Financial Management:
How To Make a Go Of Your Business
by Linda Howarth Mackay
Produced in cooperation with the American Association of Community and Junior Colleges
Charles Liner, SEA Contracting Officer’s Technical Representative Judy
Nye, Project
Director, AACJC Martha McKemie, Senior Writer-Editor, SEA Amelia Harris, Graphics,
SEA
Contents
About the Author
Introduction
I. The Necessity of Financial Planning
What is Financial Management?
Tools of Financial Planning
II. Understanding Financial Statements: A Health
Checkup for Your Business
The Balance Sheet
The Statement of Income
III. Financial Ratio Analysis
Balance Sheet Ratio Analysis
Income Statement Ratio Analysis
Management Ratios
Sources of Comparative Information
IV. Forecasting Profits
Facts Affecting Pro Forma Statements
The Pro Forma Income Statement
Comparison with Actual Monthly Performance
Break-Even Analysis
V. Cash Flow Management: Budgeting and
Controlling Costs
The Cash Flow Statement
VI. Pricing Policy
Establishing Selling Prices
A Pricing Example
The Retailers Mark-Up
Pricing Policies and Profitability Goals
VII. Forecasting and Obtaining Capital
Types and Sources of Capital
Borrowing Working Capital
Borrowing Growth Capital
Borrowing Permanent Equity Capital
Applying for Capital
VIII. Financial Management Planning
Long-Term Planning
For Further Information
About the Author
Linda Howarth Mackay has many years’ banking experience gained working
in a rural
community bank and two large regional banks. Her expertise is in commercial
and
agricultural lending and in correspondent banking. She is also knowledgeable
in the
regulation of commercial bank lending practices, with an extensive background
in the
establishment of policy and procedures and in portfolio administration. A graduate
of
Indiana University, Bloomington, Indiana, and numerous banking, accounting,
and
lending seminars, she is now president of Howarth Mackay, Incorporated, a company
providing financial consultation to businesses, financial institutions, and
professional individuals.
Introduction
This booklet was designed to equip instructors of the National Small Business
Training
Network course "Financial Management: How to Make a Go of Your Business"
with the
information required to acquaint the small business owner/manager with the basic
tools
of sound financial management. It supplements the course guide materials; it
is not
intended to replace their use by the instructor.
The booklet may also be used by anyone interested in learning the concepts
of
financial management.
I. The Necessity of Financial Planning
There is one simple reason to understand and observe financial planning in
your
business—to avoid failure. Eight of ten new businesses fail primarily because
of the
lack of good financial planning.
Financial planning affects how and on what terms you will be able to attract
the
funding required to establish, maintain, and expand your business. Financial
planning
determines the raw materials you can afford to buy, the products you will be
able to
produce, and whether or not you will be able to market them efficiently. It
affects
the human and physical resources you will be able to acquire to operate your
business.
It will be a major determinant of whether or not you will be able to make your
hard
work profitable.
This manual provides an overview of the essential components of financial
planning and
management. Used wisely, it will make the reader—the small business
owner/manager—familiar enough with the fundamentals to have a fighting
chance of
success in today’s highly competitive business environment.
A clearly conceived, well documented financial plan, establishing goals and
including
the use of Pro Forma Statements and Budgets to ensure financial control, will
demonstrate not only that you know what you want to do, but that you know how
to
accomplish it. This demonstration is essential to attract the capital required
by your
business from creditors and investors.
What Is Financial Management?
Very simply stated, financial management is the use of financial statements
that
reflect the financial condition of a business to identify its relative strengths
and
weaknesses. It enables you to plan, using projections, future financial performance
for
capital, asset, and personnel requirements to maximize the return on shareholders’
investment.
Tools of Financial Planning
This manual introduces the tools required to prepare a financial plan for
your
business’s development, including the following:
Basic Financial Statements—the Balance Sheet and Statement of Income
Ratio
Analysis—a means by which individual business performance is compared to
similar
businesses in the same category The Pro Forma Statement of Income—a method
used to
forecast future profitability Break-Even Analysis—a method allowing the
small
business person to calculate the sales level at which a business recovers all
its
costs or expenses The Cash Flow Statement—also known as the Budget identifies
the
flow of cash into and out of the business Pricing formulas and policies—used
to
calculate profitable selling prices for products and services Types and sources
of
capital available to finance business operations Short- and long-term planning
considerations necessary to maximize profits
The business owner/manager who understands these concepts and uses them effectively
to
control the evolution of the business is practicing sound financial management
thereby
increasing the likelihood of success.
II. Understanding Financial Statements: A Health Checkup for Your Business
Financial Statements record the performance of your business and allow you
to diagnose
its strengths and weaknesses by providing a written summary of financial activities.
There are two’ primary financial statements: the Balance Sheet and the
Statement of
Income.
The Balance Sheet
The Balance Sheet provides a picture of the financial health of a business
at a given
moment, usually at the close of an accounting period. It lists in detail those
material
and intangible items the business owns (known as its assets) and what money
the
business owes, either to its creditors (liabilities) or to its owners (shareholders’
equity or net worth of the business).
Assets include not only cash, merchandise inventory, land, buildings, equipment,
machinery, furniture, patents, trademarks, and the like, but also money due
from
individuals or other businesses (known as accounts or notes receivable).
Liabilities are funds acquired for a business through loans or the sale of
property or
services to the business on credit. Creditors do not acquire business ownership,
but
promissory notes to be paid at a designated future date.
Shareholders’ equity (or net worth or capital) is money put into a business
by its
owners for use by the business in acquiring assets.
At any given time, a business’s assets equal the total contributions
by the creditors
and owners, as illustrated by the following formula for the Balance Sheet:
Assets = Liabilities + Net Worth
(Total (Funds (Funds
funds supplied supplied
invested in to the to the
assets of business business
the by its by its
business) creditors) owners)
This formula is a basic premise of accounting. If a business owes more money
to
creditors than it possesses in value of assets owned, the net worth or owner’s
equity
of the business will be a negative number.
The Balance Sheet is designed to show how the assets, liabilities, and net
worth of a
business are distributed at any given time. It is usually prepared at regular
intervals; e.g., at each month’s end but especially at the end of each
fiscal
(accounting) year.
By regularly preparing this summary of what the business owns and owes (the
Balance
Sheet), the business owner/manager can identify and analyze trends in the financial
strength of the business. It permits timely modifications, such as gradually
decreasing
the amount of money the business owes to creditors and increasing the amount
the
business owes its owners.
All Balance Sheets contain the same categories of assets, liabilities, and
net worth.
Assets are arranged in decreasing order of how quickly they can be turned into
cash
(liquidity). Liabilities are listed in order of how soon they must be repaid,
followed
by retained earnings (net worth or owner’s equity), as illustrated in Figure
2-1,
below, the sample Balance Sheet for ABC Company.
The categories and format of the Balance Sheet are established by a system
known as
Generally Accepted Accounting Principles (GAAP). The system is applied to all
companies, large or small, so anyone reading the Balance Sheet can readily understand
the story it tells.
Figure 2-1
ABC Company
December 31, 19-
Balance Sheet
Cash $ 1,896 Notes Payable, $ 2,000
Bank
Accounts 1,456 Accounts 2,240
Receivable Payable
Inventory 6,822 Accruals 940
Total Current $10,174 Total Current $ 5,180
Assets Liabilities
Equipment and 1,168 Total Liabilities 5,180
Fixtures
Prepaid Expenses 1,278 Net Worth 7,440
Total Assets $12,620 Total Liabilities $12,620
and New Worth
Balance Sheet Categories
Assets: An asset is anything the business owns that has monetary value.
Current Assets include cash, government securities, marketable securities,
accounts receivable, notes receivable (other than from officers or employees),
inventories, prepaid expenses, and any other item that could be converted into
cash within one year in the normal course of business. Fixed Assets are those
acquired for long-term use in a business such as land, plant, equipment,
machinery, leasehold improvements, furniture, fixtures, and any other items
with
an expected useful business life measured in years (as opposed to items that
will
wear out or be used up in less than one year and are usually expensed when they
are purchased). These assets are typically not for resale and are recorded in
the
Balance Sheet at their net cost less accumulated depreciation. Other Assets
include intangible assets, such as patents, royalty arrangements, copyrights,
exclusive use contracts, and notes receivable from officers and employees.
Liabilities: Liabilities are the claims of creditors against the assets of
the
business (debts owed by the business).
Current Liabilities are accounts payable, notes payable to banks, accrued
expenses (wages, salaries), taxes payable, the current portion (due within one
year) of long-term debt, and other obligations to creditors due within one year.
Long-Term Liabilities are mortgages, intermediate and long-term bank loans,
equipment loans, and any other obligation for money due to a creditor with a
maturity longer than one year. Net Worth is the assets of the business minus
its
liabilities. Net worth equals the owner’s equity. This equity is the investment
by
the owner plus any profits or minus any losses that have accumulated in the
business.
The Statement of Income
The second primary report included in a business’s Financial Statement
is the
Statement of Income. The Statement of Income is a measurement of a company’s
sales and
expenses over a specific period of time. It is also prepared at regular intervals
(again, each month and fiscal year end) to show the results of operating during
those
accounting periods. It too follows Generally Accepted Accounting Principles
(GAAP) and
contains specific revenue and expense categories regardless of the nature of
the
business.
