of business names.



   *  Trade names usually identify a company, for example "Coca

      Cola Company."  Any type of business may call itself a

      company.



   *  Trademarks are any words, names, symbols or devices, or any

      combination of these, used to identify the goods of a

      business and to distinguish these goods from the goods of

      others. The word "Kleenex" is a trademark, as are "Coca 

      Cola" and "SCORE."



   *  Service marks are used to identify and distinguish a 

      business that provides services rather than goods.

      "Greyhound" is a service mark for transportation services.



After choosing a name, you may have to file organizational forms

with the Secretary of State, or file a business certificate with

the municipal clerk at the town hall in which your business is

located. This certificate is called a "dba," which means "doing

business as."  You may need to file a dba if you conduct business

under any title other than the real name of the person,

corporation or limited partnership. Corporations, limited

partnerships and business trusts must be filed with the Secretary

of State. Business trusts may need to be filed with a local

government office.



A service mark or a trademark can be registered with the

Secretary of State and the federal government, although neither

registration is required. Trademarks are protected under common

law. However, by registering your mark, you do gain certain

exclusive ownership under statutory law. State registration is

usually processed within several days. Federal registration may

take several months. Registering with the state protects your

mark during the federal application period. In some states, a

mark must be in use before it can be registered. Details and

forms for registering a trademark can be obtained by writing to

your Secretary of State.

_________________________________________________________________



LEGAL STRUCTURE OF A BUSINESS



Before you open a business, you must select the legal structure

that will best suit your needs and those of your particular

business. There are three principal types of business structure:

the proprietorship, the partnership and the corporation. Each has

its advantages and disadvantages, which will be reviewed.



Sole Proprietorship



The sole proprietorship is usually defined as a business owned

and operated by one person. To establish this form of business,

one need only obtain the required license or permit and begin

operations. This is the most common form of small business

organization.



Advantages



Ease of Formation. A sole proprietorship is the easiest and least

expensive form of a small business to begin, as well the one with

the fewest legal restrictions. No government approval is needed

to begin operation. If the business is in your own name, just

open the door and start. If you have employees, the business must

be registered with the federal government on Form SS-4. State and

local government registration may also be necessary.



Sole Ownership. The proprietor shares the profits with no one,

and the decision making is vested in one person.



Control. The sole proprietor is in complete control of his or her

business.



Flexibility. Management can quickly respond to the needs of the

business and can make the day-to-day decisions so often critical

to a new business's success.



Freedom from Government Control. There are no special taxes for

this form of business, including no state or federal taxes.

Profits become the owner's personal income and are taxed as such.



Disadvantages



Unlimited Liability. The sole proprietor is responsible for the

full amount of business debts. These could exceed the

proprietor's total investment. Be aware that this liability

extends to all the proprietor's assets, including his or her

home.



Less Available Capital. Capital is limited to the owner's

personal assets and the funds the owner can borrow. Hence, this

form of business ordinarily has less capital available than the

other forms. Also, it is usually more difficult for a sole

proprietor to borrow money for the business.



Unstable Business Life. The business may be crippled or

terminated upon the illness or death of the owner.



Experience Limitation. Single owners operating with no or few

employees are often limited in experience and viewpoint compared

to those in the other forms of business.



Limited Business Deductions. Certain types of business deductions

are not available to the sole proprietor. These include workers'

compensation insurance and a portion of personal health and

injury insurance.



Partnership



A partnership is an association of two or more people as

co-owners of a business for profit.



Although not required by law, written articles of partnership are

customary and highly recommended. These articles of agreement

state the financial, material and managerial contributions to the

business by each owner. The articles should clearly spell out the

role of each partner and the share of the profits each will

receive. There should be provisions in the articles both for

dissolving the partnership and for buying out one or more of the

partners.



Partnerships may also be formed as limited partnerships, in which

the limited partner risks only an agreed-upon investment in the

business. The liability of limited partners is restricted as long

as they do not participate in the management of the business.



The services of an attorney who specializes in drawing up

articles of partnership is essential to start this form of

business.



Advantages 



Ease of Formation. While hardly as easy to form as a

proprietorship, a partnership is easier and less costly to form

than a corporation.



Flexibility. The partnership is more flexible than a corporation,

but less flexible than a proprietorship.



Direct Rewards. The partnership pays no federal or state taxes.

The rewards or profits from the business come directly to the

partners.



Financing. Capital is easier to obtain for a partnership than for

a proprietorship. There is more than one owner to draw upon for

funds.



Freedom from Government Control. There are no special taxes on a

partnership and, like a proprietorship, it pays no state or

federal income taxes. The partners pay personal taxes on the

profits.



Skills and Experience. The skills and experience of all partners

are available to assist in decision making.



Disadvantages



Unlimited Liability. Each general partner is liable for the

business debts incurred by the other(s) and by the business in

general.



Unstable Business Life. Upon death of one partner, the

partnership terminates. Rights of survival exist, so buy-out

terms must be stated in a written agreement.



Long-Term Financing. Partnerships cannot obtain long-term or, for

that matter, short-term financing as readily as can a

corporation.



Disposal of Interest. It is often difficult to dispose of a

partner's interest in the business. As indicated above,

partnership articles should contain a buy-out agreement.



Corporation



A corporation is a legal entity distinct from the individuals who

own it. It is the most complex of the three forms of business.



A corporation can only be formed by authority of a state

government. Check with your attorney or your state's agency that

supervises corporations for details of registering your business

and information on the laws affecting corporations.



As soon as you are notified that your organization has been

approved, you must file for a federal identification number using

IRS Form SS-4. As noted earlier, check into licenses and permits

before doing business.



Advantages



Separate Legal Existence. The corporation is distinct from the

individuals who own it.



Limited Liability. Individual shareholders are not liable for

debts of the corporation.



Ownership Readily Transferable. Owners invest in shares of the

business, which can be bought and sold.



Stable and Relatively Permanent. Death of a shareholder does not

end the business.



Relatively Easy to Secure Funds. The foundation of investors'

stock purchases gives confidence to lenders of the corporation's

stability.



Delegated Authority of Management. A board of directors and

officers give structure to decision making.



Skills and Expertise Available from Many. Boards of directors

usually are made up of members with a wide variety of

perspectives, in addition to their interest in the specific

corporation.



Disadvantages



Extensive Government Regulation. Corporations must be registered

with state government and are subject to more extensive

regulation by local and federal government than are solely owned

businesses or partnerships.



Complicated Tax Reporting. Taxation of corporations is totally

different from taxation of individuals. A corporation's dividends

affect tax returns of individual shareholders.



Double Taxation. Profits are subject to corporate tax and, if

distributed to the stockholders, are taxable as personal income.



Limited Incentive. If management does not share in the profits,

there is usually less incentive.



Expensive to Form and Maintain. Forming a corporation usually

requires professional help to draft Articles of Incorporation and

other documents, and on tax and legal matters throughout the

corporation's existence.



Excise Tax Paid Each Year. Various taxes are imposed on

corporations by all levels of government that are not imposed on

solely owned businesses or partnerships. Taxes, other than

federal, vary by locality.



"Subchapter S" Corporations



One form of corporate structure, known as a "Subchapter S"

corporation, allows small business corporations to have their

income taxed to the shareholders as if the corporation were a

partnership. Using this structure, the company can overcome the

double taxation feature of the regular or "C" corporation, yet

still retain the other benefits. An "S" corporation also permits

business losses to be passed on to shareholders.



To form an "S" corporation, the company must have no more than

35 stockholders, all of whom are individuals or estates (no

corporations or other entities), are residents of the United

States, and must derive a specified amount of its income from

active business. There is also a restriction on the amount of

business an "S" corporation can do; at present, that figure is

$35 million.



To summarize, in choosing a legal structure for a business, one

must consider the following:



   *  What is the risk and what is the amount of the investors'

      liability for debts and taxes?



   *  How will the continuity of the business be handled if

      something happens to one of the principals?



   *  What is the influence of applicable laws?



   *  Can you attract capital?



   *  What are the costs of starting and running the business 

      under the different structures?



   *  Can you afford the extra record keeping and reporting

      required by some structures?

 

   *  What legal structure best serves the purpose and goals of

      the business?



   *  What legal structure ensures the maximum adaptability of

      administration?



Professional advice is often needed to select the legal structure

for a business. However, one can always start a business as a

sole proprietor and incorporate at a later date.

_________________________________________________________________



LICENSES AND PERMITS



Once you have determined the purpose, type, name and structure of

your business, you must find out if a license or permit is

required. Many businesses require one or the other. To operate

without one may be illegal.



A license is a privilege granted by a legislative body at its

discretion. A permit is a right that anyone can obtain if the

requirements of the granting agency are met. Licenses and permits

may be granted at the town, city, county or state level. Table 1

lists departments that issue licenses or permits at the local

level.

     _______________________________________________________



          Table 1 - License or permit issuing bodies

     ______________________________________________________

          Department                  Authority

     ______________________________________________________



     Building                    Construction, renovations,

                                 zoning, signs



     Health                      Food handling, rest rooms, sewer

                                 connections, septic systems



     Council                     Licenses and permits



     Town Clerk                  Business certificates



     Police                      Alarm & business registrations



     Fire                        Safety inspections, alarm

                                 registrations



     Weights and Measures        Weighing and measuring, 

                                 packaging and labeling



     Conservation Commission     Wetland alterations, building

                                 and activity near wetlands



     Historic                    Signs, building and home

                                 alterations, business 

                                 activities

     _______________________________________________________



Exhibits 1 and 2 list types of businesses, trades and professions

that often require a license, permit or registration. These lists

may not be complete. Check with your attorney or local government

for requirements in your area.

_________________________________________________________________



Exhibit 1 - Businesses Frequently Requiring a License or Permit

---------------------------------------------------------------

Alcohol - sales and distribution



Amusement parks, carnival rides, music, dancing



Appliance testing labs



Asbestos abatement



Auto body repair



Auto sales - new and used



Child day care centers



Cigarettes - wholesale and retail



Collection agencies and finance companies



Concrete technicians - testing labs



Dairies, milk dealers and plants



Dancing schools



Detective agencies



Diesel fuel trucks



Elevators and operators, escalators



Employment agencies



Engine fuel and lubricants



Engineering and related fields



Entertainment



Firearms sale



Fishing, hunting, trapping



Food or beverage service, sale or preparation



Fortune tellers



Hawkers and peddlers - balloons souvenirs arts and crafts,

  flowers, auctioneers



Hazardous chemicals or flammables



Insurance agents, adjusters, brokers, advisors



Junk dealers



Lodging - hotels, motels, inns, bed and breakfasts,

  guesthouses



Motion picture operators



Motor vehicle appraisers



Notaries public, justices of the peace



Nursing homes



Outdoor advertising



Painters, riggers



Pet shops, riding schools, cattle dealers, stables, riding

  instructors, guard and hearing dog businesses



Restricted pesticide dealers and applicators



Solid fuel burning, construction supervision



_________________________________________________________________

_________________________________________________________________



Exhibit 2 - Professions and Trades Frequently Requiring a License

            or Registration

_________________________________________________________________



Allied health professions                Landscape architects

Architects                               Nursing

Athletic trainers                        Occupational therapists

Attorneys                                Optometry

Audiology                                Pharmacy

Barbers                                  Physical therapists

Chiropractors                            Physicians

Cosmetologists                           Plumbing and gas fitting

Dental examiners                         Podiatry

Dispensing opticians                     Public accounting

Drinking water supply facility operators Psychology

Electricians                             Radio technicians

Electrolysis                             Real estate brokerage

Embalming and funeral directing          Real estate sales

Engineers                                Respiratory care therapy

Exterminators (Insect)                   Sanitarians

Hairdressers                             Social workers

Health officers, certified               Speech pathology

Land surveyors                           Television technicians

Veterinary medicine

_________________________________________________________________



There are "blue laws" in many states; these pertain mostly to 

doing business on Sundays and holidays. Check with your police

department for restrictions that apply to your area.



One cautionary note: If you are buying a business or leasing a

location, do not take the word of the seller or landlord that

certain licenses or permits exist or can be grandfathered. Check

it out yourself.

_________________________________________________________________



MANAGING A BUSINESS



Business is an economic institution whose goal is economic

survival and whose activities are dominated by the profit motive.

Its primary purpose is to create and satisfy a customer and make

a profit. To achieve this purpose, business must be skillfully

managed.



Management is defined as the art of conducting and supervising a

business or as using judgment in business affairs. A manager is

one who actively directs, controls and manipulates his or her

business environment in a manner that takes account of the risks

involved in order to realize monetary gain.



Successful business leaders have stressed that good management

skills, whether in a large corporation or in a one-person

business, are vital to the success of a business. Many small

business people may be good at launching their venture, but weak

in managing the development and later stages of the business.

Here are ways to strengthen management skills.



Management by Objectives



Objectives are fundamental to the operation of a business. An

objective is a written statement of results to be achieved,

defining specific outcomes and establishing performance levels

for the business, its manager and its employees. Objectives must

be set for both the short and long range. They must be

reasonable, attainable, measurable, detailed and time specific.

They should be commitments, not facts; directions, not fate. An

objective must have a means and a plan of accomplishment.



An example of an objective might be "to increase my business from

$24,000 to $36,000 in the next 12 months."  Another might be "to

prepare, have printed and distribute 1,000 flyers to shoppers in

the local mall, all within two months."  Others might be "to hire

and train a new sales clerk before the end of the fiscal year" or

"to telephone each account receivable at the end of each month and

to personally visit accounts that are more than six weeks

delinquent."



Objectives should be written for every phase of a business, such

as sales, service, bookkeeping, advertising, employee relations

and marketing. Note that objectives should be written and

reviewed frequently.



Keeping Records



Know your figures and keep them up to date. Doing this is the

only way you will know how the business is faring on a daily,

weekly and monthly basis. Stationery and other stores have

simplified bookkeeping systems available, or you can engage the

services of an accountant or bookkeeper. Accurate records are

needed by business owners and managers not only to make informed

decisions, but also to support reports required by federal, state

and local government agencies. (See the section on record keeping

below.)



Reviewing Records



Keeping adequate, accurate records of your business permits you

to use them in the daily management of the operation. At the end

of each month you should compare the actual profit and loss and

cash flow statements with the goals identified in your business

plan. This way you can see your progress and take the proper

action. You should not only review the financial area, but also

evaluate marketing, sales, advertising and other operational

goals.



