U.S. Small Business Administration                          EB-7



         FINANCIAL MANAGEMENT FOR THE GROWING BUSINESS



Bryan Ziegler
Director
Indian Hills Community College
Small Business Development Center
Ottumwa, Iowa

                      Emerging Business Series

_________________________________________________________________


Copyright 1990, Bryan Ziegler. All rights reserved. "How to Write
a Business Plan." Copyright 1990 Linda Pinson and Jerry Jinnet. 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

INTRODUCTION
     Managing Financial Growth
     There Is No One Right Way

SECTION 1: OBTAINING CAPITAL FOR GROWTH
     Deciding to Actively Pursue Growth
     Estimating Expansion Costs
     Obtaining Financing

SECTION 2: MANAGING CAPITAL
     Effective Cash Flow Management
     Techniques for Reducing Costs

SECTION 3: DOCUMENTING RESULTS
     Your Accounting System
     Tax Consequences of Growth

SUMMARY

APPENDIXES
     A. Sample Balance Sheet and Income Statement
     B. Sample Pro Forma Statements
     C. Blank Forms
     D. Self-Assessment Questionnaire
     E. How to Write a Business Plan
     F. Information Resources
_________________________________________________________________

INTRODUCTION

An expanding business offers the potential for numerous growth
opportunities. Employees benefit from business growth through
increased earnings and promotions. Customers benefit from
expanded products and services. Owners benefit through increased
profit potential. Society benefits through the new jobs created.
Managing this growth, although rewarding, can challenge your
skills and financial resources.

Financial management involves all the activities that enable a
company to obtain capital for growth, allocate resources
efficiently, maximize the income potential of the business
activity and monitor results through accounting documents. Such
management requires a well-written, comprehensive financial
management plan clearly outlining the assets, debts and the
current and future profit potential of your business.

This publication discusses the how to approach to financial
management (i.e., a method that makes the growth process easier
to understand and implement), in addition to providing general
information on the challenge of managing financial growth. It is
divided into three sections, with each focusing on important
aspects of financial management: Section 1: Obtaining Capital for
Growth; Section 2: Managing Capital and Section 3: Documenting
Results.

Successfully managing financial resources is important in new and
expanding businesses, so take time to develop and implement a
financial plan that will ensure the success of your business.

Managing Financial Growth

Managing the finances of a growing business requires persistence
and balance. To obtain the funding needed to finance growth, you
must understand the roles of these concepts and how to apply them
in managing a growing business. A brief discussion of these
concepts follows.

Persistence

In a growing business, financial resources are often viewed as
the major factor limiting growth potential. There are two methods
of improving your financial base: (1) grow gradually and allow
profits to fund additional growth and (2) seek outside funds
(i.e., debt or equity funding). Either approach will consume time
and energy, and you will experience some rejections. This is
where persistence is important. Your determination, combined with
a willingness to adjust your plans, will carry you through this
process.

Sustained growth puts stress on you and the financial resources
of your business. Achieving growth goals often takes longer than
you initially planned. However, you are not alone in the quest
for growth and expansion. Many successful business owners have
experienced the same problems and frustrations. To understand the
challenge ahead, visit successful local business owners and read
articles or books about their experiences. Inc., the Wall Street
Journal and some of the general business publications, such as
Business Week, Forbes and Fortune, all contain stories about
successful growing businesses. The business section in your local
newspaper features local success stories. Also, area development
corporations and chambers of commerce are excellent sources of
information on local businesses. Don't hesitate to take advantage
of these resources. You can learn valuable techniques and
concepts that will enable you to avoid many of the problems other
business owners have encountered.

Balance

The financial and operational aspects of growth must be balanced
when you expand your business. During a growth phase, for
example, the marketing function of the business may extend beyond
the business's financial capacity to sustain growth. To avoid
this dilemma, devise policies to balance the operational
functions of the business with the financial aspects of growth.

Here are several guidelines to help you balance the finances of a
growing business.

   *  Growth should be attempted only in businesses already
      profitable. To attain profit potential, a balance must be
      maintained between asset and liability items that are on 
      the balance sheet and operating items that are on the 
      expense and income reports. For example, if accounts
      receivable on a balance sheet average $50,000 and sales
      average $500,000 per year, a balance of 10 percent exists
      between these items. If growth is obtained in part by
      offering easier credit terms, the balance could be altered
      if the accounts receivable average $150,000 and are used to
      support sales of $1,000,000. Thus, the balance needed to
      maintain a profit has been altered. When growth is
      undertaken, profit will be negatively affected, at least
      initially.

   *  The existing debt position of the business must be balanced
      with equity, or additional equity must be obtained to 
      balance future debt. The rule of thumb is for the equity
      position on a balance sheet, expressed as equity divided by
      assets, to range from 30 to 50 percent. If your business 
      has an equity position of less than 30 percent and you wish
      to obtain financing for growth, a certain amount of money
      will have to be injected as equity to finance additional
      debt.

   *  Management skills and abilities must be balanced with the
      increasing demands on management in a growing business.

There are several simple examples of balancing opposing forces
that can be applied to business. One example is the financial
management concept. Financial management compares your company's
growth potential when financing the entire growth phase by
reinvesting profits to financing through an infusion of cash from
outside sources. The latter option accelerates growth; it follows
the concept of leverage and allows you to use equity to obtain
additional money so the business can grow faster. For example, if
you can use a 33-percent equity position and invest $100,000 in a
business, you can borrow $200,000 for a total investment of
$300,000. This allows the business to grow faster than using only
the $100,000.

When accelerating growth, the financial leverage concept works
only as long as the business is profitable or the return on
investment exceeds the debt expense. When this happens, the rate
of return received on the equity investment is greater. For
example, if you invested only the $100,000 and did not borrow any
additional money, the rate of return might be 10 percent.
However, if you used the $100,000 to obtain $200,000, and if the
debt is 12 percent and you make a return of 15 percent on the
entire project, the resulting rate of return on the $100,000 is
higher. The 3 percent made on the debt results in a total dollar
value of $6,000. The 15 percent made on the existing equity
(which would be $15,000), combined with the $6,000 made on the
debt would result in a final return rate of 21 percent on the
equity portion.

Profitability is important to business growth because it makes it
easier to obtain the financing needed to expand. This is the
opposite of how accounting systems are normally operated for tax
purposes. To reduce taxes, accountants and business owners often
try to show a loss or as little profit as possible, which allows
the business to retain more cash. From this standpoint, perhaps
your business should be profitable for several years before
initiating a growth phase. In many cases, however, you will not
or cannot take the time to accomplish consistent profitability.
If you are planning to expand your business, discuss this process
with the accountant who prepares your income statements or taxes
in order to legitimately transfer forward some of your current
operating expenses, thus increasing your current profits.

Other Considerations

The time you spend preparing for growth can also improve your
business in several other areas, including management. Therefore,
you should not implement growth procedures without thoroughly
examining all aspects of your business operations. Listed below
are several factors you should consider before initiating a
growth plan.

   *  Expect that your personal involvement and commitment to the
      business will increase during a growth cycle.

   *  Consider personal sacrifices and the sacrifices of people
      you associate with, including family. The rewards of growth
      can be substantial and, thus, are deemed adequate rewards
      for these sacrifices.

   *  Expect additional pressure on the time and resources needed
      to run the business, because it will take time and energy
      to organize the financial aspects of growth.

Before initiating a growth phase, be sure you have the time,
adequate personnel and financial resources to complete the
process.

There Is No One Right Way

Before you look at the different categories of financial
management for a growing company, remember there is no one right
way or easy method. Accept that you operate in a world of
uncertainty, in which decisions often are made without complete
knowledge of all the consequences. This approach can make
managing a growing business challenging and rewarding.

When financing a growth cycle, seek assistance from professionals
who know the process. Assistance is available through
consultants, accountants and lawyers and through services
provided by the government, such as the U.S. Small Business
Administration (SBA) and its resources (e.g., the Service Corps
of Retired Executives [SCORE], the Small Business Development
Centers [SBDCs] and the Small Business Institutes [SBIs] listed
in Appendix F: Information Resources).
_________________________________________________________________

SECTION 1: OBTAINING CAPITAL FOR GROWTH

Deciding To Actively Pursue Growth

A primary reason for pursuing growth is to increase profit. There
are two components that can be increased -- the absolute dollar
amounts of sales or the profit as a percentage of sales. If these
two can be achieved simultaneously, the resulting growth will be
very rewarding. A more careful decision process must be completed
in situations where there is a trade-off, such as between
decreasing the percentage of profit to sales (through reducing
prices) or increasing the dollar volume of sales (through
increasing prices).

Reducing prices to achieve growth is a strategy you might not
initially plan but must do to sustain growth after commitments
have been made. By charging lower prices to increase sales, you
usually decrease the gross profit margin. However, lower prices
may result in significant increases in the purchase quantity,
which then enables the business to earn a profit. The same
concept, only reversed, can apply to costs. For example, if you
increase costs in order to increase dollar sales volume, you
still decrease your profit margin. This latter approach is
feasible if you plan to increase marketing expenditures to gain
additional business.

Costs also can be increased from an accounts receivable
standpoint. A new business activity might increase sales by
adding customers with poor credit ratings, thus resulting in a
higher accounts receivable cost. Many managers of unprofitable
businesses believe the solution to their problem is to grow in
order to spread fixed costs over a larger number of units,
thereby improving the gross margin of the business. (A detailed
explanation of this concept is provided in the section
Determining the Break-even Point.)

Understanding Financial Statements

The balance sheet, income projection statement and the monthly
cash flow projection of funds are the statements used to manage
and report a business's financial operation. The balance sheet
and income statement will be explained in this section. The cash
statement is not always completed as the checking account
register provides the same information except that it isn't
summarized by categories.

The balance sheet and income statement contain meaningful
information about the business. The balance sheet indicates the
value of the business at a given point in time and is usually
prepared for the end of a typical reporting (or accounting)
period. The income statement covers a period of time (month,
quarter, year) and indicates the level of profit or loss based on
sales less expenses. (Examples of a balance sheet and income
statement are included in Appendix A.)

Balance Sheet

The balance sheet provides a summary of the owner's net worth at
a given time. The first section, labeled assets, usually appears
on the left side or at the top of the statement and includes the
business's assets in declining order of liquidity. The right side
or lower portion lists the liabilities and the owner's equity or
net worth. Liabilities include all commitments or contractual
agreements to be paid in the future. Examples of liabilities
include loan principal balances and accounts payable (money owed
for goods or services already received). The owner's equity is
the asset value that actually belongs to the owner. In a
corporation, this is usually divided into original capital and
retained earnings. The capital assets (i.e., equipment and
buildings) are valued at their original cost minus any
depreciation that has been taken in the past. This results in a
book-value balance sheet, because the real value of capital items
could be more or less than this calculation indicates.

Note that on the balance sheet the total assets equal the total
liabilities plus the owner's equity. The owner's equity position
is the relationship between the total assets and the total
liabilities. In the sample balance sheet in Appendix A, the
equity position is a percentage, 28.3 percent, that is calculated
by dividing the owner's equity ($57,945) by the total assets
($204,945).

Income Statement

The income statement (sometimes called profit and loss statement)
brings together the income generated and expenses incurred from
business activity over a specified period of time. This time
period can be a month, a quarter, a year or the year-to-date.

The difficulty in developing an income statement is in allocating
certain costs to the period of time covering the statement. One
example is depreciation. Many fixed assets, such as equipment and
building costs, cannot be included under expenses. To allocate
these costs properly, their purchase price must be divided by the
expected life in years or months, whichever corresponds to the
period covered by the income statement. Using the straight-line
method of calculating depreciation, their purchase price is
charged uniformly over the life of the assets. However, the
depreciation rate often is accelerated for income tax purposes.

Another difficulty in cost allocations are loans in which
payments are divided into interest and principal components. Only
interest is included on the income statement; it is treated like
a rent or lease payment. The principal is neither income when a
loan is received nor an expense when it is paid back.

The balance sheet and income statement are related to each other.
Your equity on the beginning balance sheet plus the profit (or
minus the loss) from the income statement equals your equity for
that period. Profit needs to be adjusted for any withdrawals that
are not expenses, such as payment of the loan principal or income
tax.

Developing Projections

The first step in undertaking growth is to develop projected
income statements, cash flow statements and balance sheets. All
potential lenders require these projections before approving
loans. These estimates also can be used to help you decide
whether to seek outside funding, even though this decision may
seem obvious based on your current market activities.

These projection statements, sometimes called pro forma
statements, should be developed for at least one year and perhaps
two to five years into the future. (Examples of pro forma
statements are included in Appendix B. Blank forms are included
in Appendix C.) You may wonder: How can I know what will happen?
To answer this question, divide the projections into steps. The
most critical step is balancing costs to sales in order to
determine a profit margin.

Profit margins for income projections should always be
reasonable, especially if outside financing is used. If the first
years of the projections show a loss, it will be difficult to
convince potential investors to invest in your business. If,
however, the projections show excessive profits, potential
investors may feel the project is unrealistic. This means that
your figures must be fairly conservative.

