Financial Management for the Growing Business

INTRODUCTION
An expanding business offers the potential for
numerous growth opportunities. Employees bene-
fit from business growth through increased earn-
ings and promotions. Customers benefit from
expanded products and services. Owners benefit
through increased profit potential. Society bene-
fits 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 in-
come potential of the business activity and moni-
tor 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 imple-
ment), in addition to providing general informa-
tion on the challenge of managing financial growth.
It is divided into three sections, with each focus-
ing 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 impor-
tant 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 re-
quires persistence and balance. To obtain the
funding needed to finance growth, you must under-
stand the roles of these concepts and how to apply
them in managing a growing business. A brief dis-
cussion 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 deter-
mination, combined with a willingness to adjust
your plans, will carry you through this process.
Sustained growth puts stress on you and the fi-
nancial resources of your business. Achieving
growth goals often takes longer than you initial-
ly planned. However, you are not alone in the
quest for growth and expansion. Many successful
business owners have experienced the same prob-
lems and frustrations. To understand the chal-
lenge 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 con-
tain stories about successful growing busines-
ses. The business section in your local news-
paper features local success stories. Also, area
development corporations and chambers of com-
merce are excellent sources of information on
local businesses. Don’t hesitate to take advan-
tage 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 market-
ing 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 busi-
ness 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 receiv-
able 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 re-
ceivable 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 op-
posing forces that can be applied to business. One
example is the financial management concept. Finan-
cial management compares your company’s growth po-
tential when financing the entire growth phase by
reinvesting profits to financing through an infu-
sion of cash from outside sources. The latter op-
tion accelerates growth; it follows the concept of
leverage and allows you to use equity to obtain ad-
ditional money so the business can grow faster. For
example, if you can use a 33-percent equity posi-
tion and invest $100,000 in a business, you can bor-
row $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 result-
ing rate of return on the $100,000 is higher. The
3 percent made on the debt results in a total dol-
lar 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 por-
tion.

Profitability is important to business growth be-
cause it makes it easier to obtain the financing
needed to expand. This is the opposite of how ac-
counting systems are normally operated for tax pur-
poses. To reduce taxes, accountants and business
owners often try to show a loss or as little pro-
fit as possible, which allows the business to re-
tain more cash. From this standpoint, perhaps your
business should be profitable for several years be-
fore initiating a growth phase. In many cases, how-
ever, you will not or cannot take the time to ac-
complish consistent profitability. If you are plan-
ning to expand your business, discuss this process
with the accountant who prepares your income state-
ments 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, in-
cluding management. Therefore, you should not im-
plement growth procedures without thoroughly ex-
amining all aspects of your business operations.
Listed below are several factors you should con-
sider before initiating a growth plan.

– Expect that your personal involvement and com-
mitment to the business will increase during a
growth cycle.

– Consider personal sacrifices and the sacri-
fices of people you associate with, includ-
ing family. The rewards of growth can be sub-
stantial and, thus, are deemed adequate re-
wards for these sacrifices.

– Expect additional pressure on the time and re-
sources needed to run the business, because it
will take time and energy to organize the fin-
ancial 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 fi-
nancial 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. Assis-
tance is available through consultants, accoun-
tants and lawyers and through services provided
by the government, such as the U.S. Small Busi-
ness 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 in-
crease profit. There are two components that
can be increasedthe 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 com-
pleted 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 sus-
tain growth after commitments have been made. By
charging lower prices to increase sales, you
usually decrease the gross profit margin. How-
ever, lower prices may result in significant in-
creases in the purchase quantity, which then en-
ables the business to earn a profit. The same
concept, only reversed, can apply to costs. For
example, if you increase costs in order to in-
crease dollar sales volume, you still decrease
your profit margin. This latter approach is fea-
sible if you plan to increase marketing expendi-
tures to gain additional business.

Costs also can be increased from an accounts re-
ceivable 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 un-
profitable businesses believe the solution to
their problem is to grow in order to spread
fixed costs over a larger number of units, there-
by 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 pro-
vides 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 busi-
ness 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 in-
dicates the level of profit or loss based on
sales less expenses. (Examples of a balance
sheet and income statement are included in Ap-
pendix 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 declin-
ing order of liquidity. The right side or
lower portion lists the liabilities and the own-
er’s equity or net worth. Liabilities include
all commitments or contractual agreements to be
paid in the future. Examples of liabilities in-
clude loan principal balances and accounts pay-
able (money owed for goods or services already
received). The owner’s equity is the asset value
that actually belongs to the owner. In a corpo-
ration, this is usually divided into original
capital and retained earnings. The capital as-
sets (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 rela-
tionship between the total assets and the total
liabilities. In the sample balance sheet in Ap-
pendix 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 state-
ment is in allocating certain costs to the
period of time covering the statement. One ex-
ample is depreciation. Many fixed assets, such
as equipment and building costs, cannot be in-
cluded under expenses. To allocate these costs
properly, their purchase price must be divided
by the expected life in years or months, which-
ever 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 accelera-
ted 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 re-
lated to each other. Your equity on the begin-
ning balance sheet plus the profit (or minus
the loss) from the income statement equals your
equity for that period. Profit needs to be ad-
justed 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 de-
velop projected income statements, cash flow
statements and balance sheets. All potential
lenders require these projections before ap-
proving loans. These estimates also can be
used to help you decide whether to seek out-
side 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 state-
ments 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 con-
servative.

