How To Raise Money For Starting A Business

HOW TO RAISE MONEY FOR STARTING A BUSINESS

The task of raising money for a business is not as difficult as most people seem to think. This is especially true when you have an idea that can make you and your backers rich. Actually, there’s more money available for new business ventures than there are good business ideas.

A very important rule of the game to learn: Any time you want to raise money, your first move should be to put together a proper prospectus.

This prospectus should include a resume of your background, your education, training, experience and any other personal qualities that might be counted as an asset to your potential success. It’s also a good idea to list the various loans you’ve had in the past, what they were for, and your history in paying them off.

You’ll have to explain in detail how the money you want is going to be used. If it’s for an existing business, you’ll need a profit and loss record for at least the preceding six months, and a plan showing how this additional money will produce greater profits. If it’s a new business, you’ll have to show your proposed business plan, your marketing research and projected costs, as well as anticipated income figures, with a summary for each year, over at least a three year period.

It’ll be advantageous to you to base your cost estimates high, and your income projections on minimal returns. This will enable you to 'ride through' those extreme 'ups and downs' inherent in any beginning business. You should also describe what makes your business unique---how it differs form your competition and the opportunities for expansion or secondary products.

This prospectus will have to state precisely what you’re offering the investor in return for the use of his money. He’ll want to know the percentage of interest you’re willing to pay, and whether monthly, quarterly or on an annual basis. Are you offering a certain percentage of the profits? A percentage of the business? A seat on your board of directories?

An investor uses his money to make more money. He wants to make as much as he can, regardless whether it’s short term or long term deal. In order to attract him, interest him, and persuade him to 'put up' the money you need, you’ll not only have to offer him an opportunity for big profits, but you’ll have to spell it out in detail, and further, back up your claims with proof from your marketing research.

Venture investors are usually quite familiar with 'high risk' proposals, yet they all want to minimize that risk as much as possible. Therefore, your prospectus should include a listing of your business and personal assets with documentation---usually copies of your tax returns for the past three years or more. Your prospective investor may not know anything about you or your business, but if he wants to know, he can pick up his telephone and know everything there is to know within 24 hours. The point here is, don’t ever try to 'con' a potential investor. Be honest with him. Lay all the facts on the table for him. In most cases, if you’ve got a good idea and you’ve done your homework properly, and 'interested investor' will understand your position and offer more help than you dared to ask.

When you have your prospectus prepared, know how much money you want, exactly how it will be used, and how you intend to repay it, you’re ready to start looking for investors.

As simple as it seems, one of the easiest ways of raising money is by advertising in a newspaper or a national publication featuring such ads. Your ad should state the amount of money you want--always ask for more money than you have room for negotiating. Your ad should also state the type of business involved ( to separate the curious from the truly interested), and the kind of return you’re promising on the investment.

Take a page from the party plan merchandisers. Set up a party and invite your friends over. Explain your business plan, the profit potential, and how much you need. Give them each a copy of your prospectus and ask that they pledge a thousand dollars as a non-participating partner in your business. Check with the current tax regulations. You may be allowed up to 25 partners in Sub Chapter S enterprises, opening the door for anyone to gather a group of friends around himself with something to offer them in return for their assistance in capitalizing his business.

You can also issue and sell up to $300,000 worth of stock in your company without going through the Federal Trade Commission. You’ll need the help of an attorney to do this, however, and of course a good tax accountant as well wouldn’t hurt.

It’s always a good idea to have an attorney and an accountant help you make up your business prospectus. As you explain your plan to them, and ask for their advice, casually ask them if they’d mind letting you know of, or steer your way any potential investors they might happen to meet. Do the same with your banker. Give him a copy of your prospectus and ask him if he’d look it over and offer any suggestions for improving it, and of course, let you know of any potential investors. In either case, it’s always a good idea to let them know you’re willing to pay a 'finder’s fee' if you can be directed to the right investor.

Professional people such as doctors and dentists are known to have a tendency to join occupational investment groups. The next time you talk with your doctor or dentist, give him a prospectus and explain your plan. He may want to invest on his own or perhaps set up an appointment for you to talk with the manager of his investment group. Either way, you win because when you’re looking for money, it’s essential that you get the word out as many potential investors as possible.