What is a reasonable profit margin? It is a profit margin that is
in line with the profit margins of the industry. For example,
$80,000 on a projected income statement is a reasonable
before-tax profit margin in the following case. First, all income
tax is subtracted at an estimated rate of 25 percent, leaving
$60,000. You quit a job that paid $40,000 to start this business;
therefore, you maintain this salary as being consistent with your
personal living expenses. This leaves $20,000 of profit. The next
step is to compare the remaining profit to the amount of equity
invested or the amount of your equity on the current balance
sheet. For this example, we will assume the equity level is
$200,000. The profit of $20,000 is divided by the equity of
$200,000, which results in a 10 percent rate of return. This rate
of return is reasonable for a growing business; however, the rate
of return could increase in the future because of the growth
process. Phenomenal rates of return, such as 100 to 1,000 percent
or higher, are possible in smaller businesses. (See Inc.'s list
of the 100 fastest growing companies.) Even though this is
possible, the rate of return should be conservative on a
projection.

Deciding the rate at which your company should grow is
challenging and demands flexibility. Flexibility can be difficult
if you already have a preconceived idea of the growth level you
want. Your idea may exceed the capacity of the business's
management and equity positions. It is helpful to develop several
projections because different levels of growth will have
different investment requirements and profit results. For
example, if a business is expected to grow to $500,000 in sales
per year, you may be able to continue renting a facility.
However, if the business is expected to grow to $800,000 in sales
per year, a new facility may be required and its cost will affect
the projected profit. The same can be true with items of
equipment, which also depend on the relationship between the
short- and long-term potential. The addition of a new building
can have a short-term, negative impact on profitability, but it
also can result in an improved profit margin for the business
within three to five years. Because input into a business
operation is not always proportional and can come in steps,
completing several projections based on different options will
help determine which projection is best.

Individual circumstances may require growth to be pursued at a
slower pace, yet you can end up with similar profits. For
example, you currently operate a business with sales of $600,000
per year, and you want the business to grow to sales of
$2 million by the third year. You might project both of the
following growth trends:

                      Example A 

              Year 1        $1.0 million 
              Year 2        $1.5 million
              Year 3        $2.0 million

                      Example B 

              Year 1        $1.8 million
              Year 2        $1.9 million
              Year 3        $2.0 million
 
As you can see, the result is the same. Example B illustrates an
initial high, fixed investment, used to support expansion, with
slower growth following. For example, a successful restaurant
with sales of $600,000 may build two more restaurants in
different cities and thus triple its total sales. Example A
reflects a situation in which growth is obtained more gradually
by incurring variable costs and reinvesting profits in the
business. For example, a restaurant may attempt to increase its
growth by maintaining the same single location, but adding new
services or additional operating hours.

You can further control your growth rate by recognizing that all
fixed costs are variable over time. Strictly speaking, fixed
costs are those costs that are stable for a given period (e.g.,
one year). However, when you consider growth over a three- to
five-year period, fixed costs can be treated more like variable
costs. For example, alternatives to purchasing a new, full-size
facility may include leasing facilities, constructing a smaller
facility or creating unique distribution channels.

Computer spreadsheet programs are excellent to develop
projections as they easily allow what if analysis in determining
different levels of growth. If such programs are not available,
seek help from professionals who provide services to small
businesses, such as SBA, SCORE, SBDCs and SBIs.

The costs of a growth cycle can be incurred in blocks or steps.
This is especially true for equipment and buildings; however, it
can also apply to marketing costs. For example, a manufacturing
company may have only one machine that completes a process
required of all its products. To double production capacity, the
company must decide between adding a second shift or adding a
second machine. Adding a second machine doubles costs in the form
of depreciation and other operating costs; adding a second shift
doubles personnel costs. Either way, the company must consider
the marketing option of adding a salesperson in order to increase
its sales volume to in turn support higher fixed costs.

Determining the Break-even Point

Break-even analysis can help you make decisions because it allows
you to visualize the relationships between costs that are spread
over time. Such analysis involves dividing costs into two
categories: fixed costs and variable costs.

Fixed costs are those costs that do not vary over a period of
time, or generally do not fluctuate with changes in sales volume.
These costs include the purchase price of buildings and
equipment. Variable costs are costs that vary depending on the
time period or the sales volume generated. These costs usually
include the cost of materials purchased for retail operations and
labor costs.

The textbook approach to break-even analysis is based on the
units of production. For business activities, it is better to
base such analysis on the dollar volume of sales of the business.
Break-even analysis can be expressed as a dollar amount and can
be displayed on a graph. On a projected income statement, a
convenient way of breaking out fixed costs and variable costs is
to treat the cost of goods sold and labor as variable costs and
all other expenses as fixed costs. Below is a sample income
statement:

                  Sales                $100,000
                  Cost of goods sold   $ 30,000
                  Wages                $ 20,000
                  Fixed expenses       $ 40,000
                  Profit               $ 10,000

The break-even point can be calculated as follows. First
calculate the contribution margin, which is defined as the
percentage of sales available for use toward fixed costs and
profit. In the above sample income statement, the variable costs
(goods plus wages) are 50 percent of sales, so the contribution
margin is 50 percent. The actual break-even point is the fixed
costs ($40,000) divided by the percentage of sales the variable
costs represent (50 percent), which equals $80,000. At this
point, all fixed costs as well as variable costs are covered. To
verify your answer, multiply 50 percent by $80,000. The answer is
the amount of the fixed costs, or $40,000. The variable cost at
this rate is $40,000 or 50 percent of $80,000.

The break-even point can be calculated using different
assumptions of what should be included in the fixed-cost portion.
If the business needs to generate enough profit to pay the
owner's wages plus the recovered debt principal and income tax
obligations, these costs should be included with the fixed-cost
amount; thus, the break-even point will be higher. The break-even
sales level usually covers a year; however, the time increment
can be broken down into months, weeks or days. In the above
example, the break-even point of $80,000 is equivalent to $266
per day (assuming a 300-day work year). This figure should be set
as your average daily goal; however, don't forget to consider
seasonal sales and daily fluctuations as well.

It is difficult to assure accurate projections, but if each
dollar item in a projection is carefully considered with regard
to the volume or capacity of the business, the resulting figure
should be relatively accurate. Final income statements tend to
show costs higher than what was projected. If plans are made
carefully, the result might be that profit is very similar to
what was projected; but some of the items will be higher or lower
than planned.

In projecting income in order to obtain financing, compile
figures conservatively. Bankers know it is very easy to come up
with lofty profitability projections and may discount an
application on that basis. Projections should indicate the
ability of the business to pay off debt while earning a
reasonable return on labor and investment.

Decisions on whether to grow and the rate at which to grow should
be based on the concept of improved value. Profits can be drawn
by the owner or reinvested in the business where they can
increase the asset basis of the business. A recommended strategy
for the owner-manager is to consider a combination of these
options.

Estimating Expansion Costs

An important part of growth is the budget, or the allocation of
funds to those activities that will bring about growth. There is
a fine line between not having enough money and having too much
money. The disadvantages of borrowing too much are (1) the
increased interest costs and (2) exceeding equity limitations.
The disadvantage of not borrowing enough is getting halfway
through a project and discovering there are not enough funds
available to complete it. The problem usually associated with
expansion is underestimating costs. The following sections
address the costs of buildings, equipment and inventory and the
cash tied up in accounts receivable and operating capital, as
they relate to estimating expansion costs.

Building Costs

To determine the cost of a building, choose a layout that can be
reduced to a blueprint or a sketch for contractors to bid on.
(Many contractors provide blueprints in conjunction with the
bidding process.) After you have blueprints or a layout, obtain
competitive bids from several contractors. Bids will allow you to
compare the abilities of individual firms to build efficiently
and ultimately can help you achieve lower costs. Be sure the
contractors are bidding on identical specifications and quality.
Many construction companies have specialty projects that may
match your company's project, possibly resulting in a lower
price.

If you do not know a contractor, check his or her credentials
with the bank and other references, such as customers and
suppliers of building materials. Reputable contractors are
accustomed to working under performance bonds. You should
investigate this option. Bonding is a system in which the
contractor promises to complete the work at a time, quality and
price specified in the contract. If the work is not so completed,
the contractor forfeits the bond and the proceeds are used to
reimburse the customer's loss. Bonding is usually handled through
an insurance company. If you request a bond, you should receive a
copy of the agreement directly from the insurance carrier.

Next, discuss with the contractors their relationship with
subcontractors. Usually a general contractor will negotiate and
work with subcontractors in the electrical, plumbing, heating,
and certain other trades. Subcontractors are usually coordinated
by the general contractor and complete and invoice their work
through the contractor. Should you choose to directly employ
subcontractors, you will be responsible for coordinating their
work. This can reduce costs in some cases. If this is done, the
subcontractors should also be asked to submit a bond for the work
performed. (Also, be sure to check with utility companies to
determine hookup costs and whether deposits are required.)

Scheduling is another aspect of construction that should be
carefully planned to reduce costs. Often unknown factors -- mainly
the weather -- can affect the schedule. Such factors should be
figured into the time allowed for the construction process, as
increased construction time can result in additional interest
charges. It is customary for a construction contractor to receive
periodic payments during a project to cover costs. The new
building owner usually pays 90 percent of the cost of work
completed until the project is done. Thinking through this whole
process in advance will reduce the need for any change in orders,
which can result in additional costs.

Equipment Costs

New equipment purchases often accompany an expansion. Contact
several equipment suppliers to discuss your needs, the
capabilities of specific equipment and prices. Other related
expenses associated with equipment should be investigated, such
as delivery, hookups to utilities, installation costs and unusual
operating expenses.

Leasing should be considered as an alternative to purchasing
equipment. Usually leases can be obtained from the company that
sells the equipment, but there are also leasing companies and
leasing divisions at banks. The disadvantage to leasing is that
the rate usually is higher than the interest rate for purchasing
equipment. The major advantage of a lease, however, is the low
down payment or equity position required to initiate the lease.
Most leases place the responsibility for repairing equipment with
the lessor. This can reduce the risk of having to incur repair
expenses at a time when your cash flow is tight and repair costs
difficult to cover. Be sure you understand all provisions of the
lease agreement. Many companies offer lease-to-purchase plans
that enable you to eventually purchase the equipment. This can be
a viable option.

Delivery of equipment, whether new or leased, should be carefully
timed with completion of other construction activities so the
equipment is not sitting idle.

Inventory Costs

Inventory is the product, in its various stages of completion,
that is finally sold to generate revenue and receivables. It is
an important aspect of a company's operating cycle because it is
a window into the company, i.e., it will tell how well the
company produces the goods and services it sells. Inventory
should always be valued at the lower cost or market value to
ensure that its value is not overstated on the balance sheet.

The level of inventory in an expanding business should be easy to
determine because it is based on a comparison of past inventory
levels to past sales. The inventory turnover ratio is the cost of
goods sold divided by the average inventory and is the ratio that
is often used when a growth phase is initiated. The cost of new
inventory should be considered because it might be higher than
the cost of existing inventory. It is usually assumed in an
expansion process that the existing inventory can be easily
liquidated and, therefore, the inventory turnover ratio will
increase. However, the opposite could occur if you attempt to
increase sales by offering an increased inventory. Also, it is
usually assumed that, as inventory increases, carrying costs will
decrease because of the additional economies of scale gained with
the additional inventory. Again, this should be carefully
determined by investigating actual carrying costs.

Inventory is important to both new and expanding business
because, before it is sold and becomes a receivable, it
represents invested cash. When separated into its parts (raw
materials, work in process and finished goods), the inventory
cycle will identify lags and structural difficulties a company
has in the production process.

Accounts Receivable

Like inventory, future accounts receivable are projected from the
existing receivables on the balance sheet and are normally in the
same proportion to future sales as current receivables are to
current sales. For example, past sales of $100,000 and accounts
receivable of $5,000 represent a relationship of 5 percent of
accounts receivable to sales. If growth is projected to $500,000,
then projected accounts receivable at 5 percent would be $25,000.

It is possible for accounts receivable to increase out of
proportion to the existing figure. For example, accounts
receivable could easily be a higher proportion if, in the process
of increasing sales, relationships with slower paying customers
were established. To illustrate this, if actual accounts
receivable average $5,000 when sales are at $100,000, a variance
of 1 percent would result in accounts receivable of $6,000, a
difference of only $1,000. However, at an operating level of
$500,000 sales, a 1 percent negative variance translates into a
$5,000 difference. If this is not planned for, it would be more
difficult for you to come up with $5,000 than it would be to come
up with $1,000.

Estimated Expansion Expenses

The last and most difficult cost category to project is the
additional cash needed to support increased activity. The best
method for calculating this amount is to use a cash flow
projection. Cash flow forms (see cash flow projection in Appendix
B) are available through local SBA, SCORE, SBDC and SBI offices.
To complete the form, distribute the cash income over the months
when the sales growth should occur (cash expenses are calculated
the same way) and then determine the expenses needed to generate
the desired increase in income.

During a business expansion, cash balances will normally decrease
for a while, and then show a gain. This gain will occur only if
the business is profitable. It can be difficult to predict when a
growth in cash flow should begin. As a general rule, it should be
within the first operating year, preferably by the third or
fourth month; however, this may vary.

Seasonal fluctuations in cash receipts and cash expenditures
should be built into the cash flow projection. This will indicate
those months cash should be reserved to cover excess expenses
when cash out exceeds cash in. If the business is profitable and
some portion of profit is reinvested in the business, then the
cash flow projection should account for this as well. The impact
of income tax on cash flow also should be included.

For each level of sales volume, a certain residual amount of cash
should be retained in the business. For example, if sales have
been $50,000 per year, the cash balance carried might be $1,000;
if sales are at $500,000 per year, the cash amount carried might
be $10,000. These amounts are somewhat arbitrary and depend on
the nature of the business; however, each increase does not have
to be proportional to sales. Instead, the residual cash amount
should be based on the cash flow projection for operating the
business.