What is a reasonable profit margin? It is a pro-
fit margin that is in line with the profit mar-
gins 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; there-
fore, you maintain this salary as being consis-
tent with your personal living expenses. This
leaves $20,000 of profit. The next step is to com-
pare the remaining profit to the amount of equity
invested or the amount of your equity on the cur-
rent balance sheet. For this example, we will as-
sume 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 busi-
ness; however, the rate of return could increase
in the future because of the growth process. Phe-
nomenal rates of return, such as 100 to 1,000 per-
cent or higher, are possible in smaller businesses.
(See Inc.’s list of the 100 fastest growing com-
panies.) 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 busi-
ness’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 bus-
iness 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 busi-
ness operation is not always proportional and
can come in steps, completing several projec-
tions based on different options will help de-
termine 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 current-
ly 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 fol-
lowing. 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 ex-
ample, 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 recog-
nizing 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 facili-
ty 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 grow-
th. 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 manu-
facturing 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 op-
erating costs; adding a second shift doubles per-
sonnel costs. Either way, the company must con-
sider the marketing option of adding a salesper-
son 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 relation-
ships 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 op-
erations and labor costs.

The textbook approach to break-even analysis
is based on the units of production. For busi-
ness 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 con-
venient 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 in-
come 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 fol-
lows. 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 vari-
able 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 dif-
ferent 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 av-
erage daily goal; however, don’t forget to consid-
er seasonal sales and daily fluctuations as well.

It is difficult to assure accurate projections,
but if each dollar item in a projection is care-
fully 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 finan-
cing, compile figures conservatively. Bankers
know it is very easy to come up with lofty prof-
itability projections and may discount an appli-
cation on that basis. Projections should indi-
cate 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 be-
tween not having enough money and having too much
money. The disadvantages of borrowing too much
are (1) the increased interest costs and (2) ex-
ceeding 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 us-
ually associated with expansion is underestima-
ting costs. The following sections address the
costs of buildings, equipment and inventory and
the cash tied up in accounts receivable and op-
erating 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 contrac-
tors 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 efficient-
ly and ultimately can help you achieve lower
costs. Be sure the contractors are bidding on
identical specifications and quality. Many con-
struction companies have specialty projects that
may match your company’s project, possibly result-
ing in a lower price.

If you do not know a contractor, check his or
her credentials with the bank and other referen-
ces, 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. Bond-
ing is usually handled through an insurance com-
pany. If you request a bond, you should receive a
copy of the agreement directly from the insurance
carrier.

Next, discuss with the contractors their relation-
ship with subcontractors. Usually a general con-
tractor will negotiate and work with subcontractors
in the electrical, plumbing, heating, and certain
other trades. Subcontractors are usually coordina-
ted by the general contractor and complete and in-
voice 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. Of-
ten unknown factorsmainly the weathercan affect
the schedule. Such factors should be figured into
the time allowed for the construction process, as
increased construction time can result in addition-
al interest charges. It is customary for a con-
struction 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 ex-
pansion. Contact several equipment suppliers to
discuss your needs, the capabilities of specific
equipment and prices. Other related expenses as-
sociated with equipment should be investigated,
such as delivery, hookups to utilities, installa-
tion costs and unusual operating expenses.

Leasing should be considered as an alternative to
purchasing equipment. Usually leases can be ob-
tained 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 in-
terest 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 as-
pect 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 ser-
vices 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 usual-
ly assumed in an expansion process that the exist-
ing inventory can be easily liquidated and, there-
fore, the inventory turnover ratio will increase.
However, the opposite could occur if you attempt
to increase sales by offering an increased inven-
tory. Also, it is usually assumed that, as inven-
tory increases, carrying costs will decrease be-
cause 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 pro-
portion 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 ac-
counts receivable to sales. If growth is pro-
jected to $500,000, then projected accounts re-
ceivable at 5 percent would be $25,000.