Statement of Income Categories
The Statement of Income categories are calculated as described below:
Net Sales (gross sales less returns and allowances) Less Cost of Goods Sold
(cost
of inventories) Equals Gross Margin (gross profit on sales before operating
expenses) Less Selling and Administrative Expenses (salaries, wages, payroll
taxes
and benefits, rent, utilities, maintenance expenses, office supplies, postage,
automobile/vehicle expenses, insurance, legal and accounting expenses,
depreciation) Equals Operating Profit (profit before other non-operating income
or
expense) Plus Other Income (income from discounts, investments, customer charge
accounts) Less Other Expenses (interest expense) Equals Net Profit (Loss) Before
Tax (the figure on which your tax is calculated) Less Income Taxes (if any are
due) Equals Net Profit (Loss) After Tax
For an example of a Statement of Income, see Figure 2-2, the statement of ABC Company.
Figure 2-2
ABC Company
December 31, 19-
Income Statement
Net Sales $68,116
Cost of Goods Sold 47,696
Gross Profit on Sales $20,420
Expenses
Wages $6,948
Delivery Expenses 954
Bad Debts Allowances 409
Communications 204
Depreciation Allowance 409
Insurance 613
Taxes 1,021
Advertising 1,566
Interest 409
Other Charges 749
Total Expenses $13,282
Net Profit 7,138
Other Income 886
Total Net Income $ 8,024
Calculating the Cost of Goods Sold
Calculation of the Cost of Goods Sold category in the Statement of Income
(or
Profit-and-Loss Statement as it is sometimes called) varies depending on whether
the
business is retail, wholesale, or manufacturing. In retailing and wholesaling,
computing the cost of goods sold during the accounting period involves beginning
and
ending inventories. This, of course, includes purchases made during the accounting
period. In manufacturing it involves not only finished-goods inventories, but
also raw
materials inventories goods-in-process inventories, direct labor, and direct
factory
overhead costs.
Regardless of the calculation for Cost of Goods Sold, deduct the Cost of Goods
Sold
from Net Sales to get Gross Margin or Gross Profit. From Gross Profit, deduct
general
or indirect overhead such as selling expenses, office expenses, and interest
expenses,
to calculate your Net Profit. This is the final profit after all costs and expenses
for
the accounting period have been deducted.
III. Financial Ratio Analysis
The Balance Sheet and the Statement of Income are essential, but they are
only the
starting point for successful financial management. Apply Ratio Analysis to
Financial
Statements to analyze the success, failure, and progress of your business.
Ratio Analysis enables the business owner/manager to spot trends in a business
and to
compare its performance and condition with the average performance of similar
businesses in the same industry. To do this compare your ratios with the average
of
businesses similar to yours and compare your own ratios for several successive
years,
watching especially for any unfavorable trends that may be starting. Ratio analysis
may
provide the all-important early warning indications that allow you to solve
your
business problems before your business is destroyed by them.
Balance Sheet Ratio Analysis
Important Balance Sheet Ratios measure liquidity and solvency (a business’s
ability to
pay its bills as they come due) and leverage (the extent to which the business
is
dependent on creditors’ funding). They include the following ratios:
Liquidity Ratios.
These ratios indicate the ease of turning assets into cash. They include the
Current
Ratio, Quick Ratio, and Working Capital.
Current Ratios. The Current Ratio is one of the best known measures of financial
strength. It is figured as shown below:
Total Current Assets Current Ratio = -------------------------
Total Current Liabilities
The main question this ratio addresses is: "Does your business have enough
current
assets to meet the payment schedule of its current debts with a margin of safety
for
possible losses in current assets, such as inventory shrinkage or collectable
accounts?" A generally acceptable current ratio is 2 to 1. But whether
or not a
specific ratio is satisfactory depends on the nature of the business and the
characteristics of its current assets and liabilities. The minimum acceptable
current
ratio is obviously 1:1, but that relationship is usually playing it too close
for
comfort.
If you decide your business’s current ratio is too low, you may be able
to raise it
by:
Paying some debts. Increasing your current assets from loans or other borrowings
with a maturity of more than one year. Converting noncurrent assets into current
assets. Increasing your current assets from new equity contributions. Putting
profits back into the business.
Quick Ratios. The Quick Ratio is sometimes called the "acid-test"
ratio and is one of
the best measures of liquidity. It is figured as shown below:
Quick Ratio = Cash + Government Securities
Receivables
---------------------------
Total Current Liabilities
The Quick Ratio is a much more exacting measure than the Current Ratio. By
excluding
inventories, it concentrates on the really liquid assets, with value that is
fairly
certain. It helps answer the question: "If all sales revenues should disappear,
could
my business meet its current obligations with the readily convertible ‘quick’
funds on
hand?"
An acid-test of 1:1 is considered satisfactory unless the majority of your
"quick
assets" are in accounts receivable, and the pattern of accounts receivable
collection
lags behind the schedule for paying current liabilities.
Working Capital. Working Capital is more a measure of cash flow than a ratio.
The
result of this calculation must be a positive number. It is calculated as shown
below:
Working Capital = Total Current Assets -
Total Current Liabilities
Bankers look at Net Working Capital over time to determine a company’s
ability to
weather financial crises. Loans are often tied to minimum working capital requirements.
A general observation about these three Liquidity Ratios is that the higher
they are
the better, especially if you are relying to any significant extent on creditor
money
to finance assets.
Leverage Ratio
This Debt/Worth or Leverage Ratio indicates the extent to which the business
is
reliant on debt financing (creditor money versus owner’s equity):
Debt/Worth Ratio = Total Liabilities
-----------------
Net Worth
Generally, the higher this ratio, the more risky a creditor will perceive
its exposure
in your business, making it correspondingly harder to obtain credit.
Income Statement Ratio Analysis
The following important State of Income Ratios measure profitability:
Gross Margin Ratio
This ratio is the percentage of sales dollars left after subtracting the cost
of goods
sold from net sales. It measures the percentage of sales dollars remaining (after
obtaining or manufacturing the goods sold) available to pay the overhead expenses
of
the company.
Comparison of your business ratios to those of similar businesses will reveal
the
relative strengths or weaknesses in your business. The Gross Margin Ratio is
calculated
as follows:
Gross Margin Ratio = Gross Profit
------------
Net Sales
(Gross Profit = Net Sales - Cost of Goods Sold)
Net Profit Margin Ratio
This ratio is the percentage of sales dollars left after subtracting the Cost
of Goods
sold and all expenses, except income taxes. It provides a good opportunity to
compare
your company’s "return on sales" with the performance of other
companies in your
industry. It is calculated before income tax because tax rates and tax liabilities
vary
from company to company for a wide variety of reasons, making comparisons after
taxes
much more difficult. The Net Profit Margin Ratio is calculated as follows:
Net Profit Margin Ratio = Net Profit Before Tax
---------------------
Net Sales
Management Ratios
Other important ratios, often referred to as Management Ratios, are also derived
from
Balance Sheet and Statement of Income information.
Inventory Turnover Ratio
This ratio reveals how well inventory is being managed. It is important because
the
more times inventory can be turned in a given operating cycle, the greater the
profit.
The Inventory Turnover Ratio is calculated as follows:
Inventory Turnover Ratio = Net Sales
--------------------------
Average Inventory at Cost
Accounts Receivable Turnover Ratio
This ratio indicates how well accounts receivable are being collected. If
receivables
are not collected reasonably in accordance with their terms, management should
rethink
its collection policy. If receivables are excessively slow in being converted
to cash,
liquidity could be severely impaired. The Accounts Receivable Turnover Ratio
is
calculated as follows:
Net Credit Sales/Year = Daily Credit Sales
---------------------
365 Days/Year
Accounts Receivable Turnover (in days) = Accounts Receivable
-------------------
Daily Credit Sales
Return on Assets Ratio
This measures how efficiently profits are being generated from the assets
employed in
the business when compared with the ratios of firms in a similar business. A
low ratio
in comparison with industry averages indicates an inefficient use of business
assets.
The Return on Assets Ratio is calculated as follows:
Return on Assets = Net Profit Before Tax
---------------------
Total Assets
Return on Investment (ROI) Ratio.
The ROI is perhaps the most important ratio of all. It is the percentage of
return on
funds invested in the business by its owners. In short, this ratio tells the
owner
whether or not all the effort put into the business has been worthwhile. If
the ROI is
less than the rate of return on an alternative, risk-free investment such as
a bank
savings account or certificate of deposit, the owner may be wiser to sell the
company,
put the money in such a savings instrument, and avoid the daily struggles of
small
business management. The ROI is calculated as follows:
Return on Investment = Net Profit before Tax
---------------------
Net Worth
These Liquidity, Leverage, Profitability, and Management Ratios allow the
business
owner to identify trends in a business and to compare its progress with the
performance
of others through data published by various sources. The owner may thus determine
the
business’s relative strengths and weaknesses.
Sources of Comparative Information
Sources of comparative financial information which you may obtain from your
public
library or the publishers include the following:
Almanac of Business and Industrial Financial Ratios, Leo Troy,
Prentice-Hall, Inc., Englewood Cliffs, NJ 07632
Annual Statement Studies, Robert Morris Associates, P. O. Box 8500, S-1140,
Philadelphia, PA 19178
Expenses in Retail Business, National Cash Register Corporation, Corporate
Advertising
and Sales Promotion Dayton, OH 45479.