Taking Action



Do not procrastinate! If something is not working as you planned,

do something about it - now! Don't become paralyzed by inaction.

Every well-developed business plan should detail how the

following will be accomplished:



   *  Deciding - Determining what must be done.



   *  Planning and scheduling - Setting time tables.



   *  Performing - Following through on decisions.



   *  Controlling - Monitoring events as they occur.



   *  Coordinating - Ensuring that each objective is in harmony 

      and not at odds with the others.



   *  Recording and documenting - Keeping accurate and complete

      records.



   *  Analyzing and evaluating - Studying records.



Getting Help



Building a Work Force



As your business grows there will be a need to build the

organization. Some find it easier to turn to relatives or friends

for help without considering their work experience and knowledge.

This can be a mistake. Carefully consider the requirements of the

job and the qualifications of each candidate before hiring the

person. Also consider honesty, reliability, education,

personality and communication skills.



Professional Help



One does not have to hire full-time professional help to get

certain expertise, such as that of a lawyer, banker or

accountant. SCORE counselors are also available for business

advice. Using these resources may make it easier for you to plan

and execute your goals.



Essential Management Practices



The following are practices that are essential for a successful

business.



   *  Have a written business plan that sets the objectives you

      want to achieve in the next year and the next five years.



   *  Analyze progress with hard numbers.



   *  Know your break-even point and when you are on target in

      reaching it.



   *  Have your accountant/bookkeeper prepare and thoroughly

      explain financial reports, such as profit and loss

      statements, balance sheets and cash flow sheets, in 

      addition to those related to your tax returns.



   *  Even though your objective may not be to secure a loan, 

      talk to your banker about your business. Know your numbers.



   *  Know exactly how much it costs you to make a sale, perform 

      a service, make a repair, etc.



   *  Know how much inventory is on hand. Inventory is money. Old

      and obsolete inventory can paralyze your business.



   *  Solicit regular feedback from customers and make changes

      based on their suggestions.



   *  Join a trade association for your industry.



   *  Read the same publications that your competitors and

      customers read.



   *  Constantly scrutinize your competitors' advertisements and

      read their sales literature.



   *  Ask yourself the following about your competition: Is their

      business increasing or decreasing? How do you compare as

      far as quality, price, product line, exclusivity, service,

      reliability, location, warranties, delivery and courtesy 

      are concerned?



   *  Talk regularly about business-related subjects with other

      small business owners.



   *  Review financial and marketing strategies often.



   *  Have regular training sessions for and regular motivation

      meetings with your employees.



   *  Recognize your own weaknesses and get help in these areas.



   *  Review the business plan monthly.



   *  Tell everyone on the payroll exactly what his or her

      responsibilities are and what is expected.



   *  Treat employees as individuals.



   *  When an employee does a good job, tell him or her.



   *  Keep as accurate a set of records as possible.



   *  Analyze your records often and take any appropriate steps

      that may be indicated.



   *  Take pride in your business.

_________________________________________________________________



FINANCING A BUSINESS



One of the leading causes of business failure is insufficient

start-up capital. Therefore, a crucial element for business

success is adequate financing. Not only are funds required for

start up, but also to cover initial operating losses and provide

for growth.



As a general guide, one should have sufficient cash to cover at

least one year's operating expenses, which includes the owner's

salary and money to make regular loan payments. Almost all

business operators hope their business will grow, yet some fail

because, after a successful start, additional capital is not

available to meet the increasing financial demands of an

expanding business. It is crucial that the business plan contain

a detailed analysis of all capital requirements.



Once you have determined the amount of capital required to both

start and continue the business until it generates enough cash to

sustain itself, it is time to find a source of money.



Sources of Funding



Personal Assets



The best source of funding is your personal resources, such as

savings accounts and other marketable securities and investments

that are readily converted into cash. Even if you do not have

sufficient personal funds to entirely finance the business, plan

on using those funds, because most lenders require that you do

this before they will commit to a loan. Remember, showing others

you are willing to use your own funds indicates your confidence

in your business and your willingness to take the risk.



Family and Friends



An excellent source of funding is your family and friends. Either

can make a capital investment in the business in return for

partial ownership or as a loan. Usually, family or friends will

lend their money at a lower interest rate than a commercial

lender and with mutually agreeable terms for repayment.



It is very important in your dealings with family and friends

that you carefully review your business plan with them so that

they understand all the risks involved. Family and friends should

not be encouraged to invest in your business if they cannot

afford to risk their funds.



For IRS purposes, detailed records should be kept of any

financial assistance received from friends or relatives. Also, it

is recommended that a written agreement with the individual

providing funds be prepared.



Banks



Banks are the most common source of borrowed capital.

Historically, commercial banks have been the single largest

source of loans to business. Today, however, both savings banks

and savings and loan associations make business loans.



It is very important to establish a cordial working relationship

with your banker. Pick a bank that makes loans to your particular

type of business and one with which you feel comfortable. Your

banker can be a valuable partner in helping to determine the

right financing package for you.



A bank normally requires that first-time borrowers invest from 25

to 35 percent of their own money before the bank will consider a

loan. For example, if the business plan shows a need for

$100,000, the borrower would have to have $25,000 to $35,000 of

his and her own money in order to obtain $65,000 to $75,000 from

the bank. In the case of a restaurant, the bank may require the

borrower to invest 50 percent of his or her own money.



Banks require that you have a good personal credit record and, in

most cases, will require some form of collateral to secure the

loan. Collateral can be in the form of assets used in the

business or personal assets, including the unused equity in your

home.



Credit Unions



Many companies, labor unions and government agencies have credit

unions for their employees or members. Credit unions perform

functions similar to banks, including making personal loans to

their members. If you are a member of a credit union, check it

out as a possible source of a business loan.



Loan and Finance Companies



These are companies that specialize in making personal loans for

business purposes. Some of the larger companies make business

loans as well as personal loans.



Life Insurance Companies



Many life insurance policies have provisions for the accumulation

of a "cash value," against which funds may be borrowed. Some

policies call it the "loan value." The interest rate, established

in the policy, is usually less than the commercial rate. Check to

see if you, parents or friends have life insurance with loan

values as they can be an excellent source of financing.



Small Business Investment Companies



Small business investment companies (SBICs) are privately owned

companies licensed by the SBA to provide capital to small

businesses. SBICs look for businesses that have proprietary

products with high growth potential. Young, lower-risk,

aggressive companies are preferred. Usually, an SBIC wants a

share in the business.



Community Development Companies



Many communities have established community development companies

(CDCs) to help attract new business to their area. Frequently,

they are used to develop commercial or industrial parks. Check to

see if your community has a CDC. If so, you should talk to them.



Suppliers



In order to encourage sale of their products, many suppliers

provide retailers with shelving, display cases, refrigeration

units and so on at very favorable terms. Caution should be used

when financing assets through a supplier; be sure you understand

any commitment you have to make regarding purchasing the

supplier's product in the future.



Also available from many suppliers are extended payment terms,

enabling you to sell the merchandise before having to pay for it.

A supplier may offer goods on consignment.



Leasing Companies



An alternative to purchasing equipment with borrowed funds is to

lease the equipment. Items commonly leased are office furniture,

automobiles, trucks, computers and production machinery. The

leasing company maintains ownership of the item, although

sometimes agreements can be made by which you become the owner

after a specified time period.



Leasing allows you to conserve initial capital and offers

flexibility in acquiring the use of equipment for only a limited

period of time.



Private Investors



Some investors specialize in making loans to businesses. In many

cases, the investor(s) will require a partial ownership of the

business. Care should be taken in dealing with private investors

to see that your interests are properly protected. Investors can

sometimes be found in classified advertisements.



U.S. Small Business Administration



Congress has authorized the SBA to make loans for business

purposes, and has earmarked a special fund to enable the SBA to

make direct loans to eligible Vietnam-era and disabled veterans.

Certain handicapped individuals also may be eligible for a direct

loan. These special programs are contingent upon the availability

of funds.



Mostly, the SBA administers a guaranty loan program. These are

loans made by private lenders, usually banks, and guaranteed up

to 90 percent by the SBA. The maximum amount that can be

guaranteed by the SBA is $750,000.



The lender plays the central role in the loan delivery system.

The small business submits the loan application to the lender,

who makes the initial review and, if the application is approved

for submission to the SBA, forward it and an analysis to the

nearest SBA office. If the loan is approved by the SBA, the

lender disburses the funds.



Fact sheets explaining the various loan programs that the SBA

administers, including fixed lines of credit, are available from

the SBA. Also available from the SBA or SCORE are brochures

entitled "Business Loans From The SBA."



The Loan Proposal



When you approach a lender or investor for the purpose of

obtaining funds for your business, you must have the means of

telling your story in a straightforward and convincing manner.

The best way to do this is with a written loan proposal,

presenting all the pertinent information in a logical format.



Although a well-done proposal requires a considerable amount of

work, the effort is usually worthwhile. It indicates to a

prospective lender or investor that you thoroughly understand

your business and its financial demands. The proposal must be

thorough, concise and neat. It may be submitted in longhand, but

it is worth the money to have it typed. Cash flow charts may be

submitted in writing.



The proposal should answer most of the questions that will be

asked by a prospective lender and should present a convincing

picture. Tell it like it is, being totally honest. Overstatements

of facts and figures will not serve you well in the long run and

will be challenged by an astute lender. If you cannot prepare

this yourself, get help. It will pay off!



Exhibit 3 provides an outline of a typical loan proposal.

_________________________________________________________________



            Exhibit 3  - Outline for a Loan Proposal

_________________________________________________________________



     I.   Cover Page

          A.   Name, address and telephone number

          B.   Name and title of principal(s)

          C.   Amount of loan (investment) requested

          D.   Purpose of the loan (investment)

          E.   Repayment terms of the loan



     II.  Description and Summary of the Business

          A.   Length of time the business has been operating

          B.   The business's historical trend

          C.   The nature of the business What does it do?

          D.   What is unique about your product line or service?

          E.   What or who is your market?

          F.   The business's competition

          G.   The business's long-term growth plan

          H.   Trends in your industry



     III. Management

          A.   Your management experience

          B.   Your management team

               1.   Table of organization

               2.   Brief resume of key individuals and

                    their responsibilities

               3.   Current staff or work force level and        

                    future needs

               4.   Existing backup

          C.   Your accountant and attorney



     IV.  The Loan (Investment) Request

          A.   Justification of the loan

          B.   Details of the loan request

               1.   Amount needed

               2.   How the funds will be used

               3.   Collateral available for a loan and its value

               4.   Repayment terms of the loan

               5.   Ability to repay a loan



     V.   Financial Data

          A.   Financial statements

               1.   For an existing business, three years of     

                    historical and any interim statements

               2.   Balance sheets

               3.   Profit and loss or income statement

          B.   Projected cash flow analysis for at least the next

               12 months, including loan (investment)

          C.   Sources and amounts of any other loans or         

               investments to be put into the business

          D.   Personal financial statement



     VI.  Credit Information

          A.   Banks at which you maintain accounts

          B.   Banks at which you have borrowed money

          C.   Trade suppliers

          D.   Other creditors



     VII. Miscellaneous

          A.   If incorporated, copy of articles of incorporation

          B.   If renting, copy of lease

          C.   Type and amount of business insurance coverage

          D.   Aging of accounts receivable

          E.   Copies of business and personal tax returns

_________________________________________________________________

_________________________________________________________________



THE BUSINESS PLAN



The importance of business planning cannot be over-emphasized. A

business plan is an operating tool that forces you to take an

objective view of your business and provides the means to

identify areas of strengths and weaknesses. It pinpoints needs

you might otherwise overlook, spots problems before they arise

and points out what must be done to make a profit and increase

your business. A business plan can help you avoid entering into a

venture that may fail. If the plan shows the business to be

marginal, the hours spent writing a plan will save you the high

cost of a business failure.



A business plan



   *  Clearly states both the short- and long-range objectives

      of the business.



   *  Provides the direction or plan for achieving these

      objectives.



   *  Provides financial forecasts based on your estimates of the

      future and your business experience.



   *  Provides budget guidelines, including projected cash flow

      analysis and income statements.



   *  Gives a break-even analysis of your business.



   *  Helps determine the amount and kinds of financing best for

      your business.



   *  Gives banks, investors and suppliers useful information 

      they need to make fast and accurate decisions about your

      business.



   *  Forces you to think through every aspect of your business

      and recognize opportunities for growth and profit.



   *  Provides financial information so that the past can be

      compared to the present and future.



It is not possible in this Handbook to present an example of a

completed business plan. Exhibit 4 contains an outline listing

the contents of the plan.



Remember, a business plan is a dynamic, not a static, tool. After

it is prepared it must be used often. It is flexible, not rigid,

and should be altered as conditions change. Most important is

that the owner(s)/manager(s) prepare the report.



If you have trouble understanding how to write a plan, be quick

to get help. SCORE can be of great assistance. Also, an

accountant can help in preparing the financial reports. However,

only you can set the objectives of the business only you can

decide where you want the business to go and what you want it to

be. Do it!

_________________________________________________________________



RECORD KEEPING



Experience has clearly demonstrated that for a person about to

start a business, an adequate record keeping system will increase

the chance of survival and reduce the probability of failure.

Similarly, for the established business, experience has shown

that a good record-keeping system increases the chances of

remaining in business and of earning larger profits. How? Because

accounting records can furnish the following timely information:



   *  Amount of business done in cash and credit.



   *  Amount of business tied up in receivables.



   *  Amount of collections and losses from credit sales.



   *  Aging of accounts receivable and amount of credit given to

      delinquent accounts.



   *  Amount of cash on hand and in the bank.



   *  Whether business records agree with bank statements.



   *  Amount owed to creditors and suppliers.



   *  Gross margin.



   *  Total expenses.



   *  Amount of weekly payroll.



   *  Adequacy of payroll records for withholding, etc.



   *  Payment of taxes and deposits of withholding.



   *  Net profit earned and taxes owed.



   *  Which product or service makes a profit.



   *  Which product or service loses money.



   *  Amount of money invested in inventory.

_________________________________________________________________



            Exhibit 4  Outline of the Business Plan

_________________________________________________________________



Cover Sheet - Contains name of the business, names of 

principal(s), address and phone number of business, name and

address of person who wrote the plan.



Statement of Purpose - An operating and policy guide for your

business. If funds are needed, state how they will be used and

what effect these funds will have on the business.