It is possible for accounts receivable to in-
crease 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 illus-
trate this, if actual accounts receivable aver-
age $5,000 when sales are at $100,000, a vari-
ance of 1 percent would result in accounts re-
ceivable 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 calcula-
ting this amount is to use a cash flow projection.
Cash flow forms (see cash flow projection in Ap-
pendix B) are available through local SBA, SCORE,
SBDC and SBI offices. To complete the form, dis-
tribute the cash income over the months when the
sales growth should occur (cash expenses are cal-
culated the same way) and then determine the ex-
penses 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 prof-
itable 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 resid-
ual amount of cash should be retained in the busi-
ness. 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 some-
what arbitrary and depend on the nature of the
business; however, each increase does not have
to be proportional to sales. Instead, the resid-
ual 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 def-
inite needs, thus reducing the need for a large
contingency amount.

Purchasing Another Business

At times expansion can be accomplished by pur-
chasing 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 indus-
tries have standard rules that should be consid-
ered 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 rela-
tionship with a larger bank that can handle your
company’s future needs.

The first step in obtaining financing for an ex-
panding 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 cover-
ed 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 Code1 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.

Often in a business start-up, the initial bal-
ance sheet will show an adequate collateral
position; however, six months to a year later,
the balance sheet may show a decreased colla-
teral 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 accele-
rated basis. If you purchase a vehicle for
$20,000 and borrow the full amount at 10 per-
cent 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 clear-
ly 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 princi-
pal 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 ex-
penses (such as utility bills and marketing costs)
that do not result in asset appreciation. For ex-
ample, 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 be-
cause the expenditure has value only for your busi-
ness 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, fore-
closure 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 ac-
counts 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 liabili-
ties 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 posi-
tion 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. Be-
cause 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 pro-
jections 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 pro-
jection is included in the section Effective
Cash Flow Management on page 10 or see Instruc-
tions 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 dy-
namic changes that occur over time between two
balance sheets. It reflects the company’s op-
eration 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 com-
pany’s ability to generate profits (excess of
revenues over expenses).

Income projections should indicate when profit-
ability will occur. Even though profit and cash
flow can be unrelated, the possibility of hav-
ing an adequate cash flow definitely increases
when a projected income statement shows a profit.
Bankers generally assume that a loan can be re-
paid 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 inven-
tory 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 manage-
ment ability. Management and the organization
must be flexible to allow for growth and change.
Consider the following question: If growth oc-
curs, will management be able to handle the new
situation? Your answer should help you determine
whether you will need to hire additional mana-
gers 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 fin-
ancing are in themselves a new challenge to man-
agement. Management weaknesses should be addres-
sed 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 busi-
ness’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 per-
sonal financial statements; therefore, the strong-
er 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. Per-
sonal financial statements should not include
existing business activities; these figures
should be supplied separately. As indicated
above, the banker is looking at potential col-
lateral and adequate equity.

Market Value Balance Sheet

One of the problems in a growing business is
that the existing equity or collateral posi-
tion can be artificially low because of ac-
celerated depreciation. Using accelerated de-
preciation results in a book-value balance
sheet that has less equity or collateral
than a market-value balance sheet. The for-
mer shows assets at their depreciated value
whereas the latter shows the assets at their
current market value. Thus it may be impor-
tant to provide a banker with a market-value
balance sheet.

A typical way to develop a market-value bal-
ance 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. Documenta-
tion 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 dol-
lar 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 inten-
tions of the owner to others and can be used to
obtain financing. The content of the business
plan is determined by the planning process it-
self, 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 slight-
ly 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 per-
cent 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 por-
tion 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 alloca-
ted. 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 develop-
ment 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 in-
terest 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 op-
erations 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 pro-
jection 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 bal-
ance 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 de-
velop 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 Appen-
dix B). The SBA’s version is a simplified form;
it allows for only one sales entry and one ac-
counts receivable entry per month. Completing
this form will enable you to compute projections
correctly, and better understand the relation-
ship 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 bal-
ance. 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 in-
clude

– 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 col-
umn. 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 im-
pact.

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 state-
ment. Another way to compensate in these situa-
tions is to change your month’s beginning and end-
ing 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 soft-
ware, you can design your own spreadsheet, or
you can get templates from business service pro-
viders.

Good accounting records and good projections are
important tools for a small business. Qualified
accountants are necessary to help keep your rec-
ords accurate and current. However, you can re-
duce 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 fu-
ture 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 prin-
cipal 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 busi-
ness expense of the income statement but not as
cash outflow.