Key Business Ratios, Dun & Bradstreet, Inc., 99 Church Street, New York, NY
10007, ATTN: Public Relations and Advertising Department
IV. Forecasting Profits
Forecasting, particularly on a short-term basis (one year to three years),
is
essential to planning for business success. This process, estimating future
business
performance based on the actual results from prior periods, enables the business
owner/manager to modify the operation of the business on a timely basis. This
allows
the business to avoid losses or major financial problems should some future
results
from operations not conform with reasonable expectations. Forecasts—or
Pro Forma Income
Statements and Cash Flow Statements as they are usually called—also provide
the most
persuasive management tools to apply for loans or attract investor money. As
a business
expands, there will inevitably be a need for more money than can be internally
generated from profits.
Facts Affecting Pro Forma Statements
Preparation of Forecasts (Pro Forma Statements) requires assembling a wide
array of
pertinent, verifiable facts affecting your business and its past performance.
These
include:
Data from prior financial statements, particularly:
a. Previous sales levels and trends
b. Past gross percentages
c. Average past general, administrative, and selling expenses necessary
to generate your former sales volumes
d. Trends in the company’s need to borrow (supplier, trade credit, and
bank credit) to support various levels of inventory and trends in
accounts receivable required to achieve previous sales volumes
Unique company data, particularly:
a. Plant capacity
b. Competition
c. Financial constraints
d. Personnel availability
Industry-wide factors, including:
a. Overall state of the economy
b. Economic status of your industry within the economy
c. Population growth
d. Elasticity of demand for the product or service your business
provides
e. Availability of raw materials
Once these factors are identified, they may be used in Pro Formas, which estimate
the
level of sales, expense, and profitability that seem possible in a future period
of
operations.
The Pro Forma Income Statement
In preparing the Pro Forma Income Statement, the estimate of total sales during
a
selected period is the most critical "guesstimate." Employ business
experience from
past financial statements. Get help from management and salespeople in developing
this
all-important number.
Then assume, for example, that a 10 percent increase in sales volume is a
realistic
and attainable goal. Multiply last year’s net sales by 1.10 to get this
year’s estimate
of total net sales. Next, break down this total, month by month, by looking
at the
historical monthly sales volume. From this you can determine what percentage
of total
annual sales fell on the average in each of those months over a minimum of the
past
three years. You may find that 75 percent of total annual sales volume was realized
during the six months from July through December in each of those years and
that the
remaining 25 percent of sales was spread fairly evenly over the first six months
of the
year.
Next, estimate the cost of goods sold by analyzing operating data to determine
on a
monthly basis what percentage of sales has gone into cost of goods sold in the
past.
This percentage can then be adjusted for expected variations in costs, price
trends,
and efficiency of operations.
Operating expenses (sales, general and administrative expenses, depreciation,
and
interest), other expenses, other income, and taxes can then be estimated through
detailed analysis and adjustment of what they were in the past and what you
expect them
to be in the future.
Comparison with Actual Monthly Performance
Putting together this information month by month for a year into the future
will
result in your business’s Pro Forma Statement of Income. Use it to compare
with the
actual monthly results from operations by using the SBA form 1099 (4-82) Operating
Plan
Forecast (Profit and Loss Projection). Obtain this form from your local SBA
office. You
will find it helpful to refer to the SBA Guidelines for Profit and Loss Projection.
Preparation of the information is summarized below and on the back of the form
1099.
Revenue (Sales)
List the departments within the business. For example, if your business is
appliance sales and service, the departments would include new appliances, used
appliances, parts, in-shop service, on-site service. In the "Estimate"
columns,
enter a reasonable projection of monthly sales for each department of the
business. Include cash and on-account sales. In the "Actual" columns,
enter the
actual sales for the month as they become available. Exclude from the Revenue
section any revenue not strictly related to the business.
Cost of Sales
Cite costs by department of the business, as above. In the "Estimate"
columns,
enter the cost of sales estimated for each month for each department. For product
inventory, calculate the cost of the goods sold for each department (beginning
inventory plus purchases and transportation costs during the month minus the
inventory). Enter "Actual" costs each month as they accrue.
Gross Profit
Subtract the total cost of sales from the total revenue.
Expenses
Salary Expenses: Base pay plus overtime. Payroll Expenses: Include paid vacations,
sick leave, health insurance, unemployment insurance, Social Security taxes.
Outside Services: Include costs of subcontracts, overflow work farmed-out,
special or one-time services. Supplies: Services and items purchased for use
in the
business, not for resale. Repairs and Maintenance: Regular maintenance and repair,
including periodic large expenditures, such as painting or decorating. Advertising:
Include desired sales volume, classified directory listing expense, etc. Car,
Delivery and Travel: Include charges if personal car is used in the business.
Include parking, tolls, mileage on buying trips, repairs, etc. Accounting and
Legal: Outside professional services. Rent: List only real estate used in the
business. Telephone. Utilities: Water, heat, light, etc. Insurance: Fire or
liability on property or products, worker’s compensation. Taxes: Inventory,
sales,
excise, real estate, others. Interest. Depreciation: Amortization of capital
assets. Other Expenses (specify each): Tools, leased equipment, etc. Miscellaneous
(unspecified): Small expenditures without separate accounts.
Net Profit
To find net profit, subtract total expenses from gross profit.
The Pro Forma Statement of Income, prepared on a monthly basis and culminating
in an
annual projection for the next business fiscal year, should be revised not less
than
quarterly. It must reflect the actual performance achieved in the immediately
preceding
three months to ensure its continuing usefulness as one of the two most valuable
planning tools available to management.
Should the Pro Forma reveal that the business will likely not generate a profit
from
operations, plans must immediately be developed to identify what to do to at
least
break even—increase volume, decrease expenses, or put more owner capital
in to pay some
debts and reduce interest expenses.
Break-Even Analysis
"Break-Even" means a level of operations at which a business neither
makes a profit
nor sustains a loss. At this point, revenue is just enough to cover expenses.
Break-Even
Analysis enables you to study the relationship of volume, costs, and revenue.
Break-Even requires the business owner/manager to define a sales level—either
in terms
of revenue dollars to be earned or in units to be sold within a given accounting
period—at which the business would earn a before tax net profit of zero.
This may be
done by employing one of various formula calculations to the business estimated
sales
volume, estimated fixed costs, and estimated variable costs.
Generally, the volume and cost estimates assume the following conditions:
A change in sales volume will not affect the selling price per unit; Fixed
expenses (rent, salaries, administrative and office expenses, interest, and
depreciation) will remain the same at all volume levels; and Variable expenses
(cost of goods sold, variable labor costs including overtime wages and sales
commissions) will increase or decrease in direct proportion to any increase
or
decrease in sales volume.
Two methods are generally employed in Break-Even Analysis, depending on whether
the
break-even point is calculated in terms of sales dollar volume or in number
of units
that must be sold.
Break-Even Point in Sales Dollars
The steps for calculating the first method are shown below:
1. Obtain a list of expenses incurred by the company during its past fiscal year.
2. Separate the expenses listed in Step 1 into either a variable or a fixed
expense
classification. (See Figure 4-1, below, under "Classification of Expenses.")
3. Express the variable expenses as a percentage of sales. In the condensed
income
statement (Figure 4-1) of the Small Business Specialties Co. (below), net sales
were
$1,200,000. In Step 2, variable expenses were found to amount to $720,000. Therefore,
variable expenses are 60 percent of net sales ($720,000 divided by $1,200,000).
This
means that 60 cents of every sales dollar is required to cover variable expenses.
Only
the remainder, 40 cents of every dollar, is available for fixed expenses and
profit.
4. Substitute the information gathered in the preceding steps in the following
basic
break-even formula to calculate the breakeven point.
Figure 4-1
THE SMALL-BUSINESS SPECIALTIES CO.
Condensed Income Statement
For year ending Dec. 31, 19-
Net sales (60,000 units @ $20 per unit)..........................$1,200,000
Less cost
of goods sold:
Direct material.............................$195,000
Direct labor................................ 215,000
Manufacturing expenses (Schedule A)......... 300,000
Total....................................................... 710,000
Gross profit..................................................... 490,000
Less
operating expenses:
Selling expenses (Schedule B)...............$200,000
General and administrative expenses
(Schedule C).............................. 210,000
Total....................................................... 410,000
Net Income.......................................................$ 80,000
Supporting Schedules of Expenses Other Than Direct Material and Labor
Schedule C
Schedule A Schedule B general and
manufacturing selling administrative
Total expenses expenses expenses
Rent.................$ 60,000 $ 30,000 $ 8,000 $ 22,000
Insurance............ 11,000 9,000 1,000 1,000
Commissions.......... 120,000 ....... 120,000 .......
Property tax......... 12,000 10,000 1,000 1,000
Telephone............ 7,000 1,000 5,000 1,000
Depreciation......... 80,000 70,000 5,000 5,000
Power................ 100,000 100,000 ....... .......
Light................ 60,000 30,000 10,000 20,000
Officers’ salaries... 260,000 50,000 50,000 160,000
Total...........$710,000 $300,000 $200,000 $210,000
Classification of Expenses
Total Variable Fixed
Direct material...................$ 195,000 195,000 .......
Direct labor...................... 215,000 215,000 .......
Manufacturing expenses............ 300,000 100,000 $200,000
Selling expenses.................. 200,000 50,000
General and admin. expenses....... 210,000 60,000 150,000
Total........................$1,120,000 $720,000 $400,000
Where: S = F + V (Sales at the break-even point)
F = Fixed expenses
V = Variable expenses expressed as a percentage of sales.