Table of Contents



Part I - The Business



     A.   Description of the business

          1.   Products sold, services offered

          2.   Capital equipment and value



     B.   Market

          1.   Who buys your product or service

          2.   Who needs it

          3.   Size of the market

          4.   Growth potential



     C.   Location of business

          1.   Physical features of site

          2.   Whether it is leased or owned

          3.   Renovations needed

          4.   Description of neighborhood

          5.   Zoning restrictions, if any

          6.   Other businesses in the area

          7.   Advantages and disadvantages of the location

          8.   Whether relocation is necessary and, if so,       

               effect on operating costs



     D.   Competition

          1.   Names and addresses of competitors

          2.   Their share of market

          3.   What you have that your competitors do not

          4.   Future effects of competitors

          5.   Comparison of your site inside and out to         

               competitors'



     E.   Management

          1.   Your background and experience

          2.   Experience of management employees

          3.   Analysis of strength and weaknesses of

               management, including your own

          4.   Needs for the future and plans to hire  

          5.   Job descriptions and training program



     F.   Personnel

          1.   Number of employees and experience

          2.   Strengths and weaknesses

          3.   Skills needed for future

          4.   Plans to hire and training program



     G.   Application and effect of loan or personal funds

          1.   How much is needed

          2.   What for - inventory, equipment, renovations, etc.

          3.   How funds will help business

          4.   What happens if funds are not available in full



     H.   Objectives of business and plans to achieve them

          1.   List objectives for each part of your business

          2.   Describe your plan to achieve each objective



     I.   Summary - Summarize all thoughts and ideas about

          the business so that they make sense to you and readers



Part II - Financial Data



     A.   Sources and application of funding - A restatement of

          Part I - G. Shows up in cash flow projections



     B.   Capital equipment list - but list depreciable assets on

          income statement



     C.   Balance sheet - Shows assets, liabilities, net worth

          at a given time



     D.   Break-even analysis - The sales or income point at

          which the company breaks even



     E.   Income projections (Profit and loss statements)

          1.   Three-year summary

          2.   First year detailed by months

          3.   Second and third years detailed by quarters

          4.   Notes of explanation



     F.   Cash flow projections

          1.   First year detailed by months

          2.   Second and third years detailed by quarters

          3.   Notes of explanation



     G.   Deviation analysis - Compares actual income and         

          expenses to projected income and expenses on a         

          month-to-month basis. Spots strengths and weaknesses.



     H.   Historical financial reports for existing business

          1.   Balance sheets for past three years

          2.   Income statement for past three years

          3.   Tax returns



Part III - Supporting Documents

Includes personal resumes, credit reports, job descriptions,

contracts, legal documents, letters of intent and anything that

has to do with the plan

_________________________________________________________________



Records provide a tremendous amount of information. Most

important is that the system be



   *  Simple to use.



   *  Easy to understand.



   *  Reliable.



   *  Accurate.



   *  Consistent.



   *  Able to give information on a timely basis.





The following information must be recorded:



   *  Cash receipts.



   *  Cash disbursements (expenditures).



   *  Sales.

 

   *  Purchases.



   *  Equipment.



   *  Inventory.



   *  Accounts receivable (amount customers owe).



   *  Accounts payable (what business owes).



From the record keeping system, the owner/manager must determine

the following information:



Daily



   *  Cash sales and cash receipts.



   *  Cash on hand.



   *  Bank balance of business.



   *  Monies paid out -- both cash and check.



Weekly



   *  Accounts receivable.



   *  Accounts payable.



   *  Payroll - in detail.



   *  Taxes - sales, social security, withholding, etc.



Monthly



   *  All journal entries posted as like elements to

      general ledger.



   *  Cash flow statement.



   *  Profit and loss statement.



   *  Balance sheet.



   *  Reconciliation of bank statement with own books.



   *  Petty cash balance.



   *  All federal taxes deposited and withholding and

      sales taxes paid.



   *  Accounts receivable aged to 30, 60 and 90 days.



   *  Inventory worked to remove dead stock and order new.



Every business needs controls. If you do not control the

business, it will control you. Adequate record keeping provides

information for preparation of the statements that provide the

control.



There are five control statements that give a clear picture of

your business:



   *  Cash flow sheet - Shows the cash in compared to the cash

      out by subtracting disbursements from receipts.



   *  Income statement - Shows total sales and receipts, cost of

      sales, gross margin, expenses and net profit, all expressed

      in percentage of sales.



   *  Balance sheet - Shows assets, liabilities and net worth of

      the business.



   *  Break-even analysis - Shows at what level of sales the

      business breaks even. Break-even analysis is based on

      gross margin.



   *  Deviation analysis - Compares actual performance to

      projected performance.



These are the early warning systems, the problem indicators and

the solution indicators. If there is to be only a single

statement available monthly, it should be the cash flow

statement, because this will show how well cash is managed.

Obviously, cash in must be greater than cash out.



Before you open the door of a new business, be certain a good

record-keeping system is in place. If you do not understand the

need for this, it indicates you do not have enough managerial

know-how to run a business.



If possible, do the record keeping yourself. If not, hire a

part-time bookkeeper, use a business service or public

accountant. SCORE can help you set up a system.



In any case, be sure - absolutely sure - that you understand what

records are required for your business. If a system is designed

by someone else, understand the system. IRS Publication 583 is

helpful for the beginner.

_________________________________________________________________



PRICING SERVICES PROFITABLY



Successful business owners know that the greatest opportunity for

success and growth comes through quality of service and customer

satisfaction. However, the service must be priced properly or

there will be no profit.



Many small businesses do what they consider a good volume of

business, but do not make any money. Why? Because of improperly

priced services or products. Some make a profit on certain

services, lose money on others and do not know which is which.

Remember, the right to establish price is yours - 100 percent

yours.



Types of Costs



For the purposes of this section, costs are defined as



   *  Fixed costs - Costs that remain the same in any time period

      despite changes in business activity. These include rent,

      insurance, utilities, office supplies, salaries,

      depreciation, legal services, accounting and property 

      taxes. These expenses are usually called overhead.



   *  Variable costs - Costs that usually vary in proportion with

      business activity. These include materials used in 

      manufacturing, goods purchased for resale, labor and

      commissions. In a service business, labor may not be

      variable.



 Calculating the Cost of a Service



A simple, easy-to-understand method of calculating the cost of a

service is by basing the cost on billable hours. Because services

must be provided by people, begin by determining the number of

hours available for billing in a year. Then calculate the

break-even point by dividing the overhead and labor charges by

the billable hours and adding the cost of any materials used.

Your desired profit is then added to the break-even point. Two

examples are shown below.



Example 1



Two people experienced at bookkeeping open a business together.

They estimate their overhead expenses as shown in Table 2.



The two entrepreneurs decide they each want a salary of $25,000.

In this case, the salary is actually an overhead expense, but we

will treat it separately because the principals decide they want

to make a profit of 20 percent on their salaries but only a

10 percent profit on their overhead. These expenses are set out

below in Table 3.



    Table 2 - Estimated overhead expenses

    -------------------------------------

    Expense       Amount per year

    -------------------------------------

    Rent              $9,600

    Utilities          1,800

    Telephone          1,200

    Office supplies    1,200

    Insurance            600

    Depreciation       2,500

    Advertising        2,000

    Miscellaneous      1,500

                     -------

      Total          $20,400

    -------------------------------------





    Table 3 - Estimated total revenues required

    -------------------------------------------

    Expense                    Amount per year

    -------------------------------------------

    Owners' salaries              $50,000

    Profit on salaries (20%)       10,000

    Overhead                       20,400

    Profit on overhead (10%)        2,040

                                  -------

      Total                       $82,440

    ------------------------------------------- 



The number of working days per year is 260 (52 weeks x 5 days).

Subtracting holidays, vacations and sick days, the actual number

of work days total 230. Two people working 8 hours per day

results in 3,680 hours (230 x 2 x 8 = 3,680). However, the

bookkeepers estimate 20 percent of these hours (736) will not be

spent working for clients. Therefore, the billable hours for this

company total 2,944.



To determine what rate to charge, the bookkeepers divide the

desired revenue ($82,440) by the number of billable hours

(2,944), resulting in an hourly rate of $28.00. Profit is then

calculated by subtracting total overhead and salaries from the

proposed revenue ($82,440 - $70,400 = $12,040). This is the profit

to be realized, assuming the billable hours figure is realistic

for the first year of operation.



Example 2



DWA Repair Service employs ten repair technicians, who are paid

$18,000 each. Social Security tax, unemployment tax, workers'

compensation insurance, health insurance and retirement benefits

cost an additional $5,400 each, for a total cost of $23,400.

Because there are ten technicians, the yearly labor charge is

$234,000.



DWA Repair Service's overhead expenses are listed in Table 4.





    Table 4  - DWA repair service's overhead expenses

    -------------------------------------------------

    Expense                       Amount per year

    -------------------------------------------------

    Salaries (including owner)       $60,000

    Payroll taxes and costs            3,700

    Insurance                         13,000

    Utilities                          2,600

    Rent                              10,000

    Telephone                          1,200

    Depreciation                       5,000

    Miscellaneous                      2,500

                                     -------  

      Total                          $98,000

    -------------------------------------------------



To break even, DWA Repair must have a total revenue of $234,000

(labor) plus $98,000 (overhead) = $332,000. All of it must come

from the income of the repair service based on the hourly rate

charged.



The owner of the business has calculated the billable hours as

follows:



     Work days per year = 52 weeks x 5 days =

     260 days. Subtracting 15 vacation days,

     7 sick days and 8 holidays leaves 230 work

     days.



     Work hours = 230 work days x 8 hours =

     1,840 per year for each repair technician.



However, from experience, the owner knows that he cannot keep his

crew working eight hours per day as there is lost time between

jobs. He deducts 10 percent of the hours as nonbillable, leaving

1,840 - 184 = 1,656 billable hours per technician. Because there

are 10 technicians, the total billable hours = 1,656 x 10 = 

16,560 per year.



To determine the hourly labor cost, the owner divides the labor

cost per year ($234,000) by the billable hours (16,560). The

result is $14.13 per hour.



To find total cost, overhead must be added. Total overhead per

year is $98,000. When divided by billable labor hours of 16,560,

overhead equals $5.92 per hour. Thus, the total hourly cost of

labor plus overhead is $14.13 + $5.92 = $20.05.



The owner knows that if he charges only the hourly rate based on

actual cost, he will merely break even. In order to make a profit

so that he can reduce debts, buy new equipment, provide working

capital and provide a return on investment, the owner decides to

add 25 percent on his labor, and 30 percent on his overhead, as

shown in Table 5.



    Table 5  - Calculation of final hourly rate

    -------------------------------------------

    Labor cost per hour              $14.13

    Profit on labor (25%)              3.53

    Overhead cost per hour             5.92

    Overhead profit (30%)              1.78

                                     ------

      Total                          $25.36

    -------------------------------------------



The owner decides to charge $25.50 per hour. This hourly rate,

multiplied by the billable hours of 16,560, results in an income

of $422,280.00 per year. Thus, the income ($422,280) minus the

expenses ($332,000) equals profit of $90,280.



Each year this calculation must be repeated to include any

changes in labor or overhead.



If any materials are used in the repairs, they must be figured

into the cost per job. A profit percentage is also added to the

materials charge.



Remember, the charge for a service equals materials plus labor

plus overhead, with a profit built into each component.

_________________________________________________________________



PRICING PRODUCTS PROFITABLY



In setting prices, the objective is to maximize profit. Profit

has just three ingredients: costs, selling price and sales

volume. In this section we are concerned with selling price,

which has about the same elements for all types of businesses.

For example, in manufacturing, the elements of the selling price

are direct costs, manufacturing overhead, nonmanufacturing

overhead and planned profit. In a service business, the elements

are materials and supplies, labor and operating expenses, planned

profit and competition. (See "Pricing Services Profitably.") In a

retail business, the elements of price are costs of goods sold,

overhead, sales volume, planned profit and, often, competition.



Types of Costs



In the retail business, there are two types of costs: the cost of

acquiring the goods, called cost of goods, and the cost of

operating the business, called operating expenses.



Cost of Goods (Variable Cost)



Cost of goods is known as a variable cost or expense because it

varies depending upon the amount of goods purchased for resale

and the price of the goods. Cost of goods includes the price paid

for goods, freight charges, import duties, handling charges and

any commissions.



Operating Expenses (Fixed Cost)



Operating expenses are a fixed cost because they usually do not

vary with the volume of business. Operating expenses include

wages, management salaries, rent, utilities, office supplies,

insurance and any other costs attributed to the operation of the

business.



Planned Profit



Planned profit is whatever the owner/manager calculates the

business will generate. Usually, return on owner's investment,

fruits of labor, plans for expansion or relocation, return to

stockholders, demand for the product and competition are

considered when calculating the amount of planned profit.



Competition



In setting prices, small businesses should consider prices

charged by competitors for similar or comparable items. A small

business should not try to compete pricewise with large stores,

discount houses or supermarkets. This type of competitor can

charge less because of buying power. Pricing should be based on

the quality or type of service offered, as customers will pay

higher prices for merchandise to obtain the services they want.



Pricing Below Competition



Beating the competitor's price is effective only if it greatly

increases sales. This strategy reduces the profit margin.

Consequently, cost of goods and/or operating expenses must be

reduced and inventory must be closely controlled; the product

line must be limited to fast moving items; and services must be

limited or eliminated.



Pricing below competitors often backfires because every cost

component must be constantly monitored and adjusted. Competitors

can retaliate by matching the lower prices, at which point both

businesses lose.



Pricing Above Competitors



This strategy depends on whether non-price considerations are

important enough to customers to justify higher prices. These

considerations include specialized services (such as delivery,

product knowledge, exclusive location, brand or designer names),

satisfaction in handling complaints, in-home demonstrations and

so on.



Markdowns



A markdown is a reduction in the price of any item brought about

by overbuying, overstocking seasonal merchandise, misjudging

customer response, poor personal selling or competition. This

technique is used to avoid being left with dated merchandise that

will be difficult to sell. In setting a markdown price, the

original cost of the merchandise should be recovered if at all

possible. If the selling price originally was high enough, a

small profit is possible.



Price Lining



This is a marketing strategy based strictly on price. A specific

portion of the buying public is targeted by carrying products in

a specific price range. For example, a retail store carries an

exclusive line of women's undergarments or an expensive designer

perfume line.