In a business in which sales are growing, the in-
ventory and accounts receivable are also probably
growing. These different areas of growth can af-
fect the income and cash flow. For example, if in-
ventory increases during the year, the dollar
amount used to purchase materials will increase,
and thus the cash flow or available cash will de-
crease. This can cause an inadequate cash level
during a slow period. A similar situation can oc-
cur with accounts receivable. If accounts receiv-
able increase, then expenditures to provide ser-
vices 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 recei-
vable and inventory are fairly constant, the cash
flow should be adequate if the business is opera-
ting profitably. In this situation, any deprecia-
tion amounts should be retained for future expan-
sion, 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 certifi-
cate of deposit or a U.S. Treasury note (common-
ly called a T-bill). The money should not be used
for cash operating expenses or to avoid a short-
fall 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 a-
void 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 busines-
ses and growing businesses often do not have
the advantage of previous experience with their
customers and can find themselves extending cre-
dit to high-risk customers. Research should be
done in advance to determine a customer’s abil-
ity to pay bills on time. Methods of determin-
ing this include obtaining a copy of a Dun &
Bradstreet report on a potential customer and
requiring potential customers to complete a cre-
dit 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 publica-
tions available through the U.S. Government Print-
ing Office that discuss credit. Complying With
the Credit Practices Rule and How to Write Read-
able Credit Forms are both published by the Fed-
eral Trade Commission and are available through
the Superintendent of Documents, U.S. Govern-
ment 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 ex-
tend store credit but to use charge cards. Infor-
mation 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 cre-
dit 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, cus-
tomers often expect the convenience of credit cards.

As credit and terms are tightened, more custo-
mers will pay cash for their purchases, thereby
increasing your cash on hand and reducing your
potential for a bad debt expense. While tighten-
ed credit is helpful in the short run, it may
not be advantageous in the long run. Looser cre-
dit allows customers more opportunity to pur-
chase your products or services. Just be certain
the increase in sales is greater than the in-
crease 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 nega-
tively 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 capital-
ize 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 por-
tion of sales are purchased on credit. There-
fore, when sales increase, accounts receivable,
not cash, increase. Receivables are usually col-
lected 30 days after the purchase date. Sales
expenses are most often incurred before receiv-
ables are collected. When sales rise, inventory
is depleted and must be replaced. Because receiv-
ables 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 re-
quired 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 busi-
ness service providers, including libraries,
banks, SBDCs, SBIs and SBA offices. Membership
in a trade association includes access to fi-
nancial averages for the industries in that as-
sociation. Comparing financial ratios allows a
business to identify costs and relationships
that are out of line with others in the indus-
try. 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 ex-
ample, if COS is 50 percent of sales, a 10-per-
cent 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 de-
preciation 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 ex-
penses 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 compan-
ies. One method of reducing purchasing costs is
to join or create buying groups of like busines-
ses that purchase the same products but are not
in direct competition with one another. This
type of relationship can result in quantity dis-
counts and a better selection of merchandise.

Inventory

Inventory has several associated costs in addi-
tion 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 per-
iod of time. A high ratio normally indicates an
efficient use of inventory. However, a high ra-
tio can also mean you are missing sales oppor-
tunities because items that customers are re-
questing are not in stock. The proper relation-
ship must be determined for each situation.

Inventory carrying costs usually include inter-
est, storage, insurance, obsolescence, physical
damage and deterioration. These costs can be re-
duced by applying just-in-time inventory and man-
ufacturing techniques. For a manufacturer, just-
in-time techniques involve structuring the flow
of materials through the plant to reduce inven-
tory in all categories. The benefit of this tech-
nique 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 tech-
niques are usually associated with manufacturing
but can also be applied to retail/wholesale busi-
nesses.

The economic order quantity formula is one method
of calculating the optimum amount of inventory to
order.
⁄ƒƒƒƒƒƒƒ
The formula is ≥ ro
≥ 2 —
x = \≥ 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 inven-
tory to the cost of carrying it and identifies the
minimum cost point, thus balancing the two costs
against each other. The formula indicates the num-
ber 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 eco-
nomic 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 over-
all cash flow. It also will affect expenses be-
cause less cash is needed to carry the activi-
ties of the business, thus reducing interest
costs. Instead of requesting payment at the end
of the project, schedule monthly or weekly pay-
ments for completed work. This is also accom-
plished by requiring deposits for materials pur-
chased during the production process.

Overhead Costs

Reducing overhead costs, such as rent, utili-
ties and interest, immediately lowers a com-
pany’s break-even point. When the break-even
point is lowered, the company can reach pro-
fitability sooner and experience profitabil-
ity 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 control-
ling inventory. When this system is used for
checkouts, labor costs are reduced, as are chan-
ces for error. Also, through its increased ac-
curacy 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 equip-
ment 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 leas-
ing are that it does not allow net worth to
build over time (unless it is a lease-purchase
arrangement) and it is usually more expensive
than an equal period of ownership.