This formula means that when sales revenues equal the fixed expenses and variable
expenses incurred in producing the sales revenues, there will be no profit or
loss. At
this point, revenue from sales is just sufficient to cover the fixed and the
variable
expenses. In this formula "S" is the break even point.
For the Small Business Specialties Co., the break-even point (using the basic
formula
and data from Figure 4-2) may be calculated as follows:
S = F + V
S = $400,000 + 0.605
10S = $4,000,000 + 6S
10S - 6S = $4,000,000
4S = $4,000,000
S = $1,000,000
Proof that this calculation is correct follows:
Sales at break-even point per calculation $1,000,000
Less variable expenses (60 percent of sales) 600,000
Marginal income 400,000
Less fixed expenses 400,000
Equals neither profit nor loss $ 0
Modification: Break-Even Point to Obtain Desired Net Income.
The first break-even formula can be modified to show the dollar sales required
to
obtain a certain amount of desired net income. To do this, let "S"
mean the sales
required to obtain a certain amount of net income, say $80,000. The formula
then reads:
S = F + V + Desired Net Income
S = $400,000 + 0.60S + $80,000
10S = $4,000,000 + 6S + 800,000
4S = $4,800,000
S = $1,200,000
Break-Even Point in Units to be Sold
You may want to calculate the break-even point in terms of units to be sold
instead of
sales dollars. If so, a second formula (in which "S" means units to
be sold to break
even) may be used:
Break-even Sales = Fixed expenses
(S = Units) -----------------------------------------
Unit sales price - Unit variable expenses
S = $400,000 = $400,000
-----------------------
$20 - $12 $8
S = 50,000 units
The Small Business Specialties Co. must sell 50,000 units at $20 per unit
to break
even under the assumptions contained in this illustration. The sale of 50,000
units at
$20 each equals $1 million, the break-even sales volume in dollars calculated
in the
basic formula. This formula indicates there is $8 per unit of sales that can
be used to
cover the $400,000 fixed expense. Then $400,000 divided by $8 gives the number
of units
required to break even.
Modification: Break-Even Point in Units to be Sold to Obtain Desired Net Income.
The second formula can be modified to show the number of units required to
obtain a
certain amount of net income. In this case, let S mean the number of units required
to
obtain a certain amount of net income, again say $80,000. The formula then reads
as
follows:
S = Fixed expenses + Net income
----------------------------------------
Unit sales price - Unit variable expense
S = $400,000 + $80,000 = $480,000
------------------ --------
$20 - $12 $8
S = 60,000 units
Break-even Analysis may also be represented graphically by charting the sales
dollars
or sales units required to break even as in Figure 4-2, below.
Remember: Increased sales do not necessarily mean increased profits. If you
know your
company’s break-even point, you will know how to price your product to
make a profit.
If you cannot make an acceptable profit, alter or sell your business before
you lose
your retained earnings.
V. Cash Flow Management: Budgeting and Controlling Costs
If there is anything more important to the successful financial management
of a
business than the thorough, thoughtful preparation of Pro Forma Income Statements,
it
is the preparation of the Cash Flow Statement, sometimes called the Cash Flow
Budget.
The Cash Flow Statement
The Cash Flow Statement identifies when cash is expected to be received and
when it
must be spent to pay bills and debts. It shows how much cash will be needed
to pay
expenses and when it will be needed. It also allows the manager to identify
where the
necessary cash will come from. For example, will it be internally generated
from sales
and the collection of accounts receivable—or must it be borrowed? (The
Cash Flow
Projection deals only with actual cash transactions; depreciation and amortization
of
good will or other non-cash expense items are not considered in this Pro Forma.)
The Cash Flow Statement, based on management estimates of sales and obligations,
identifies when money will be flowing into and out of the business. It enables
management to plan for shortfalls in cash resources so short term working capital
loans
may be arranged in advance. It allows management to schedule purchases and payments
in
a way that enables the business to borrow as little as possible. Because all
sales are
not cash sales management must be able to forecast when accounts receivable
will become
"cash in the bank" and when expenses—whether regular or seasonal—must
be paid so cash
shortfalls will not interrupt normal business operations.
The Cash Flow Statement may also be used as a Budget, permitting the manager
increased
control of the business through continuous comparison of actual receipts and
disbursements against forecast amounts. This comparison helps the small business
owner
identify areas for timely improvement in financial management.
By closely watching the timing of cash receipts and disbursements, cash balance
on
hand, and loan balances, management can readily identify such things as deficiencies
in
collecting receivables, unrealistic trade credit or loan repayment schedules.
Surplus
cash that may be invested on a short-term basis or used to reduce debt and interest
expenses temporarily can be recognized. In short, it is the most valuable tool
management has at its disposal to refine the day-to-day operation of a business.
It is
an important financial tool bank lenders evaluate when a business needs a loan,
for it
demonstrates not only how large a loan is required but also when and how it
can be
repaid.
A Cash Flow Statement or Budget can be prepared for any period of time. However,
a
one-year budget matching the fiscal year of your business is recommended. As
in the
preparation and use of the Pro Forma Statement of Income, the projected Cash
Flow
Statement should be prepared on a monthly basis for the next year. It should
be revised
not less than quarterly to reflect actual performance in the preceding three
months of
operations to check its projections.
In preparing the Cash Flow Statement or Budget start with the sales budget.
Other
budgets are related directly or indirectly to this budget. The following is
a sales
forecast in units:
Sales Budget—Units For the Year Ended December 31, 19__
Territory Total 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
East....................26,000 5,000 6,000 7,000 8,000
West....................11,000 2,000 2,500 3,000 3,500
37,000 7,000 8,500 10,000 11,500
Assume you sell a single product and the sales price for it is $10. Your sales
budget
in terms of dollars would look like this:
Sales Budget—Dollars For the Year Ended December 31, 19__
Territory Total 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
East......................$260,000 $50,000 $80,000 $ 70,000 $ 80,000
West...................... 110,000 20,000 25,000 30,000 35,000
$370,000 $70,000 $85,000 $100,000 $115,000
Say the estimated per unit cost of the product is $1.50 for direct material,
$2.50 for
direct labor, and $1.00 for manufacturing overhead. By applying unit costs to
the sales
budget in units, you would come out with this budget:
Cost of Goods Sold Budget For the Year Ended December 31, 19__
Total 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Direct material......$ 55,500 $10,500 $12,750 $15,000 $17,250
Direct labor......... 92,500 17,500 21,250 25,000 28,750
Mfg. overhead........ 37,000 7,000 8,500 10,000 11,500
$185,000 $35,000 $42,500 $50,000 $57,500
Later on, before a cash budget can be compiled, you will need to know the
estimated
cash requirements for selling expenses. Therefore, you prepare a budget for
selling
expenses and another for cash expenditures for selling expenses (total selling
expenses
less depreciation):
Selling Expenses Budget For the Year Ended December 31 19__
Total 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Commissions.............$46,500 $ 8,750 $10,625 $12,500 $14,375
Rent.................... 9,250 1,750 2,125 2,500 2,875
Advertising............. 9,250 1,750 2,125 2,500 2,875
Telephone............... 4,625 875 1,062 1,250 1,437
Depreciation—office.... 900 225 225 225 225
Other................... 22,250 4,150 5,088 6,025 6,983
$92,500 $17,500 $21,250 $25,000 $28,750
Selling Expenses Budget—Cash Requirements For the Year Ended
December 31, 19__
Total 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Total selling expenses..$92,500 $17,500 $21,250 $25,000 $28,750
Less: depreciation......
expense—office......... 900 225 225 225 225
Cash requirements.......$91,600 $17,275 $21,025 $24,775 $28,525
Basic information for an estimate of administrative expenses for the coming
year is
easily compiled. Again, from that budget you can estimate cash requirements
for those
expenses to be used subsequently in preparing the cash budget.
Administrative Expenses Budget For the Year Ended December 31, 19___
Total 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Salaries.................$22,200 $4,200 $5,100 $ 6,000 $ 6,900
Insurance................ 1,850 350 425 500 575
Telephone................ 1,850 350 425 500 575
Supplies................. 3,700 700 850 1,000 1,150
Bad debt expenses........ 3,700 700 850 1,000 1,150
Other expenses........... 3,700 700 850 1,000 1,150
$37,000 $7,000 $8,500 $10,000 $11,500
Administrative Expenses Budget—Cash Requirements
For the Year Ended December 31, 19___
Total 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Estimated adm. expenses...$37,000 $7,000 $8,500 $10,000 $11,500
Less: bad debt expenses... 3,700 700 850 1,000 1,150
Cash requirements.........$33.300 $6,500 $7,650 $ 9,000 $10,350
Now, from the information budgeted so far, you can proceed to prepare the
budget
income statement. Assume you plan to borrow $10,000 at the end of the first
quarter.