Price lining is only successful if there is little or no

competition. It works to the benefit of the retailer because it

limits the merchandise line and makes inventory and buying

easier. It is also easier for the customer to select merchandise,

so that fewer salespeople may be needed.



Markup



One technique of establishing price is to mark up goods sold by

adding a percentage to the total cost of the goods. For example,

a retailer purchases shoes at $25 per pair and marks them up

60 percent for resale.



   Cost of shoes per pair   = $25 

   Markup percentage        = 60% 

   Markup amount per pair   = $15 

   Selling price per pair   = $40



The 60 percent markup must cover all operating expenses,

including the owner's salary and profit.



A given markup is satisfactory depending on the sales volume.

When beginning a business, it is difficult to determine how much

goods must be marked up because the new business has no history

of sales on which to base future sales projections. An

experienced retailer usually can use markup successfully,

particularly if he or she has historical information regarding

the movement of merchandise.



Suppliers often suggest a retail price, which makes it easy for

the retailer. If there is a competitor selling the same or

comparable merchandise, check the competitor's retail price. It

may dictate your price.



Break-Even Analysis



A break-even analysis can be used by a new or old manufacturing

or retail business. It indicates the amount of revenue at which a

business will neither lose nor make money. For a retail business,

the break-even point is when sales equal the cost of goods plus

operating expenses, or



                S=FC+VC



where   S = sales in dollars

       FC = fixed costs or operating expenses

       VC = variable costs or cost of goods.



From a strict accounting standpoint, cost of goods cannot be

determined until an inventory has been taken, because cost of

goods is determined as follows:



         Inventory at beginning of a period +

       Purchases during the period - Inventory at end

          of period = Cost of goods sold



Thus, the break-even analysis involves a variation in the

break-even formula because the total cost of goods is not known.

First, gross profit (also known as the gross margin or

contributing margin) on sales is determined as follows:



       Cost of sales - cost of goods = gross profit



The break-even point is then calculated as



       FC (operating expenses)

       -----------------------

          GM (gross margin)



Earlier, an example of a retailer buying shoes for $25 a pair and

selling them for $40 a pair was used. The gross margin on each

pair of shoes sold was



       Selling price = $40.00 or 100%

       Cost of shoes = $25.00 or 62.5%

       ---------------------- 

        Gross margin = $15.00 or 37.5%



Note that the gross margin and cost of goods (variable unit cost)

are expressed as percentages of the sales price.



Let's assume the shoe retailer has operating expenses (fixed

costs) of $75,000 per year. The break-even point is



       FC ($75,000)

       ------------

       GM (37.5%) = $200,000 in sales



Sales of $200,000 mean the retailer must sell 5,000 pairs of

shoes at $40 per pair to break even. Assume the retailer cannot

sell 5,000 pairs of shoes. To break even, he must raise his

price, which will raise his gross margin. The question is how

much the retailer will have to raise his price to break even.



Assume the retailer determines that he can sell the shoes for $50

a pair.



       Selling price = $50.00 or 100%

     - Cost (shoes)  = $25.00 or 50%

       ------------- 

       Gross margin  = $25.00 or 50%





With operating expenses of $75,000, the sales volume to break

even is



       FC ($75,000)

       ------------

         GM (50%)   = $150,000 of sales



At a price of $50 per pair, the retailer now has to sell 3,000

pairs of shoes to break even. The retailer is confident he can

sell this volume, but he will not make a profit selling at $50

a pair. He would like to realize a profit of 10 percent on his

operating or fixed costs ($75,000 x 10% = $7,500). To calculate

the volume of sales required to earn this profit, he adds the

profit to the fixed costs. If he holds the price at $50 for a

gross margin of 50 percent, the sales needed to realize this

profit are



       FC + profit ($75,000 + $7,500)

       ------------------------------

                 GM (50%)             = $165,000 in sales



This level of sales will cover the variable expenses (cost of

goods), the fixed expenses (operating expenses) and a profit of

$7,500. To generate $165,000 in sales, he must sell 3,300 pairs

of shoes at $50 per pair.



Because the retailer has no competition, he is confident he can

sell this volume of merchandise and can also raise the unit price

of the shoes. He decides to do a calculation using a gross margin

of 55 percent.



       FC + profit ($75,000 + $7,500)

       ------------------------------

                  GM (55%)            = $150,000 in sales



The unit selling price or price per pair of shoes at 55 percent

gross margin is determined by dividing the unit cost by the

percent of variable costs.



       VC = 100% - GM%

          = 100% - 55% 

          = 45%

 

       Unit cost of shoes ($25)

       ------------------------

               VC% (.45)        = $55.56 or $56 selling price



As a check



       Unit selling price = 100% = $56

     - Variable cost      = 45%  = $25

       -------------------------------

       Gross margin       = 55%  = $31



Let us determine if $150,000 of sales at a gross margin of

55 percent will provide a profit of $7,500.



       Today's sales  = $150,000 or 100%

     - Cost of sales  =   67,500 or 45%

       ---------------------------------

       Gross margin   =   82,500 or 55%

     - Fixed costs    =   75,000

       -------------------------

         Profit       =   $7,500



If a business manager calculates the gross margin for all

merchandise sold, the price structure that will generate a level

of revenue to purchase goods, pay operating expenses and make a

profit can be determined.



The gross margin percentage can be used as a monitor of the

sales/purchasing area of the business. The gross margin

calculation allows the manager to buy goods that can be sold at

or higher than the desired margin. Pricing policy should be based

on gross margin.



If an item of merchandise has a low sales volume, it should have

as high a gross margin as possible or else it will not be

profitable. If a business does a high volume of sales, it may be

possible to have a pricing policy based on a lower gross margin,

subject to calculation.



In review, the break-even point is the level of sales that will

just cover fixed plus variable expenses. By determining the gross

margin for each item of goods sold, the level of sales needed to

break even can be determined as follows:



           Fixed cost

          ------------

          gross margin = break-even sales



By adding planned profit to fixed costs, the level of sales to

make the planned profit can be determined. To determine the unit

sales price of an item at a desired gross margin the formula is



          Cost of goods per unit

          ----------------------

              (100% -  GM%)      = unit selling price



Examples: Shoes cost $25 per pair. What is the selling price at

60 percent and 70 percent GM?



          $25.00                     $25.00

      -------------              --------------

      (100%) - 60%) = $62.50      (100% - 70%)  = $83.33





Many businesses have gone astray by ignoring the need for

break-even analysis. Remember that increased sales do not always

mean increased profits. Goods must be priced properly.

_________________________________________________________________



ADVERTISING



No matter how wonderful or unique your product or service is,

nothing sells itself. Potential customers must be told about your

product or service and how they can purchase it.



Informing potential customers about your product, service or

business is called advertising, derived from the Latin "ad,"

meaning "toward," and "verture," meaning "to turn." Together,

the meaning is to turn toward a product or business.



Advertising is a paid communication, the purpose of which is to

impart information, develop attitudes and induce favorable action

for the advertiser. The means of communication can be as humble

as a matchbook, as traditional as a barber's pole or as elaborate

as a celebrity-packed commercial. Remember the beer commercials

with all the athletes at the bar?



Reasons for Advertising



Why advertise? The specific purposes of advertising are as

numerous as the many different products and services promoted. In

general, there are three broad purposes:



   *  To promote consumer awareness of the business and

      its products and services.



   *  To stimulate sales.



   *  To establish or change a firm's image in the eyes

      of the consumer.



Objectives of Advertising



Objectives will vary with each type of business. Usually, one or

two will be of most importance to a business. Some typical

objectives are to

 

   *  Increase store traffic.



   *  Acquaint customers with new products.



   *  Promote special events, such as a clearance sale, a new

      location or the opening of a new business.



   *  Change the company image.



   *  Keep the business name and location before the public.



   *  Inform customers of special services available, such as

      delivery service, alterations or credit plans.



   *  Introduce new employees to the public.



   *  Tie in with a supplier's national promotions.



   *  Capitalize on the seasonal nature of a product.



   *  Offer get-acquainted incentives.



   *  Emphasize quality of product and services.



The most important asset of a small business is quality, and

advertising is the way to let potential customers know that it is

the mainstay of your business.



Unfortunately, some small businesses underestimate the value of

advertising or are basically uninformed about how to budget money

for advertising, how much to spend and where to advertise. A new

business should be prepared to spend about 5 percent of projected

gross revenue on advertising. An established business should

budget 2 to 3 percent of gross revenue.



Advertising Media



Once the advertising objectives have been established and

written, the next step is to select the specific media in which

the advertising will appear. Media costs vary from inexpensive,

such as business cards, to very expensive, such as television.

The selection should be based on cost effectiveness, scheduling,

trading area, customer type and frequency of message.



The types of media available are as follows:



   *  Telephone solicitation - Low cost; effective if message

      is worded carefully.



   *  Business card - Low cost; easily distributed; describes

      product or service; gives address and phone.



   *  Word of mouth - The cheapest and most effective; a 

      customer praises your business.



   *  Business stationery - Low cost; must be well designed.



   *  Business signs - Very effective; low cost; may be

      subject to zoning regulations.



   *  Storefront - Extremely effective; low cost; shows product 

      and price.



   *  Interior or point of purchase display - Attractive display 

      of merchandise creates impulse buying; low cost.



   *  Vehicles - Can be effective; low cost; wide exposure;

      can be a painted or a magnetic display.



   *  Shopping bags - Carry name and message into home.



   *  Yellow Pages - Essential for small business; reaches

      customer who is ready to buy; wide distribution.

   *  Direct mail - Most personalized and pinpointed of all

      media; tells complete story; rapid feedback; can use

      coupons, catalogs, letters, brochures or postcards.



   *  Local newspapers - Great flexibility; ad size and

      position can be varied; great with editorial association,

      such as food advertisements with cooking column.



   *  Local radio - Expensive but reaches targeted audience;

      advertisement can be repeated frequently.



   *  Television - Most expensive; reaches the masses; high

      visibility; instant exposure of pictures or ideas.



There are many other means of advertising, such as calendars,

pens, billboards, sky writing and point of presentation (flyers,

brochures, samples). To be effective, advertising should be

repeated -- yes, repeated -- as often as possible. It should call

attention to something the buyer needs or wants.



Help in Advertising



Carefully, skillfully written advertising copy is essential. Help

in writing an advertisement can be obtained from newspapers,

suppliers, Yellow Pages and advertising agencies.



For help in planning, producing and measuring the effectiveness 

of advertising, consider an advertising agency. Often the 

services of an agency can be obtained at low cost because 

agencies earn commissions paid by the media (about 15 percent) 

and take a percentage of the cost of the material they design 

(also 15 to 20 percent). Before selecting an agency, be sure the

agency knows the objectives of your advertising and the size of

your budget. Then have the agency describe what it can and will 

do for you.



Advertising is not merely an item of business expense; rather, it

is an investment in building your business. Its objective is to

help you sell your product or service. The copy should attract

attention, develop interest, describe the product or service,

convince the reader or listener and get action.



Do not advertise something you are stuck with. Advertise what

your customers want and like to buy. Show the benefit of your

product or service. Attempt to tell your prospective customers

what is in it for them.



Be sure to include the name and address of the business in all

advertisements! Finally, be honest!

_________________________________________________________________



MARKETING



Business success ultimately comes from satisfying market needs.

Therefore, it is essential that people in small business

understand and develop marketing programs for their products and

services. What is meant by market and what is marketing?



   *  Market - A body of existing or potential buyers for

      specific goods or services. It is the demand for a product.



   *  Marketing - The total of activities involved in the

      transfer of goods from the producer or seller to the

      consumer or buyer. Marketing activities include buying,

      storing, selling, advertising, pricing and promoting

      products as well as managing the business.



A business will not succeed just because the owner wants it to.

There must be a market for the merchandise or service being

offered or there is no chance of success.



Marketing Before Opening



Before opening a business, the following information must be

obtained:



   *  Is the product or service to be offered one that people

      want? How do you know this?



   *  How many people want it?



   *  Who are the potential customers?



   *  Do they live or shop near the place of business?



   *  Will it be the right business, at the right time, at the

      right place?



   *  Can a demand be created for the product or service?



   *  How many competitors offer the same product or service?



   *  How will the new business effectively compete in price

      and quality?



   *  Who will the suppliers be and how good are their services?



Only after the answers to the above questions are obtained and

analyzed should the plan to open the business proceed.



Marketing for an Existing Business



The marketing concept for an existing business focuses on efforts

to identify, satisfy and follow up on customer needs at a

satisfactory profit. This concept includes market research,

market strategy, target marketing and managing the market mix. It

is difficult, if not impossible, to sell people goods or services

they do not want or need. It is easy to sell people something

they do want or need.



Market Research



Market research determines what people want by systematically

gathering, recording and analyzing information related to

marketing goods and services. The information processed can help

spot potential problems, find sales opportunities and form plans

of action. Such research can be done internally or by companies

specializing in market research services.



Many small businesses do market research every day and may not be

aware of it. This is accomplished by talking to customers,

talking to employees, reading newspapers and trade journals,

looking at competitors' and noncompetitors' advertisements and

promotional activities, looking for information about trends in

the marketing area served and gathering financial and economic

information from bankers, suppliers and trade associations.



A small business has an advantage over a large business in

learning about its customers because, by being close to the

customers, it can learn quickly about their likes and dislikes

and, best of all, react rapidly to changes in customers' buying

habits. Small business owners and managers can talk to the

customers and ask questions about



   *  The merchandise they like.



   *  How much they are willing to pay.



   *  Where they live.



   *  How they like the business.



   *  Whether they would recommend the store, product or service.



   *  Why they came to the business.



   *  The products they would like that the business does not 

      have.



Listed below are the logical steps in more formal market

research:



   *  Define the problem or area to be investigated.



   *  Assess all available information.



   *  Assess additional information if required by



      --- Reviewing internal files and records.

      --- Interviewing employees.

      --- Interviewing customers and suppliers.



   *  Organize and interpret information.



   *  Make decisions.



   *  Observe and evaluate results of the decision.



A good part of marketing research can be done with readily

available information. Trade associations constantly report on

and analyze pertinent marketing information. If your type of

business has a trade association, the membership fee may be money

well spent.



Market Strategy



Market strategy involves identifying customer groups that small

businesses can serve better than larger competitors can, and

tailoring products, services and promotional efforts to that

particular market segment.



Ideally, this strategy should address the customers whose needs

are not currently being met in the marketplace and whose needs

are great enough to provide a profit. Small business should

analyze its market and capabilities, and focus on that part of

the market it can serve best.



