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HOW TO RUN A SMALL BUSINESS 



HOW TO RUN 
A SMALL BUSINESS 



BY 

J. K. LASSER 

REVISED BY 

SYDNEY PRERAU 

Director 
J. K. Lasser Tax Institute 



SECOND EDITION 



McGRAW-HILL BOOK COMPANY, ING. 

NEW YORK TORONTO LONDON 
1955 



HOW TO RUN A SMALL BUSINESS 

Copyright 1955 by the McGraw-Hill Book Company, Inc. 

Copyright, 1950, by the McGraw-Hill Book Company, Inc. Printed in the 

United States of America. All rights reserved. This book, or parts thereof, 

may not be reproduced in any form without permission of the publishers. 

Library of Congress Catalog Card Number: 55*11566. 



PREFACE 



The complexity of modern business operations is not confined to big buy- 
ness alone. Because successful business management today calls for a working 
knowledge of financing, taxes, accounting, insurance, law, office manage- 
ment, and promotion, know-how in a particular business line may fall short 
of insuring a profit-making venture. 

As a small businessman, you may not have to be an expert in all of these 
fields. Nevertheless, you must be aware of them and have sufficient under- 
standing to enable you to deal with the problems presented in these areas. 
They can determine the success or failure of your business. 

How to Run a Small Business is intended as a practical guide to all the 
areas of required information for the small businessman in our present-day 
economy. It assumes that your business activities consume the major part 
of your time. Thus our purpose is to give you easy-to-read, pinpointed 
answers to your diverse problems. To do this, we have designed special 
check lists to be used as 

A quick summary of the various implications of a business situation 

A reservoir of ideas that in the day-to-day pace of business you may easily 

overlook 

A guide to the tax advantages and tax pitfalls of a business matter 
Your insurance against (1) faulty memory, (2) failure to claim rights 
under the law, (3) unwitting or inadvertent assumption of risks or 
liabilities, (4) inexperience in a particular phase of your activity 

In addition to these aids, a special supplement of tax ideas for business- 
men is included. Today a book on business must be pointed to the ultimate 
goal of successful operations net after taxes. With tax rates that go as high 
as 91 per cent, a $1.00 profit may only mean $.09 in your pocket. And you 
can rarely make a business decision without either increasing or decreasing 
your tax liabilities. The special supplement shows you ways to cut the taxes 
on your business profits. 



vi PREFACE 

There are some necessary precautions in using a guide of this type. 
Although it serves to give you the best kind of experience eliminating much 
of your business operation that is based on hunch, intuition, and vague 
memory it cannot be a substitute for the composite of intelligent vision and 
flexibility of mind that is summed up as business imagination. Rules like 
those expressed in this book are not the alternative to the creative business 
mind but the aids to that mind. 

This book aims to free you of the labor of research others have done for 
you. Use it as a watchman to be sure no important details have been 
overlooked. Then you can be at liberty to use your own creative planning 
for a more successful business. 

SYDNEY PRERAU 



CONTENTS 

PREFACE v 

WHY THIS BOOK Is IMPORTANT TO You '1 

1. How TO BUILD FOR PROFITS 3 

What are the risks in small business? 3 

How can you plan to avoid failure of your business? ... 4 

How do you build for profits? 7 

How can you change sales and niarketing policies to increase 

profits? 8 

What production factors should a small manufacturer review to 

increase profits? 9 

What are the usual weak points in retail merchandising? . . 9 

How can you use the tax laws for greater profits? .... 13 

2. How GOOD ACCOUNTING AND OTHER RECORDS CAN HELP CON- 

TROL AND DIRECT A BUSINESS 15 

How to get good records 15 

Why the certified public accountant can help the businessman 15 
What to get from your records they should be more than mere 