Although payable at maturity of the note, the interest appears in the last three
quarters of the year. The statement will resemble the following:
Budgeted Income Statement For the Year Ended December 31, 19___
Total 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Sales...................$370,000 $70,000 $85,000 $100,000 $115,000
Cost of goods sold...... 185,000 35,000 42,500 50,000 57,500
Gross Margin............$185,000 $35,000 $42,500 $ 50,000 $ 57,500
Operating expenses:
Selling................$ 92,500 $17,500 $21,250 $ 25,000 $ 28,750
Administrative......... 37,000 7,000 8,500 $ 10,000 $ 11,500
Total................$129,500 $24,500 $29,750 $ 35,000 $ 40,250
Net income
from operations........$ 55,500 $10,500 $12,750 $ 15,000 $ 17,250
Interest expense....... 450 150 150 150
Net income before
Income taxes...........$ 55,050 $10,500 $12,600 $ 14,850 $ 17,100
Federal income tax..... 27,525 5,250 6,300 7,425 8,550
Net income..............$ 27,525 $ 5,250 $ 6,300 $ 7,425 $ 8,550
Estimating that 90 percent of your account sales is collected in the quarter
in which
they are made, that 9 percent is collected in the quarter following the quarter
in
which the sales were made, and that 1 percent of account sales is uncollectible,
your
accounts receivable budget of collections would look like this:
Budget of Collections of Accounts Receivable For the Year Ended December
31, 19___
Total 1st 2nd 3rd 4th
(net) Quarter Quarter Quarter Quarter
4th Quarter Sales 19-0...$ 6,000 $ 6,000
1st Quarter Sales 19-1... 69,300 63,000 $ 6,300
2nd Quarter Sales 19-1... 84,150 76,500 $ 7,650
3rd Quarter Sales 19-1... 99,000 90,000 $ 9,000
4th Quarter Sales 19-1... 103,500 103,500
$361,950 $69,000 $82,800 $97,650 $112,500
Going back to the sales budget in units, now prepare a production budget in
units.
Assume you have 2,000 units in the opening inventory and want to have on hand
at the
end of each quarter the following quantities: 1st quarter, 3,000 units; 2nd
quarter,
3,500 units; 3rd quarter, 4,000 units; and 4th quarter, 4,500 units.
Production Budget—Units For the Year Ended December 31, 19___
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Sales requirements........... 7,000 8,500 10,000 11,500
Add: ending
inventory requirements...... 3,000 3,500 4,000 4,500
Total requirements..........10,000 12,500 14,000 16,000
Less: beginning
inventory................... 2,000 3,000 3,500 4,000
Production
requirements............... 8,000 9,000 10,500 112,000
Next, based on the production budget, prepare a budget to show the purchases
needed
during each of the four quarters. Expressed in terms of dollars, you do this
by taking
the production and inventory fires and multiplying them by the cost of material
(previously estimated at $1.50 per unit). You could prepare a similar budget
expressed
in units.
Budget of Direct Materials Purchases For the Year Ended December 31, 19___
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Required for production........$12,000 $13,500 $15,750 $18,000
Required for ending inventory.. 4,500 52,250 6,000 6,750
Total........................$16,500 $18,750 $21,750 $24,750
Less: beginning inventory...... 3,000 4,500 5,250 6,000
Required purchases.............$13,500 $14,250 $16,500 $18,750
Now suppose you pay 50 percent of your accounts in the quarter of the purchase
and 50
percent in the following quarter. Carryover payables from last year were $5,000.
Further, you always take the purchase discounts as a matter of good business
policy.
Since net purchases (less discount) were figured into the $1.50 cost estimate,
purchase
discounts do not appear in the budgets. Thus your payment on purchases budget
will come
out like this:
Payment on Purchases Budget For the Year Ended December 31, 19___
Total 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
4th Quarter Sales 19-0...$ 5,000 $ 5,000
1st Quarter Sales 19-1... 13,500 6,750 $ 6,750
2nd Quarter Sales 19-1... 14,250 7,125 $ 7.125
3rd Quarter Sales 19-1... 16,500 8,250 $ 8,250
4th Quarter Sales 19-1... 9,375 9,375
Payments by Quarters $58,625 $11,750 $13,875 $15,375 $17,625
Taking the data for quantities produced from the production budget in units,
calculate
the direct labor requirements on the basis of units to be produced. (The number
and
cost of labor hours necessary to produce a given quantity can be set forth in
supplemental schedules.)
Direct Labor Budget—Cash Requirements For the Year Ended December 31, 19__
Total 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Quantity................ 39,500 8,000 9,000 10,500 12,000
Direct labor cost.......$98,750 $20,000 $22,500 $26,250 $30,000
Now outline the items that comprise your factory overhead, and prepare a budget
like
the following:
Manufacturing Overhead Budget For the Year Ended December 31, 19___
Total 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Heat and power..........$10,000 $1,000 $2,500 $ 3,000 $ 3,500
Factory supplies........ 5,300 1,000 1,500 1,800 1,000
Property taxes.......... 2,000 500 500 500 500
Depreciation............ 2,800 700 700 700 700
Rent.................... 8,000 2,000 2,000 2,000 2,000
Superintendent.......... 9,400 2,800 1,800 2,500 4,300
$39,500 $8,000 $9,000 $10.500 $12,000
Figure the cash payments for manufacturing overhead by subtracting depreciation,
which
requires no cash outlay, from the totals above, and you will have the following
breakdown:
Manufacturing Overhead Budget—Cash Requirements
For the Year Ended December 31, 19___
Total 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Productions—units...... 39,500 8,000 9,000 10,500 12,000
Mfg.overhead expenses...$39,500 $8,000 $9,000 $10,500 $12,000
Less: depreciation...... 2,800 700 700 700 700
Cash requirements.......$36,700 $7,300 $8,300 $ 9,800 $11,300
Now comes the all important cash budget. You put it together by using the
Collection
of Accounts Receivable Budget; Selling Expenses Budget—Cash Requirements;
Administrative
Expenses Budget—Cash Requirements; Payment of Purchases Budget; Direct
Labor Budget—Cash
Requirements; and Manufacturing Budget—Cash Requirements.
Take $15,000 as the beginning balance, and assume that dividends of $20,000
are to be
paid in the fourth quarter.
Cash Budget For the Year Ended December 31, 19___
Total 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Beginning cash balance $ 15,000 $15,000 $ 3,850 $ 13,300 $ 25,750
Cash collections 361,950 69,000 82,800 97,650 112,500
Total $376,950 $84,000 $86,650 $110,950 $138,250
Cash payments
Purchases $ 58,625 $11,750 $13,875 $ 15,375 $ 17,625
Direct labor 98,750 20,000 22,500 26,250 30,000
Mfg. overhead 38,700 7,300 8,300 9,800 11,300
Selling expense 91,600 17,275 21,025 24,775 28,525
Adm. expenses 33,300 6,300 7,650 9,000 10,350
Federal income tax 27,525 27,525
Dividends 20,000 20,000
Interest expenses 450 450
Loan repayment 10,000 10,000
Total $376,950 $90,150 $73,350 $ 85,200 $128,250
Cash deficiency ($ 6,150)
Bad loan received 10,000 10,000
Ending cash balance $ 10,000 $ 3,850 $13,300 $ 25,750 $ 10,000
Now you are ready to prepare a budget balance sheet. Take the account balances
of last
year and combine them with the transactions reflected in the various budgets
you have
compiled. You will come out with a sheet resembling this:
Budgeted Balance Sheet December 31, 19___
Assets
19___ 19___ Current assets:
Cash $ 10,000 $ 15,000
Accounts receivable 11,500 6,666
Less: allowance for doubtful accounts (1,150) (666)
Inventory:
Raw materials 6,750 3,000
Finished goods 22,500 10,000
Total current assets $ 49,600 34,000
Fixed assets:
Land $ 50,000 $ 50,000
Building 148,000 148,000
Less: allowance for depreciation (37,000) (33,000)
Total fixed assets $161,100 $164,700
Total assets $210,600 $198,700
Liabilities and Shareholders’ Equity
Current liabilities:
Account payable $ 9,375 $ 5,000
Shareholders’ equity:
Capital stock (10,000 shares; $10 par value) $100,000 $110,000
Retained earnings 101,225 93,700
$201,225 $193,700
Total liabilities and shareholders’ equity $210,600 $198,700
In order to make the most effective use of your budgets to plan profits, you
will want
to establish reporting devices. Throughout the time span you have set, you need
periodic reports and reviews on both efforts and accomplishments. These let
you know
whether your budget plan is being attained and help you keep control throughout
the
process. It is through comparing actual performance with budgeted projections
that you
maintain control of the operations.
Your company should be structured along functional lines, with well identified
areas
of responsibility and authority. Then, depending upon the size of your company,
the
budget reports can be prepared to correspond with the organizational structure
of the
company.
Two typical budget reports are shown below to demonstrate various forms these
reports
may take.
Report of Actual and Budgeted Sales For the Year Ended December 31, 19___
Variations from budget (under)
Actual sales Budgeted sales Quarterly Cumulative
1st Quarter $ $ $ $
2nd Quarter
3rd Quarter
4th Quarter
Budgeted Report on Selling Expenses For the Year Ended December 31, 19___
Budget ³ Actual ³ Variation³ Budget ³ Actual ³Variations³ Remarks
This ³ This ³ This ³ Year to ³ Year to ³ Year to ³
Month ³ Month ³ Month ³ Date ³ Date ³ Date ³
³ ³ ³ ³ ³ ³
³ ³ ³ ³ ³ ³
³ ³ ³ ³ ³ ³
³ ³ ³ ³ ³ ³
³ ³ ³ ³ ³ ³
³ ³ ³ ³ ³ ³
Remember, the Cash Flow Statement used as the business’s Budget allows
the
owner/manager to anticipate problems rather than react to them after they occur.
It
permits comparison of actual receipts and disbursements against projections
to identify
errors in the forecast. If cash flow is analyzed monthly, the manager can correct
the
cause of the error before it harms profitability.
VI. Pricing Policy
Identifying the actual cost of doing business requires careful and accurate
analysis.