Target Marketing



Because small business owners may have limited funds to spend on

marketing activities, they should consider restricting their

efforts to one or two key market segments by



   *  Geographic targeting - Specializing in serving the needs of

      customers in a particular area, thus restricting 

      advertising and promotional efforts to that area.



   *  Customer targeting - Identifying and promoting to those

      groups of customers most likely to buy, e.g., promoting 

      boat products to boat owners.



Market Mix



Product and Services. Small business owners may use the strategy

of concentrating on a narrow product line, selling a highly

specialized product or service or providing a product/service

package that includes a large amount of skilled or personal

service.



Promotion. This area includes advertising, sales tactics and

other promotional activities. High quality selling is a must for

small businesses and is one of the most effective types of

promotion. (For a detailed discussion of advertising, refer to

the above section on advertising.)



Location and Product Distribution. Selecting the proper areas for

distribution and sale of certain products is crucial. Successful

selling of popcorn requires high traffic areas with high

visibility. On the other hand, a plumbing supply house does not

require a high traffic area, as people will go out of their way

to look for it.



Additional Marketing Help



Other sources of information to help make marketing decisions

include chambers of commerce, bankers and local business

journals. Again, do not forget suppliers, as they know what

businesses similar to yours are doing.



Keep the following in mind: Most businesses are built around

products and services that are already available. Although you

may think your products or services are special, that perception

is not necessarily shared by your market. Therefore, one of the

most important aspects of marketing is to give the consumer

reasons to buy your products or services.

_________________________________________________________________



LOCATING A BUSINESS



Small business advisors often say that the success of a retail

business depends on three factors: location, location and

location. A bad location usually leads to failure while a good

location is an integral part of success.



Small businesses fall into three general categories. The first is

one in which the customer comes to the place of business.

Examples are clothing, food and hardware stores, barber and

beauty shops. For this type of business, a good location is

vital.



The second is a business in which the customer comes to the

business and the business goes to the customer. Examples are a

carpet store and a drapery and curtain shop, both of which

require that the customer come to the store to select merchandise

that will be installed off-site by the business. For this type of

business, location is also important.



The third business type is one in which the business comes to the

customer, such as plumbers, electricians and landscapers. For

this type of business, location is not of primary concern. The

only caution that may apply is compliance with zoning laws

regarding material storage and truck or other vehicle parking.



Three factors are involved in choosing a business location:

selection of a city, town or municipality; choice of an area

within a city or town; and choice of a specific site.



Selecting a City or Town



When selecting a city or town for your business, consider the

following:



   *  Size of the trading area within the city or town.



   *  Population and population trends.



   *  Total purchasing power and distribution of the locale.



   *  Total retail potential within the city or town.



   *  Number and size of competitors.



   *  Aggressiveness of competitors.



Selecting an Area Within a City or Town



Once a city or town has been chosen, consider the following in

selecting an area:



   *  Power of the shopping district to attract customers.



   *  Number and quality of competitive stores.



   *  Availability of access routes to the store.



   *  Nature of zoning regulations.



   *  General appearance of the area.



   *  Expansion and rebuilding of the area.



Selecting a Specific Site



In selecting a specific site for your business, consider the

following:



   *  Adequacy of parking.



   *  Cost of the site.



   *  Nature and compatibility of neighboring stores.



   *  Adequacy of potential traffic passing the site.



   *  Ability of site to intercept traffic en route from one

      place to another.



   *  Accessibility of site to shoppers.



Consumer Goods Considerations



Consumers' views of the goods or merchandise sold by a store has

an effect on site selection. Consumers group products into three

categories:



   *  Convenience goods - Goods frequently bought by habit and

      having a low unit price, such as cigarettes, groceries, 

      etc. Convenience stores are usually close to the consumer's

      residence and depend on traffic for success.



   *  Shopping goods - Goods with a higher unit price. They are

      purchased infrequently, such as men's suits and furniture.

      Stores selling shopping goods usually do better if they are

      located near a large department store.



   *  Specialty goods - Usually high priced, although customers 

      may not regard price as a consideration. Although sometimes

      located near shopping goods stores, specialty goods stores  

      may be in isolated areas because they generate their own

      traffic. Examples are precious jewelry, expensive perfumes

      and antiques.



Retail Compatibility



Retail compatibility is important to a new business. Locating

next to a store that does not clash with the new business but

does bring traffic into the area may be the salvation of the new

business.



If a new business offers shopping goods, the best location is

near other stores carrying shopping goods. Locating a store

selling shopping goods near a convenience store is not

recommended. New businesses do better in an established shopping

center rather than standing alone.



In choosing a site, there should be adequate traffic, adequate

parking and safe, easy access. Parking spaces may be expensive

and it may be wise to investigate related charges, such as snow

removal, before considering the site.



Zoning laws and regulations regarding business signs should be

investigated. The building itself should be attractive because,

whether the owner realizes it or not, the business will have an

image. What people think of a business is influenced by both the

interior and exterior attractiveness of the building. Unclean

exteriors, walls that need painting and an overall unattractive

site turn customers away. Excellent products and services can be

negated by a poor location.

_________________________________________________________________



INSURANCE



Going into business is a risk. To succeed in business, the many

potential risks must be managed, i.e., reduced and controlled.

One of the methods of controlling risks is with insurance.



For the small firm the most common risks are



   *  Business fraud and theft.

 

   *  Fire.



   *  Legal liability - injury to customers or employees, 

      defective merchandise, etc.



   *  Business interruptions.



   *  Death or loss of key personnel.



   *  Death or loss of owner or partner.



   *  Violent weather -- hurricanes, floods, etc.



   *  Damage to or loss of vehicles.



If a business has even one employee, workers' compensation

insurance is mandatory. In several states, if a business has five

or more employees, health insurance is required. When applying

for a loan, banks may require certain types of insurance,

depending on the nature of the business and the type of loan.



Each business will have its own particular insurance needs. At

business start-up, funds to purchase insurance may be limited.

Nevertheless, insurance must be investigated and that which is

essential must be purchased. For example, one can imagine a tree

surgeon must carry liability insurance when felling a tree.



The general categories of insurance are



   *  Property.



   *  Automobile and vehicular.



   *  General liability.



   *  Product liability.



   *  Group life and health.



   *  Fidelity and surety.



   *  Workers' compensation.



Before purchasing insurance, find out which types are required,

how you can reduce the cost of coverage and which risks you can

afford to cover yourself. Also, you must



   *  Decide which kind of risk protection will work best and

      be most economical for you.



   *  Cover your largest loss exposure first, the less severe

      as your budget permits.



   *  Make proper use of deductibles. They save premium dollars

      you may need elsewhere.



   *  Review your insurance coverage and costs periodically with

      your agent.



   *  Always discuss expansion or change of location with your

      agent.



   *  Familiarize yourself with insurance terms and provisions so

      you know exactly what is covered and what it costs.



   *  Be sure the coverage you buy is adequate to cover the value

      of the property insured.



Usually, the life savings of a small business owner are invested

in the business and often homes are used to secure notes. What

happens when the owner dies? Does the business close? Does the

family of the owner have to stand by and watch savings and other

assets go down the drain?



You can protect both your business and your family with business

life insurance. Consult your agent so that a business life

insurance policy is tailored to fit the needs of your family and

your business. A suitable business life insurance program can



   *  Ensure immediate funds to meet taxes, debts and

      administrative expenses.



   *  Provide income for heirs.



   *  Equitably distribute the property value to heirs.



   *  Enable your executor or administrator to dispose of your

      business to the best advantage if your family is not taking

      over.



   *  Put your family on a sound financial basis if the family is

      assuming the operation of the business.



   *  Stabilize the credit of the business.



   *  Help maintain good employee relations by eliminating

      uncertainties and hazards.



   *  If the business is a partnership, provide a prearranged 

      plan for the orderly and equitable dissolution of the

      partnership and the opportunity for surviving partners to buy

      out the heirs.



   *  Provide funds to replace a key employee or train another if

      the key employee leaves, becomes ill or dies. This is 

      called "Key Employee" insurance.



Insurance is one area of your business where professional help is

strongly recommended to obtain proper coverage at the best price.

Help is readily available from local insurance agents and

brokers, the best choice being one who writes insurance for other

small businesses.



One way to determine which insurance agent is best for you is to

ask other small business owners whom they use and what kind of

service they receive. Also, your banker, accountant or attorney

may be able to recommend an agent or broker.

_________________________________________________________________



RETAILING TIPS



Image



Every retail and retail-service business has an image, which can

be controlled by the operator. People's impression of a store,

office, showroom, beauty shop is based initially on the

appearance of the premises, both inside and out, and then by the

type of merchandise and services offered. Therefore, each

business operator must decide what image he or she wants and then

take steps to develop it.



Creating the proper image and environment is particularly

important to certain types of businesses and not as critical to

others. For example, a junk yard may not be very attractive; but

then its customers do not expect it to be. However, most business

should create an atmosphere that corresponds to their product

line or service. For example, people do not expect carpet in

hardware stores; but they do expect clean, uncluttered aisles and

easily accessed displays. In a store selling expensive clothing,

people will expect carpeting and papered walls. There is no doubt

that carpet leaves a different impression than vinyl tile or

linoleum and costs more to install and maintain. In this case,

the extra cost may be worth it.



Window Displays



A neat, eye-catching window display is an effective way to stop

pedestrian traffic and entice people to enter the premises. It

takes only two to four seconds to pass a six- or eight-foot

window. Therefore the display not only has to be eye catching,

but also must be well lighted day and night. (Good daytime

lighting avoids shadows that dull a display.)



Change window displays periodically and keep windows clean.

Window displays used for community projects often create good

will. Art galleries or individual collectors may lend interesting

objects around which to build a display.



Parking Areas and Sidewalks



Keep parking areas and walkways clean and lighted at all times.

If your regional climate brings harsh winter weather, be sure

snow, and particularly ice, is removed to ensure customer safety.

Dirty areas create an unfavorable impression and often result in

unfavorable comments.



Decor



Decor is part of the image. Well-maintained building exteriors

make customers want to enter. Once inside, the interior decor

must be conducive to customer buying. Clean windows, floors,

counters and aisles, attractively painted or papered walls and

good lighting are a must. Well-planned aisles help customers find

and look at merchandise. Gaudy decor reduces customer interest.

The decor should make customers feel comfortable. The point is to

let the merchandise be the attraction, not the decor.



Customer Relations



Customers not only sustain a business but help it to expand. How

a customer is greeted and treated can build or destroy customer

relations. The old adage that the customer is always right still

applies.



Courtesy is a business byword. Customers who feel they were not

treated properly, for whatever reason, usually do not return and

have only derogatory comments about the business. As pointed out

in the section on advertising, word of mouth advertising is not

only the least expensive but also one of the most effective types

of promotion. All employees should be constantly reminded of the

need for courtesy.



Keep a notebook near the cash register. Jot down customer

requests and suggestions for products and services. Customers are

a great and inexpensive source of information not only about your

business but about your competitors as well. Customers can tell

you much about their buying habits and help you detect trends.

Ask customers what they like, want, need and read. Without

customers, there is no business.



Credit Cards



Credit cards are a service to customers at the expense of the

business. However, credit cards do provide instant cash at no

risk to the business. Often, credit card terms can be negotiated

with the issuing bank. Card companies such as American Express

can usually be approached through chambers of commerce or

national trade associations if the business is a member.



Some small businesses may want to issue charge cards or charge

accounts to special customers. Needless to say, care must be

taken if this policy is adopted.



Markdowns



Markdowns on certain items reduce profit margins but usually are

an excellent way to sell unsalable or end-of-season goods.

Markdowns, if properly done, clear out merchandise quickly,

thereby increasing cash flow and reducing inventory.



Loss Leaders



Loss leaders are items sold at a lower price to attract people

who will buy other regularly priced items or become regular

customers. Loss leaders should have a lower wholesale price, look

more expensive, sell at other stores at a higher price and be

readily available from the supplier.



Loss leaders are more effective as a strategy when they are

associated with another item at regular price and both items are

sold together. An example is a shirt and tie, with the tie being

the loss leader.



Sometimes loss leaders do not work. With experience, the

successful leader will be selected and often can be used over and

over again.



Pricing Policy



Pricing may depend on the following:



   *  Location of the business.



   *  Physical appearance of the premises.



   *  Purchase of manufacturer's close outs.



   *  Volume of sales.



Pricing must take into account fixed or operating costs, owner

and manager salaries, variable costs (cost of goods) and profit.

Buying practices affect the cost of goods. Attention must be

given to quality as well as the quantity of goods purchased.

Utilities, rent, services, salaries, employee benefits, etc.,

affect fixed costs. Unless prices are changed accordingly,

increases in either variable or fixed costs will decrease profit.



Often, competition dictates pricing. Therefore, competitors'

pricing must be constantly monitored. As pointed out in the

section on pricing products, a pricing policy must be examined

and reviewed frequently to be certain the desired profit level is

maintained. Profit and loss or income statements are most

helpful.



Leases



Landlords can be difficult; remember they are trying to make a

profit, too. Cordial relationships make it easier to get

improvements to the premises and to negotiate late rent payments.



A long-range lease is usually better. If a business owner or

operator is inexperienced with leases, the service of an attorney

is essential.



Protecting Against Crime



To limit shoplifting, locate the cash register and the telephone

near or at the front door. This reduces the chance of people

walking out without paying. Also, offer to hold parcels at the

register, but be sure to treat them with care, sealing them in

the presence of the customer. The business is liable if anything

is missing.



If your business is located in a shopping center or mall, contact

other small businesses and set up a system to alert each other if

a customer tries to pass a bad check or steal. With a phone alert

system a description of the person in question is quickly

circulated to other businesses in the center or mall, as well as

to law enforcement authorities.



Competitors



Always have something constructive to say about competitors. If

you are out of an item or do not carry it, recommend a store that

does carry it. Customers appreciate this and will usually return

to your store.



Watch competitors' advertising by visiting them or sending

someone to check displays, windows and prices. Ask salespeople

who call on you how your competitors are selling their items.



Employees



Good employees produce more sales and require less training and

supervision. Poor employees can ruin a business. Develop a

training program for new and old employees and regularly review

their performance with them individually and privately. Train

employees to treat customers exactly as you would.



Explain the buying system to employees and try to involve them.

The more involved employees are, the more interest they take and

the better they work. Listen to employees and ask them for

suggestions. Make employees your eyes and ears.