bookkeeping 17 

You will find accounting aids to good management all through 

this book 18 

How to prepare useful operating statements 20 

What your balance sheets can tell you 21 

How your financial and operating ratios can help you ... 22 

Compare your ratios with others carefully 26 

Where you can get standard ratios with which to compare yours 28 

How a budget can aid you in efficient management .... 29 

How long should you keep records 30 

Why you should keep your records on your natural business year 30 

3. How TO AVOID FRAUDS BY EMPLOYEES, CUSTOMERS, AND OTHERS 32 

How employees steal 32 

Internal checks that will help stop plundering 34 

vB 



vlfl CONTENTS 

Be on guard for cash frauds they are most common ... 35 

Steps to take to avoid stealing of mail receipts 36 

How to stop the most common thievery from petty cash . 37 

Common errors made in handling checks 38 

Losses that come from poor customer relationships .... 38 

How you can stop over-the-counter sales thefts 39 

What to watch for in cash handling 40 

Use your bonding company fully 41 

How to stop customers' shoplifting 42 

How to protect against robberies 43 

And watch out for these confidence men 46 

4. How GOOD TAX MANAGEMENT CAN INCREASE YOUR NET PROFITS 50 

Poor tax planning can easily offset business efficiency ... 51 

Tax effects from renting vs. owning 52 

Financing your business has direct tax impacts 53 

Employing your dependent children may have tax advantages 53 

How you keep your records has a tax effect 53 

What year should you use for tax reporting 54 

Legitimate aids in cutting your income for tax purposes . . 55 

Tax economy in reporting your deductions 56 

What is your best business form for tax purposes? , . . 58 

Tax considerations in operating a family business . 59 

How you can get maximum deductions 62 

Know how to compute depreciation of your assets for tax 

purposes 66 

How to use your standard deduction tax-wisely 67 

How you can get the greatest advantage from income splitting 68 
How to find whether it is tax-wise to operate as a partnership or 

a corporation 69 

Tax advantages of a corporation 70 

Tax advantages of a partnership - . . 71 

How you can get corporate tax advantages without incorporating 73 

Know the tax pitfalls in changing the form of your business . 74 
Tax overpayments because of lack of knowledge can destroy a 