No one is expected to calculate the cost of doing business with complete accuracy.
However, failure to calculate all actual costs properly to ensure an adequate
profit
margin is a frequent and often overlooked cause of business failure.
Establishing Selling Prices
The costs of raw materials, labor, indirect overhead, and research and
development must be carefully studied before setting the selling price of
items offered by your business. These factors must be regularly
re-evaluated, as costs fluctuate.
Regardless of the strategies employed to maximize profitability, the method
of costing
products offered for resale is basic. It involves four major categories:
Direct Material Costs Direct Labor Costs Overhead Expenses Profit Desired
Combining these factors allows you to calculate an item’s minimum sales
price, which
is described below:
1. Calculate your Direct Material Costs. Direct material costs are the total
cost of
all raw materials used to produce the item for sale. Divide this total cost
by the
number of items produced from these raw materials to derive the Total Direct
Materials
Cost Per Item.
2. Calculate your Direct Labor Costs. Direct labor costs are the wages paid
to
employees to produce the item. Divide this total direct labor cost by the total
number
of items produced to get the Total Direct Labor Cost Per Item.
3. Calculate your Total Overhead Expenses. Overhead expenses include rent,
gas and
electricity, telephone, packing and shipping, delivery and freight charges,
cleaning
expenses, insurance, office supplies, postage, repairs and maintenance, and
the
manager’s salary. In other words, all operating expenses incurred during
the same time
period that you used for calculating the costs above (one year, one quarter,
or one
month). Divide the Total Overhead Expense by the number of items produced for
sale
during that same time period to get the Total Overhead Expense Per Item.
4. Calculate Total Cost Per Item. Add the Total Direct Material Cost Per Item,
the
Total Direct Labor Cost Per Item, and the Total Overhead Expense Per Item to
derive the
Total Cost Per Item.
5. Calculate the Profit Per Item. Now, calculate the profit you determine
appropriate
for each category of item offered for sale based on the sales and profit strategy
you
have set for your business.
6. Calculate the Total Price Per Item. Add the Profit Figure Per Item to the
Total
Cost Per Item.
A Pricing Example
You produce skirts that take 1 ½ yards of fabric per skirt, and you
can manufacture
three skirts per day. The fabric costs $2.00 per yard. The normal work week
is five
days. If you complete three skirts per day, your week’s production is 15
skirts.
1. Calculate Direct Materials Cost
Materials Cost
Fabric for 1 week’s production:
15 skirts x 1 ½ yds. each = 22 ½ yds. x $2 per yd. $45.00
Linings, interfacings, etc.:
$.50 per skirt x 15 skirts 7.50
Zippers, buttons, snaps:
$.50 per skirt x 15 skirts 7.50
Belts, ornaments, etc.:
$.75 per skirt x 15 skirts 11.25
Notions, seam binding, etc.:
1 week’s supply 5.00
ÄÄÄÄÄÄ
Total Direct Materials Cost: $76.25 per week
Total Direct Materials Cost per week = $5.08 Direct Materials
------------------------------------ Cost per skirt
15 skirts per week
2. Calculate Direct Labor Costs
Wages paid to employees = $100.00 per week
Total Direct Labor Cost per week = $6.67 Direct Labor Cost
-------------------------------- per skirt
15 skirts
3. Calculate Overhead Expenses Per Month
Overhead Expenses Monthly
Expenses
Owner’s Salary $400.00
Rent 100.00
Electricity 24.00
Telephone 12.00
Insurance 15.00
Cleaning 20.00
Packing Materials and Supplies 15.00
Delivery and Freight 20.00
Office Supplies, Postage 10.00
Repairs and Maintenance 15.00
Payroll Taxes 5.00
Total Monthly Overhead Expenses: $636.00
15 skirts per week x 4 weeks in one month = 60 skirts per month.
Total Monthly Overhead Expenses = $10.60 Overhead Cost
------------------------------- per skirt
60 skirts per month
4. Calculate the Total Cost per Skirt by adding the total individual costs
per skirt
calculated in the three preceding steps.
Total Direct Material Cost per Skirt $ 5.08
Total Direct Labor Cost per Skirt 6.67
Total Overhead Expense per Skirt 10.60
TOTAL COST PER SKIRT $22.35
5. Assume you want to make a profit of $5.00 per skirt.
6. Calculate the Total Price Per Item:
Total Cost per Skirt $22.35
Total Profit per Skirt 5.00
Total Selling Price Per Skirt $27.35
The Retailer’s Mark-Up
A word of caution is in order regarding the popular but misunderstood pricing
method
known as retailers mark-up. Retail mark-up means the amount added to the price
of an
item to arrive at the retail sales price, either in dollars or as a percentage
of the
cost.
For example, if a single item costing $8.00 is sold for $12.00 it carries
a mark-up of
$4.00 or 50 percent. If a group of items costing $6,000 is offered for $10,000,
the
mark-up is $4,000 or 66 2/3 percent. While in these illustrations the mark-up
percentage appears generally to equal the gross margin percentages, the mark-up
is not
the same as the gross margin. Adding mark-up to the price merely to simplify
pricing
will almost always adversely affect profitability.
To demonstrate, assume a manager determines from past records that the business’s
operating expenses average 29 percent of sales. She decides that she is entitled
to a
profit of 3 percent. So she prices her goods at a 32 percent gross margin, in
order to
earn a 3 percent profit after all operating expenses are paid. What she fails
to
realize, however, is that once the goods are displayed, some may be lost through
pilferage. Others may have to be marked down later in order to sell them, or
employees
may purchase some of them at a discount. Therefore, the total reductions (mark-downs,
shortages, discounts) in the sales price realized from selling all the inventory
actually add up to an annual average of six percent of total sales. To correctly
calculate the necessary mark-up required to yield a 32 percent gross margin,
these
reductions to inventory must be anticipated and added into its selling price.
Using the
formula:
Initial Mark-up = Desired Gross Margin + Retail Reductions
----------------------------------------
100 Percent + Retail Reductions
32 percent + 6 percent = 38 percent = 35.85 percent
----------------------- -----------
100 percent + 6 percent 106 percent
To obtain the desired gross margin of 32 percent, therefore, the retailer
must
initially mark up his inventory by nearly 36 percent.
Pricing Policies and Profitability Goals
Break-Even Analysis, discussed in Chapter IV, and Return on Investment, described
in
Chapter III, should be reviewed at this time. Remember, all costs (direct and
indirect), the break-even point, desired profit, and the methods of calculating
sales
price from these factors must be thoroughly studied when you establish pricing
policies
and profitability goals. They should be understood before you offer items for
sale
because an omission or error in these calculations could make the difference
between
success and failure.
Selling Strategy
Proper product pricing is only one facet of overall planning for profitability.
A
second major factor to be determined once costs, break-even point, and profitability
goals have been analyzed, is the selling strategy. Three sales planning approaches
are
used (often concurrently) by businesses to develop final pricing policies, as
they
strive to compete successfully.
In the first, employed as a short-term strategy in the earliest stages of
a business,
the owner/manager sells products at such low prices that the business only breaks
even
(no profit), while trying to attract future steady customers. As volume grows,
the
owner/manager gradually builds in the profit margin necessary to achieve the
targeted
Return on Investment.
"Loss leaders" are a second strategy practiced in both developing
and mature business.
While a few items are sold at a loss, most goods are priced for healthy profits.
The
hope is that while customers are in the store to purchase the low-price items,
they
will also buy enough other goods to make the seller’s overall profitability
higher than
if he had not used "come-ons." The seller wants to maximize total
profit and can
sacrifice profit on a few items to achieve that goal.
The third strategy recognizes that maximum profit does not result only from
selling
goods at relatively high profit margins. The relationship of volume, price,
cost of
merchandise, and operational expenses determines profitability. Price increases
may
result in fewer sales and decreased profits. Reductions in prices, if sales
volume is
substantially increased, may produce satisfactory profits.
There is no arbitrary rule about this. It is perfectly possible for two stores,
with
different pricing structures to exist side by side and both be successful. It
is the
owner/manager’s responsibility to identify and understand the market factors
that
affect his or her unique business circumstances. The level of service (delivery,
availability of credit, store hours, product advice, and the like) may permit
a
business to charge higher prices in order to cover the costs of such services.
Location, too, often permits a business to charge more, since customers are
often
willing to pay a premium for convenience.
The point is that many considerations go into setting selling prices. Some
small
businesses do not seek to compete on price at all, finding an un- or under-occupied
market niche, which can be a more certain path to success. What is important
is that
all factors that affect pricing must be recognized and analyzed for their costs
as well
as their benefits.
VII. Forecasting and Obtaining Capital
Forecasting the need for capital, whether debt or equity, has already been
discussed
in Chapter V. This chapter looks at the types and uses of external capital and
the usual
sources of such capital.
Types and Sources of Capital
The capital to finance a business has two major forms: debt and equity. Creditor
money
(debt) comes from trade credit, loans made by financial institutions, leasing
companies, and customers who have made prepayments on larger—frequently
manufactured—orders. Equity is money received by the company in exchange
for some
portion of ownership. Sources include the entrepreneur’s own money; money
from family,
friends, or other non-professional investors; or money from venture capitalists,
Small
Business Investment Companies (SBICs), and Minority Enterprise Small Business
Investment Companies (MESBICs) both funded by the SBA.