Don’t overlook the possibilities of the Small Business Investment Companies in your area. Look them up in your telephone book under 'Investment Services.' These companies exist for the sole purpose of lending money to businesses which they feel have a good chance of making money. In many instances, they trade their help for a small interest in your company.

Many states have Business Development Commissions whose goal is to assist in the establishment and growth of new businesses. Not only do they offer favorable taxes and business expertise, most also offer money or facilities to help a new business get started. Your Chamber of Commerce is the place to check for further information of this idea.

Industrial banks are usually much more amenable to making business loans than regular banks, so be sure to check out these institutions in your area. insurance companies are prime sources of long term business capital, but each company varies its policies regarding the type of business it will consider. Check your local agent for the name and address of the person to contact. It’s also quite possible to get the directories of another company to invest in your business. Look for a company that can benefit from your product or service. Also, be sure to check at your public library for available foundation grants. These can be the final answer to all your money needs if your business is perceived to be related to the objectives and activities of the foundation.

Finally, there’s the Money broker or Finder. These are the people who take your prospectus and circulate it with various known lenders or investors. They always require an up-front or retainer fee, and there’s no way they can guarantee to get you the loan or the money you want.

There are many very good money brokers, and there are some that are not so good. They all take a percentage of the gross amount that’s finally procured for your needs. The important thing is to check them out fully; find out about the successful loans or investment plans they’re arranged, and what kind of investor contacts they have---all of this before you put up any front money or pay any retainer fees.

There are many ways to raise money---from staging garage sales to selling stocks. Don’t make the mistake of thinking that the only place you can find the money you need is through the bank or finance company.

Start thinking about the idea of inviting investors to share in your business as silent partners. Think about the idea of obtaining financing for a primary business by arranging financing for another business that will support the start-up, establishment and developing of the primary business. Consider the feasibility of merging with a company that’s already organized, and with facilities that are compatible or related to your needs. Give some thought to the possibilities of getting the people supplying your production equipment to co-sign the loan you need for start-up capital.

Remember, there are thousands upon thousands of ways to obtain business start-up capital. This is truly the age of creative financing.

Disregard the stories you hear of 'tight money,' and start making phone calls, talking to people, and making appointments to discuss your plans with the people who have money invest. There’s more money now than there’s ever been for a new business investment. The problem is that most beginning 'business builders' don’t know what to believe or which way to turn for help. They tend to believe the stories of 'tight money,' and they set aside their plans for a business of their own until a time when start-up money might be easier to find.

The truth is this: Now is the time to make your move. Now is the time to act. the person with a truly viable business plan, and determination to succeed, will make use of every possible idea that can be imagined. And the ideas I’ve suggested here should serve as just a few of the unlimited sources of monetary help available and waiting for you!

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Financial Management

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.

Figure 4-2 +---------------------------------------------------_Revenue (Sales) � _ � � _ � + _ � Total � _ � Costs � Potential Profit-----_---X _ ----- + _ _ � _ � _ _ � � � _ _ � � + _ _ � Variable � _ _ � Costs & � _ _ � Expenses + _ _ � � �-- -- -- -- -- -- -_Break-Even Profit � � � _ � � + _ _ � � � � _ _ � � � _ Loss _ � Fixed Cost Line � _------_--------------------------------------------� ----- � _ � � Fixed � Costs Sales Volume

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 Ac

How To Get A Visa/mastercard With No Credit Check

HOW TO GET A VISA/MASTERCARD WITH NO CREDIT CHECK

SHAPING YOUR APPLICATION TO FIT THE RIGHT PROFILE

Creditors approve credit to those people who most closely match the right profile. They arrive at those conclusions by assigning point values to various items of information that are included either on your credit application or in a credit report.

Credit card companies like scoring systems because as a large volume creditor, they can replace trained credit personnel with a relatively few employees who can quickly total number columns and determine if an applicant’s point values add up to the right score.