After determining cash needs, a certain amount could be budgeted
to cover unexpected contingent liabilities or to compensate for
slow turnover in receivables. Select this figure carefully
because investors may be skeptical if it is too large. It is
better to estimate a little higher on some of the account
categories that have definite needs, thus reducing the need for a
large contingency amount.

Purchasing Another Business

At times expansion can be accomplished by purchasing another
business. In this situation, the expansion costs equal the costs
of purchasing the business plus the amount of money needed for
improvements and operating expenses. Many industries have
standard rules that should be considered on how to determine the
purchase price of a business.

Obtaining Financing

Bank Requirements

To obtain bank financing for your business, the relationship
between your company and the banker should be open and honest. If
this is not the case, perhaps it is time to consider a different
bank. When shopping for a new bank, do not make a decision based
upon a particular loan officer, because this relationship can
change if the loan officer is replaced. Therefore, consider both
the relationship with the loan officer and the relationship with
the bank. It is also possible for your business to grow to the
extent it does not fit the capacity of its existing bank. If this
happens, consider establishing a new relationship with a larger
bank that can handle your company's future needs.

The first step in obtaining financing for an expanding business
should be to understand and meet the exact requirements and
concerns of the bank. To avoid risks and make safe investments,
bankers primarily base their decisions on the collateral and
equity positions. Other concerns of a banker include cash flow,
profitability and management ability.

Collateral

Debt can be either secured by collateral or covered by a firm's
assets. A bank considers collateral the final alternative (last
resort) for collecting money if payments are not made on loan
principal. The Uniform Commercial Code* establishes procedures
whereby a bank can seize any collateral pledged in a loan
agreement in case of default on the loan. The value of collateral
is usually listed in the asset section of the balance sheet; its
value should always equal or exceed the amount of the loan.

     * American Law Institute, Uniform Commercial Code, written
       by National Conference of Commissioners on Unified State
       Laws, 1987.

Often in a business start-up, the initial balance sheet will show
an adequate collateral position; however, six months to a year
later, the balance sheet may show a decreased collateral
position. One example of this is getting a loan to purchase a
vehicle. The depreciation rate for the first six months to one
year will exceed the amount paid on the principal. Thus,
depreciation is usually computed on an accelerated basis. If you
purchase a vehicle for $20,000 and borrow the full amount at
10 percent for four years, the monthly payment would be
$507.25 per month. The day you purchased the vehicle and took out
the loan, the collateral value matched the loan amount exactly.
If you use a straight-line rather than an accelerated method of
calculating depreciation, the vehicle will last four years, and
cost $5,000 per year. At the end of the first year, the book
value of the vehicle, which often equals its real market value,
is $15,000. However, the amount owed on the principal at the end
of one year is $15,720.36$720.36 more than the book value. This
point clearly illustrates why banks require a down payment on
this type of loan. The down payment usually ensures that the
asset value always exceeds the loan principal balance.

It is also possible to lose collateral in the first years of a
business by borrowing money and then gradually using that money
to pay for expenses (such as utility bills and marketing costs)
that do not result in asset appreciation. For example, if you are
planning to spend $1,000 to have brochures printed, the cash in
the bank before the brochures are printed is good collateral
because it can be used by the bank if you default on the loan.
However, once this money is spent to buy the brochures, the
collateral value is much weaker because the expenditure has value
only for your business and cannot be easily transferred to
others.

When a bank forecloses on a failing business, it is often unable
to recover the full amount the owner paid for the assets, because
of depreciation and the nature of a force sale. As a result,
foreclosure leaves the banker with assets worth less than the
dollar value indicated on your balance sheet. For these reasons,
you can understand why it is easier to borrow money to buy fixed
assets (such as inventory, equipment, buildings and accounts
receivable) than it is to borrow money for marketing expenses or
general operating costs.

Equity

Bankers also review the current and projected equity position of
a business. Equity is listed as owner's equity or a combination
of capital and retained earnings. The owner's equity is usually
calculated by subtracting all liabilities from all assets. The
important aspect of equity is not so much the dollar amount but
the ratio of equity to assets or debt.

A growing business usually shows an equity position of 30 to
50 percent in relation to total assets, i.e., the owners own 30
to 50 percent of the company. Initially, such an equity position
may be adequate, but it may become inadequate when additional
money is needed for growth. Because of the need to maintain the
equity ratio in its relative position, additional equity may need
to be brought into the company. For example, suppose a company's
total assets are $100,000; total debt, $70,000; and owner's
equity, $30,000. The equity-to-assets ratio is 30 percent. For
this business to grow to an asset level of $200,000, the owner
needs to provide an additional $30,000 of equity and then borrow
another $70,000 (debt). Ways to bring equity into a business
include

   *  Venture capital funds

   *  State and federal financing programs

   *  Private investment

   *  Owner's personal investment

An alternative to obtaining equity is to wait and reinvest the
business's profits to finance the growth.

Cash Flow Projections

For any business growth cycle, cash flow projections that compare
cash receipts and cash expenses should be completed. Bankers
realize that bank loans are paid from the business's cash flow,
so you must convince them that there is adequate potential to
repay the loan. A detailed explanation of the cash flow
projection is included in the section Effective Cash Flow
Management on page 10 or see Instructions for Cash Flow
Projection in Appendix C. 

Income (Profit and Loss) Projection Statement

The profit and loss statement, more commonly known as an income
statement, reflects the dynamic changes that occur over time
between two balance sheets. It reflects the company's operation
as a result of management's efforts to generate a profit. The
income statement matches all revenues with corresponding expenses
for a specific period of time and reports the company's ability
to generate profits (excess of revenues over expenses).

Income projections should indicate when profitability will occur.
Even though profit and cash flow can be unrelated, the
possibility of having an adequate cash flow definitely increases
when a projected income statement shows a profit. Bankers
generally assume that a loan can be repaid if the business is
profitable. The banker's concern in this process is, Where is the
profit going? If the profit is being reinvested into expansion
activities, such as increasing inventory or marketing expenses,
the banker's concern is whether or not loan payments can still be
made. See Appendix C for Instructions for the Income Projection
Statement.

Management Ability

A growing business usually has the advantage over a new business
of having records on past performance that reflect the owner's
management ability. Management and the organization must be
flexible to allow for growth and change. Consider the following
question: If growth occurs, will management be able to handle the
new situation? Your answer should help you determine whether you
will need to hire additional managers or develop current
management skills.

Simply developing and implementing a strategic plan to obtain
additional funding will test management's ability to plan and
handle growth. The activities involved in obtaining needed
financing are in themselves a new challenge to management.
Management weaknesses should be addressed as a part of the growth
process.

Personal Financial Statement

Usually banks will require personal financial statements from all
owners. Personal financial statements are the balance sheets of
the business's owners. They are an important part of a business's
financial package because (1) they verify the company financial
statements, (2) they identify hidden company liability or equity
and (3) they reveal other activities vying for an owner's
attention. Strong company financial statements are generally
reflected in strong personal financial statements; therefore, the
stronger an owner's financial statements, the better his or her
chances of obtaining the loan.

Wealth accumulated on a personal balance sheet is an informal
method of judging an owner's ability to obtain, manage and keep
money. Personal financial statements should not include existing
business activities; these figures should be supplied separately.
As indicated above, the banker is looking at potential collateral
and adequate equity.

Market Value Balance Sheet

One of the problems in a growing business is that the existing
equity or collateral position can be artificially low because of
accelerated depreciation. Using accelerated depreciation results
in a book-value balance sheet that has less equity or collateral
than a market-value balance sheet. The former shows assets at
their depreciated value whereas the latter shows the assets at
their current market value. Thus it may be important to provide a
banker with a market-value balance sheet.

A typical way to develop a market-value balance sheet is to
present your current book-value balance sheet with an additional
column for the market value. At the bottom of this balance sheet
explain each column. Documentation of market value can be
provided through appraisals or advertisements that include prices
on similar equipment or assets. The market-value balance sheet
usually increases the equity dollar amounts and the
equity-to-assets ratio. This should result in a banker's
willingness to loan a larger amount for growth activities.

Business Plan

A business plan is the blueprint or road map for the owners to
successfully carry out growth in a business. This plan
communicates the intentions of the owner to others and can be
used to obtain financing. The content of the business plan is
determined by the planning process itself, and includes research
documenting growth potential. Business plans include

   *  Cash flow projections

   *  Income statements and balance sheets with a detailed
      narrative of how growth must be attained 

   *  Justification for numbers used in financial statements

Details on writing a business plan can be found in many sources.
See the outline of How to Write a Business Plan in Appendix E. In
addition, the SBA, SBDCs, SCORE chapters and SBIs can provide
assistance in developing business plans.

Other Sources of Financing

Small Business Administration Loan Guarantee Program
The SBA Loan Guarantee Program provides financing in cases in
which banks feel uncomfortable with the risk by allowing banks to
recover their money from the SBA if the borrower defaults. The
SBA guarantees 90 percent of the loan up to $150,000 and
80 percent up to the maximum of $750,000. Terms for the loan are
usually better than those for regular bank loans. Compared to a
conventional bank loan, the life of the loan can be longer, the
equity position less and the interest rate slightly lower. The
interest cost is usually less for two reasons. First, SBA has
established an upper limit of 2 percent above the prime rate for
the program; second, bankers are usually willing to offer lower
interest rates because of the SBA's guarantee.

The life of an SBA loan can be longer than that of conventional
bank loans. This results in a lower monthly cash payment, which
can enhance the cash flow of the firm during the early years of
the loan. The equity position for an SBA loan can be 30 percent
compared to the 40 to 50 percent required by banks. (The SBA
percentage can vary depending on the type of business and your
past credit history.)

The bank loans the money and the SBA guarantees the loan. Because
of the guarantee, banks can loan over their normal limit, which
can be an incentive for small banks. The guaranteed portion of
the loan is not considered part of the banks' regular loans.
There is a 2-percent fee for the guarantee, which is sometimes
reduced to 1 percent for loans under $50,000. This fee is paid
from proceeds when the loan is allocated. The upper limit for an
SBA loan guarantee is $750,000. There is no lower limit, however,
most banks prefer to work with amounts over $10,000.

Other State Financing

State financial programs are also available to small business
owners who need financing. Most programs are justified by the
economic development and the jobs created within the state by the
business. At times these programs can take a second mortgage
position compared to banks or other sources of debt and can
charge lower interest rates. Many state programs have special
programs for women, minorities or manufacturing businesses.
_________________________________________________________________

SECTION 2: MANAGING CAPITAL

Effective Cash Flow Management

Cash flow analysis shows whether your daily operations have
generated enough cash to meet your obligations, and if major cash
outflows combine with major cash inflows to form a positive cash
flow or a net drain. Any significant changes over time will also
appear in this analysis.

It is extremely important to have enough cash on hand each month
to pay the cash obligations of the following month. A monthly
cash flow projection helps to project funds and compare actual
figures to those of past months and enables you to eliminate cash
deficiencies or surpluses. Cash flow deficiencies indicate a need
to alter plans to provide more cash. Cash surpluses may indicate
excessive borrowing or idle money that could be invested.

Cash itself does not create new income for the business.
Therefore, the cash account balance on a balance sheet actually
should be small relative to other assets. The object is to
develop a plan that will provide a well-balanced cash flow.

Cash flow analysis establishes a budget for the cash requirements
for the business. During stable business conditions, there is
little need to develop a budget because future business activity
can be predicted from past trends. For growing businesses, the
relationship between sales and expenses changes, thus
establishing the need for a cash flow projection. The cash flow
projection indicates a flow of dollars; therefore, if dollar
amount changes early in the year, it is going to affect the
remaining months by the same amount. Understanding cash flow and
how it is computed is a very important part of cash flow
projections.

SBA has an excellent cash flow form (See Appendix B). The SBA's
version is a simplified form; it allows for only one sales entry
and one accounts receivable entry per month. Completing this form
will enable you to compute projections correctly, and better
understand the relationship of cash flow in the finances of a
company. This form is available at SBA area offices and through
SCORE chapters and SBDCs.

Unfortunately, cash flow management is often limited to keeping
track of the checkbook balance. The problem with relying on this
system is that it can result in your using cash that should be
reserved for something else. Some practical steps can be taken to
improve your ability to manage cash flow, especially during the
changes brought about by growth. These include

   *  Collecting receivables

   *  Tightening credit requirements

   *  Increasing sales

   *  Pricing products

   *  Securing loans

If your company has multiple divisions, products or locations,
develop individual cash flows and then consolidate them to
determine the complete cash flow picture. The SBA form has a
column for actual results in addition to the estimated column.
This allows you to record what you actually have spent and
compare it against the estimate. A cash flow projection is
usually computed on a yearly basis. To compensate for changes
occurring after the projection, it is advisable to update it
periodically to determine if there will be a detrimental effect
later. If your company's new area of growth is an activity that
is seasonal, i.e., opposite the current season, the cash flow
projection will help determine the combined impact.

In a cash flow statement it is important that all sales and
expenses listed for a particular month are balanced. To
compensate for situations in which expenses are due at the first
of the month but revenue does not come in until the end of the
month, complete a daily or weekly cash flow statement. Another
way to compensate in these situations is to change your month's
beginning and ending dates; for example, go from the 15th of the
current month to the 15th of the next month. This will resolve
the problem because it will ensure that one month's cash from
sales arrives before expenses are due.

Computer spreadsheet programs can be extremely helpful for
computing cash flow projections. They allow for what if analysis,
which provides several possible outcomes. If you have the
software, you can design your own spreadsheet, or you can get
templates from business service providers.