business 75 

5. How BEST TO HANDLE YOUR CREDIT AND INSTALLMENT SALES 76 

What are disadvantages of selling on credit? 77 

Know the mnciples of a sound credit system 77 

How goodjlfecord keeping will aid you in credit sales ... 79 




CONTENTS Ik 

How to conduct retail credit interviews 79 

How to check a customer's credit 81 

How you can earn profits from installment sales 82 

How to check the credit standing of a businessman .... 85 

How to evaluate a business for credit purposes 86 

How to analyze your customer's financial statements ... 88 

How to collect overdue accounts 93 

Know the important laws affecting your collection methods . 95 

6. How TO FINANCE YOUR BUSINESS 100 

Should you use capital stock or long-term obligations for equity 

capital? 100 

What are your sources for equity capital? 101 

Rules for finding the working capital you need 102 

Shop for your borrowed money 105 

What does the bank want to know when you apply for a loan? 105 

Aids in choosing the bank best for you 108 

How to set up good relations with your bank 109 

What kind of bank loan can you get? 110 

Should you use industrial banking companies for loans? . . 112 

Small-loan companies as a source of loans 113 

Factoring companies as a source of loans 113 

Commercial credit companies as a source of loans . . . . 114 

Sales finance companies as a source of loans 115 

Miscellaneous finance companies as a source of loans . . . 116 

Insurance companies may be a source of loans 116 

Equipment manufacturers as a source of loans 116 

Wholesalers and suppliers as a source of loans 116 

Corporations seeking affiliates, branches, or outlets as a source 

of loans 117 

The Small Business Administration as a source of loans . . 117 

Federal reserve banks as a source of loans 118 

The Federal Housing Administration as a souttie of loans . . 118 

The "GI" bill as a source of loans 119 

Community industrial development groups as a source of loans 120 

7. How TO PLAN THE BEST INSURANCE PROGRAM FOR YOUR BUSINESS 121 

Getting the most economical insurance rates these may not be 

the cheapest 121 

Steps to take when you have a loss 122 

How to buy fire insurance 123 



t CONTENTS 

What other forms of business insurance do you need? ... 124 

Consider life insurance for your business 127 

Favorable tax laws make pension or profit-sharing plans ad- 
vantageous 129 

8. How TO BUY AN ESTABLISHED BUSINESS 133 

Advantages and disadvantages of buying an established business 133 

Steps you ought to take when you investigate another business 134 

How to buy a business tax-wisely 136 

You have a bargaining point in preserving the seller's tax ad- 
vantages 138 

How to break down the purchase price to your best tax ad- 
vantage 139 

Check list when you close title 140 

9. SHOULD YOUR BUSINESS BE A PROPRIETORSHIP, PARTNERSHIP, 

CORPORATION, OR SOME OTHER FORM? 142 

What business forms can you use 142 

How to operate a partnership 144 

How partners figure their Federal taxes 146 

How each partner makes up his tax return 146 

Sometimes operating partnerships are taxed as corporations . 147 

Your partnership reports on its own tax year 149 

Dealings between you and your firm 149 

Know the tax problems on the distribution of partnership assets 149 

Sales of partnership interests create peculiar tax problems . . 150 

How to operate a corporation 151 

Know the securities a corporation can issue 152 

How corporations figure Federal taxes 154 

How to avoid a tax on failure to pay dividends 155 

How corporations tax-wisely deal with stockholders and bond- 
holders 159 

How to finance your corporation and get the greatest tax 

deductions 162 

10. How TO OPERATE A STORE MOST EFFICIENTLY 165 

Are you going to open a new store or another store? . . . 166 

How to choose the right town for your store 167 

How to select the best store site 169 

A well-planned layout makes the selling easier 171 

Advantages of a self-service store 172 



CONTENTS xl 

Prevent damage to your store and injuries to customers and 

employees 173 

Planning a buying program for your store 175 

How much should you buy? 175 

Aids in your buying program 178 

Buying offices can help you 179 

How to get good stock control for your store 181 

How to find if you have the correct stock for your store . . 182 

How to use budgets to control stock of a store 183 

How to price inventory for tax purposes 184 

How to price inventory for profitable sales 185 

How to price particular merchandise items 186 

Simple formulas to find profitable markups 190 

How to keep your salespeople constantly alert 195 

How to train new salespeople 196 

How to get the greatest benefit from your window display . . 199 

How advertising can help you meet competition .... 200 

Using outside salesmen may help you ........ 203 

How to cut your delivery costs 206 

How to improve your customer relations 207 

11. How TO OPERATE A PLANT PROFITABLY 210 

Guides to good plant location 210 

Should you lease, buy, or build your plant? 212 

Aids in selecting the building for your plant 214 

How you can get the most efficient lighting for your building 217 

How to lay out a plant 219 

How to get employees' cooperation in eliminating accidents . 223 

How to reduce workers' fatigue to a minimum 228 

How to get the best plant maintenance at lowest cost . . . 229 

How to buy material and supplies most economically . . . 236 

What are your sources of supplies? 237 

How to check frauds in your purchasing 239 

How to control receipt of your materials to get what you pay for 241 

How to plan for good inventory control 242 

Check list of instructions for use of your perpetual inventory card 242 

How to take shop inventories for tax purposes 244 

How to inventory for tax purposes 245 

How to use inventory hedges advantageously 248 

Scientific cost keeping is necessary for your survival .... 249 

How best to organize for your plant sales 251 



xi! CONTENTS 

How to find your best market for sales ....... 252 

Do a selling research job it will pay off handsomely . . . 253 

Planning a productive promotion and advertising program . . 254 

What to study in developing a new product 256 

Aids in marketing your new product 260 

How to set the price for your product for greatest profits . . 261 

Know the laws you face in selling your product 262 

You must avoid terms of sale that are discriminating . . . 264 

Check list for effective packaging of your product .... 266 

Use proved methods of advertising to the trade 268 

Planning an efficient sales organization . 270 

Helping your salespeople get more sales 271 

How your salesman can use his time most productively . . . 273 

How to control your salesmen's expenses 275 

How best to sell by direct mail 277 

How to cut costs in direct-mail sales 278 

How to build productive direct-mail lists 279 

Your wholesalers may be able to help you operate efficiently . 280 

How you can promote sales through retail outlets .... 282 

How you can promote sales through jobber outlets .... 283 

Be sure you know the cost of plant selling 284 

What to look for in your cost studies 286 

How you can exploit undeveloped profit possibilities . . . 287 

12. How TO MAKE PROFITS IN WHOLESALING 289 

Why cost control is so necessary in wholesaling 289 

Planning physical operations that reduce handling costs . . 291 

Know the territories in which you can operate profitably . . 292 

How mail-order sales can increase profits 293 

'Cash-and-carry outlets can expand sales volume .... 294 

How you can help retailers sell your products 295 

One way is to help the retailer fix a pricing policy .... 297 
Good accounting and inventory methods are indispensable in 