Retired persons offer small businesses an opportunity to get

experienced help on a part- or full-time basis. They may teach

you and other employees what they have learned over the years.

Retirees usually are very loyal and hard workers.



Suppliers



Suppliers, manufacturers, distributors and their respective

salespeople can become important adjuncts to a small business.

They can alert you to trends, hot items, competitive activity,

closeouts, special volume prices, delayed payment terms, etc.



Most important, get to know the credit manager of your supplier.

If you need extra time to pay, extra credit or special terms,

this is the person to contact. The credit manager can be a

valuable ally to your business.



For special promotions, ask manufacturers and suppliers if they

have a program to contribute to advertising costs. The way to

learn about all the services a supplier offers is to spend time

with the supplier and ask questions.



Be sure you know the availability of every item purchased and how

long it will take to get to your store. This will help you place

orders and keep you from running out of an item.





EMPLOYEES AND INDEPENDENT CONTRACTORS



Classes of Employees



For federal and state tax purposes, small business owners and

operators must know who is an employee and who is not, and what

their classification is. Employees may be classified as common

law or statutory.



Common-Law Employees



Every individual who performs services that are subject to the

will and control of an employer as to both what is to be done and

how it is to be done is a common-law employee. Two of the usual

characteristics of an employer-employee relationship are that the

employer has the right to fire an employee and the employer

supplies the tools and the place to work.



Employers must withhold federal income tax, Social Security tax

and, where required, state and local income tax from common-law

employees. Also, employers must pay their share of Social

Security and federal and state unemployment tax for such

employees.



Statutory Employees



In many states, a statutory employee is one who works for an

employer in any one of the following four categories:



  1. A driver who distributes meat, vegetables, fruit, bakery

     products or beverages (other than milk), or who picks up

     and delivers laundry or dry cleaning, if the driver is

     your agent or is paid on commission.



  2. A full-time insurance salesperson.



  3. An individual who works at home on materials or goods that

     you supply and that must be returned to you or to a person

     you name. You also furnish the specifications for the work

     to be done.



  4. A full-time traveling or local salesperson who works on your

     behalf and obtains orders from wholesalers, retailers,

     contractors or operators of hotels, restaurants or similar

     establishments. The goods sold are merchandise for resale or

     supplies for use in the buyer's business.



Business owners are not required to withhold federal and, where

applicable, state or local income taxes from the wages of

statutory employees. However, individuals in any of the preceding

four categories are employees for Social Security tax purposes if

they meet all of the three following conditions:



  a. The service contract states or implies that almost all of

     the services are to be performed by them.



  b. The investment in the facilities, other than those for

     transportation, used to perform the services is not

     substantially that of such employee.



  c. The services are performed on a continuing basis.



For federal unemployment tax purposes, the term employee includes

statutory employees in categories 1 and 4 above who perform

services for pay under conditions a through c.



Independent Contractors



Generally, people who are in business for themselves are not

employees. These include physicians, attorneys, CPAs,

construction contractors and others who offer their services to

the public.



However, whether such people are employees or independent

contractors depends on the facts in each case. The general rule

is that an individual is a independent contractor if the employer

has the right to direct only the result of the work and not the

means and methods of accomplishing the result.



Under the heading of independent contractors, two categories of

statutory nonemployees exist for the purpose of federal

employment taxes: real estate agents and direct sellers. However

two conditions must be met:



  1. All remuneration for their services relates directly to

     sales or output and not to the number of hours worked.



  2. Their services are performed under a written agreement

     that provides they will not be treated as employees for

     federal tax purposes.



Another test is that when an independent contractor has

assistants, they can be fired only by the contractor. Also, if

workers are free to take other jobs at the same time they are

working for you, then they are generally regarded as independent

contractors.



An employer does not have to withhold income tax or Social

Security tax from the wages of independent contractors, nor does

the employer have to pay the unemployment taxes or workers'

compensation insurance.



Because an employer who has hired an independent contractor must

file form 1099-MISC with the Internal Revenue Service and, where

applicable, state and local government, the independent

contractor must provide the employer with an employee

identification or a Social Security number. If the independent

contractor fails to provide this number, the employer may have to

withhold 20 percent of the amount paid as income tax.



Casual Labor



Many small businesses classify certain types of labor as casual

labor. In these cases, the employer does not withhold income

taxes or Social Security tax, does not pay employment taxes and

usually does not cover the worker with any type of insurance.



If one asks either the IRS or a state department of revenue for a

definition of casual labor none will be forthcoming. This means

that the IRS and other agencies do not recognize the term and

will not define it. Federal and state agencies reserve the right

to judge each case as to whether or not a worker is a casual

employee.



The issue at hand is whether or not an employer must withhold

income and Social Security tax, pay unemployment taxes and

provide workers' compensation insurance. In some cases, the IRS

and other taxing agencies may recognize intermittent and

temporary labor, such as in the following cases.



Case 1



Katie's Catering has two full-time employees. Katie contracts for

a job for which she needs extra help, so she hires a person to

work for one day for $50 with no withholdings of any kind. She

does not intend to hire this person on a regular basis.



Case 2



Conwald Construction accepts a contract to frame two houses and

agrees to finish both houses within one month. Conwald does not

have enough regular full-time employees to accomplish this, so he

hires two extra carpenters at an agreed-upon wage of $300 per

week for three weeks. At the end of the job, Conwald pays each

carpenter $900, but does not withhold taxes, etc. However,

because the wages were over $600 to each person, Conwald must

obtain the Social Security number of each carpenter and, at the

end of the year, submit a 1099-MISC to the IRS, appropriate local

agencies and to the carpenters.



Case 3



Russ's Restaurant has occasional need for an extra bartender

during July and August. He hires a person to work one night a

week for eight weeks at $45 per night, with no withholding. The

total wages paid are $360. In this case, Russ does not report

these wages because the amount is less than $600.



According to some state employment security laws, the workers in

each of these cases would be regarded as employees and the

employer would have to pay the state unemployment tax.



Often, employers abuse the classification of intermittent or

temporary help. Be aware that if the IRS decides the employee is

common law and the employer has not withheld taxes, the employer

is liable for all the withholding, Social Security taxes and

unemployment taxes.



Both the state and federal agencies frequently audit income tax

reports, during which the question of who is an employee arises.

If there is any question about who is an employee, contact the

IRS or state department of revenue. If there is a question as to

whether unemployment tax should be paid, contact the IRS and the

state department of employment and training.

_________________________________________________________________



MANAGING HUMAN RESOURCES



Successful management of any business, large or small, is based

on effective utilization of available resources. People are a

primary resource, and people, including managers, can make or

break a business.



Managing a work force from a regulatory standpoint has become

complicated because there are more than 100 rules and regulations

promulgated by local, state and federal authorities that affect

employees who make up the work force. It is imperative to seek

guidance through this maze by contacting the appropriate

government authority when necessary.



Also complicating the management of workers is the new generation

whose goals extend beyond the basic maintenance needs of wages

and safe, clean working conditions. Many employees are looking

for challenge, incentive and opportunity to learn, to be creative

and to advance. Small businesses must design management methods

to meet the needs of employees as well as the business.



The work force payroll may be the greatest single expense in the

budget. This means employee selection, training and supervision

are of primary concern. It is estimated that each turnover of an

employee costs 500 times the hourly wage; thus, retaining good

employees is critical. Employee retention and productivity often

depend entirely on the ability of the person supervising the job.



It is essential to define the objectives of the work force and

clearly plan the strategy to reach those objectives at the

outset. Once employees are on the job, reasonable, attainable

objectives should be set for them with their input. If employees

are respected members of the team, they will have more incentive

to perform at peak level.



Recruiting



Advertising in the local newspaper is the most direct method of

recruiting employees. The most productive method is word-of-mouth

referral by a satisfied employee. Schools, trade associations and

professional groups are excellent sources for specialized needs.

As a rule, it is wise to avoid employing relatives and close

friends, as discipline problems often arise. If they bring

special expertise, that may be another matter.



A prerequisite to hiring any worker is a well-written, thoroughly

thought-out job description, describing the duties and

responsibilities of the job. Such a description makes it easier

for the employee and supervisor to work together.



Interviewing



An interview is a two-way communication, during which the

participants find out about each other and assess competence and

compatibility. The interviewer must guard against invading the

legal right to privacy of the applicant, both on the application

form and in direct questioning.



The primary concerns of the interview are the job description,

working conditions, standards of performance and the applicant's

ability to meet or exceed these standards. All these matters must

be clearly understood and agreed upon before a final decision to

hire is made. References must be checked, preferably by

telephone.





Wages and Working Conditions



Wages and working conditions are controlled to some degree by

labor laws and, to a greater extent, by local practice. The

National Bureau of Labor Statistics can provide surveys of

conditions in local markets.



Usually, it is wise to set wages at the midpoint of current

practice to allow for incentive and future growth. Employee

benefits will add from 20 to 40 percent to the cost of the

payroll. Careful thought must be given to benefits when planning

and budgeting. For businesses experiencing peaks and valleys in

work flow, thought should be given to the use of temporary

workers and agencies.



Training



An employee may be considered on probation for an agreed upon

length of time -- usually three months. During this time, attention

must be given to integrating the employee into the work force and

bringing the employee's performance up to standard. This is best

accomplished by explaining and demonstrating the task, having the

employee perform the task and then giving constructive correction

and reinforcement. Time spent in proper training will more than

pay for itself in weeding out employees who lack the ability to

perform or fit in. Training fosters the success and high

performance of those retained.



Supervision



Both the supervisor and the employee have an interest in the

successful performance and stability of the work force. The

essence of good employee relations is to treat all equally, and

to be fair and consistent in maintaining discipline. Be factual

and not subjective. Always let the employee know what is expected

and whether or not those expectations have been reached. Both

correction and recognition should be given regularly to achieve a

healthy and productive work force.



Terminating Employment



When an employment relationship is to end, it is expected that

both the employer and employee will give the other adequate

written notice. If it is necessary to terminate employment, the

employee should be given an honest explanation of the reason for

termination.



When it is termination for cause, except in extraordinary

circumstances, the employee should have been warned previously,

counseled and given the opportunity to meet the performance

standards before the actual separation. When the question of

unfair treatment or discrimination is raised, it is important to

have a written record of the steps followed in disciplining the

employee.



One caution: Because employee relations are so tenuous and hedged

by laws and other restrictions, it may be wise to seek expert

advice when contemplating any critical action affecting an

employee. SCORE can help direct you to the appropriate source of

information.

_________________________________________________________________



COMPUTERS IN SMALL BUSINESS



A question asked frequently by small business operators is "Should

I have a computer?"  To answer this question, you first must

understand the advantages and disadvantages of alternatives to

the computer and, second, must know exactly what is to be

accomplished with a computer. In other words, consider how much

it will cost and what the benefits over a manual system will be.

Finally, you should know who is going to operate and become

proficient with the computer.



Generally, a well-organized and well-staffed business will

benefit from a computer, particularly if the business has large

amounts of detailed, repetitious information to be handled with

speed and accuracy. Others who will benefit are businesses with

large, fast turning inventories and large customer files.



Small businesses just starting out without computer skills should

not consider a computer, nor should a business that does not have

a good functioning manual system in operation.



What a Computer Can Do



   *  Organize and store similarly constructed pieces of

      information, such as names and addresses of customers,

      suppliers, employees, etc.



   *  Rapidly retrieve a single piece of information from a

      file or data base, e.g., name, ZIP code, date of last

      purchase, amount owed.



   *  Perform complicated computations quickly and accurately.

 

   *  Print information quickly and accurately.



   *  Perform the same activity indefinitely and precisely,

      such as printing hundreds of form letters, printing

      mailing labels, etc.



   *  Keep transaction records, such as cash receipts,

      receivables ledger and a general ledger.



   *  Prepare statements and reports such as cash flow sheets,

      income statements, balance sheets and inventory status

      reports.



Areas a Computer Can Improve



   *  Accounts receivable.



   *  Accounts payable.



   *  Sales records.



   *  Billing.



   *  Order entry.



   *  Inventory records.



   *  Payroll.



   *  Tax reporting.



   *  Mass mailings.



   *  Projections.



   *  File management.



What a Computer Cannot Do



   *  Correct errors in an existing manual system.



   *  Save money by eliminating employees.



   *  Make business judgments or create logic.



   *  Solve poorly defined problems.



   *  Define or describe jobs that should be done.



   *  Generate information that is not in the system.



   *  Operate itself.



Buying a Computer



Before selecting a computer (hardware) and the program

(software), a prospective buyer should prepare a written

statement that includes the following information:



   *  A description of the business.



   *  Present and anticipated number of customers.



   *  If retail, number of transactions per day.



   *  Size of inventory, if applicable.



   *  Inventory turnover rate.



   *  Number of employees.



   *  Reasons for buying the computer.



   *  Amount of money available, or affordable price range.



   *  Potential operators of the computer.



The purpose of this statement is to pinpoint the prospective

buyer's need for computerization and to provide concise

information on these needs and resources to each vendor

approached.



Going to more than one vendor is highly recommended so you can

compare prices and recommendations. Also, ask each vendor for the

names and telephone numbers of customers who have purchased a

system, particularly those with needs similar to yours. Contact

several of these customers and ask them if they are satisfied

with the hardware, software, training and service received from

the vendor. Ask them how long it took until the computer system

was operational.



Be sure the vendor has the staff to provide training, answer

yours questions while you are setting up, solve problems and

provide repair service. Visit the vendor's training facilities.

Ask about charges for training.



A computer will not operate itself. It must be fed, nurtured and

massaged in order to get results. Entering data takes time. It is

important to realize that if your record keeping system is

incomplete or sloppy, your computer data will be the same. Time

and money can be wasted creating data that will not be used. Use

good judgment in selecting information to be entered and

processed.



Software has been developed for specific types of businesses. Be

sure your vendor is knowledgeable about available software and

selects the one best suited to your particular business.

Experience indicates that the computer applications most

beneficial to a small business are accounts payable, order entry,

accounts receivable, inventory control and general ledger.



Getting a computer into operation initially requires the full and

total involvement of the owner/manager, which translates into

many extra and sometimes frustrating hours. Meanwhile, the

regular business functions must be continued. If an employee is

to operate the computer, the employee will also have to devote

extra hours, at the expense of the owner.



Computers do not save money by eliminating employees. Rather,

computers facilitate and complement employees' work by performing

certain functions rapidly and efficiently. This may be of great

advantage in effecting other savings.