Good accounting records and good projections are important tools
for a small business. Qualified accountants are necessary to help
keep your records accurate and current. However, you can reduce
your accounting expenses by producing your own summary statistics
and projections. With the help of a personal computer and a good
financial management plan, you can successfully project future
activity and use the what if analysis to test various management
decisions.

Cash Flow Versus Income Projections

One of the major distinctions between cash flow and income
projections is that the two can appear unrelated. The differences
result from how principal payments and depreciation are recorded.
Loan principal payments are included as cash outflow but are not
recorded on the income statement. On the other hand, depreciation
is included as a business expense of the income statement but not
as cash outflow.

In a business in which sales are growing, the inventory and
accounts receivable are also probably growing. These different
areas of growth can affect the income and cash flow. For example,
if inventory increases during the year, the dollar amount used to
purchase materials will increase, and thus the cash flow or
available cash will decrease. This can cause an inadequate cash
level during a slow period. A similar situation can occur with
accounts receivable. If accounts receivable increase, then
expenditures to provide services to customers will increase, but
there will be no incoming cash to cover these increased costs.
The accounts receivable, inventory and cash-on-hand amounts are
all represented on a business's balance sheet.

In a growing business in which the accounts receivable and
inventory are fairly constant, the cash flow should be adequate
if the business is operating profitably. In this situation, any
depreciation amounts should be retained for future expansion, and
profits should be used to retire the loan principal. Such a
strategy is important for a growing business. If depreciation and
money from accounts receivable are used for operating cash flow,
this can result in a lower equity position, making it difficult
to borrow money to replace worn-out assets.

Borrowing Money

Loans from various financial institutions are often necessary for
covering short-term cash flow problems. Revolving credit lines
and equity loans are common types of credit used in this
situation. Short-term borrowing works fine as long as everything
goes well. However, if your business experiences a downturn in
volume, short-term borrowing can cause a bank to call in a loan
or cancel its credit line, leaving your business without adequate
operating cash.

Long-term loans amortized monthly can improve a business's
operating cash position. Amortized monthly means the monthly
payment is constant and includes interest and principal portions
that change in proportion as the loan is paid off. During the
early stages of the loan, the interest portion is high and the
principal is low; however, this situation reverses itself over
the life of the loan.

In a situation in which long-term debt is used and the business
has a seasonal peak demand, the excess cash should be invested in
easily accessible, interest-bearing, low-risk accounts, such as
savings accounts, a short-term certificate of deposit or a U.S.
Treasury note (commonly called a T-bill). The money should not be
used for cash operating expenses or to avoid a shortfall when
cash is needed. Keeping excess cash on hand reduces both the
growth and the return on investment.

Tax Obligations

Income and payroll tax obligations can also affect cash flow. If
a business is profitable and growing, the cash that should be
retained for income tax payment and payroll tax can easily be
spent for other items that support growth. This results in a cash
shortage when income taxes are due. To avoid this shortage, make
adequate projections and analyze current income statements to
determine future tax obligations. As these obligations are
determined, cash should be set aside to meet them.

Managing Credit

The credit a company extends to its customers can be crucial in
its impact on cash flow if the customers do not pay on time. New
businesses and growing businesses often do not have the advantage
of previous experience with their customers and can find
themselves extending credit to high-risk customers. Research
should be done in advance to determine a customer's ability to
pay bills on time.  Methods of determining this include obtaining
a copy of a Dun & Bradstreet report on a potential customer and
requiring potential customers to complete a credit application
that asks questions about the business's ability to pay.
References should be checked to get others' perceptions of
customers and their integrity. (There are several publications
available through the U.S. Government Printing Office that
discuss credit. Complying With the Credit Practices Rule and How
to Write Readable Credit Forms are both published by the Federal
Trade Commission and are available through the Superintendent of
Documents, U.S. Government Printing Office, listed in the
Information Resources in Appendix F.

When working in a business activity that sells directly to
customers, it is advisable not to extend store credit but to use
charge cards. Information on offering credit card purchases can
be obtained through your company's bank. Banks charge businesses
different rates for credit card sales, based on the dollar volume
of the sales, so check several bank sources. The disadvantage of
the credit card is it costs you a specified percentage, ranging
from 2 to 5 percent, of the total dollar volume customers charge.
On the other hand, customers often expect the convenience of
credit cards.

As credit and terms are tightened, more customers will pay cash
for their purchases, thereby increasing your cash on hand and
reducing your potential for a bad debt expense. While tightened
credit is helpful in the short run, it may not be advantageous in
the long run. Looser credit allows customers more opportunity to
purchase your products or services. Just be certain the increase
in sales is greater than the increase in bad debt expenses.

Discounts for Early Payment

The practice of receiving cash discounts for early payment
illustrates a major difference between the cash flow and
projected income statements. Not taking advantage of a cash
discount by paying bills promptly can improve your immediate cash
flow, but can also negatively affect profitability. On the other
hand, by paying early, your costs will be lower and profit margin
higher, but your cash flow could be strained. Certainly a
business should consider taking advantage of discounts, but
should also know when and how to capitalize on them. Your company
might also consider offering these discounts to help its cash
flow.

Increasing Sales

Increasing sales appears to increase cash flow, but be careful.
For many companies, a large portion of sales are purchased on
credit. Therefore, when sales increase, accounts receivable, not
cash, increase. Receivables are usually collected 30 days after
the purchase date. Sales expenses are most often incurred before
receivables are collected. When sales rise, inventory is depleted
and must be replaced. Because receivables have not yet been
collected, a substantial increase in sales can quickly deplete a
firm's cash reserves. With a computer, you can monitor this
critical data and increase the time required to consider
alternate what if scenarios.

Techniques for Reducing Costs

Techniques for reducing costs will be discussed in two sections:
the first suggests methods for reducing the cost of normal
operations and the second shows how to evaluate and deal with
risks that can increase costs.

Analyzing Your Costs

Keeping Costs within Industry Averages

There are several studies available comparing industry averages
and financial ratios. Three popular ones are Annual Statement
Studies by Robert Morris Associates, One Liberty Place,
Philadelphia, PA 19103; Almanac of Business and Industrial
Financial Ratios by Leo Troy, PhD, Prentice-Hall, Englewood
Cliffs, NJ 07632; and Financial Studies of the Small Business by
Financial Research Associates, P.O. Box 7708, Winterhaven, FL
33883-7708.

These studies usually are published annually and can be purchased
from the publishers, or you can get the information through small
business service providers, including libraries, banks, SBDCs,
SBIs and SBA offices. Membership in a trade association includes
access to financial averages for the industries in that
association. Comparing financial ratios allows a business to
identify costs and relationships that are out of line with others
in the industry. Reducing these costs will produce a more
competitive situation.

Determining Highest Costs

All expense categories on an income statement should be reviewed
to identify opportunities to reduce expenses. The first place to
look for cost reduction opportunities is those cost categories
highest as a percentage of sales this is often the cost of sales
(COS). For example, if COS is 50 percent of sales, a 10-percent
reduction in this category will result in a 5-percent reduction
in overall costs. This can be compared with some of the fixed
costs in the operation, such as interest, rent or depreciation
costs, which are often in the area of 5 to 10 percent of sales.
If you reduce an expense item that is only 10 percent of sales by
10 percent, you only reduce your overall expenses by 1 percent.
Determining your highest costs can guide you on how to allocate
time and resources toward cost reductions and will result in a
substantial decrease in costs.

Buying Groups

Often small businesses have trouble purchasing goods at a
discounted price because they do not have the volume buying power
of larger companies. One method of reducing purchasing costs is
to join or create buying groups of like businesses that purchase
the same products but are not in direct competition with one
another. This type of relationship can result in quantity
discounts and a better selection of merchandise.

Inventory

Inventory has several associated costs in addition to its
purchase price. This is true for raw materials, work in process,
finished goods and retail/wholesale inventory. If inventory can
be reduced and sales maintained, the result will have a positive
impact on profitability.

The inventory turnover ratio is a good measure of the
relationship between inventory and sales. This ratio is
calculated by dividing the cost of sales by the average inventory
for that period of time. A high ratio normally indicates an
efficient use of inventory. However, a high ratio can also mean
you are missing sales opportunities because items that customers
are requesting are not in stock. The proper relationship must be
determined for each situation.

Inventory carrying costs usually include interest, storage,
insurance, obsolescence, physical damage and deterioration. These
costs can be reduced by applying just-in-time inventory and
manufacturing techniques. For a manufacturer, just-in-time
techniques involve structuring the flow of materials through the
plant to reduce inventory in all categories. The benefit of this
technique is that it reduces holding costs. Just-in-time
inventory results in better management and scheduling of both raw
materials coming into the plant and inventory leaving the plant.
These techniques are usually associated with manufacturing but
can also be applied to retail/wholesale businesses.

The economic order quantity formula is one method of calculating
the optimum amount of inventory to order.

The formula is

   x equals the square root of 2 times r times o divided by c

     r = number of units used/sold per period; 
     o = cost of placing the order and 
     c = cost of carrying the inventory per unit per period.

This formula compares the cost of ordering inventory to the cost
of carrying it and identifies the minimum cost point, thus
balancing the two costs against each other. The formula indicates
the number of units to be ordered. The lead time to place the
order can be determined based on usage and the time it takes to
receive the order. In a growing business, where inventory is
increasing, the economic order quantity formula can help
determine the new quantity to order. Economic order quantity is
explained in inventory, finance or operations management texts.

Use Contracts

If business activity is generated by contracts, consider
negotiating the payment time as well as the price. This technique
will improve overall cash flow. It also will affect expenses
because less cash is needed to carry the activities of the
business, thus reducing interest costs. Instead of requesting
payment at the end of the project, schedule monthly or weekly
payments for completed work. This is also accomplished by
requiring deposits for materials purchased during the production
process.

Overhead Costs

Reducing overhead costs, such as rent, utilities and interest,
immediately lowers a company's break-even point. When the
break-even point is lowered, the company can reach profitability
sooner and experience profitability over a larger range of sales.
As sales increase, you will be able to retain a greater
percentage of sales dollars as profit. One of the keys to
managing overhead costs is to keep these costs in balance with
the sales level. Often overhead costs are spent up front to
generate the desired sales.

Management Compensation

One way to reduce costs during an expansion phase is to reduce
the owner's compensation until the business is in a position to
pay the owner better. Compensation should match an owner's living
expenses. Profit returned to a business that is growing should be
a good investment for the owner.

Use of Bar Code

Expanding businesses need to carefully balance the costs
associated with increased business activity. The bar code system
for inventory and pricing can reduce costs in selling and
controlling inventory. When this system is used for checkouts,
labor costs are reduced, as are chances for error. Also, through
its increased accuracy in controlling inventory, the bar code
system can decrease the number of dollars tied up in inventory.
This common system is called the Uniform Product Code and is
available through the Uniform Code Council, Inc., 8163 Old Yankee
Street, Dayton, OH 45458, (513) 435-3870.

Leasing Equipment

Leasing is a way of reducing costs if the equipment can be leased
when you need it, or if the time period you need the equipment is
less than a normal ownership period. Equity or net worth
requirements may be less if leasing is used to expand the
business. The disadvantages of leasing are that it does not allow
net worth to build over time (unless it is a lease<196>purchase
arrangement) and it is usually more expensive than an equal
period of ownership.

Training Employees

An expanding business may need to add employees who lack
experience in its business area and need training. There are
several ways to reduce training costs. One option is the Job
Training Partnership Act (JTPA), a federally funded program that
assists in finding employees and that will reimburse up to
50 percent of employees' wages for the first 2 to 26 weeks of
employment. People hired must meet certain eligibility criteria
because this program is intended to provide an incentive for
hiring individuals who either are unemployed or have low income.
The program also compensates for training expenses, but only when
such training is merited. For specific information on the
program's requirements, contact your local JTPA office.

State governments have other job-related training programs based
on job specifications. These programs can be researched by
contacting local employment agencies, state and federal
departments of labor or community colleges. If employees need to
learn a specific skill, the U.S. Department of Labor has an
apprenticeship program that allows training to be provided at a
reduced cost to the employer. You can obtain information on this
program by contacting the U.S. Department of Labor office in your
state.

Reducing Costs by Changing Business Organization

Expansion

At times an expansion can result in spreading existing fixed
costs over a larger sales volume. In this case, the decision to
increase size is justified. Whenever you have to increase fixed
costs to attain higher sales levels, investigate the proportion
of the increase before proceeding with growth plans.

An example is operating a wholesale business from a warehouse.
Once the warehouse is established, it becomes a fixed cost and
you can increase sales by adding a salesperson -- a variable cost.
The variable cost per unit of sales (i.e., salespeople
productivity) should remain constant in order to result in a
lower fixed cost per unit sold. Increased variable costs can take
away the benefit of lower fixed costs per unit. This is true
until the warehouse reaches its capacity to function. One of the
concerns here is that variable costs remain constant. For
example, if the additional salespeople cover a territory farther
from your base operation, there are additional costs associated
with travel and unproductive sales time. If the variable costs
deplete the advantage, then the decision to expand is
unprofitable.

Diversification

Diversification is traditionally considered an option for
business growth. One of the major advantages of pursuing
diversification is that it can balance seasonal or yearly cycles
in your business, or it can be used to balance a multiyear cycle
influenced by economic conditions. Usually the area selected for
diversification should be related to your current business
activity.