Training Employees

An expanding business may need to add employ-
ees 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 employ-
ees 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 train-
ing is merited. For specific information on
the program’s requirements, contact your local
JTPA office.

State governments have other job-related train-
ing programs based on job specifications. These
programs can be researched by contacting local
employment agencies, state and federal depart-
ments of labor or community colleges. If employ-
ees need to learn a specific skill, the U.S.
Department of Labor has an apprenticeship pro-
gram 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 estab-
lished, it becomes a fixed cost and you can
increase sales by adding a salespersona vari-
able 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 reach-
es 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 ex-
pand 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 multi-
year cycle influenced by economic conditions.
Usually the area selected for diversification
should be related to your current business ac-
tivity.

There are two types of diversification: vertical
and horizontal. Vertical diversification invol-
ves expanding either up or down the channel of
distribution. An example of vertical diversifi-
cation is a manufacturer who has been selling to
independent wholesalers and then starts his or
her own wholesale operation. Horizontal diversi-
fication involves adding other similar products
or business lines. An example of horizontal di-
versification 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 exam-
ples of diversification provide a framework
for identifying methods for creating addition-
al business.

Joint Ventures

Joint ventures also can be a method for cut-
ting expansion costs in production processes,
purchasing and sales. These relationships
should be established carefully so they bene-
fit both parties and allow a way for either
party to end the relationship. The cost sav-
ings often occur in the area of fixed over-
head expenses, as these costs are now shared.

Reducing Costs by Managing Risks

Risk is always associated with business acti-
vity. In a stable company risk is manageable,
but for a growing company risk can easily be-
come 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 appro-
priate precaution not to harm others. Knowledge
of federal and state regulations is the respon-
sibility 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 pos-
sibility of bad publicity, which may take time,
money and extra effort to overcome. Discuss your
concern over being sued with an attorney. Talk-
ing 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 pa-
tent infringement occurs because owners didn’t
realize the product was patentable. If there al-
ready is a patent on the new product and the pa-
tent owners become aware of your product when it
is marketed, they could force you to stop pro-
duction and sue you for patent infringement. Be-
cause of this potential, even if obtaining a pa-
tent 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 attor-
neys, 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 ex-
pansion is started with used equipment, the risk
of the equipment breaking down increases.

In general, money should be allotted for equip-
ment repair and replacement; depreciation dol-
lars 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; there-
fore, 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 pro-
blem and cannot produce. As supplier relation-
ships expand, consider formal written relation-
ships instead of relying on verbal understand-
ings. 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 ad-
versely affect your business.

Customer Credit

In a growing business, establishing relation-
ships with new customers and expanding rela-
tionships 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 deter-
mination 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 Cor-
poration (FDIC), but you should verify this.
Banks financial statements are available for
public review. A good way to protect your com-
pany from the effects of a bank failure is to
obtain the bank’s financial statements and com-
pare the total deposits to the number of out-
standing 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 com-
pany 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 tornadothe disruption to the bus-
iness 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 re-
structure 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 insur-
ance, there are additional costs associated with
the loss. In the case of either death or disable-
ment, the business can be named as the benefici-
ary, 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 pro-
tect your trade secrets? Is there the poten-
tial for one of your employees to share your
business secrets? If you don’t have proce-
dures 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 le-
gal right. Responsible management, however, is
one way of deterring employees from forming a
union. Unions usually are formed when wage lev-
els or other working conditions are unaccept-
able 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 agen-
cies can help review the requirements that per-
tain to your business. Trade associations also
can be helpful in staying abreast of develop-
ments. Two areas particularly important to a
business are labor and environmental laws. Vio-
lating 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 com-
pany 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 infor-
mation, obtain the publication Product Warran-
ties and Servicing published by the U.S. De-
partment of Commerce, Office of Consumer Af-
fairs 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 employ-
ees who are comfortable with the existing system.
Also, when accounting systems change, it becomes
more difficult to compare past trends with cur-
rent results. Further, a new or improved account-
ing system can cost time and money to develop and
implement, placing an additional strain on limi-
ted resources. Despite these negatives, a growing
business usually needs additional management in-
formation from the accounting system.