Debt capital, depending upon its sources (e.g., trade, bank, leasing company,
mortgage
company) comes into the business for short or intermediate periods. Owner or
equity
capital remains in the company for the life of the business (unless replaced
by other
equity) and is repaid only when and if there is a surplus at liquidation of
the
business—after all creditors are repaid.
Acquiring such funds depends entirely on the business’s ability to repay
with interest
(debt) or appreciation (equity). Financial performance (reflected in the Financial
Statements discussed in Chapter II) and realistic, thorough management planning
and
control (shown by Pro Formas and Cash Flow Budgets), are the determining factors
in
whether or not a business can attract the debt and equity funding it needs to
operate
and expand.
Business capital can be further classified as equity capital, working capital,
and
growth capital. Equity capital is the cornerstone of the financial structure
of any
company. As you will recall from Chapter II, equity is technically the part
of the
Balance Sheet reflecting the ownership of the company. It represents the total
value of
the business, all other financing being debt that must be repaid. Usually, you
cannot
get equity capital—at least not during the early stages of business growth.
Working capital is required to meet the continuing operational needs of the
business,
such as "carrying" accounts receivable purchasing inventory, and meeting
the payroll.
In most businesses, these needs vary during the year, depending on activities
(inventory build-up, seasonal hiring or layoffs, etc.) during the business cycle.
Growth capital is not directly related to cyclical aspects of the business.
Growth
capital is required when the business is expanding or being altered in some
significant
and costly way that is expected to result in higher and increased cash flow.
Lenders of
growth capital frequently depend on anticipated increased profit for repayment
over an
extended period of time, rather than expecting to be repaid from seasonal increases
in
liquidity as is the case of working capital lenders.
Every growing business needs all three types: equity, working, and growth
capital. You
should not expect a single financing program maintained for a short period of
time to
eliminate future needs for additional capital.
As lenders and investors analyze the requirements of your business, they will
distinguish between the three types of capital in the following way:
1) fluctuating needs (working capital); 2) needs to be repaid with profits
over a
period of a few years (growth capital); and 3) permanent needs (equity capital).
If you are asking for a working capital loan, you will be expected to show
how the
loan can be repaid through cash (liquidity) during the business’s next
full operating
cycle, generally a one year cycle. If you seek growth capital, you will be expected
to
show how the capital will be used to increase your business enough to be able
to repay
the loan within several years (usually not more than seven). If you seek equity
capital,
it must be raised from investors who will take the risk for dividend returns
or capital
gains, or a specific share of the business.
Borrowing Working Capital
Chapter II defined working capital as the difference between current assets
and
current liabilities. To the extent that a business does not generate enough
money to pay
trade debt as it comes due, this cash must be borrowed.
Commercial banks obviously are the largest source of such loans, which have
the
following characteristics: 1) The loans are short-term but renewable;
2) they may fluctuate according to seasonal needs or follow a fixed schedule
of
repayment (amortization); 3) they require periodic full repayment ("clean
up"); 4) they
are granted primarily only when the ratio of net current assets comfortably
exceeds net
current liabilities; and 5) they are sometimes unsecured but more often secured
by
current assets (e.g., accounts receivable and inventory). Advances can usually
be
obtained for as much as 70 to 80 percent of quality (likely to be paid) receivables
and to 40 to 50 percent of inventory. Banks grant unsecured credit only when
they feel
the general liquidity and overall financial strength of a business provide assurance
for repayment of the loan.
You may be able to predict a specific interval, say three to five months,
for which
you need financing. A bank may then agree to issue credit for a specific term.
Most
likely, you will need working capital to finance outflow peaks in your business
cycle.
Working capital then supplements equity. Most working capital credits are established
on a one-year basis.
Although most unsecured loans fall into the one-year line of credit category,
another
frequently used type, the amortizing loan, calls for a fixed program of reduction,
usually on a monthly or quarterly basis. For such loans your bank is likely
to agree to
terms longer than a year, as long as you continue to meet the principal reduction
schedule.
It is important to note that while a loan from a bank for working capital
can be
negotiated only for a relatively short term, satisfactory performance can allow
the
arrangement to be continued indefinitely.
Most banks will expect you to pay off your loans once a year (particularly
if they are
unsecured) in perhaps 30 or 60 days. This is known as "the annual clean
up," and it
should occur when the business has the greatest liquidity. This debt reduction
normally
follows a seasonal sales peak when inventories have been reduced and most receivables
have been collected.
You may discover that it becomes progressively more difficult to repay debt
or "clean
up" within the specified time. This difficulty usually occurs because:
1) Your business
is growing and its current activity represents a considerable increase over
the
corresponding period of the previous year;
2) you have increased your short-term capital requirement because of new promotional
programs or additional operations; or 3) you are experiencing a temporary reduction
in
profitability and cash flow.
Frequently, such a condition justifies obtaining both working capital and
amortizing
loans. For example, you might try to arrange a combination of a $15,000 open
line of
credit to handle peak financial requirements during the business cycle and $20,000
in
amortizing loans to be repaid at, say $4,000 per quarter. In appraising such
a request,
a commercial bank will insist on justification based on past experience and
future
projections. The bank will want to know: How the $15,000 line of credit will
be
self-liquidating during the year (with ample room for the annual clean up);
and how
your business will produce increased profits and resulting cash flow to meet
the
schedule of amortization on the $20,000 portion in spite of increasing your
business’s
interest expense.
Borrowing Growth Capital
Lenders expect working capital loans to be repaid through cash generated in
the
short-term operations of the business, such as, selling goods or services and
collecting receivables. Liquidity rather than overall profitability supports
such
borrowing programs. Growth capital loans are usually scheduled to be repaid
over longer
periods with profits from business activities extending several years into the
future.
Growth capital loans are, therefore secured by collateral such as machinery
and
equipment, fixed assets which guarantee that lenders will recover their money
should the
business be unable to make repayment.
For a growth capital loan you will need to demonstrate that the growth capital
will be
used to increase your cash flow through increased sales, cost savings, and/or
more
efficient production. Although your building, equipment, or machinery will probably
be
your collateral for growth capital funds, you will also be able to use them
for general
business purposes, so long as the activity you use them for promises success.
Even if
you borrow only to acquire a single piece of new equipment, the lender is likely
to
insist that all your machinery and equipment be pledged.
Instead of bank financing a particular piece of new equipment, it may be possible
to
arrange a lease. You will not actually own the equipment, but you will have
exclusive
use of it over a specified period. Such an arrangement usually has tax advantages.
It
lets you use funds that would be tied up in the equipment, if you had purchased
it. It
also affords the opportunity to make sure the equipment meets your needs before
you
purchase it.
Major equipment may also be purchased on a time payment plan, sometimes called
a
Conditional Sales Purchase. Ownership of the property is retained by the seller
until
the buyer has made all the payments required by the contract. (Remember, however,
that
time payment purchases usually require substantial down payments and even leases
require cash advances for several months of lease payments.)
Long-term growth capital loans for more than five but less than fifteen years
are also
obtainable. Real estate financing with repayment over many years on an established
schedule is the best example. The loan is secured by the land and/or buildings
the
money was used to buy. Most businesses are best financed by a combination of
these
various credit arrangements.
When you go to a bank to request a loan, you must be prepared to present your
company’s case persuasively. You should bring your financial plan consisting
of a Cash
Budget for the next twelve months, Pro Forma Balance Sheets, and Income Statements
for
the next three to five years. You should be able to explain and amplify these
statements and the underlying assumptions on which the figures are based. Obviously,
your assumptions must be convincing and your projections supportable. Finally,
many
banks prefer statements audited by an outside accountant with the accountant’s
signed
opinion that the statements were prepared in accordance with generally accepted
accounting principles and that they fairly present the financial condition of
your
business.
If borrowing growth capital is necessary and no private conventional source
can be
found, the U.S. Small Business Administration (SBA) may be able to guarantee
up to 90
percent of a local bank loan. By law, SBA cannot consider a loan application
without
evidence that the loan could not be obtained elsewhere on reasonable terms without
SBA
assistance. Even for such guaranteed loans, however, the borrower must demonstrate
the
ability to repay.
Borrowing Permanent Equity Capital
Permanent capital sometimes comes from sources other than the business owner/manager.
Considered ownership contributions, they are different from "stockholders
equity" in
the traditional sense of the phrase. Small Business Investment Companies (SBIC’s)
licensed and financed by the Small Business Administration are authorized to
provide
venture capital to small business concerns. This capital may be in the form
of secured
and/or unsecured loans or debt securities represented by common and preferred
stock.
Venture capital, another source of equity capital, is extremely difficult
to define;
however, it is high risk capital offered with the principal objective of earning
capital gains for the investor. While venture capitalists are usually prepared
to wait
longer than the average investor for a profitable return, they usually expect
in excess
of 15 percent return on their investment. Often they expect to take an active
part in
determining the objectives of the business. These investors may also assist
the small
business owner/manager by providing experienced guidance in marketing, product
ideas,
and additional financing alternatives as the business develops. Even though
turning to
venture capital may create more bosses, their advice could be as valuable as
the money
they lend. Be aware, however, that venture capitalists are looking for businesses
with
real potential for growth and for future sales in the millions of dollars.