wholesaler control 298 

How to get good inventory control 299 

13* How TO OPERATE A BUSINESS OFFICE MOST EFFICIENTLY . . 303 

How to lay out an office 303 

What equipment should you have for your particular office? . 306 

How to maintain office equipment at the lowest cost . . . 307 

How to cut your costs for printing, paper, and engraving . . 309 



CONTENTS xlii 

How to get the best design for the forms you need in your 

business 312 

How to keep stenographic and correspondence costs at a mini- 
mum 314 

How to control office filing costs 316 

How to cut your postage costs 320 

Are you getting the greatest return on your office employee 

budget? 322 

Watch your costs for supplies they can be a source of great 

savings 322 

Check list for economical use of utilities 324 



327 



HOW TO RUN A SMALL BUSINESS 



WHY THIS BOOK IS IMPORTANT TO YOU 



The major goal in business is making profits. But profits come as the 
result of the difficult job of blending many factors to name just a few of 
them: taking quick action on business opportunities, careful planning of 
business moves, good accounting methods and control, proper tax planning 
and elections. 

In these and other areas of business action, use this book as your advisor 
for it is a collection of ideas and techniques on how to make money and a 
warning against the causes of business failures. But on the other hand, once 
you have become aware of a technique that calls for expert knowledge, don't 
hesitate to seek professional advice. An attorney or a CPA will know how 
best to fit that technique to the particular facts of your business. 

This book is divided into two parts: the first, general aid to all small 
businessmen; the second to particular businesses. The nine chapters which 
follow deal with subjects that apply to all kinds of businesses: 

1. How to Build for Profits 

2. How Good Accounting and Other Records Can Help Control and 
Direct a Business 

3. How to Avoid Frauds by Employees, Customers, and Others 

4. How Good Tax Management Can Increase Your Net Profits 

5. How Best to Handle Your Credit and Installment Sales 

6. How to Finance Your Business 

7. How to Plan the Best Insurance Program for Your Business 

8. How to Buy an Established Business 

9. Should Your Business Be a Proprietorship, Partnership, Corporation, or 
Some Other Form? 

Since American business is composed of stores, plants, wholesalers, and 
those who run offices, you'll find the last four chapters to be the collection of 
ideas on 

10. How to Operate a Store Most Efficiently 

11. How to Operate a Plant Profitably 

12. How to Make Profits in Wholesaling 

13. How to Operate a Business Office Most Efficiently 

I 



2 HOW TO RUN A SMALL BUSINESS 

Of course, there are a great many other matters which are common to all 
kinds of businesses how they buy, sell, inventory, price, and so many other 
things. It seemed best to put them into the chapters devoted to running a 
store, plant, wholesaling, or office. If you read all of the chapters, not only 
the one which is applicable to you, you will gain these other points. Or you 
can short-cut your job through the Table of Contents. 



1. HOW TO BUILD FOR PROFITS 

One approach toward greater profits is to know what causes so many busi- 
ness failures. T^at will also help you to understand what is needed to create 
profits in going businesses. 

~The first couple of years always gives the most difficulty in a small business. 
Our best information seems to give these facts. In retailing 

About 20 to 25 per cent of businesses never last over the first year 

Pretty close to 20 per cent more never last the second year 

10 per cent go out of business in the third year 

Less than 20 per cent are in business at the end of the tenth year 

Drug stores, grocery stores, and hardware stores have the shortest life 

The life of small plants or wholesaling firms may be somewhat better. 
Perhaps 25 per cent last for 10 years. 

Small-business mortality comes from changes of ownership and discontinu- 
ances. Discontinuances include those that have failed and those whose doors 
have been closed voluntarily by owners. Sometimes a proprietor discovers 
that the going is rougher than he anticipated. He is unable to get out from 
under before he suffers a material financial loss. 

r Often the successful owners have succeeded simply by having greater man- 
agerial ability. And, of course, there are always cases where small-business 
owners quit because of poor health or age. 

What causes all the trouble? Half is due to bad financial management. 
That covers bad record keeping, inadequate costing, poor financing, bad 
credit granting, personal extravagances, and too much overhead. 

Much of that would be cured with decent attention to the figure side of the 
business. Good accounting will always put red flags onto^oppy "buying, 
markugs, extravagant selling, extravagant serviceTor grora^on cpl^. Many 
wEohave quit Because of mabilify to use or understand cost controls should 
never have attempted to operate businesses of their own. 