If the business owner/manager has his fingers on the pulse of his

business, a computer may not be needed. In any event, the cost,

efficiency and adequacy of a manual system should be evaluated

before you consider buying a computer.

_________________________________________________________________



FRANCHISES



Franchising has a number of appealing features for prospective

business owners. Primarily, the risks of opening a business are

reduced because of easy access to an established product and a

proven method of marketing.



Franchising has existed in one form or another for over a

century; in recent years enormous growth has occurred in the

number of franchises. Industries relying on franchised business

to distribute their products and services touch every aspect of

life, from automobile sales and real estate to fast foods and tax

preparation.



As a matter of fact, franchises have the highest success rate of

any type of business start-up, which adds to their appeal.

However, buying a franchise does not in any way ensure instant

success; unless you are prepared for total commitment of time,

energy and financial resources, it is not for you.



Definition



A franchise is a legal and commercial relationship between the

owner of a trademark, service mark, trade name or advertising

symbol and an individual or group seeking the right to use that

identification in a business. The franchise governs the method

for conducting the business between the two parties.



In its simplest form, a franchisor owns the right to a name or

trademark and sells that right to a franchisee. This is known as

product/trade name franchising. In the more complex form,

business format franchising, a broader, ongoing relationship

exists between the parties. The franchisor provides a full range

of services, including site selection, training, product supply,

marketing plans and sometimes financing. Generally, a franchisee

sells goods or services supplied by the franchisor or sells goods

or services that meet the franchisor's quality standards.



Advantages

  

   *  Franchising offers quick access to an established and

      well-proven method of marketing, which reduces the risk

      of opening a business.



   *  The franchisee purchases, along with the trademark, the

      experience and expertise of the franchiser's organization.



   *  The franchisee's standing with local financial institutions

      is strengthened.



   *  Franchisors offer training and management assistance.



   *  The franchisor offers experience in facility design,

      layouts, displays, fixtures, marketing and advertising.

 

Disadvantages



   *  Franchisors have required, standardized operation and

      management techniques. If you prefer to be an independent

      operator or prefer to do business using your own methods,

      franchising is not for you.



   *  A franchisee loses his or her identity to the benefit of

      the franchisor.



   *  The franchisor does not share in any losses but does share

      in the profits.



   *  The franchisee usually has to purchase all goods and 

      supplies from the franchisor only.



   *  The contract between the parties is usually to the benefit

      of the franchisor.



Disclosure Document



The Federal Trade Commission requires that franchise sellers

provide certain information in a detailed disclosure document to

help a prospective buyer evaluate the franchise opportunity. This

information includes



   *  Names and addresses of other purchasers.



   *  A fully audited financial statement of the franchise 

      seller.



   *  The background and experience of the key executives of the

      franchisor's staff.



   *  The cost required to start and maintain the business.



   *  The responsibilities you and the franchisor will share.



A good franchisor usually encourages prospective franchisees to

visit and talk to other owners of the franchise. This certainly

should be done!



Other Considerations



An attorney should assist the prospective franchisee to evaluate

the franchise package. An accountant may be needed to determine

the full costs of purchasing and operating the business, as well

as the potential profit to the franchisee.



Before purchasing a franchise, carefully consider the level of

independence you will maintain, how comprehensive the operating

controls are, and the full costs of purchasing the franchise.

Also, be sure to ask about the terms and conditions for reselling

your franchise.



Although the success rate of franchises is high, very independent

people with their own concepts of operating a business may not be

the type to open a franchise.

_________________________________________________________________



MANUFACTURING COST ACCOUNTING



Cost accounting, in a broad sense, means accumulating all the

costs associated with an activity (manufacturing, retailing,

providing a service, etc.) and organizing them in a meaningful

way to (1) satisfy financial reporting requirements and

(2) achieve understanding of the costs of the activity for

control and optimization purposes.



There is a distinction between general accounting and cost

accounting. Although costs are of primary concern in both,

general accounting is concerned more with the total costs of a

business. These costs are usually classified into

well-established summary level accounts, such as cost of goods

sold, selling expenses, administrative expenses, advertising and

research.



Cost accounting details costs of individual products by the types

of costs (raw material, direct labor, etc.) and by the

departments (cost centers) within each of the business functions

(manufacturing, selling, administration, etc.). Cost accounting

is used to



   *  Control business operations by detailing the important

      costs of the business, permitting analysis of these costs

      and indicating where corrective action is required if

      costs are not meeting expectations (budgets, standards,

      etc.).



   *  Optimize business performance by using cost details, along

      with sales revenue details (sales price received by 

      product, customer, territory, etc.) to identify the most

      profitable areas of the business for further development, 

      as well as to ferret out marginally profitable or 

      unprofitable operations for elimination.



   *  Satisfy financial reporting requirements, particularly in 

      the valuation of inventories in manufacturing businesses.



Although cost accounting is mainly used for manufacturing

businesses, it is equally effective in nonmanufacturing

businesses. The discipline of detailing costs by type and

location, determining whether costs are fixed or variable and

comparing costs with expectations (budgets, standards, etc.)

provides a sound basis for controlling and more efficiently

performing any activity.



When applying cost accounting to a manufacturing function, each

cost element is classified generally in two ways:



   *  Whether the cost is direct or indirect.



   *  Whether the cost is fixed or variable.



Normally, there are three classification combinations:

direct-variable, direct-fixed and indirect-fixed.

(Indirect-variable is unlikely).



Direct costs are those incurred in the manufacture of the

product; they can be readily identified with the product. These

costs usually include raw materials and the labor required to

convert the raw materials to the finished product. In some

situations, direct costs include power, fuel, steam and other

significant costs that can be readily identified with the

product.



Indirect costs are generally the costs of activities required to

support the manufacturing operations. These usually include plant

administration, quality control, purchasing, insurance,

depreciation, property taxes and other similar activities.



Variable costs are those that vary directly with the quantity of

product produced; a good example is raw materials. Labor spent in

processing raw materials may also be a variable cost if the

amount of labor required is directly proportional to the quantity

of goods produced. Other costs, such as fuel if directly consumed

into process operations and if proportional to the quantity of

production, can also be classified as variable.



Fixed costs, as the term implies, do not vary with the quantity

of production. These generally include all of the indirect costs

(support costs such as insurance, plant administration,

depreciation, etc.). They can also include some direct costs,

such as departmental supervisors, utilities required to heat/air

condition production areas and maintenance required to service

the production equipment.



Fixed costs are "fixed" only for a range of production levels. A

significant change in production level can change these costs.

Support activities, such as purchasing, employee relations, plant

administration and insurance, along with direct costs such as

supervisors and maintenance, can vary with substantial changes in

production levels. When a cost is considered "fixed," the range of

production levels for which the cost is fixed should be

understood. This is called the relevant range.



There are two other distinctions made concerning the application

of cost accounting to manufacturing operations. Two types of

manufacturing operations are recognized: job-order and continuous

process manufacturing.



Job-order manufacturing is based on specific quantities of a

product being processed through the operations with all of the

costs associated with that particular lot being collected and

identified with that lot.



Continuous process manufacturing (such as many chemical

operations) is a continuing manufacturing operation where costs

are collected over time (such as a month) and quantities of

materials consumed or produced are measured through inventory

changes.



Typical manufacturing costs and their general classification are

listed in Table 6.

_________________________________________________________________



Table 6  - Typical manufacturing costs and their classification

________________________________________________________________

                                        Classification

                      -----------------------------------------

   Cost element         Direct   Indirect   Variable   Fixed

---------------------------------------------------------------

Raw materials             X                    X

Labor                     X         X          X         X

Salaries                  X         X                    X

Supplies                  X         X          X         X

Payroll taxes             X         X          X         X

Medical insurance         X         X                    X

Heat, light, power        X         X          X         X

Telephone                           X                    X

Rent                      X         X                    X

Insurance, property taxes           X                    X

Depreciation                        X                    X

Other

_________________________________________________________________



Manufacturing cost accounting is particularly effective when it

includes a budgeting/standard cost system. A standard cost system

develops a projected unit cost, achievable under controlled

conditions, for each product. This unit cost is identified as the

standard cost, and includes all the raw materials, labor and

other costs incurred in producing the product plus an allocation

of the support costs. A sample standard cost (summary) could be

as follows:



      Direct-variable  $2.00 per unit

      Direct-fixed      1.00 per unit

      Indirect-fixed    1.25 per unit

                       --------------

          Total        $4.25 per unit

 

The standard cost originates from the manufacturing budget. This

budget projects the production requirements (from sales and

inventory projections), the costs of each of the departments

within the plant, the costs of raw materials, the raw material

and labor requirements for each product, the production rates and

other considerations depending on the particular manufacturing

operations.



A sample budget, simplified for illustration purposes, follows in

Table 7.

_________________________________________________________________



             Table 7 - Sample manufacturing budget

_________________________________________________________________



                    Annual Budget - ZYX Company

__________________________________________________________________



Production requirements:

  10,000 units (for the year)



Product requirements:

  Raw materials - $6.00/unit

  Labor - 5.0 hr/unit

  Labor rate - $12.00/hr



Production department budget:             $      % variable costs

  Labor (10,000 units x 5 hrs x $12)   600,000          100

  Salaries (1 supervisor)               30,000            0

  Rent                                  15,000            0

  Utilities                             40,000           50

  Maintenance                           50,000            0

     Total                             735,000



Allocation of production costs:

  Variable cost                        620,000 

  Fixed cost                           115,000

     Total                             735,000



Administration department budget:

  Salaries                             100,000            0

  Rent                                  12,000            0

  Utilities                              3,000            0

  Depreciation                          50,000            0

     Total                             165,000 



Total budget:

  Raw materials (10,000 x $6)           60,000

  Production department                735,000

  Administration department            165,000

     Total                             960,000 

-----------------------------------------------------------------



Standard cost, per unit:

  Raw materials                         $ 6.00

  Direct variable labor and expense      62.00

  Direct fixed                           11.50

  Indirect fixed                         16.50

     Total                               96.00

_________________________________________________________________ 



Manufacturing cost budgets are divided into periods (month,

quarter, etc.) for business planning purposes as well as control

purposes (compare actual costs with budget). Table 8 shows

quarterly figures for ZYX Company's annual budget.

_________________________________________________________________



             Table 8 - Sample annual budget, by quarter

_________________________________________________________________



                           ZYX Company

                    Annual Budget, by Quarter

__________________________________________________________________



                        1st qtr  2nd qtr  3rd qtr  4th qtr   Year



Production (units)       3,000    4,000    2,000    1,000  10,000

Raw materials ($)       18,000   24,000   12,000    6,000  60,000



Production department budget ($)   

  Labor                180,000  240,000  120,000   60,000 600,000

  Salaries               7,500    7,500    7,500    7,500  30,000

  Rent                   3,750    3,750    3,750    3,750  15,000

  Utilities             11,000   13,000    9,000    7,000  40,000

  Maintenance           12,500   12,500   12,500   12,500  50,000

     Total             214,750  276,750  152,750   90,750 735,000

   

Administration department budget ($)   

  Salaries              25,000   25,000   25,000   25,000 100,000

  Rent                   3,000    3,000    3,000    3,000  12,000

  Utilities                750      750      750      750   3,000

  Depreciation/Insur.   12,500   12,500   12,500   12,500  50,000

     Total              41,250   41,250   41,250   41,250 165,000



*Total mfg costs       274,000  342,000  206,000  138,000 960,000

_________________________________________________________________



*Raw materials + production and administration department budgets.



A budget broken down by periods is extremely important in

planning raw material purchases, arranging to have labor

available during seasonally busy periods and particularly for

ensuring that cash is available to fund the manufacturing

operations. It is also essential to control operations during the

course of the year. As the year progresses, actual costs are

compared to budgeted costs and the variances analyzed. Table 9

shows the first quarter manufacturing cost (or variance) report

for the ZYX Company. The manufacturing budget is adjusted for

actual production volume. This permits a valid comparison of

actual costs with allowable costs based on actual production

volume.



The above first quarter report for the ZYX Company indicates that

the plant exceeded allowable costs by $20,950. Higher volumes

than budget would result in higher actual costs compared to

budget. However, it is important to compare actual costs to

allowable costs (budget adjusted for actual volume) to make a

meaningful comparison and analysis. In this case, the analysis

revealed that the unfavorable variance of $20,950 was due mainly

to a surge in orders requiring considerable overtime for direct

labor. This resulted in a substantial unfavorable labor variance,

which could have been avoided by moving more quickly to hire

additional labor to handle the increased orders. The variance

report, with analysis, provides a much clearer understanding of

costs so that actions can be taken when indicated.



The above examples have been simplified. Some issues - such as

inventory valuation, raw material purchase price variances, labor

rate variances, labor hour variances and the basis for allocating

fixed costs - have not been covered. However, the examples

illustrate the discipline that cost accounting with a budget

system, including standard costs, can provide.



_________________________________________________________________



               Table 9 - Sample cost variance report

_________________________________________________________________



                          ZYX Company

               First Quarter Cost Variance Report

_________________________________________________________________



                                                         Variance

                      Budgeted   Allowable  Actual    Favorable/

                      Costs       Costs     Costs   (Unfavorable)

_________________________________________________________________



Production (units)      3,000                 4,000

Raw materials used ($) 18,000      24,000    25,000     (1,000)

Production department 

  budget

  Labor               180,000     240,000   260,000    (20,000)

  Salaries              7,500       7,500     7,500        

  Rent                  3,750       3,750     3,750        -

  Utilities            11,000      13,000    12,000      1,000

  Maintenance          12,500      12,500    13,000       (500)

     Total            214,750     276,750   296,250    (19,500)



Administration department budget

  Salaries             25,000      25,000    25,500       (500)

  Rent                  3,000       3,000     3,000        -

  Utilities               750         750       700         50

  Depreciation/Ins.    12,500      12,500    12,500        -

     Total             41,250      41,250    41,700       (450)



*Total manufacturing

 costs                274,000     342,000   362,950    (20,950)

_________________________________________________________________

*Raw materials + production and administration department budgets.

_________________________________________________________________



INVENTORY



In many businesses, the cost of purchasing merchandise for resale

(retailing) or the costs of purchasing and converting materials

into finished products (manufacturing) represent the business's

most significant expenditures. Keeping track of merchandise and

materials, known as inventory, is important because of the

considerable costs involved. This can be accomplished through a

good inventory record keeping system.