There are two types of diversification: vertical and horizontal.
Vertical diversification involves expanding either up or down the
channel of distribution. An example of vertical diversification
is a manufacturer who has been selling to independent wholesalers
and then starts his or her own wholesale operation. Horizontal
diversification involves adding other similar products or
business lines. An example of horizontal diversification is a
business that manufactures and sells ice and then starts bottling
water. The bottled water is related to its current activity and
uses some of the same equipment, thus reducing overhead costs.
These two examples of diversification provide a framework for
identifying methods for creating additional business.

Joint Ventures

Joint ventures also can be a method for cutting expansion costs
in production processes, purchasing and sales. These
relationships should be established carefully so they benefit
both parties and allow a way for either party to end the
relationship. The cost savings often occur in the area of fixed
overhead expenses, as these costs are now shared.

Reducing Costs by Managing Risks

Risk is always associated with business activity. In a stable
company risk is manageable, but for a growing company risk can
easily become monumental. Unexpected occurrences may result in
additional expenses that increase the cash outflow. The following
is a list of potential risks and options to help reduce their
impact on your business.

Lawsuits

Lawsuits usually can be avoided by complying with regulations or
policies and taking appropriate precaution not to harm others.
Knowledge of federal and state regulations is the responsibility
of management. Two potential areas for a lawsuit are
relationships with employees and the potential for physical harm
to people or damage to their property. A major cost with a
lawsuit, in addition to legal fees, is the possibility of bad
publicity, which may take time, money and extra effort to
overcome. Discuss your concern over being sued with an attorney.
Talking to a business owner who has been sued may help avoid
problems as well as identify the courses of action to take if you
are sued. Even if all precautions have been taken, the risk of a
suit remains. Liability insurance is one means of reducing the
potential impact of the risk. At a time of growth, liability
insurance should be evaluated to determine if it is still
adequate.

Patent Infringements

Owners of a manufacturing or product development business should
investigate the possibility of obtaining patents for new
products. Usually patent infringement occurs because owners
didn't realize the product was patentable. If there already is a
patent on the new product and the patent owners become aware of
your product when it is marketed, they could force you to stop
production and sue you for patent infringement. Because of this
potential, even if obtaining a patent is not being considered, it
is prudent to conduct a patent search to assure that no one else
has a patent for the product you plan to produce. This can be
done through patent attorneys, patent depository libraries or
computer data base systems.

Machine Breakdowns

Most business activities use equipment that can break down
unexpectedly. Not only is there the possibility of additional
repair costs but also there is the likelihood of having to
replace the equipment entirely. These kinds of costs can be
managed by implementing a preventive maintenance program. The
potential for breakdown is related to the age of the equipment
and the care it has been given. If you are purchasing new
equipment for a growth phase, the potential for unforeseen repair
costs should be reduced greatly. When expansion is started with
used equipment, the risk of the equipment breaking down
increases.

In general, money should be allotted for equipment repair and
replacement; depreciation dollars are normally accumulated for
the purpose of replacing the depreciated assets. However, in a
case in which repair costs will prolong the life of the asset,
the dollars set aside for depreciation may be used to cover
repairs. This should apply only to unusual repairs, not normal
maintenance. In a business that has just begun to grow, the
depreciation account has not accumulated a significant amount;
therefore, a reasonable amount should be planned for later
financing.

Usually manufacturers are concerned about this type of risk, but
retail businesses also have equipment that needs to be examined,
including cash registers, computers, air conditioners and
delivery vehicles.

Supplier Problems

During an expansion phase, relationships with new suppliers will
be established or existing relationships will be expanded,
especially for volume purchases. It may be a good policy to
consider using diverse suppliers. Dependence on one supplier can
jeopardize your potential sales volume if that supplier develops
a problem and cannot produce. As supplier relationships expand,
consider formal written relationships instead of relying on
verbal understandings. These can clarify any issues that later
could cause problems. Pass on to suppliers any obligations you
have with your customers in areas in which supplier performance
can adversely affect your business.

Customer Credit

In a growing business, establishing relationships with new
customers and expanding relationships with existing customers can
create the potential for noncollectible accounts. To obtain new
customers, it may be tempting to relax past credit policies. A
careful determination of a new customer's ability to pay should
be considered and follow-up collection procedures implemented. An
amount should be set aside in financial projections for bad debt
expenses. This can be proportional to the bad debt expense
incurred in the past. However, the amount could become higher as
a portion of sales if credit terms are relaxed to obtain
increased sales.

Bank Failure

Banks are not fail-safe. They have had and will continue to have
an impact on businesses, especially when they close. Most banks
are insured by the Federal Deposit Insurance Corporation (FDIC),
but you should verify this. Banks financial statements are
available for public review. A good way to protect your company
from the effects of a bank failure is to obtain the bank's
financial statements and compare the total deposits to the number
of outstanding loans. Even if your company's bank is insured by
the FDIC, should it fail, it takes time for the FDIC to release
the cash your company had in the bank. This could put a severe
strain on the cash flow of the business.

Physical Damage

Even though in most cases physical risks are covered by
insurance, whenever a disaster strikes -- whether it is a fire,
hurricane, flood, earthquake or tornado -- the disruption to the
business will be greater than the damage to the property. The
major risk to a business is lost sales because of (1) the
business's inability to function and (2) the time it takes to
restructure the business.

Personnel Problems

There is insurance to protect against most risks involving
people, including you or a key employee becoming disabled or
dying. Even with the insurance, there are additional costs
associated with the loss. In the case of either death or
disablement, the business can be named as the beneficiary, but
the dollars recovered cannot repair all of the damage caused by
the business's inability to serve its customers' needs.

Also consider the risk involved with losing company secrets. Do
you have a system to protect your trade secrets? Is there the
potential for one of your employees to share your business
secrets? If you don't have procedures to protect trade secrets,
take the time to develop and implement such policies.

Unions

If your operation is non-union, employees may vote to establish a
union, which is their legal right. Responsible management,
however, is one way of deterring employees from forming a union.
Unions usually are formed when wage levels or other working
conditions are unacceptable to the employees.

Unknown Laws

The best way to avoid costs in this category is to conduct
business according to the law. Attorneys or state and federal
regulating agencies can help review the requirements that pertain
to your business. Trade associations also can be helpful in
staying abreast of developments. Two areas particularly important
to a business are labor and environmental laws. Violating the law
can result in costly fines and penalties.

Tax Requirements

Whenever your business is growing and changing, you should
investigate the impact taxes will have on the business, such as
property, sales, payroll and federal and state income taxes. Pay
particular attention to sales tax if your company is expanding
into new geographic areas. Each state has its own sales tax
system, and states are cooperating in collecting sales tax from
out-of-state businesses.

Warranty Claim Risks

Manufacturing companies have product warranty requirements. These
requirements can involve state and federal laws. A warranty claim
on a single product may not be devastating, but if a major flaw
is detected in your product and all the products sold are
recalled, it can be quite a challenge to overcome. For more
information, obtain the publication Product Warranties and
Servicing published by the U.S. Department of Commerce, Office of
Consumer Affairs through the Superintendent of Documents, U.S.
Government Printing Office, Washington, D.C. 20402.
_________________________________________________________________

SECTION 3: DOCUMENTING RESULTS

Your Accounting System

The accounting system of a growing business must change and adapt
to new needs after growth. Changes in accounting may be resisted
by employees who are comfortable with the existing system. Also,
when accounting systems change, it becomes more difficult to
compare past trends with current results. Further, a new or
improved accounting system can cost time and money to develop and
implement, placing an additional strain on limited resources.
Despite these negatives, a growing business usually needs
additional management information from the accounting system.

The purpose of most accounting systems is to provide management
with information, control and feedback. If your accounting system
is used only for providing information to the Internal Revenue
Service (IRS), it is not fulfilling its total purpose. If
business growth is occurring in existing product or service
lines, the current system will apply to the new growth cycle.
However, because the number of transactions will increase, the
accounting system should be evaluated to ensure the data are
accumulated in an efficient manner. This evaluation should
include whether certain types of transactions need to be
recategorized.

During growth or a change in the form of ownership, all previous
accounting standards need to be reconsidered to determine if
changes are necessary. Examples include

   *  Cash-based versus accrual accounting

   *  Single- versus double-entry accounting

   *  Fiscal year

   *  Form of ownership

Cash-based Versus Accrual Accounting

If you are using the accrual accounting system, there probably is
no need to change. If you have been using the cash-based
accounting system, perhaps the accrual system should be
considered. In cash accounting, transactions are recorded as
income or expenses when the cash has actually been transferred.
(For a retail business in which only cash is received on the
income side, the cash and accrual systems are the same.) In
accrual accounting, transactions are recorded when they occur or
when the goods or services are transferred. In this system,
payment is usually received after the product or service has been
delivered. For example, your business sold and delivered $10,000
worth of materials on December 28 but was not paid until
January 5. If you were operating on a cash-based accounting
system, you would record the income in January; if you were on an
accrual accounting system, you would record the income in
December. The accrual system can affect your tax obligations.
However, the main advantage of accrual accounting is that it
results in more meaningful information for controlling business
activities. This is true because expenses that generate income
are brought together in the same time period that the income is
reported.

Single- Versus Double-entry Accounting

Growth might be better managed with a double-entry system.
Single-entry means that a transaction is entered only once into
your system. Double-entry involves entering a transaction twice:
first as a debit and then as a credit. For example, in a
double-entry system, the payment of an invoice would be recorded
as a materials purchased expense and as a deduction from the cash
account. Double-entry accounting is more accurate than
single-entry accounting because each transaction is entered as a
balanced item -- with offsetting increases and decreases on each
side of the asset/liability or revenue/expense ledger. Thus, the
resulting balances should be identical.

Choosing a Fiscal Year

When you begin a business, you choose the operating fiscal year,
whether it is a calendar year or some other 12-month period that
is convenient for you. When the business begins to grow,
reconsider your fiscal year. Perhaps the new activity will be
seasonal, i.e., in a different season than you currently use. You
should consider some type of tax year that matches the season and
avoids splitting the season into two tax years.

Form of Ownership

The accounting system is slightly different for a sole
proprietorship, a partnership or a corporation. During a growth
phase, you should perhaps consider other forms of ownership and
implement the accounting system that matches that form.

Multiple Accounting Systems

Managers need guidance to make decisions. If you operate with a
single or a simple accounting system that produces a single
income statement and balance sheet, consider developing two or
three separate accounting systems, one for each area of your
business, which can then be consolidated into one income
statement and balance sheet. The separate systems will enable you
to know what is happening.

This is similar to the concept of developing profit centers for a
business. If you operate a retail business, profit centers are
divided into different functional areas in your store, or, if you
are a manufacturer, they are based on your product lines.
Accounting systems for each profit center allow you to determine
the profitability of each product. If each product line or profit
center category is generating a profit, then the overall business
will be profitable on a consolidated accounting statement.

An example is a retail hardware store generating one income
statement. Management might benefit from dividing the business
into functional areas such as household, sports and tools, and
developing income statements for each of these areas. This
information still must be consolidated into one statement, but
the individual statements provide information that will help
maximize profitability in each area. This system also works for
branch offices, which are often established to increase business
activity. Each branch office has its own operating system, then
they are pulled together into a consolidated system.

Accounting systems are set up so that information flows from a
large number of entries to a final income statement and balance
sheet. Income statements allow trends to be tracked by listing a
current month's sales and expense amounts, current month's
percentages, year-to-date activity and year-to-date percentages.
The current month percentage is the expense amount for the month
divided by sales. For example, if sales were $100,000 and wages
were $10,000, the percentage for wages is 10 percent ($10,000
wages divided by $100,000 sales). This system must be maintained,
although categories may need to be added in a growing business.
The owner of a growing business should be able to access reports
that track the efficiency of the operation. If the information is
compiled appropriately, it will be readily available at minimal
cost.

For example, on an income statement for a restaurant, the cost of
sales and labor are separate items, including their dollar
amounts and their percentage relative to sales. Combine these and
compare them over a time period. If prepared food is purchased,
the food cost per meal served will be higher but the labor cost
lower. This is particularly true in a restaurant in which the
labor and cost of food can be inversely related. The important
factor overall may be the combined percentages of labor and
material compared to sales. (However, be aware that trends are
not always accurate for comparison because they may fluctuate
seasonally. Compare trends from the same time frame each year.
This can be done by using a table or a graph to express the
comparison.)

Management can determine operational efficiency by several
factors not measured in dollars. Efficiency means that the
business operation is maximizing output levels for a given amount
of time or resources. The management information generated by the
accounting system results in an accurate measure of efficiency,
but there is other information that can be accumulated to measure
efficiency. An example is the number of prospect phone calls made
over a certain time. By accumulating, recording and tracking this
information, the efficiency of the sales staff can be calculated.
In a manufacturing business, this can be the number of hours it
takes to perform certain tasks or the resulting data collected
from a statistical process control system.

Because these reports increase the fixed costs of your business,
any report request should be thought through carefully to ensure
that the result is of value to the user. With computerized data
systems, it is very easy to produce a lot of paper that isn't
meaningful or usable for management.

Computer Applications

During growth, many business owners-managers believe a computer
is necessary to complete accounting needs for the business. This
can be true, but there are certain pitfalls to consider before
selecting a system. If you have a system, future growth may cause
you to exceed the system's current capacity, which will require a
reevaluation of your system.

There can be costs associated with purchasing equipment and
hardware, but perhaps the most difficult cost to measure is the
hidden cost involved with implementing a computer system. Even
though computers are supposed to decrease the use of labor and
add to the efficiency of the operation, this often is not the
case with a computer system. Before installing a system, become
familiar with how the system works and what it produces by
developing and implementing a manual or paper accounting system.
Once the manual system is completed and transferred to the
computer, you will know exactly what the system can and cannot
produce.