The purpose of most accounting systems is to pro-
vide 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 pur-
pose. 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 owner-
ship, all previous accounting standards need to
be reconsidered to determine if changes are ne-
cessary. 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, per-
haps the accrual system should be considered. In
cash accounting, transactions are recorded as in-
come 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 account-
ing, 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 in-
come in January; if you were on an accrual account-
ing system, you would record the income in Decem-
ber. The accrual system can affect your tax obliga-
tions. However, the main advantage of accrual ac-
counting is that it results in more meaningful in-
formation 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 itemwith offsetting increases and decrea-
ses on each side of the asset/liability or revenue/
xpense 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 sea-
sonal, i.e., in a different season than you cur-
rently 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 cor-
poration. During a growth phase, you should per-
haps consider other forms of ownership and imple-
ment 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 sys-
tem 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 in-
to 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 pro-
fit centers for a business. If you operate a re-
tail 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 consoli-
dated 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 develop-
ing income statements for each of these areas.
This information still must be consolidated into
one statement, but the individual statements pro-
vide information that will help maximize profita-
bility 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 informa-
tion flows from a large number of entries to a
final income statement and balance sheet. In-
come 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 ex-
ample, 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 ac-
ess reports that track the efficiency of the op-
eration. If the information is compiled appro-
priately, it will be readily available at minimal
cost.

For example, on an income statement for a restau-
rant, 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 par-
ticularly true in a restaurant in which the labor
and cost of food can be inversely related. The
important factor overall may be the combined per-
centages of labor and material compared to sales.
(However, be aware that trends are not always ac-
curate 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. Ef-
ficiency 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 in-
formation, 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 re-
sult 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 be-
lieve a computer is necessary to complete account-
ing needs for the business. This can be true, but
there are certain pitfalls to consider before se-
lecting a system. If you have a system, future
growth may cause you to exceed the system’s cur-
rent 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 implement-
ing 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 com-
puter 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 develop-
ing 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 speci-
fic 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 applica-
tions. It is sometimes tempting to purchase soft-
ware that employees are familiar with rather
than to purchase a system tailored to the busi-
ness. This may work, but if the employees quit
and the software was not the best for the busi-
ness, it could be challenging to keep the system
going.

In addition to considering the computer equip-
ment and software, explore the availability of
printing options as they can affect the useful-
ness of the information produced. Computer print-
ers 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 assist-
ants 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 ser-
vice that matches the level of your business ac-
tivities.

Accountants can design new systems for managing
your business information. Be sure you get what
you need because, occasionally, accountants de-
sign systems for tax purposes and have difficulty
considering the broader need for information man-
agement in your business. If you feel this hap-
pening, rely on the accountant for your tax ob-
ligations 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 an-
ticipate 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 re-
duction often does not result in a decreased tax
obligation but transfers payment of the obliga-
tions 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 avail-
able.

One of the primary tasks of tax planning is con-
templating 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 pro-
jections indicate higher taxes or profit in the
first years, arrange to pay tax now. Several fac-
tors 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 ex-
pansion costs that can have a positive effect on
sales volume in the future. An example is any ex-
penditure used to develop a channel of distribu-
tion 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 ex-
penses in the current year. A reduction in ex-
penses means more profit, which means paying more
tax currently. When higher profits occur, amorti-
zation 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 in-
terest 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 Modi-
fied 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 de-
veloped 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 obliga-
tions. 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 own-
ership, whether it is a sole proprietorship, a
partnership or a corporation, can have an im-
pact on personal income taxes. In certain busi-
ness 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 ac-
celerated methods were called investment credit.
Currently they are available to growing busi-
nesses 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 Sec-
tion 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 de-
preciation on the capital assets. There are
specific guidelines on the taxable income
limit, the carryover of an allowable deduc-
tion 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 Pub-
lication 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 accomplish-
ed growth but were unable to sustain their new
position, often because of lax attention to man-
aging the finances that support growth. Finan-
cial management needs to correspond to the ex-
pansion activities being undertaken. Giving pro-
per 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 en-
suring 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 re-
sources 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 im-
proved their income potential and their net
worth.

APPENDIX A: SAMPLE BALANCE SHEET AND INCOME
STATEMENT

The following balance sheet and income state-
ment provide examples of the information that
should be currently available before attempt-
ing to increase a business’s sales. These
statements are the standard that is accept-
able for communication of financial informa-
tion to banks and are the usual format devel-
oped by accountants. These statements result
in management information that helps manage-
ment determine what action should be taken
for future business potential.