Inventory Record Keeping



Inventory record keeping establishes and maintains information on

current inventory, the additions and withdrawals to inventory and

inventory balances at the end of specified periods (week, month,

etc.). These records identify the products/materials, the

quantities and the value (cost) of these products/materials. A

simple inventory record could look like the one shown in

Table 10.



                  Table 10 - Sample inventory record

------------------------------------------------------------------

                        Product code: 1020

            Product description: 1 quart bottle, Hi Temp Oil

------------------------------------------------------------------

Period                           Inventory activity

Month: May             Beginning     Sales     Production     End

------------------------------------------------------------------

Quantity (units)          600        (200)        300         700

Value/cost ($)            300        (100)        150         350

------------------------------------------------------------------



The value is the cost of the product. This would be what a

retailer paid for the product or what a manufacturer paid for

materials plus labor and other charges applied in converting the

materials into the finished product. In Table 10, the cost of

goods sold would be $100 for this product for the month of May.



There are two different methods used in inventory record keeping:

perpetual and periodic.



Perpetual Inventory



The perpetual inventory method starts with a physical inventory

(actual count) and then adjusts this inventory for additions and

withdrawals. The inventory at the end of the period is calculated

by subtracting the number of units sold from the total of the

beginning inventory plus the additional units produced. An

example is furnished in Table 11.



     _______________________________________________________



             Table 11 - Sample perpetual inventory

         ----------------------------------------------

            Activity                 Value in units

         ----------------------------------------------

         Beginning inventory               100

         Sales                             (75)

         Production                         95

         Ending inventory (calculated)     120

     _______________________________________________________





The perpetual inventory method is used when reliable sales and

production information is readily available and the frequent

taking of physical inventories would be burdensome. However,

physical inventories must be periodically taken (e.g., quarterly

or annually) to check the calculated inventories. The inventory

records are then adjusted to agree with the physical inventories.

The financial effect of these adjustments is reflected in the

balance sheet and the profit/loss statement of the business.



Periodic Inventory



The periodic inventory starts with the physical inventory taken

at the end of each period. Sales or production amounts are then

calculated based on the beginning and ending physical

inventories. This method is used when reliable sales or

production data are not readily available. Consider the examples

in Tables 12 and 13.

     _______________________________________________________



        Table 12 - Sample periodic inventory (retailing)

        ------------------------------------------------

             Activity                  Value in $

        ------------------------------------------------

         Beginning inventory             12,000

         Purchases                        6,000

         Cost of sales (calculated)      (8,000)

         Ending inventory                10,000

     _______________________________________________________



     _______________________________________________________



       Table 13 - Sample periodic inventory (manufacturing)

       ----------------------------------------------------

             Activity                  Value in units

       ----------------------------------------------------

         Beginning inventory                   1,500

         Sales                                  (800)

         Production (calculated)                 900

         Ending inventory                      1,600

     ______________________________________________________



In Table 12, the cost of sales equals the beginning inventory

plus the purchases minus the ending inventory.



In Table 13, the number of units produced equals the ending

inventory plus sales minus the beginning inventory.



Inventory record keeping is primarily used to determine the cost

of goods sold as well as to provide information for financial

statements.



Inventory Control



Inventory control is the management of inventory and relies

heavily on information provided by the inventory record keeping

system. Inventory is required to support the operations of the

business, whether it be a retailing or manufacturing business.

The proper management of inventory helps the business achieve its

objectives in sales, costs and profits. The business plan must

recognize and define the role inventories will play in achieving

the business objectives.



Inventory control consists of the following:



   *  Setting objectives for inventory: the type, quantity, cost

      and order/production point (what quantity will initiate

      action for resupply) of products/materials.



   *  Recording and reporting actual results (done by the 

      inventory keeping system).



   *  Comparing actual results with objectives and analyzing the

      differences.



   *  Taking action to correct problems or improve business

      performance.



Inventory supports the sales activity. This means having what the

customer is willing to buy, when he or she needs it, at a price

that provides an acceptable profit to the business.



Inventory control is integrated with systems that track sales,

production and purchasing activities. The following is a simple

example.



The BAC Company plans to produce and sell three products: X, Y

and Z as detailed in Table 14.

     _______________________________________________________



         Table 14 - Proposed annual sales and production

                      rates for BAC Company

         -----------------------------------------------

                 Annual sales     Production rate

          Product          (units)         (units/day)

         -----------------------------------------------

            X               26,000             200

            Y               52,000             300

            Z               13,000             100

     _______________________________________________________



The business operates five days per week, 52 weeks per year. The

minimum economic production run is two weeks. It is planned to

have a minimum inventory equivalent to four weeks of the planned

sales rate to ensure having enough product for customer needs.

The maximum inventory is to be eight weeks of the planned sales

rate to limit the investment. The minimum and maximum

inventories, based on these plan assumptions, would be as listed

in Table 15.



     _______________________________________________________



            Table 15 - Minimum and maximum inventory

                       for BAC Company

            

        -------------------------------------------------

                           Daily       Minimum     Maximum

                       sales rate    inventory   inventory

          Product       (units/day)    (units)     (units)

        -------------------------------------------------

           X                100         2,000       4,000

           Y                200         4,000       8,000

           Z                 50         1,000       2,000

     _______________________________________________________



When product X inventory falls to 2,000 units, a production order

is issued to bring the inventory level to 4,000 units. If sales

continue at 100 units per day and the production rate is 200

units per day, it will take four weeks of production time to

raise the product X inventory to 4,000 units.



Various measures are used, for control purposes, to relate

inventory amount to sales activity. Two commonly used measures

are inventory days (used in manufacturing businesses) and

inventory turnover (used in retailing businesses).



Inventory Days



Inventory days measure the amount of inventory in terms of days

of sales. In the example for BAC Company, where product X sales

rate was 100 units per day, the inventory days for the minimum

inventory planned of 2,000 units would be 20 days (inventory

amount divided by daily sales rate, or



   2,000

  -------

    100   = 20). The maximum inventory days would be 40 days



  (4,000

   -----

    100   = 40).



Values (costs) can be used in calculating inventory days. Assume

that the units cost $5.00 each in the above example. For product

X, the minimum inventory planned would be $10,000 (2,000 units x

$5.00 per unit) and the daily cost of sales would be $500/day

(100 units/day x $5.00 per unit). Inventory days for the minimum

inventory planned would be 20 days (inventory value/cost of sales

per day or



  $10,000

  -------

   $500/day = 20 days).



Inventory Turnover



Inventory turnover measures the number of times in a year that

the inventory "turns over." In the above example, if product 

sales are planned at a rate of 100 units per day or 26,000 units

for the year and the inventory averages 3,000 units, the 

inventory turnover would be 8.67



 (26,000

  ------

  3,000  = 8.67).



Again, values (costs) could be used in calculating inventory

turnover similar to that done above.



Although the time period of a year is used as the basis for

calculating inventory turnover in most cases, a seasonal business

(such as a store in a summer resort) would use the season as the

basis. In this case, the business objective is to turn the

inventory over as many times as possible and have little or no

inventory by the end of the season.



Actual sales activity (sales rate, product preferences, selling

prices) must be closely monitored with inventory (products,

quantities, costs, resupply limits) to be sure that the inventory

control system is properly supporting the sales activity.



Another important objective of inventory control is to keep the

financial investment in inventories just sufficient to support

the business. Inventory building converts cash into products that

may or may not sell or may sell at a price less than cost.

Inventories consume cash, increase the investment in the business

and can bankrupt the business if not properly controlled.



Inventory Strategies



Every business competes within an industry and each industry has

a life cycle. The strategies employed by the business depend on

where in the life cycle the industry is. The management of

inventories is influenced by this life cycle.



Generally, there are four stages in the life cycle of an

industry. These are as follows:



   *  Development - Uniquely new products are being developed and

      market tested. Products must be available for market 

      testing. There is little concern about inventory 

      investment, other than to be sure products are available 

      for market testing and development.



   *  Growth - The product has been demonstrated to have

      significant market potential and the business strives to 

      gain a major market share. Investment in inventory is heavy

      to ensure product availability to gain significant market

      share.



   *  Maturity - Growth has leveled off. Inventories are very

      closely controlled to keep investment in them just 

      sufficient to maintain market share.



   *  Aging - A period of retrenchment as competitive industries

      take away or eliminate markets. Inventories decline as

      unprofitable and marginally profitable segments of the

      business are weeded out.



The proper control of inventories is essential to the success of

any business in which investment in inventories is significant.

Awareness of the competition and the state of new product

development is just as important as a finely honed record-keeping

system. While the record-keeping system is important, how it is

applied will determine the success of the business.

_________________________________________________________________



APPENDIX A: USEFUL IRS TAX PUBLICATIONS

----------------------------------------------------------------

  Number                       Subject

----------------------------------------------------------------

  SS-4        Application for Employer Identification Number

  Sch C       Profit or Loss from Business-Sole Proprietor

  Sch SE      Computation of Social Security Self-Employment Tax

  1040ES      Estimated Tax for Individuals

  15          Employers Tax Guide (Circular E)

  334         Tax Guide for Small Business

  505         Tax Withholding and Estimated Tax

  533         Self-Employment Tax

  534         Depreciation

  535         Business Expense

  538         Accounting Periods and Methods

  539         Employment Taxes (Defines an Employee)

  541         Tax Information on Partnerships

  542         Tax Information on Corporations

  552         Recordkeeping for Individuals

  583         Information for Business Taxpayers

  587         Business Use of the Home

  589         Tax information on S Corporations

  917         Business Use of a Car

_________________________________________________________________



APPENDIX B: INFORMATION RESOURCES



U.S. Small Business Administration (SBA)



The SBA offers an extensive selection of information on most

business management topics, from how to start a business to

exporting your products.



SBA has offices throughout the country. Consult the U.S. 

Government section in your telephone directory for the office

nearest you. SBA offers a number of programs and services,

including training and educational programs, counseling services,

financial programs and contract assistance. Ask about



     *     SCORE: Counselors to Americas Small Business, a 

           national organization sponsored by SBA of over 11,000

           volunteer business executives who provide free

           counseling, workshops and seminars to prospective and

           existing small business people.  Free online counseling

           and training at www.score.org. 



     *     Small Business Development Centers (SBDCs), sponsored

           by the SBA in partnership with state governments, the

           educational community and the private sector. They

           provide assistance, counseling and training to 

           prospective and existing business people.



     *     Womens Business Centers (WBCs), sponsored by the SBA  

           in partnership with local non-government organizations

           across the nation. Centers are geared specifically to 

           provide training for women in finance, management,

           marketing, procurement and the Internet.



For more information about SBA business development programs and

services call the SBA Small Business Answer Desk at 1-800-U-ASK-

SBA (827-5722) or visit our website, www.sba.gov. 



Other U.S. Government Resources



Many publications on business management and other related topics

are available from the Government Printing Office (GPO). GPO

bookstores are located in 24 major cities and are listed in the

Yellow Pages under the bookstore heading. Find a Catalog of

Government Publications at http://catalog.gpo.gov/F 



Many federal agencies offer Websites and publications of interest 

to small businesses. There is a nominal fee for some, but most 

are free. Below is a selected list of government agencies that 

provide publications and other services targeted to small 

businesses. To get their publications, contact the regional 

offices listed in the telephone directory or write to the 

addresses below:



Federal Citizen Information Center (FCIC)

Http://www.pueblo.gsa.gov 

1-800-333-4636

The CIO offers a consumer information catalog of federal

publications.



Consumer Product Safety Commission (CPSC)

Publications Request

Washington, DC 20207

http://www.cpsc.gov/cpscpub/pubs/pub_idx.html 

The CPSC offers guidelines for product safety requirements.



U.S. Department of Agriculture (USDA)

12th Street and Independence Avenue, SW

Washington, DC 20250

http://www.usda.gov 

The USDA offers publications on selling to the USDA. Publications

and programs on entrepreneurship are also available through 

county extension offices nationwide.



U.S. Department of Commerce (DOC)

Office of Business Liaison

14th Street and Constitution Avenue, NW

Washington, DC 20230

http://www.osec.doc.gov/obl/ 

DOC's Business Liaison Center provides listings of business

opportunities available in the federal government. This service

also will refer businesses to different programs and services in

the DOC and other federal agencies.



U.S. Department of Health and Human Services (HHS)

Substance Abuse and Mental Health Services Administration

1 Choke Cherry Road

Rockville, MD 20857

http://www.workplace.samhsa.gov 

Helpline: 1-800-workplace. Provides information on Employee

Assistance Programs Drug, Alcohol and other Substance Abuse.



U.S. Department of Labor (DOL)

Employment Standards Administration

200 Constitution Avenue, NW

Washington, DC 20210

The DOL offers publications on compliance with labor laws.



U.S. Department of Treasury

Internal Revenue Service (IRS)

1500 Pennsylvania Avenue NW

Washington DC 20230

http://www.irs.gov/business/index.html 

The IRS offers information on tax requirements for small

businesses.



U.S. Environmental Protection Agency (EPA)

Small Business Ombudsman

1200 Pennsylvania Avenue NW

Washington, DC 20480

http://epa.gov/sbo

Hotline: 1-800-368-5888

The EPA offers more than 100 publications designed to help small

businesses understand how they can comply with EPA regulations.



U.S. Food and Drug Administration (FDA)

5600 Fishers Lane

Rockville MD 20857-0001

http://www.fda.gov

Hotline: 1-888-463-6332

The FDA offers information on packaging and labeling requirements

for food and food-related products.



For More Information



A librarian can help you locate the specific information you need

in reference books. Most libraries have a variety of directories,

indexes and encyclopedias that cover many business topics. They

also have other resources, such as



     *     Trade association information

           Ask the librarian to show you a directory of trade

           associations. Associations provide a valuable network

           of resources to their members through publications 

           and services such as newsletters, conferences and

           seminars.



     *     Books

           Many guidebooks, textbooks and manuals on small

           business are published annually. To find the names of

           books not in your local library check Books In Print,

           a directory of books currently available from

           publishers.



     *     Magazine and newspaper articles

           Business and professional magazines provide 

           information that is more current than that found in

           books and textbooks. There are a number of indexes to

           help you find specific articles in periodicals.



      *    Internet Search Engines



In addition to books and magazines, many libraries offer free

workshops, free access to computers and the Internet, lend 

skill-building tapes and have catalogues and brochures 

describing continuing education opportunities.