What are the risAs in imall fx/s/ness? 

If you know the risks in small business, you may be able to organize for 
profits. Let me here list the more important causes of failures. 

Half of business trouble comes fron^nternal difficulties. Too many failures 
are caused by a refusal to recognize cost keeping, ratio study, and statement 

3 



HOW TO RUN A SMALL BUSINESS 

(all of which we have tried to emphasize in Chap. 2) as the life line of 
1 business. 

You need to understand and use your figures if you hope to operate a suc- 
cessful business. 

Some of the trouble is due to bad management or to employees who are 
incompetent, inexperienced, or neglectful. That may be reflected in gpor 
promotion, poor selling, inferior product, or poor location. Or it may come 
ii- 

Failure to create reserves in periods of earnings 

Bad Credit policies or overexpansion or speculation 

Investment in undesirable or uneconomical property, causing high financ- 
ing or carrying charges 

Unexpected financial difficulties due to improper financing, expensive 
floating of^working debt, encroachments on working capital, or .inven- 
tory accumulations < 

Indiscreet contractual obligations such as 
Agreements against sales in certain areas or against sale of certain 

articles 

Bad contracts with unions or competitors 

Long-term leases based on sales or purchase contracts at high prices 
Long-term sales contracts at too low a price 

How con you plan to avoid failure of your business? 

Understanding the failures due to poor selling is all-important. See Chaps. 
10 and 1 1 for all the aids suggested in this book. 

In some small businesses, failure has come because profits are too long 
deferred. You may have to plan diligently to do this kind of job: 

Overcome "buying resistance" to an entirely new store or unproved prod- 
uct. Time is required to develop the market; advertising, missionary 
work, etc., are necessary for buyer acceptance, and that may take too 
much time 

Overcome competition of other vendors, or resistance of many organiza- 
tions who see in you a threat to their investments or jobs 

Overcome the inertia of society, and condition the people to the innovation 
you may be presenting 

Have enough working capital to permit you to age or season a product, as 
in natural seasoning of lumber or "natural drying" of fruit, f&h, etc., 
where a basic stock must be built up before business can hit its normal 
stride. (The same risk, requiring intelligent planning, comes with any 
other business where time must elapse before a normal sales level can be 
reached) 

In some businesses, failures are due to a capricious sales market. The best 



HOW TO BUILD FOR PROFITS 5 

example is the store created to sell a product heavily influenced by style. 
Troubles also come when 

Acceptance of styles and public demand depend on unpredictable public 

taste 

Sales prices are depressed intermittently by dumping and similar gluts 
Specialty businesses depend on public "crazes" and "crushes" that are un- 
predictable, or there is the manufacture or sale of similar articles that 
"take" at irregular intervals 

Some businesses fail because they unnecessarily take the risk of keeping all 
their eggs in one basket. The sudden loss of the customer, the market, the 
source of supplies, the license, or the key individual may cause trouble. You 
may readily count on trouble if yours is a satellite business dependent on a 
single customer or small group of customers, or if you become dependent on 

A single supplier or small group of suppliers 

A chemist or key individual who controls the process of production 

A single sales outlet 

A license 

In some businesses, climate or weather is a primary and uncertain influ- 
ence upon sales. You must know the market. Then you can intelligently 
arrange your working funds to see you through the difficulty. See Chaps. 10 
and 1 1 for a lot of aids on that. Difficulties will often come in 

Businesses in farming, horticulture, agriculture, and livestock both those 
which plant and harvest variable crops and also those which raise live- 
stock 

Industries that make products the demand for which varies with weather 
conditions (umbrellas, raincoats, etc.) 

Resort hotels, furs, summer and seasonal clubs, open-air restaurants, the- 
aters geared to the weather and season 

Sales of beverages such as soft drinks 

Industries in which deterioration or spoilage due to weather conditions is 
a material factor (some chemical industries and food industries) 

Some failures are due to accidents and to unexpected events. Insurance 
(covered in Chap. 7) may include your loss, but it cannot take care of cases 
where your store, your plant, or your product may meet suddenly with public 
disapproval. That has often happened. 