Scoring, of course, is done for one reason. A creditor just wants to know that the odds are high he will get his money back. Scoring systems are fine for those people who fit right into the right profile, but what about those who don’t but could pay off their monthly obligations just as easily and reliably as the next person? If you are one of those people who just doesn’t 'fit the mold,' you’ll simply have to make a few adjustments in your application so that you do fit the scoring profile of what a creditor is looking for in a final total.

HOW CREDITORS RATE AN APPLICATION

The first thing you should know is that every system is different. That in itself can work to your advantage. You could be rejected by one company’s scoring system and approved by another. One creditor’s system will give you many points for a good ancwer, and totally ignore a question that gives a negative answer. Another creditor can simply reverse the process.

Keeping in mind that creditors use different scoring systems, we will list only the most important questions and briefly review how a response can affect your total score. The following categories are listed from the highest to lowest points awarded each response.

RESIDENCE - The longer you have lived in one place the better. Stability is given high points.

HOME OWNERSHIP - The best possible housing situation is to own your own home, even if itt is mortgaged. The worst is: renting an unfurnished apartment, living with parents, living in a trailer or motel.

FHA ASSUMABLE HOME LOANS

President Bush signed legislation making credit checks for home mortgages mandatory after December 1989. Prior to that date however, all loans are fully assumable without a mandatory credit check. There are four important factors that will allow you to purchase a home without a credit check and with a minimal down payment:

1) As a home buyer, your application can be pre-approved and your loan without a credit check provided: a) The original VA loan was granted March 1988, or b) The original FHA loan was granted prior to December 2) If the original home buyer made a small down payment on the sale price which was used primarily for closing costs and consequently did not buy any equity at that time. 3) If most of the payments made by the original owner were applied to interest during the first 4-5 years and very little went towards the principal. In that event, very little equity would result from making payments. Or, if there was any equity it would probably have been reduced by depreciation or other home market conditions. 4) The last factor would be low- or no-equity conditions that resulted from low inflation and other economic conditions that can decrease the value of property.

UNDERSTANDING WHAT EQUITY MEANS AS A BUYING FACTOR

In order to understand the buying significance of equity you must understand what it means. Equity is the difference between what real estate sells for (market value), and the payoff amount of the loan to a lender on that property. In other words, if you own a home with a market value or $100,000, but you owe the bank $99,000, your eequity is $1,000. In tens of thousands of cases, VA and FHA homes can be purchased with little or no down payment because no equity has been built up.

TENS OF THOUSANDS OF HOMES ARE AVAILABLE - INCLUDING YOURSS!

If you have been dreaming about owning your own home someday, Dream No More! Right now at this very moment there are tens of thousands of homes for you to choose from that can be purchased with no credit check and no down payment. or with a very modest down payment.

Sounds incredible doesn’t it? But remember, the only reason any seller requires a down payment in the first place is usually to recover the equity in their home. A small amount of equity requires a small down payment. No equity means no down payment!

DEAL WITH MOTIVATED SELLERS

Your objective as a smart buyer should always be to buy real estate with little or nothing down. Even if a seller has equity, you can work out an arrangement that is to your benefit. For example, a seller may agree to carry all the paper on the transaction. This doesn’t mean that the seller will receive no down payment where there is an equity consideration. What it does mean is that you shouldn’t have to come up with cold cash out of your pocket.

Extending credit to customers is the way creditors make money. If you convince them you are a good risk they will give you what you want. Basically, there are two ways you can achieve that goal.

1) You can bypass the normal scoring methods that are used by impressing the person processing your application that you are sincerek reliable, stable, and have the ability to make monthly payments on a loan or credit card account. 2) You can tailor your answers to the application’s questions and in that manner fit into the right scoring mold of what a good credit risk is, according to the formula they are using.

That doesn’t mean you should lie on your application. It simply means you should be aware that being compatible with certian sterotypes will work in your favor. Remember, a creditor can still verify the information you list in an application. Still, many people will twist the truth to put themselves in a favorable position. For example:

1) Some applicants will list their parent’s, a friend’s, or a relative’s address as their own residence and indicate they have lived there for years, knowing it probably won’t be checked. 2) Provided an applicant has a friend or employer who will go along with them, they can list a position and salary they don’t really receive. Then when the creditor calls to verify employment the friend will support what the applicant has claimed to be true. 3) Another way applicants instantly increase their salary is to set up their own corporation. After issuing themselves private stock with an inflated value, they list the stock as part of their salary.