New Business Balance Sheet
(Current Date)
——————————————————–
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 debt 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 38,000 100.00 450,000 100.00
Beginning inventory 143,000 135,850
Materials purchased 23,560 286,150
Ending inventory 143,000 143,000
Cost of goods sold 23,560 62.00 279,000 62.00

Gross profit 14,440 38.00 171,000 38.00

Operating and fixed expenses
Wages 7,500 19.74 90,000 20.00
Payroll tax 750 1.97 9,000 2.0
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
– 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 and balance sheet items
are balanced or in the proper relationship
to the historical statements. In these pro-
jections, 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 440,800 484,880 533,368
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 & legal …………. 1,600 1,600 1,600
Advertising ……………….. 8,000 8,800 9,680
Travel & 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 expenses 229,134 241,849 256,907
——— ——— ———
Net profit 31,166 26,771 38,575

Income tax 6,856 5,890 8,486
Owners withdrawal 0 0 0

Profit 24,309 20,882 30,088

Balance Sheet
Business Name Here
First Day 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 & fiztures 0
Total of property, plant & equipment 95,988
Less accumulated depreciation (18,892)
Total long-term assets 77,096

Total assets 302,945

Liabilities & equity

Current liabilities
Accrued expenses 0
Accounts payable 71,000
Current portion of debt (new) 9,842
Current portion debt (existing) 11,802

Total current liabilities 92,644

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

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

Owners 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 247,114

Property, plant & equipment
Land 0
Building 24,000
Equipment 63,988
Vehicles 8,000
Furniture & fixtures 0
Total of property, plant & equipment 95,988
Less accumulated depreciation (30,492)
Total long-term assets 65,496

Total assets 312,610

Liabilities & equity

Current liabilities
Accrued expenses 0
Accounts payable 78,000
Current portion of debt (new) 6,619
Current portion debt (existing) 11,802

Total current liabilities 96,421

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

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

Owners equity 82,254

Total liabilities and equity 312,610

APPENDIX C: BLANK FORMS

Industry ANN. ANN.
% J F M A M J J A S O N D TOT. %

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

Instructions for Income Projection Statement

The income projection (profit and loss) statement
is valuable as both a planning tool and a key man-
agement 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 predic-
tions of monthly levels of sales, costs and ex-
penses.

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

Industry Percentage

In the industry percentage column, enter the per-
centages of total sales (revenues) that are stand-
ard for your industry, which are derived by divid-
ing

cost/expense items
—————— x 100
total net sales

These percentages can be obtained from various
sources, such as trade associations, accountants
or banks. The reference librarian iD your near-
est public library can refer you to documents
that contain the percentage figures, for example,
Robert Morris Associates’ Annual Statement Stud-
ies (One Liberty Place, Philadelphia, PA 19103).

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

Total Net Sales (Revenues)

Determine the total number of units of 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 pro-
jection to review your pricing practices.

– What returns, allowances and markdowns
can be expected?

– Exclude any revenue that is not strict-
ly related to the business.

Cost of Sales

The key to calculating your cost of sales is
that you do not overlook any costs tnat 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 is expressed as a percentage
of total sales (revenues). It is calculated by
dividing

gross profits
—————
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.

– Outsidc servics–Include costs of subcontracts,
overflow work and special or one-time services.

– Supplies–Services and items purchased for use
in the business.

– Repairs and maintenance–Regular maintenance
and repair, including periodic large expendi-
tures 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 busi-
ness.

– 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
(before taxes) from gross profit.

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

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

Annual Total – For each of the sales and
expense items in your in-
come projection statement,
add all the monthly figures
across the table and put
the result in the annual
total comumn.

Annual Percentage – Calculate the annual per-
centage by dividing

annual total
————– x 100%
total net sales

– Compare this figure to the
industry percentage in the
first column.

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
Short-term investments $ Federal income tax $
Prepaid expenses $ State income tax $
Self-employment tax $
Long-term investments $ Sales tax (SBE) $
Property tax $
Fixed assets
Land $ Payroll accrual $
Buildings $
Improvements $ Long-term liabilities
Equipment $ Notes payable $
Furniture $
Automobiles/vehicles $ Total liabilities $

Other assets Net worth (owner equity)
1. $ Proprietorship $
2. $ or
3. $ Partnership
4. $ (name’s) equity $
(name’s) equity $
or
Corporation
Capital stock $
Surplus paid in $
Retained earnings $

Total net worth $
Total liabilites and
total 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 con-
verted into cash within 12 months of the date
of the balance sheet (or during one establish-
ed cycle of operations). Include money on hand
and demand deposits in the bank, e.g., check-
ing 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 cus-
tomers in payment for merchandise or services.

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

– Short-term investments–Also called tempo-
rary investments or marketable securities,
these include interest- or dividend-yield-
ing holdings expected to be convened 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 ser-
vices 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 hold-
ings the business intends to keep for at least
a year and that typically yield interest or
dividends. Included are stocks, bonds and sav-
ings 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 not 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 sup-
pliers for goods and services purchased
in connection with business operations.

– Notes payable–The balance of principal
due to pay off short-term debt for bor-
rowed 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 cur-
rently owed.