One of the main criteria for selecting a computer system is that
the resulting information be usable based upon the company's
needs. There are software packages specifically designed for
accounting. Even though they are expensive, they may cost less
overall compared to developing a system of your own. There are
usually four issues that should be considered in developing a
computerized accounting system:

  1. Design an accounting system programmed in a computer 
     language.

  2. Purchase a software spreadsheet package and program the
     spreadsheet.

  3. Purchase software specifically designed for accounting
     systems.

  4. Purchase software designed for a specific accounting system
     for a specific type of business.

All of these should be explored and reviewed carefully before you
decide to implement a particular system. Assistance should be
sought not only from computer and software vendors but also from
accountants and professionals with knowledge of accounting and
computer applications. It is sometimes tempting to purchase
software that employees are familiar with rather than to purchase
a system tailored to the business. This may work, but if the
employees quit and the software was not the best for the
business, it could be challenging to keep the system going.

In addition to considering the computer equipment and software,
explore the availability of printing options as they can affect
the usefulness of the information produced. Computer printers
vary in printing speed, quality of print, cost and page layout
and dimensions. All of these factors have an impact on the
appearance of your output information.

Relationship with Your Accountants

Changes in the accounting system will cause you to reevaluate
your relationship with accountants. If you are doing your own
accounting, you may need to consider whether you should hire
assistants or seek additional training. Either way, a growing
company requires more complex accounting decisions. Growing
companies can find themselves in a position of having outgrown
their accountant. If this happens, search for a professional
service that matches the level of your business activities.

Accountants can design new systems for managing your business
information. Be sure you get what you need because, occasionally,
accountants design systems for tax purposes and have difficulty
considering the broader need for information management in your
business. If you feel this happening, rely on the accountant for
your tax obligations but consider seeking assistance from others
in designing a system consistent with your business needs.
Remember, the accounting system should be designed so your
business grows into it. When you are making changes, try to
anticipate what will be happening in the future to avoid the need
for further change in your system. The advantage of this is it
will be easier to maintain a consistent method of analyzing
trends from year to year.

Tax Consequences of Growth

Growth should produce additional profit, which will result in an
increasing tax obligation. Several aspects of taxes affect
growth. Tax reduction often does not result in a decreased tax
obligation but transfers payment of the obligations to a future
time. In a real sense, total tax dollars paid over a long-term
period are going to be fairly constant. The idea usually is to
reduce taxes now, then invest the money so that as taxes become
due more money is available.

One of the primary tasks of tax planning is contemplating
profitability over the next 10 to 20 years. If projections show
profits will be low in the first years and higher thereafter,
consider transferring profit to the first years. Should
projections indicate higher taxes or profit in the first years,
arrange to pay tax now. Several factors influence this decision.
One possibility is to amortize expansion costs that are unrelated
to capital improvements. According to IRS guidelines, a capital
improvement can be depreciated based on a determined life span.
This span usually involves physical assets that wear out, as
compared to expansion costs that can have a positive effect on
sales volume in the future. An example is any expenditure used to
develop a channel of distribution that is going to be in
existence for some time. This cost can be calculated and
amortized over a minimum of five years, thus reducing expenses in
the current year. A reduction in expenses means more profit,
which means paying more tax currently. When higher profits occur,
amortization will transfer more expense to that time period,
resulting in lower profit and taxes.

The following areas are among those that should be investigated
to determine if their costs, when associated with an expansion,
can be amortized:

   *  Training for employees

   *  Travel and related expenses

   *  Advertisement related to the expansion

   *  Surveys and market research

   *  Salaries of those involved in the expansion

   *  Organization costs for the form of ownership

   *  Research, experimental and development costs

   *  Agreements not to compete

   *  Cost of acquiring leases

   *  Cost of commissions or finder fees

This list is not comprehensive.

Keep in mind the effect taxes will have on interest and
depreciation. During the early part of a business, interest and
depreciation are usually high, resulting in increased expenses
and, thus, decreased profits. Later, when the principal is paid
down, interest is low and depreciation is close to nonexistent,
you will owe higher taxes, which will result in a higher tax
rate.

The current depreciation system used for all assets placed in
service after 1986 is Modified Accelerated Cost Recovery System
(MACRS). This system divides capital improvements into time
periods of 3, 5, 7, 10, 15 and 20 years. The allowable rate of
depreciation should be used when projected income statements are
developed to justify the growth potential of a business.

If a change in the ownership structure of the business is
contemplated during a growth period, be sure to consider the
subsequent tax obligations. If you own several separate
businesses (with various situations of profit and loss), it may
be more cost effective to control them through a parent holding
company so tax losses in one business can be balanced against tax
owed in another business. Also, the form of ownership, whether it
is a sole proprietorship, a partnership or a corporation, can
have an impact on personal income taxes. In certain business
situations, the corporation can be a means of reducing taxes and
in other cases the sole proprietorship can result in lower income
or payroll taxes.

During an expansion, consider the current tax status of programs,
such as investment credit, which allows acceleration of
deductions for capital improvements. In the past, these
accelerated methods were called investment credit. Currently they
are available to growing businesses through the Section 179
deduction. This allows an additional deduction in the current
year which means lower profits and less tax. This deduction also
is available through Section 38 property that has a useful life
of at least three years. (Check with the IRS for specifics about
the maximum allowance.) The amount of the deduction is subtracted
from the basis in order to begin calculating depreciation on the
capital assets. There are specific guidelines on the taxable
income limit, the carryover of an allowable deduction and the
original cost of the asset.

Investigate the impact taxes will have on growth by talking with
tax accountants or by studying tax information provided by the
IRS. Two IRS publications that address growth issues are
Publication 534, Depreciation, and Publication 334, Tax Guide for
Small Business. You can obtain copies through your local IRS
office or check the listing in Appendix F: Information Resources.
_________________________________________________________________

SUMMARY

When future growth is anticipated by business owners, the
excitement and challenge often draw the owner's attention away
from the financial aspects of the business. Business history is
full of examples of businesses that accomplished growth but were
unable to sustain their new position, often because of lax
attention to managing the finances that support growth. Financial
management needs to correspond to the expansion activities being
undertaken. Giving proper attention to managing finances will
enhance growth potential and sustain levels of sales once they
are obtained. Financial planning should be viewed not as an
obstacle but as a means of ensuring your success.

The challenge of a growing business should be carefully weighed
against your personal drive to achieve what you are attempting.
It often seems the time and effort it takes to achieve goals in
business increase more than what was originally anticipated. Part
of a well-devised plan is to have options open to compensate for
possible areas that do not develop as expected. To have these
options identified so they can be implemented immediately can
often make the difference between success and failure. To a great
extent, growth potential is based on your ability to know
yourself. You must either have the personal abilities to complete
the growth, or you must know your limitations and have resources
available to cover them. (See the self-assessment questionnaire
in Appendix D.) Also, in some instances, business owners rely too
heavily on outside expertise or employees and are misguided or
misunderstand their ability to assist in obtaining growth.

The encouraging side of growth is that many others have
undertaken and achieved growth successfully in business. There
are many success stories in which people have improved their
income potential and their net worth.
_________________________________________________________________

APPENDIX A: SAMPLE BALANCE SHEET AND INCOME STATEMENT

The following balance sheet and income statement provide examples
of the information that should be currently available before
attempting to increase a business's sales. These statements are
the standard that is acceptable for communication of financial
information to banks and are the usual format developed by
accountants. These statements result in management information
that helps management determine what action should be taken for
future business potential.

                    New Business Balance Sheet
                          (Current Data)
     _______________________________________________________

     Assets
     Current assets
       Cash                                        $  2,174
       Accounts receivable                           28,459
       Notes receivable                              24,216
       Inventory                                    143,000

         Total current assets                      $197,849

     Property, plant and equipment
       Equipment                                     17,988
       Vehicles                                       8,000
       Furniture and fixtures  
        Total cost of PPE                            25,988
          Less accumulated depreciation              18,892
        Book value of PPE                             7,096

               Total assets                        $204,945

     Liabilities and Equity
     Current liabilities
        Accrued expenses
        Accounts payable                             71,000
        Current portion of long-term debts           11,802

          Total current liabilities                  82,802

     Long-term debt                                  64,198
     
          Total liabilities                         147,000

     Owner's equity                                  57,945

          Total liabilities and equity             $204,945
     _______________________________________________________

                  New Business Income Statement
                     (Current Year-To-Date)

                              Current Month     Year-To-Date
                                $       %         $        %
  Sales

    Beginning Inventory      38,000   100.00   450,000   100.00
    Materials purchased     143,000            138,850
    Ending inventory         23,500            286,150
  Cost of goods sold         23,500    92.00   279,000    62.00

     Gross profit            14,400    38.00   171,000    38.00

  Operating and fixed expense
    Wages                     7,500    19.74    90,000    20.00
    Payroll tax                 750     1.97     9,000     2.00
    Benefits                    400     1.05     5,000     1.11
    Accounting and legal          0     0.00     1,000     0.22
    Advertising                 475     1.25     5,265     1.17
    Sales expenses               85     0.22     1,000     0.22
    Interest                    700     1.84     9,000     2.00
    Utilities                   275     0.72     3,000     0.67
    Telephone                   330     0.87     4,000     0.89
    Supplies                    400     1.05     5,000     1.11
    Office supplies             140     0.37     1,570     0.35
    Repair and maintenance      100     0.26     1,100     0.24
    Freight                      50     0.13       450     0.10
    Insurance                   833     2.19    10,000     2.22
    Depreciation                425     1.12     5,100     1.13
    Vehicles                    200     0.53     2,600     0.58
    Rent                          0     0.00         0     0.00
    Outside services             75     0.20     1,000     0.22

    Miscellaneous               165     0.43     2,000     0.44

  Total operating and fixed 
    expenses                 12,903    33.96   156,085    34.69

      Operating profit        1,537     4.04    14,915     3.31
_________________________________________________________________

APPENDIX B: SAMPLE PRO FORMA STATEMENTS

  *  Income Projection Statement

   *  Cash Flow Projection

   *  Balance Sheets

The following projections are based upon the historical
statements provided in Appendix A. These are based on the actual
situation and include obtaining an additional loan amount to
finance the growth of the business. The income statement, cash
flow and balance sheet items are all balanced or in the proper
relationship to the historical statements. In these projections,
growth in sales is expected to go to $685,000 from a level of
$450,000 for the first year; the business is expected to double
in size within three years.

                  Income Projection Statement
                     Business Name Here

                                     First    Second    Third
                                     Year     Year      Year

Gross Sales                        685,000   753,500   828,850
  Beginning Inventory              161,000   177,100   177,100
  Materials Purchased              440,800   484,800   533,368
  Ending Inventory                 177,100   177,100   177,100
Cost of Goods sold                 424,700   484,880   533,368
    Gross profit                   260,300   268,620   295,482

Fixed Expenses
Wages                              137,000   150,700   165,770
Outside services                         0         0         0
Accounting and legal                 1,600     1,600     1,600
Advertising                          8,000     8,800     9,680
Travel and Freight                     400       400       400
Rent                                15,456    15,456    15,456
Depreciation                        11,600    11,600    11,600
Supplies                            10,000    10,000    10,000
Utilities                            3,600     3,780     3,969
Telephone                            4,700     5,170     5,687
Interest (new loan)                 10,294     9,155     7,884
Interest (existing loans)            8,485     6,988     5,342
Repairs                              2,000     2,000     2,000
Taxes                                    0         0         0
Insurance                           12,000    13,200    14,520
Other                                1,000
Misc.                                3,000     3,000     3,000 

Total                              229,134   241,849   256,907

     Net profit                     31,166    26,771    38,575

     Income Tax                      6,856     5,890     8,486

     Owner's withdrawal                  0         0         0

     Profit                         24,309    20,882    30,088
     _____________________________________________________

    ** The Following Table is Presented in Two Sections. To
          Red Properly, Please Match Line Numbers**


Name of Business:                     Cash Flow Projection    

 Months    Start-up Sept.    Oct.   Nov.    Dec.    Jan.    Feb.
 1. Cash on hand   12,174   2,821   1,829   1,248   6,606  28,112
 2. Cash receipts  51,431   9,141  52,997  57,785  71,240  45,895
    Loan or other 
     injection              
 3. Notes receivable2,018   2,018   2,018   2,018   2,018   2,018
 4. Cash available 65,623  53,980  56,844  61,051  79,864  76,025
              
              
Cash paid out              
 5. Purchases-goods43,497  30,273  34,681  34,681  30,273  25,865
 6. Gross wages    11,417  11,417  11,417  11,417  11,417  11,417
 7. Outside services    0       0       0       0       0       0
 8. Supplies          833     833     833     833     833     833
 9. Repair/maintenance  0     400       0       0       0   1,600
10. Advertising       300     300   1,800     600     600     600
11. Travel & freight    0     400       0       0       0       0
12. Accounting/legal  133     133     133     133     133     133
13. Rent            1,288   1,288   1,288   1,288   1,288   1,288
14. Telephone         392     392     392     392     392     392
15. Utilities         240     300     350     400     400     350
16. Insurance       1,000   1,000   1,000   1,000   1,000   1,000
17. Taxes               0       0       0       0       0       0
18. Interest 
      (new loan)      898     891     884     877     869     862
19. Interest 
    (existing loans)  760     751     741     732     722     713
20. Miscellaneous     250     250     250     250     250     250
21. Other              83      83      83      83      83      83
22. Subtotal       61,091  48,711  53,852  52,685  48,261  45,385