MORE HOT TIPS ON HOW YOU CAN STACK THE ODDS IN YOUR FAVOR!

1) If you don’t have a telephone get one installed. The alternative is to make an arrangement with the telephone company and a friend or relative, to have your name listed with their phone. 2) If you have more than one job, list the one that provides you with the greatest income. 3) Add up your income from all sources and place the total in your gross income listing. Be prepared to submit a supplement to your application if they want to verify your income with your employer.

4) Many banks will have a list of 'good' and 'bad' reasons for borrowing money. Unless you are applying for a secured loan, you don’t have to spend the money for the reason specified. 'Good' reasons include home improvement, education, loan to establish credit, medical treatment for you or your family, and secured loans for a home, car, boat, and other properties. 'Bad' reasons include loans that create another obligation such as that created when you borrow money for a down payment and then have two payments to make; money to pay aa fine or penaltly; money to consolidate debts, unless you are doing it to get lower interest rates; an unnecessary luxury item; money to finance politics; and money that you will loan to someone else. Use a little common sense in determining what type of loan a creditor may consider bad.

5) Banks use dependent figures to determine what your living costs are. If you have more than two dependents you should indicate how they earn their own way or are self-supporting.

6) If you don’t own your own home, counteract this by showing how stable you are. For example, even though you have only rented in a new location for a relatively short time, you lived at your last residence for many years. You moved to improve yourself in some way.

7) Even job changes can be counteracted if each change increased your salary and improved your position.

8) Don’t ever let a creditor guess as to whether or not you can afford the extra obligation you are asking for. Make it obvious by the amount of your income. If you have more income sources than just your salary, include those amounts.

ALWAYS BE PERSISTENT AND NEVER GIVE UP!

If you complete an application and are still rejected, the very first thing you should do is be persistent and never give up. There are many reasons why a person may be turned down for credit, but whatever the reason, you have a legal right to ask a creditor what their reason was.

By knowing what some of the main reasons are for denying credit you can put yourself in a position whereby you can make necessary adjustments and avoid negative effects in advance. If you are turned down, you can then of course concentrate on those points when you reapply.

When you are dealing with creditors you will know who is the cooperative sort, and who is not. If an unsecured loan does not appear imminent, turn the conversation to a secured loan. Then all you do is deposit an amount into savings account to serve as collateral for the amount of credit you want to secure. In some cases the creditor may take personal property as security. If you go to one creditor and it’s clear he has no imagination to deal, go to another who is willing.

CONSIDER ASKING SOMEONE YOU KNOW TO CO-SIGN

A co-signer is soneone who generall has better credit than the person he is co-signing for. He is also the person a creditor will go after first in the event you do not pay off you debt. Why? Because the know that co-signers don’t want their credit ratings ruined and will quickly settle the obligation.

If you are trying to establish or rebuild credit, co-signers can help you achieve that goal. Naturally you wouldn’t need a co-signer every time you apply for credit. After paying off one obligation with a co-signer, it should be much easier to acquire more credit on your own.

Co-signers are usually friends or relatives. When you find someone willing to help they should be offered some compensation agreeable to both of you. Your application for credit will be approved primarily on the strength of your co-signer’s credit.

HOW TO GET A VISA OR MASTERCARD

The tips and techniques described in this report are meant to increase the odds for anyone who is absolutely certain they cannot get a Visa/Mastercard through normal channels. You should make every attempt to clean up your credit report by removing negative items and replacing them with positive items. If you have no credit at all, open an account at a local department store. After a few months apply for your bank card. If you are rejected, find out why and correct the problem. If that doesn’t work, cultivate a relationship with your banker. Open other accounts that are easier to obtain. Increase your income. Buy a home. Make yourself a better credit risk on your credit report. Ask a friend or relative to co-sign. After paying off that debt, reapply on your own. Or, the fastest and easiest way to open a Visa or Mastercard account in your own name, is through a secured account.