Figure 7-1
Financing Sources for Your Business
Equity (Sell part of company)
Family, friends, and other non-professional investors Venture Capitalists
Small
Business Investment Companies (SBICs and MESBICs)
Personal Loans
Banks
Unsecured loans (rare) Loans secured by:
Real Estate
Stocks and Bonds
Finance Companies
Loans secured by:
Real Estate
Personal Assets
Credit Unions
Unsecured "signature" loans Loans secured by:
Real Estate (some credit unions)
Personal Assets
Savings and Loan Associations
Unsecured loans (rare) Loans secured by Real Estate
Mortgage Brokers and Private Investors
Loans secured by Real Estate
Life Insurance Companies
Policy loans (borrow against cash value)
Business Loans
Loans
Banks (short-term)
Unsecured loans (for established, financially sound companies only) Loans
secured
by:
Accounts Receivable
Inventory
Equipment
Banks (long-term)
Loans secured by:
Real Estate
Loans guaranteed by:
Small Business Administration (SBA)
Farmers Home Administration (FmHA)
Commercial Finance Companies Loans secured by:
Real Estate
Equipment
Inventory
Accounts Receivable
Life Insurance Companies
Loans secured by commercial Real Estate (worth at least $150,000)
Small Business Administration (SBA)
Loans secured by:
All available business assets
All available personal assets
Suppliers
Trade Credit
Customers
Prepayment on orders
Leasing
Banks Leasing Companies
Loans secured by:
Equipment
Sales of Receivables (called "factoring")
(Source: The Business Store, Santa Rosa, California.)
Applying for Capital
Below is the minimum information you must make available to lenders and investors:
1. Discussion of the Business
Name, address, and telephone number. Type of business you are in now or want
to
expand or start.
2. Amount of Money You Need to Borrow
Ask for all you will need. Don’t ask for a part of the total and think
you can
come back for more later. This could indicate to the lender that you are a poor
planner.
3. How You Will Use the Money
List each way the borrowed money will be used. Itemize the amount of money
required for each purpose.
4. Proposed Terms of the Loan
Include a payback schedule. Even though the lender has the final say in setting
the terms of the loan, if you suggest terms, you will retain a negotiating
position.
5. Financial Support Documents
Show where the money will come from to repay the loan through the following
projected statements: Profit and Loss Statements (one year for working capital
loan requests and three to five years for growth capital requests) Cash Flow
Statements (one year for working capital loan requests and three to five years
for
growth capital requests)
6. Financial History of the Business
Include the following financial statements for the last three years: Balance
Sheet
Profit and Loss Statement Accounts Receivable and Accounts Payable Listings
and
Agings
7. Personal Financial Statement of the Owner(s)
Personal Assets and Liabilities Resume(s)
8. Other Useful information Includes
Letters of Intent from Prospective Customers Leases or Buy/Sell Agreements
Affecting Your Business Reference Letters
Although it is not required, it is useful to calculate the ratios described
in Chapter
III for your business over the past three years. Use this information to prove
the
strong financial health and good trends in your business’s development
and to
demonstrate that you use such management tools to plan and control your business’s
growth.
VIII. Financial Management Planning
Studies overwhelmingly identify bad management as the leading cause of business
failure. Bad management translates to poor planning by management.
All too often, the owner is so caught up in the day-to-day tasks of getting
the
product out the door and struggling to collect receivables to meet the payroll
that he
or she does not plan. There never seems to be time to prepare Pro Formas or
Budgets.
Often new managers understand their products but not the financial statements
or the
bookkeeping records, which they feel are for the benefit of the IRS or the bank.
Such
overburdened owner/managers can scarcely identify what will affect their businesses
next week, let alone over the coming months and years. But, you may ask, "What
should I
do? How can I, as a small business owner/manager, avoid getting bogged down?
How can I
ensure success?"
Success may be ensured only by focusing on all factors affecting a business’s
performance. Focusing on planning is essential to survival.
Short-term planning is generally concerned with profit planning or budgeting.
Long-term planning is generally strategic, setting goals for sales growth and
profitability over a minimum of three to five years.
The tools for short- and long-term plans have been explained in the previous
chapters:
Pro Forma Income Statements, Cash Flow Statements or Budgets, Ratio Analysis,
and
pricing considerations. The business’s short-term plan should be prepared
on a monthly
basis for a year into the future, employing the Pro Forma Income Statement and
the Cash
Flow Budget.
Long-Term Planning
The long-term or strategic plan focuses on Pro Forma Statements of Income
prepared for
annual periods three to five years into the future. You may be asking yourself,
"How
can I possibly predict what will affect my business that far into the future?"
Granted,
it’s hard to imagine all the variables that will affect your business in
the next year,
let alone the next three to five years. The key, however, is control—control
of your
business’s future course of expansion through the use of the financial
tools explained
in the preceding chapters.
First determine a rate of growth that is desirable and reasonably attainable.
Then
employ Pro Formas and Cash Flow Budgets to calculate the capital required to
finance
the inventory, plant, equipment, and personnel needs necessary to attain that
growth in
sales volume. The business owner/manager must anticipate capital needs in time
to make
satisfactory arrangements for outside funds if internally generated funds from
retained
earnings are insufficient.
Growth can be funded in only two ways: with profits or by borrowing. If expansion
outstrips the capital available to support higher levels of accounts receivable,
inventory, fixed assets, and operating expenses, a business’s development
will be
slowed or stopped entirely by its failure to meet debts as they become payable.
Such
insolvency will result in the business’s assets being liquidated to meet
the demands of
the creditors. The only way to avoid this "outstripping of capital"
is by planning to
control growth. Growth must be understood to be controlled. This understanding
requires
knowledge of past financial performance and of the future requirements of the
business.
These needs must be forecast in writing—using the Pro Forma Income Statement
in
particular—for three to five years in the future. After projecting reasonable
sales
volumes and profitability, use the Cash Flow Budget to determine (on a quarterly
basis
for the next three to five years) how these projected sales volumes translate
into the
flow of cash in and out of the business during normal operations. Where additional
inventory, equipment, or other physical assets are necessary to support the
sales
forecast you must determine whether or not the business will generate enough
profit to
sustain the growth forecast.
Often, businesses simply grow too rapidly for internally generated cash to
sufficiently support the growth. If profits are inadequate to carry the growth
forecast,
the owner/manager must either make arrangements for working growth capital to
borrowed,
or slow growth to allow internal cash to "catch up" and keep pace
with the expansion.
Because arranging financing and obtaining additional equity capital takes time,
this
need must be anticipated well in advance to avoid business interruption.
To develop effective long-term plans, you should do the following steps:
1. Determine your personal objectives and how they affect your willingness
and ability
to pursue financial goals for your business. This consideration, often overlooked,
will
help you determine whether or not your business goals fit your personal plans.
For
example, suppose you hope to become a millionaire by age 45 through your business
but
your long-term strategic plan reveals that only modest sales growth and very
slim profit
margins on that volume are attainable in your industry. You must either adjust
your
personal goals or get into a different business. Long-range planning enables
you to be
realistic about the future of your personal and business expectations.
2. Set goals and objectives for the company (growth rates, return on investment
direction as the business expands and mature). Express these goals in specific
numbers,
for example, sales growth of 10 percent a year, increases in gross and net profit
margins of 2 to 3 percent a year, a return on investment of not less than 9
to 10
percent a year. Use these long-range plans to develop forecasts of sales and
profitability and compare actual results from operations to these forecasts.
If after
these goals are established actual performance continuously falls short of target,
the
wise business owner will reassess both the realism of expectations and the desirability
of continuing to pursue the enterprise.
3. Develop long-range plans that enable you to attain your goals and objectives.
Focus
on the strengths and weaknesses of your business and on internal and external
factors
that will affect the accomplishment of your goals. Develop strategies based
upon
careful analysis of all relevant factors (pricing strategies, market potential,
competition, cost of borrowed and equity capital as compared to using only profits
for
expansions, etc.) to provide direction for the future of your business.
4. Focus on the financial, human, and physical requirements necessary to fulfill
your
plan by developing forecasts of sales, expenses, and retain earnings over the
next
three to five years.
5. Study methods of operation, product mix, new market opportunities, and
other such
factors to help identify ways to improve your company’s productivity and
profitability.
6. Revise, revise. Always use your most recent financial statements to adjust
your
short- and long-term plans. Compare your company’s financial performance
regularly with
current industry data to determine how your results compare with others in your
industry. Learn where your business may have performance weaknesses. Don’t
be afraid to
modify your plans if your expectations have been either too aggressive or too
conservative.
Planning is a perpetual process. It is the key to prosperity for your business.
For Further Information
U.S. Small Business Administration Publications
Business Development Booklets
The following booklets and other publications are available from the Superintendent
of
Documents, U.S. Government Printing Office, Washington, DC 20402. Write GPO
to obtain
SBA Order Form 115B, which lists publications and current prices.
Handbook of Small Business Finance—Small Business Management Series No. 15.
Ratio Analysis for Small Business—Small Business Management Series No. 20.
Guides for Profit Planning—Small Business Management Series No. 25.
Financial Control by Time-Absorption Analysis—Small Business Management Series No. 37.
Purchasing Management and Inventory Control for Small Business—Small
Business
Management Series No. 41.
Managing for Profits—Nonseries (GPO Stock No. 045-000-00206-3).
Business Development Pamphlets
Many pamphlets are available from the U.S. Small Business Administration for
a small
processing fee. Write SBA, P. O. Box 15434, Fort Worth, TX 76119 to request
SBA Order
Form 115A.
Other Sources
Retailing, Principles and Methods, Richard D. Irwin, Inc., Chicago, IL.
"Understanding Financial Statements," Small Business Reporter, 1980,
Bank of America
NT & SA, San Francisco, CA.