Long-term Liabilities

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

Net Worth

Also called owner’s equity, net worth is the
claim of the owner(s) on the assets of the busi-
ness. In a proprietorship or partnership, equity
is each owner’s original investment plus any
earnings after withdrawals.

Total Liabilities and Net Worth

The sum of these two amounts must always match
that for 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 activi-
ties associated with growth and the time the
larger business volume will consume?
2. Does your family support your efforts to ex-
pand the business?
3. Is your personal financial position congru-
ent with the financial situation of the com-
pany?
4. Does your management ability correspond to
that necessary to manage growth?

Finance
1. Does your business have the equity level to
justify growth?
2. If not, do you have potential sources of
equity?
3. Has your business been profitable or shown
the potential for profitability?
4. Will your bank be able to cooperate with you
in your growth phase?
5. Is the collateral position of the business
adequate to meet the requirements of lenders?
6. Do accounting procedures allow you to main-
tain control of the business?
7. What contingency plans do you have if your
initial attempts fall short?
8. Have you researched sources of government-
assisted funding?
9. Do you have a knowledge of how cash flow
interacts in your business to ensure future
cash flow?
10. Do you have support people who understand
finance?
11. Will the rate of return justify the commit-
ment of resources?
12. Will the value of the business grow?

APPENDIX E: HOW TO WRITE A BUSINESS PLAN

The following pages provide a suggested out-
line 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 prepara-
tion 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 pro-
vide potential lenders with detailed in-
formation 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 parti-
cular. Address the following:

– Legal structure – Tell what legal struc-
ture you have chosen and state reasons
for your choice.
– Description of the business – Detail your
business. Tell about your history, pre-
sent status and future projections. Out-
line 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 pro-
vide 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 mar-
keting section below.)
– Management – Describe who is behind the
business. For each owner, tell about re-
sponsibilities 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 ac-
counting 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 in-
formation.

V. Marketing
Covers the details of your marketing
plan. Include information about the
total market with emphasis on your tar-
get market. Identify your customers and
tell about the means to make your pro-
duct 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 di-
rect competition. Show how you can com-
pete. 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 re-
ports, rate sheets, etc.
– Advertising – How will your advertising
be tailored to your target market? In-
clude rate sheets, promotional material
and time lines for your advertising cam-
paign.
– 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 re-
search.
– 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 fol-
lowing 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 docu-
ment 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 ex-
pressed 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 state-
ments that follow.

– Balance sheet – Shows the condition of
the business as of a fixed date. It is
a picture of your firm’s financial con-
dition 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, annual-
ly). It is a moving picture showing what
has happened in your business and is an
excellent tool for assessing your busi-
ness. Your ledger is closed and balanced
and the revenue and expense totals trans-
ferred to this statement.
– Business financial history – This is a
summary of financial information about
your company from its start to the pre-
sent. 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 in-
formation 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 state-
ment 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 cur-
rently in force between your company
and a leasing agency.
– Letters of reference – Letters recom-
mending you as being a reputable and
reliable businessperson worthy of be-
ing considered a good risk. (Include
both business and personal references.)
– Contracts – Include all business con-
tracts, both completed and currently
in force.
– Legal documents – All legal papers per-
taining to your legal structure, pro-
prietary rights, insurance, titles, etc.
– Miscellaneous documents – All other doc-
uments that have been referred to, but
are not included in the main body of
the plan (e.g., location plans, demo-
graphics, 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 sec-
tions 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 con-
tact 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 pro-
grams and services, including training
and educational programs, counseling
services, financial programs and con-
tract assistance. Ask about

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

– Small Business Development Centers
(SBDCs),sponsored by the SBA in part-
nership with state and local govern-
ments, the educational community and
the private sector. They provide as-
sistance, counseling and training to
prospective and existing business
people.

– Small Business Institutes (SBIs), or-
ganized through SBA on more than 500
college campuses nationwide. The in-
stitutes provide counseling by stu-
dents and faculty to small business
clients.

For more information about SBA business
development programs and services call
the SBA Small Business Answer Desk at
1-800-8-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 re-
quest a Subject Bibliography by writing
to Government Printing Office, Superin-
tendent 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 busines-
ses. To get their publications, contact
the regional offices listed in the tele-
phone 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 avail-
able in the federal government. This ser-
vice also will refer businesses to differ-
ent 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 require-
ments 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 under-
stand how they can comply with EPA regula-
tions.

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 li-
brarian 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 li-
brary 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 periodi-
cals.

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

About author

SMB Reviews
SMB Reviews 473 posts

SMBReviews is committed to providing small and mid-sized business owners with the information and resources they need to select the best service or product for their company.

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