SECURED CREDIT CARDS

Secured Visa and Mastercard bank cards are issued by savings and loan associations throughout the U.S. The lender will ask you to open a savings account. The funds placed into the savings account are frozen as long as there is an outstanding balance on the credit card. The savings account acts as security against non-payment of charges made against the credit card. Then, in the event a cardholder doesn’t pay, funds from the frozen account can be used to pay off the debt. This method completely reduces any risk to the lender.

Requirements are often lowered by lending institutions that have this program. So if you couldn’t obtain a card through your regular bank, chances are you will receive one through a secured credit card program without a credit check.

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The Free Credit Card Trap

THE FREE CREDIT CARD TRAP

They arrive in your mail - a conspicuous looking mail piece from some 'official looking' bank claiming that you have been Pre-Approved for a Mastercard or VISA credit card.

Of course, you don’t have to have any credit. You can even have bad credit or have just filed bankruptcy or even be rated as a 'slow payer.' It doesn’t matter because these companies want to give you a second chance! These companies want to make it easy for you to obtain a credit card because they only want your money!

How the thing works is that you must send $35 to receive an application that provides you with a name and address listing of banks willing to give you a VISA and/or Mastercard without any credit approval. That’s a stiff price to pay for a sheet of paper, don’t you think? The instructions that come with the application will let you know how the scheme works. You must open up a bank account with the bank once that bank approves you. Big deal! They make it appear that you have won some contest or something and people will feel 'good inside' that someone has approved them.

But that’s not all. The minimum amount you must deposit is $200 but you can deposit as much as you want. In return, you get a Mastercard or VISA credit card with a credit limit up to the amount you deposit. Wow! What a great honor! This is no break! Think about it. If a stranger gave you $200 to hold for him until Friday wouldn’t you feel safe in granting them a $200 loan? I mean - it’s their own money you’ve got. If they default, you’ve got the full amount to pay off the loan. It takes a twisted mind to take $200 from you, grant you $200 credit with your own money plus charge you astronomical interest rates just to take the money from your hand and give it back to you. That’s insane!

Of course - to combat this insanity, the great and wonderful banks claim to help fix your credit report. They say that if you maintain payments in a correct fashion, this information will be reported to the credit bureau. Yea, right! When Shell calls the credit bureau to check your credit for a gas credit card, your report shows 47 defaulted loans and a bankruptcy. However, there is one company that you make payments to on-time. Big deal. Don’t you think the rest of your bad credit will still be the deciding factor in Shell’s final decision. You bet you bottom dollar!

Look at this: the bank makes money from the interest of your deposit. The bank also makes money by charging you 18% to 22% interest for the right to use their Mastercard or VISA. Plus the bank is guaranteed their money because if you don’t pay on time, they take the money out of the bank account you opened with them along with any interest you have accumulated.

Why would anyone with $200 to deposit want a credit card with a $200 limit? If you have $200 and want to buy an item for $200 - go out and purchase it. That way, you’ll own it lock, stock and barrel. No interest, no payments, no hassle! Plus, you won’t owe your soul to the company store - sort-of-speak.

Credit is a wonderful thing if you use it intelligently. I know people who charge $100 at the beginning of the month and use that $100 to make $300. It’s free money for 30 days. Then, when the bill comes, they immediately pay the entire balance and come out smelling like a rose with $200 to the good. Credit is also needed in certain circumstances for establishing clout. You can’t call in a telephone order unless you can charge the purchase to your credit card. This delays you getting items you want now.

In fact - some companies will try and make you feel 'low class' if you don’t own a credit card. I am proud to say that I DON’T OWN one. When I’m in a store and they say 'Would you like to put this on your charge?' I promptly say, 'No, I pay for everything I buy!' They immediately shut up. And if they would snap back with a rude answer, I’d leave the stuff sitting on the counter, walk out of the store and get what I needed somewhere else. You don’t have to take abuse just because you don’t choose to line the pockets of the rich credit card companies! It’s insane!

If you’ve ever had a credit card and charged $200, you know you end up paying back $400 or more (unless you pay the balance within 30 days.) Stop allowing these so called banks to rip you off.

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