23. Loan principal
      (new loan)      780     787     794     801     809     816
24 .Loan principal
    (existing loans)  931     940     949     959     968     978
25. Income tax          0   1,714       0       0   1,714       0
26. Capital purchases           
27. Owner withdrawal    0       0       0       0       0       0

28. Cash paid out  62,802  52,152  55,596  54,446  51,752  47,180
              
29. Cash position   2,821   1,829   1,248   6,606  281,12  28,846
                              ______

              Part 2 of Above Chart -- Match Line Numbers
                                       Time Period: Year One

       Mar.    Apr.    May    June    July    Aug.    Total
 1.  28,846  25,540  24,382  29,347  34,996  38,932 
 2.  53,430  61,650  61,650  62,335  62,335  58,225  688,114


 3.   2,018   2,018   2,018   2,018   2,018   2,018   24,216
 4.  84,294  89,208  88,050  93,700  99,349  99,175 



 5.  39,089  43,497  39,089  39,089  39,089  34,681  433,800
 6.  11,417  11,417  11,417  11,417  11,417  11,417  137,000
 7.      0       0       0       0       0       0        0
 8.     833     833     833     833     833     833   10,000
 9.       0       0       0       0       0       0    2,000
10.     600     600     600     600     600            8,000 
11.       0       0       0       0       0       0      400
12.     133     133     133     133     133     133    1,600
13.   1,288   1,288   1,288   1,288   1,288   12,88   15,456
14.     392     392     392     392     392     392    4,700
15.     300     250     250     250     250     260    3,600
16.   1,000   1,000   1,000   1,000   1,000   1,000   12,000
17.       0       0       0       0       0       0        0

18.     854     847     839     832     824     816   10,294 

19.     703     693     683     673     663     652    8,485
20.     250     250     250     250     250     250    3,000
21.      83      83      83      83      83      83    1,000
22.  56,942  61,283  56,857  56,839  56,821  52,605  651,334


23.     824     831     839     846     854     862    9,842

24.     988     998   1,008   1,018   1,028   1,038   11,802
25      . 0   1,714       0       0   1,714       0    6,856
26.                                                        0
27.       0       0       0       0       0       0        0

28.  58,754  64,826  58,704  58,704  60,418  54,506 

29.  25,540  24,382  29,347  34,996  38,932  44,669 

     _______________________________________________________

                          Balance Sheet
                        Business Name Here
                 First Year of Business Expansion

     Assets
     Current assets 
      Cash                                    12,174
      Accounts Receivable                     28,459
      Notes Receivable                        24,216
      Inventory                              161,000

     Total Current Assets                    225,849

     Property, plant & equipment
      Land                                         0
      Building                                24,000
      Equipment                               63,988
      Vehicles                                 8,000
      Furniture & fixtures                         0
     Total property, plant & equipment        95,988
      Less accumulated depreciation          (18)892) 
     Total long-term assets                   77,096  

         Total assets                                   302,945


     Liability & equity 
     Current liabilities
      Accrued expenses                             0
      Accounts payable                        71,000
      Current portion of debt (new)            9,842  
      Current portion of debt (existing)      11,802
    Total current liabilities                 92,644

      Long-term loan (new)                    88,158
      Long-term loan (existing)               64,198

    Total long-term liabilities              152,356
    Total liabilities                        245,000

      Owner's equity                          57,945 

     Total liabilities and equity                       302,945
                      ___________________________

                            Balance Sheet
                          Business Name Here
              After First Year of Business Expansion

     Assets
     Current assets
      Cash                                    44,669
      Accounts Receivable                     25,345
      Notes Receivable                             0
      Inventory                              177,100

     Total Current Assets                    247,144

     Property, plant & equipment
      Land                                         0
      Building                                24,000
      Equipment                               63.988
      Vehicles                                 8,000
      Furniture & fixtures                         0
     Total property, plant & equipment        95,988   
      Less accumulated depreciation          (30,492) 
     Total long-term assets                   65,496

         Total assets                                   312,610


     Liability & equity
     Current liabilities
      Accrued expenses                             0 
      Accounts payable                        78,000
      Current portion of debt (new)            6,619
      Current portion of debt (existing)      11,802    
    Total current liabilities                 96,421

      Long-term loan (new)                    81,539
      Long-term loan (existing)               52,396

    Total long-term liabilities              133,935
    Total liabilities                        230,356

      Owner's equity                          82,254  

     Total liabilities and equity                       312,610

_________________________________________________________________

APPENDIX C:  BLANK FORMS

                  INCOME PROJECTION STATEMENT

                   Industry J F M A M J J A S O N D Annual Annual
                      %                               total   %

Total net sales
  (revenues)          _     _ _ _ _ _ _ _ _ _ _ _ _     _     _  
 Cost of sales        _     _ _ _ _ _ _ _ _ _ _ _ _     _     _  
 Gross profit         _     _ _ _ _ _ _ _ _ _ _ _ _     _     _  
 Gross profit 
   margin             _     _ _ _ _ _ _ _ _ _ _ _ _     _     _  
                
Controllable 
   expenses    
 Salaries/wages       _     _ _ _ _ _ _ _ _ _ _ _ _     _     _  
 Payroll expenses     _     _ _ _ _ _ _ _ _ _ _ _ _     _     _  
 Legal/accounting     _     _ _ _ _ _ _ _ _ _ _ _ _     _     _  
 Advertising          _     _ _ _ _ _ _ _ _ _ _ _ _     _     _  
 Automobile           _     _ _ _ _ _ _ _ _ _ _ _ _     _     _  
 Office supplies      _     _ _ _ _ _ _ _ _ _ _ _ _     _     _  
 Dues/subscriptions   _     _ _ _ _ _ _ _ _ _ _ _ _     _     _  
 Utilities            _     _ _ _ _ _ _ _ _ _ _ _ _     _     _  
 Miscellaneous        _     _ _ _ _ _ _ _ _ _ _ _ _     _     _  
 Total controllable 
   expenses           _     _ _ _ _ _ _ _ _ _ _ _ _     _     _  
                
Fixed expenses
 Rent                 _     _ _ _ _ _ _ _ _ _ _ _ _     _     _  
 Depreciation         _     _ _ _ _ _ _ _ _ _ _ _ _     _     _  
 Utilities            _     _ _ _ _ _ _ _ _ _ _ _ _     _     _  
 Insurance            _     _ _ _ _ _ _ _ _ _ _ _ _     _     _  
 Licenses/permits     _     _ _ _ _ _ _ _ _ _ _ _ _     _     _  
 Loan payments        _     _ _ _ _ _ _ _ _ _ _ _ _     _     _  
 Miscellaneous        _     _ _ _ _ _ _ _ _ _ _ _ _     _     _  
 Total fixed 
   expenses           _     _ _ _ _ _ _ _ _ _ _ _ _     _     _  
                
Total expenses        _     _ _ _ _ _ _ _ _ _ _ _ _     _     _  
                
Net profit (loss) 
   before taxes       _     _ _ _ _ _ _ _ _ _ _ _ _     _     _  
 Taxes                _     _ _ _ _ _ _ _ _ _ _ _ _     _     _  

Net profit (loss) 
   after taxes        _     _ _ _ _ _ _ _ _ _ _ _ _     _     _  

The income projection (profit and loss) statement is valuable as
both a planning tool and a key management tool to help control
business operations. It enables the owner-manager to develop a
preview of the amount of income generated each month and for the
business year, based on reasonable predictions of monthly levels of
sales, costs and expenses.

As monthly projects are developed and entered into the income
projection statement, they can serve as definite goals for
controlling the business operation. As actual operating results
become known each month, they should be recorded for comparison
with the monthly projections. A completed income statement allows
the owner-manager to compare actual figures with monthly
projections and to take steps to correct any problems.

Industry Percentage

In the industry percentage column, enter the percentages of total
sales (revenues) that are standard for your industry which are
derived by dividing

          cost/expense items by total net sales x 100%

These percentages can be obtained from various sources, such as
trade associations, accountants or banks. The reference librarian
in your nearest public library can refer you to documents that
contain the percentage figures, for example, Robert Morris
Associates' Annual Statement Studies (1 Liberty Place, Philadelphia
PA  19103)

Industry figures serve as a useful benchmark against which to
compare cost and expense estimates that you develop for your firm.
Compare the figures in the industry column to those in the annual
percentage column

Total Net Sales (Revenues)

Determine the total number of units or products or services you
realistically expect to sell each month in each department at the
prices you expect to get. Use this step to create the projection to
review your pricing practices.

   *  What returns, allowances and markdowns can be expected?

   *  Exclude any revenue that is not strictly related to the
      business.

Cost of Sales

The key to calculating your cost of sales is that you do not
overlook any costs that you have incurred. Calculate cost of sales
for all products and services used to determine total net sales.
Where inventory is involved, do not overlook transportation costs.
Also include any direct labor.

Gross Profit

Subtract the total cost of sales from the total net sales to obtain
gross profit.

Gross Profit Margin.

The gross profit margin is expressed as a percentage of total sales
(revenues) it is calculated by dividing

              gross profits by total net sales

Controllable Expenses

   *  Salary expenses -- Base pay plus overtime.

   *  Payroll expenses -- Include paid vacations, sick leave, 
      health insurance unemployment insurance and social security
      taxes.

   *  Outside services -- Include costs of subcontracts, overflow
      work and special or one-time services.

   *  Supplies -- Services and items purchase for use in the
      business.

   *  Repairs and maintenance -- Regular maintenance and repair,
      including periodic large expenditures such as painting.

   *  Advertising -- Include desired sales volume and classified
      directory advertising expenses.

   *  Car, delivery and travel -- Include charges if personal car
      is used in business, including parking, tolls, buying
      trips, etc.

   *  Accounting and legal -- Outside professional services.

Fixed Expenses

   *  Rent -- List only real estate used in the business

   *  Depreciation -- Amortization of capital assets.

   *  Utilities -- Water, heat, light, etc.

   *  Insurance -- Fire or liability on property or products.
      Include workers' compensation.

   *  Loan repayments -- Interest on outstanding loans.

   *  Miscellaneous -- Unspecified; small expenditures without
      separate accounts.

Net Profit (loss)        *  Subtract total expenses from gross
(before taxes)              profit.

Taxes                    *  Include inventory and sales taxes,
                            excise tax, real estate tax, etc.

Net Profit (loss)        *  Subtract taxes from net profit
(after taxes)               (before taxes)

Annual Total             *  For each of the sales and expense
                            items in your income projection
                            statement, add all the monthly
                            figures across the table and put the
                            results in the annual total column.

Annual Percentage        *  Calculate the percentage by dividing
                                      annual total by 
                                      total net sales x 100%

                         *  Compare this figure to the industry
                            percentage in the first column
     ______________________________________________________

MONTHLY CASH FLOW PROJECTION

This is a form which cannot be reproduced in .txt format.
     _______________________________________________________

BALANCE SHEET

                         COMPANY NAME

             As of _________________________, 19_____

Assets                             Liabilities

Current assets                     Current Liabilities

 Cash               __________      Accounts Payable   __________

 Petty Cash         __________      Notes Payable      __________

 Accounts Receivable__________      Interest Payable   __________

 Inventory          __________      Taxes Payable
                                     Fed. income tax   __________
 Short-term Invest-                  State income tax  __________
   ments            __________       Self-employment   __________
                                     Sales tax (SBE)   __________
 Prepaid expense    __________       Property tax      __________

Long-term invest-                   Payroll accrual    __________
   ments            __________
                                   Long-term liabil-
Fixed assets                        bilities          

 Land               __________      Notes payable      __________
                                                     ____________
 Buildings          __________
                                   Total liabilities   __________
 Improvements       __________     ______________________________
                                   
 Equipment          __________     Net worth (owner equity)

 Furniture          __________      Proprietorship     __________
                                     or Partnership
 Automobiles/                        (name's) equity   __________
  vehicles          __________       (name's) equity   __________
                                            or
Other assets                        Corporation
                                      Capital stock    __________
  1.                __________        Surplus paid in  __________

                                      Retained earnings__________
  3.                __________                      _____________

  4.                __________      Total net worth    __________

                 _____________                      _____________
                                    Total liabilities
Total assets        __________       and net worth  _____________
    (Total assets will always equal total liabilities and 
     total net worth)
      ____________________________________________________

INSTRUCTIONS FOR BALANCE SHEET

Figures used to compile the balance sheet are taken from the
previous and current balance sheet as well as the current income
statement. The income statement is usually attached to the balance
sheet. The following text covers the essential elements of the
balance sheet.

At the top of the page fill in the legal name of the business, the
type of statement and the day, month and year.

Assets

List anything of value that is owned or legally due the business.
Total assets include all net values. These are the amounts derived
when you subtract depreciation and amortization from the original
costs of acquiring the assets.

Current Assets

   *  Cash -- List cash and resources that can be converted into
      cash within 12 months of the date of the balance sheet (or
      during one established cycle of operations). Include money 
      on hand and demand deposits in the bank, e.g., checking
      accounts and regular savings accounts.

   *  Petty cash -- If your business has a fund for small
      miscellaneous expenditures, include the total here.

   *  Accounts receivable -- The amounts due from customers in
      payment for merchandise or services.

   *  Inventory -- Includes raw materials on hand, work in
      progress and all finished goods, either manufactured or
      purchased for resale.

   *  Short-term investments -- Also called temporary investments
      in marketable securities, these include interest- or 
      dividend-yielding holdings expected to be converted into
      cash within a year. List stocks and bonds, certificates of
      deposit and time-deposit savings accounts at either their
      cost or market value, whichever is less.