Your planning must assume the calamities that may occur. Then you can 
organize to meet them. For example 

You may develop unexpected loss of customers, and it may cost much to 

meet complaints and returns 
Your supply of materials may change in quality or quantity. In one case 

several deteriorations in quality of a product, and consequent loss of 



6 HOW TO RUN A SMALL BUSINESS 

market, were caused by an undetected change in the quality of the water 
supply 

Unforeseen personnel difficulties may arise, such as illness of a proprietor 
or inability to get employees because of market conditions, accidents, or 
occupational diseases 

Location problems may be caused by movement of customers to other dis- 
tricts or changes in sources of supply 

Some businesses are constantly subject to unfair and ruinous competition 
and practices. They would include the businesses that are so often subject to 

Price wars or secret rebates 
Unfair labor practices or competitors 
Labor pirating 

Infringement of patents; theft of secret processes, copyrights, or trade- 
marks; pirating 

Some businesses do not follow general business prosperity. You invest in 
them knowing they have a business cycle of their own. 

Some are likely to have to wait before the recovery phases of a cycle catch 
up with them. When business begins to show a decline, you find that their sales 
slow down. Volume drops more precipitately than in general business. Others 
that do not follow normal business practices are 

Those whose sales are to persons other than the ultimate consumer. Sales 
fall off sharply when demand for consumer goods declines relatively 
lightly. That is sometimes due to accumulated inventories available to 
meet the lessened demand without reordering from primary producers. 
When the inventories are low and the recovery phases begin, the reverse 
processes take place. A small increase in consumer demand sets off a 
hasty expansion by primary producers eager for speculative profits, while 
costs are still low. 

Those selling products that have a long life, like durable goods. They are 
likely to have a profit cycle different from the general business cycle. 
Purchase of such goods can be deferred for relatively long periods. Con- 
sequently during bad times the production drops sharply. It stays at a 
very low level. When business improves and the recovery phases get 
under way, these durable-goods industries become exceedingly active. 
These are often called "prince or pauper" industries. 

In some businesses, failure is due to group pressures. Examples would be 

Consumer leagues' pressure Sanctions by religious or other pres- 
Dictation from monopolistic groups sure groups 

(suppliers, customers, transport- Organized labor pressures 

ers, etc.) Picketing or boycott 

Temperance groups Gangster coercion 



HOW TO BUILD FOR PROFITS 7 

In some businesses, failure is due to physical interruptions or economic dis- 
tress to others. An example is where a source of supply upon which you are 
dependent is temporarily and unexpectedly cut off or diminished. 

Many businesses are subject to unavoidable loss due to political changes. 
Conditions may be changed by new government regulations; for example, 
tariffs, excessive hauling inspections, introduction of government competition 
into your business. 

Finally, some businesses are deeply influenced by variable legislation. That 
covers the worries that come with prohibitions, local options, price-control 
legislation, unequal tax burdens (usually local, as a tax on chain stores), 
health laws, quarantines, police and fire laws, and injunctions or foreclosures. 
They also include 

Local option and other restrictive legislation that seesaws according to the 

group in power 

Public controls of operating or selling conditions, etc. 
Legislative control of wages, selling prices, terms, etc. 
Relocation of industries, migrations, reclamation programs 
Enforcement of local laws with oscillating rigidity and laxity 

Planning to meet all risks in a small business requires much foresight. 
If you know what causes death and decay of business organizations, then 
you can intelligently see what you must do to forestall trouble. 

How do you build for profits? 

Much of this book is concerned with your financial and cost control. This 
is your life line. Chapter 2 tells what good accounting control can give you. 

Much is about the need of a fundamental change to eliminate wastes, 
thievery, shoplifting, and high costs (see Chap. 3). 

And much is about the need to organize and operate in the more advan- 
tageous economic environment, as that concerns sales, markets, sources of 
capital and supplies, less labor dissatisfaction, greater employee productivity, 
less regulatory legislation. You should check all those in the index to find 
how this guide helps to solve your difficulties. 