   *  Prepaid expenses -- Goods, benefits or services a business
      buys or rents in advance. Examples are office supplies, 
      insurance protection and floor space.

Long-term investments

Also called long-term assets, these are holdings the business
intends to keep for at least a year and that typically yield
interest or dividends.  Included are stocks, bonds and savings
accounts earmarked for special purposes.

Fixed Assets

Also called plant and equipment.  Includes all resources a business
owns or acquires for use in operations and no intended for resale. 
Fixed assets, except for land, are listed at cost less
depreciation. Fixed assets may be leased.  Depending on the leasing
arrangement, both the value and the liability of the leased
property may need to be listed on the balance sheet.

   *  Land -- List original purchase price without allowances
      for market value.

   *  Buildings

   *  Improvements

   *  Equipment

   *  Furniture

   *  Automobiles/vehicles

Liabilities

Current liabilities

List all debts, monetary obligations and claims payable within 12
months or within one cycle of operations.  Typically they include
the following:

   *  Accounts payable -- Amounts owed to suppliers for goods and
      services purchased in connection with business operations.

   *  Notes payable -- The balance of principal die to pay off
      short-term debt for borrowed funds.  Also include the
      current amount due of total balance on notes whose terms
      exceed 12 months.

   *  Interest payable -- Any accrued fees due for use of both
      short- and long-term borrowed capital and credit extended
      to the business.

   *  Taxes payable -- Amounts estimated by an accountant to have
      been incurred during the accounting period.

   *  Payroll accrual -- Salaries and wages currently owed.

Long-term Liabilities

Notes payable -- List notes, contract payments or mortgage payments
due over a period exceeding 12 months or one cycle of operations.
They are listed by outstanding balance less the current portion
due.

Net Worth

Also called owner's equity, net worth is the claim of the owner(s)
on the assets of the business.  In proprietorship or partnership,
equity is each owner's original investment plus any earnings or
withdrawals.

Total Liabilities and Net Worth

The sum of these two amounts must always match at of total assets.
_________________________________________________________________

APPENDIX D: SELF-ASSESSMENT, DECIDING WHETHER TO PURSUE GROWTH

The following points should be considered when evaluating whether
growth is reasonable for your business.

Personal

1.  Do you have the time to undertake the activities associated
    with growth and the time the larger business volume will
    consume?

2.  Does your family support your efforts to expand the business?

3.  Is your personal financial position congruent with the
    financial situation of the company?

4.  Does your management ability correspond to that necessary to
    manage growth?

Finance

1.  Does your business have the equity level to justify growth?
    If not, do you have potential sources of equity?

2.  Has your business been profitable or shown the potential for
    profitability?

3.  Will your bank be able to cooperate with you in your growth
    phase?

4.  Is the collateral position of the business adequate to meet
    the requirements of lenders?

5.  Do accounting procedures allow you to maintain control of the
    business?

6.  What contingency plans do you have if your initial attempts
    fall short?

7.  Have you researched sources of government-assisted funding?

8.  Do you have a knowledge of how cash flow interacts in your
    business to ensure future cash flow?

9.  Do you have support people who understand finance?

10. Will the rate of return justify the commitment of resources?

11. Will the value of the business grow?

_________________________________________________________________

APPENDIX E: HOW TO WRITE A BUSINESS PLAN

The following pages provide a suggested outline of the material
that should be included in your business plan. Your final plan
may vary according to your needs or because of the individual
requirements of your lender.

What Are the Benefits?

Every business can benefit from the preparation of a carefully
written plan. There are two main purposes for writing that plan:

   1.  To serve as a guide during the lifetime of the business.
       It is the blueprint of your business and will provide you
       with the tools for analysis and change.

   2.  A business plan is a requirement if you are planning to
       seek a loan. It will provide potential lenders with
       detailed information on all aspects of your company's past
       and current operations and provide future projections.
 
Business Plan Outline

I.   Cover sheet

     Serves as the title page of your business plan. It
     should contain the following:

     *  Name of the company
     *  Company address
     *  Company phone number (include area code)
     *  Logo (if you have one)
     *  Names titles addresses phone numbers (include area code)
        of owners
     *  Month and year your plan was issued
     *  Name of preparer
 
II.  Statement of purpose

     (Same as executive summary.) This is the thesis statement
     and includes business plan objectives. Use the key words
     (who, what, where, when, why, how, and how much) to
     briefly tell about the following:
     *  What your company is (also who what where and when).
     *  What your objectives are.
     *  If you need a loan why you need it.
     *  How much you need.
     *  Why you will be successful.
     *  How and when you plan to repay your loan.
 
III. Table of contents

     A page listing the major topics and references.

IV. The business

    Covers the details of your business. Include information
    about your industry in general, and your business in
    particular. Address the following:

    *  Legal structure -- Tell what legal structure you have
       chosen and state reasons for your choice.
    *  Description of the business -- Detail your business. Tell
       about your history present status and future projections.
       Outline your product or service in terms of marketability.
       Project a sense of what you expect to accomplish in the
       next few years.
    *  Products or services -- Give a detailed description of
       your products from raw materials to finished items. Tell
       about your manufacturing process. If you provide a service
       tell what it is how it is provided and why it is unique.
       List future products or services you plan to provide.
    *  Location -- Describe site and why it was chosen. (If
       location is important to your marketing plan focus on this
       in the marketing section below.)
    *  Management -- Describe who is behind the business. For
       each owner tell about responsibilities and abilities.
       Support with resumes.
    *  Personnel -- Who will be doing the work why are they
       qualified what is their wage what are their
       responsibilities?
    *  Methods of record keeping -- What accounting system will
       you use? Who will do your record keeping? Do you have a
       plan to help you use your records in analyzing your
       business?
    *  Insurance -- What kinds of insurance will you need? What
       will these cost and who will you use for a carrier?
    *  Security -- Address security in terms of inventory control
       and theft of information.

V.   Marketing

     Covers the details of your marketing plan. Include
     information about the total market with emphasis on your
     target market. Identify your customers and tell about the
     means to make your product or service available to them.

     *  Target market -- Identify characteristics of your
        customers. Tell how you arrived at your results. Back up
        information with demographics questionnaires and surveys.
        Project size of your market.

     *  Competition -- Evaluate indirect and direct competition.
        Show how you can compete. Evaluate competition in terms
        of location market and business history.

     *  Methods of distribution -- Tell about the manner in which
        products and services will be made available to the
        customer. Back up decisions with statistical reports rate
        sheets etc.
     *  Advertising -- How will your advertising be tailored to
        your target market? Include rate sheets promotional
        material and time lines for your advertising campaign.
     *  Pricing -- Pricing will be determined as a result of
        market research and costing your product or service. Tell
        how you arrived at your pricing structure and back it up
        with materials from your research.
     *  Product design -- Answer key questions regarding product
        design and packaging. Include graphics and proprietary
        rights information.
     *  Timing of market entry -- Tell when you plan to enter the
        market and how you arrived at your decision.
     *  Location -- If your choice of location is related to
        target market cover it in this section of your business   
        plan. (See location in the business section of this
        outline.)
     *  Industry trends -- Give current trends project how the
        market may change and what you plan to do to keep up.
 
VI.  Financial documents

     These are the records used to show past, current and
     projected finances. The following are the major documents
     you will want to include in your business plan. The work is
     easier if these are done in the order presented.

     *  Summary of financial needs -- This is an outline
        indicating why you are applying for a loan and how much
        you need.
     *  Sources and uses of funds statement -- It will be         
        necessary for you to tell how you intend to disperse the
        loan funds. Back up your statement with supporting data.
     *  Cash flow statement (budget) -- This document projects
        what your business plan means in terms of dollars. It
        shows cash inflow and outflow over a period of time and
        is used for internal planning.
     *  Cash flow statements show both how much and when cash
        must flow in and out of your business.
     *  Three-year income projection -- A pro forma income
        statement showing your projections for your company for
        the next three years. Use the pro forma cash flow
        statement for the first year's figures and project the
        next according to economic and industry trends.
     *  Break-even analysis -- The break-even point is when a
        company's expenses exactly match the sales or service
        volume. It can be expressed in total dollars or revenue
        exactly offset by total expenses or total units of
        production (cost of which exactly equals the income
        derived by their sales). This analysis can be done either
        mathematically or graphically.

        Note: The following are actual performance statements
        reflecting the activity of your business in the past. If
        you are a new business owner your financial section will
        end here and you will add a personal financial history.
        If you are an established business you will include the
        actual performance statements that follow.

     *  Balance sheet -- Shows the condition of the business as
        of a fixed date. It is a picture of your firm's financial
        condition at a particular moment and will show you
        whether your financial position is strong or weak. It is
        usually done at the close of an accounting period and
        contains assets liabilities and net worth. 
     *  Income (profit and loss) statement -- Shows your business
        financial activity over a period of time (monthly
        annually). It is a moving picture showing what has
        happened in your business and is an excellent tool for
        assessing your business. Your ledger is closed and
        balanced and the revenue and expense totals transferred
        to this statement.
     *  Business financial history -- This is a summary of
        financial information about your company from its start
        to the present. The business financial history and loan
        application are usually the same. If you have completed
        the rest of the financial section you should be able to
        transfer all the needed information to this document.

VII. Supporting documents

     These are the records that back up the statements and
     decisions made in the three main parts of your business
     plan. Those most commonly included are as follows:

     *  Personal resumes -- Should be limited to one page and
        include work history educational background professional
        affiliations and honors and special skills.
     *  Personal financial statement -- A statement of personal
        assets and liabilities. For a new business owner this
        will be part of your financial section.
     *  Credit reports -- Business and personal from suppliers or
        wholesalers credit bureaus and banks.
     *  Copies of leases -- All agreements currently in force
        between your company and a leasing agency.
     *  Letters of reference -- Letters recommending you as being
        a reputable and reliable business person worthy of being
        considered a good risk. (Include both business and
        personal references.)
     *  Contracts -- Include all business contracts both
        completed and currently in force.
     *  Legal documents -- All legal papers pertaining to your
        legal structure proprietary rights insurance titles etc.
     *  Miscellaneous documents -- All other documents that have
        been referred to but are not included in the main body of
        the plan (e.g. location plans demographics advertising
        plan etc.).

Putting Your Plan Together

When you are finished: Your business plan should look
professional, but the lender needs to know that it was done by
you. A business plan will be the best indicator he or she has to
judge your potential for success. It should be no more than 30 to
40 pages long. Include only the supporting documents that will be
of immediate interest to your potential lender. Keep the others
in your own copy where they will be available on short notice.
Have copies of your plan bound at your local print shop, or with
a blue, black or brown cover purchased from the stationery store.
Make copies for yourself and each lender you wish to approach. Do
not give out too many copies at once, and keep track of each
copy. If your loan is refused, be sure to retrieve your business
plan. For a more detailed explanation of each section of the
business plan outline, see SBA's publication, How to Write a
Business Plan, which includes step-by-step directions and sample
sections of actual business plans. Also available from the SBA is
a VHS videotape and workbook, The Business Plan: Your Roadmap for
Success.

_________________________________________________________________

APPENDIX F: 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.

This information is listed in The Small Business Directory. For a
free copy contact your nearest SBA office.

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

     Service Corps of Retired Executives (SCORE), a national
     organization sponsored by SBA of over 13,000 volunteer
     business executives who provide free counseling, workshops
     and seminars to prospective and existing small business
     people.

     Small Business Development Centers (SBDCs), sponsored by the
     SBA in partnership with state and local governments, the
     educational community and the private sector. They provide
     assistance, counseling and training to prospective and
     existing business people.

     Small Business Institutes (SBIs), organized through SBA on
     more than 500 college campuses nationwide. The institutes
     provide counseling by students and faculty to small business
     clients.

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).

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. You can request a
Subject Bibliography by writing to Government Printing Office,
Superintendent of Documents, Washington, DC 20402-9328.

Many federal agencies offer 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:

Consumer Information Center (CIC)
P.O. Box 100
Pueblo, CO 81002
The CIC offers a consumer information catalog of federal
publications.

Consumer Product Safety Commission (CPSC)
Publications Request
Washington, DC 20207
The CPSC offers guidelines for product safety requirements.

U.S. Department of Agriculture (USDA)
12th Street and Independence Avenue, SW
Washington, DC 20250
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
Room 5898C
Washington, DC 20230
DOC's Business Assistance 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)
Public Health Service
Alcohol, Drug Abuse and Mental Health Administration
5600 Fishers Lane
Rockville, MD 20857
Drug Free Workplace Helpline: 1-800-843-4971. Provides information
on Employee Assistance Programs.
National Institute for Drug Abuse Hotline:
1-800-662-4357. Provides information on preventing substance
abuse in the workplace.
The National Clearinghouse for Alcohol and Drug Information:
1-800-729-6686 toll-free. Provides pamphlets and resource materials
on 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)
P.O. Box 25866
Richmond, VA 23260
1-800-424-3676
The IRS offers information on tax requirements for small
businesses.

U.S. Environmental Protection Agency (EPA)
Small Business Ombudsman
401 M Street, SW (A-149C)
Washington, DC 20460
1-800-368-5888 except DC and VA
703-557-1938 in DC and VA
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)
FDA Center for Food Safety and Applied Nutrition
200 Charles Street, SW
Washington, DC 20402
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.

In addition to books and magazines, many libraries offer free
workshops, lend skill-building tapes and have catalogues and
brochures describing continuing education opportunities.
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