For example, assume your problem is wholly poor working capital. How 
to aid that is covered at length in this book in Chap. 6. Working-capital 
problems may have to be cured by drastic steps like 

Abandoning your policy of selling wholly on cash for selling exclusively on 

long-term credit, or vice versa 
Arranging for a bank or other financial institution to finance your sales, 

when before your sales were restricted to the limits of your own ability 

to finance 



$ HOW TO RUN A SMALL BUSINESS 

Converting your retail business from credit and catch-and-collect system to 

a vigorous cash-and-carry or to a cut-rate business 
Converting your business into a "mutualized" or "cooperativelike" business 

by making your customers profit sharers, investors, and in a measure, 

coowners 
Having merchandise suppliers finance your business by means of cash, 

long-term credit, or profit-sharing arrangements, or by the use of the 

consignment system 

Wow can you change so/es and marketing policies to increase profits? 

Sales and marketing changes may mean studies to include elimination of 
unprofitable lines, products, markets, or customers. Chapters 10, 11, and 12 
may tell you the way that problem is best handled in your own type of busi- 
ness. 

Sometimes the cure of difficulties takes full knowledge of the cost of distri- 
bution; only then can you coordinate sales and production. It often means 
adopting measures to reduce seasonal production, concentrate on most profit- 
able lines, and reduce the variety and number of products marketed. Many 
other steps, after you know your cost of selling, are outlined in Chaps. 10, 11, 
and 12, particularly those 



Determine the most economical sales distribution for your product (agents, 
jobbers, brokers, door-to-door selling, mail order, exclusive sales agencies, 
factory branches, etc.) and then formulate the best sales presentation and 
most useful promotion and advertising methods to aid that distribution 

Adopt most effective promotion mediums after study of audience possi- 
bilities, merchandising opportunities, cost per unit of coverage, time fac- 
tors, character and length of messages, useful life of the message, com- 
petition for attention, etc., as a result of which effective selling can be 
secured 

Change, customer services, customer credits, and other customer relations 
to enhance profits and eliminate abuses 

Organize for most efficient, economical delivery methods by ascertaining 
the best process of shipping, for greatest convenience to customers, pro- 
tection against damage or loss, speeding collections, suitability to size and 
weight of normal shipments, adaptability to shipping emergencies, adapt- 
ability to competitors' practices and customers' desires 

Develop methods to teach consumers new uses of existing products; secure 
markets never before believed attainable for the product ; 

Develop a whole new class of customers by such services to them as taking 
smaller orders or giving greater discounts, longer credit terms, premiums, 
generous return privileges, unusual guarantees, unusual deliveries, con- 
cessions on freight delivery charges, or unrestricted service after sale 

Restyle or redesign the product and package to secure wider markets and 



HOW TO BUILD FOR PROFITS * 

increase volume, or construct the product to get better protection in 
transit and make it more suitable to the purchaser and to needs of 
distributors. (Thus products often reach new markets never before 
attainable) 

Change product design to make it clear, immediate, distinctive, visible on 
shelf and counter and in show window so as to secure sales not previously 
attainable 

Change labeling to eliminate returns and complaints or make it more help- 
ful to salespeople in procuring sales not previously attainable 

All the plant changes are based on financial controls cost studies of labor, 
materials, service, maintenance, and a hundred other elements. 
Chapter 1 1 tells you how easily you can get that information. 

What production factors should a small manufacturer review 
to increase profits? 

How can a small manufacturing business get production changes to avoid 
troubles? Chapter 11 covers that in great detail. Perhaps it suggests radically 
different or new manufacturing processes. It also includes thinking about 

Adoption of all the controls of wastes, idle time, spoilages, maintenance, 
sales of by-products, employee frauds, and general change of thinking to 
one seeking full, intelligent control based upon accurate, speedy cost 
figures 

Organizing for cost reduction in purchasing stores and supplies, other in- 
ventory controls, labor production, power, and all other possible sources 

Machinery changes that make possible specialization of labor, use of un- 
skilled labor for skilled labor, less labor, and more capital per unit of 
product, etc. 

Adoption of real planning, scheduling, or routing techniques and sequences 

Adoption of incentive plans that make changes in productivity of labor, 
resulting in increased efficiency, less deadwood, less labor turnover, less 
spoilage, and greater employee loyalty and effort 

Securing control of quality through a system of standardization, inspection, 
etc. 

Creation of better health and accident-prevention facilities to reduce turn- 
over 

Making in your own plant certain parts or assemblies formerly farmed out 
to others; or, vice versa, contracting out to others certain parts formerly 
made by you 

What are the usual weak points in retail merchandising? 

Twenty to twenty-five per cent of retail businesses never last a year. Here 
is a Department of Commerce list of things you must think about when you 



10 HOW TO RUN A SMALL BUSINESS 

start a store. It is also a fine check list to use in examining an established 
store. All of it is covered in great detail in Chap. 10. 

The building and its location: 

Is the site good for this type of store? 

Are there other similar stores nearby? 

Are most of the passers-by potential customers? 

Is the section zoned for commercial occupancy? 
Is the space adequate? For present needs? For future needs? 
Is the space too large? For present needs? For future needs? 
Are the display windows suitable? 
Is the front modern and attractive? 
Is the entrance at grade level? Wide enough? 
Is there storage space for reserve stock? 
Is there a rear or side entrance for deliveries? 
Is the construction sound? Attractive? 
Will any major remodeling or alterations be necessary? 
Are there enough electrical outlets for your purposes? 
Are the plumbing facilities adequate? 
Is there a satisfactory heating plant? 
Are there any built-in fixtures or equipment you can use? 

Rental terms: 

Is the term of the lease long enough to protect you? Even if you make 

major alterations? 
Are there provisions in the lease for cancellation? For subleasing? For 

renewal? 

Does the lease provide for reimbursement for alterations? 
Is the rent a fixed dollar amount? Or a percentage of sales? 
Is the amount of the rent in proper proportion to the estimated sales? 

Equipment and fixtures: 

Have you determined your equipment needs? Your fixtures? 

Have you planned for expansion and future additions to your equipment? 
To your fixtures? Can additions and replacements be easily and har- 
moniously made? 

Have you held your purchase plans to the minimum? Without omitting 
any essential items? 

Are your fixtures and equipment properly suited to the needs of your store? 
To the lines carried? To the customer appeal? 

Is your investment in fixtures and equipment in proper proportion in your 
financial structure? 

Are you going to pay for the equipment or fixtures on the installment plan? 
Have you decided the maximum monthly payment you can safely con- 
tract to make? 



HOW TO BUILD FOR PROFITS It 

If buying fixtures and equipment as a part of the purchase of a going 
business: Are they a good buy? Is there a lien on them? Are they similar 
to the modern type you would select now? Have you checked to make 
sure they are in good condition? Do you need all of them in your opera- 
tion? 

Planning your stock: 

Have you estimated how much your total stock should be? 

Have you broken this estimate down into the major lines to be carried? 

Has your stock selection been guided by an analysis of consumer preference 

in your community? 

Have you set up a model stock assortment to follow in your buying? 
Have you worked out your stock control plans to avoid overstocks, under- 

stocks, and out-of-stocks with your CPA? 

Your source of supply: 

Have you made arrangements with wholesalers? For each line of goods? 
Have you decided what merchandise you will buy from manufacturers? 
Are there any lines of goods which you can get the privilege of handling 

exclusively? What are the franchise arrangements? 
Have you considered affiliating with a voluntary or cooperative group? 
Have you planned to make your account more valuable by concentrating 

your buying? 

Selecting your help: 

What is the method of paying employees in the community? 

What is the prevailing wage scale? What do you plan to pay? 

Do you want to hire men, women, part-time, experienced, or inexperienced 
people? 

Are satisfactory employees available locally? 

Would it be advantageous or disadvantageous to hire someone now em- 
ployed by a competitor? 

What skills are necessary? 

Will employees supply skills you lack? 

Your accounting controls: 

Have you planned a bookkeeping and reporting system with a local CPA? 
Have you checked the index in this book to find all you need to get the best 
type of financial management? 

Store policies: 

Have you decided your service policy? 
Are you going to deliver? 
Are you going to sell for credit? 
Are you going to operate on a self-service basis? ^ 



12 HOW TO RUN A SMALL BUSINESS 

Do most of the other stores in the community offer full services or do 
they operate on a cash-and-carry or limited-service basis? 

Is your best opportunity to offer more services, or to make an economy 
appeal? 

What will be your returned goods policy? 

Do you have the additional capital necessary to carry accounts receivable 

or to buy delivery equipment? 
Have you considered store policy in selecting lines? 

What lines do competitors carry? 

What lines are lacking which customers would buy? 

Do you have the capital and space to carry all the lines carried by com- 
petitors? 

Do you have the capital and space to carry any lines not carried by com- 
petitors? 

Have you considered the profit possibilities of the various lines? 

Do you have the knowledge and experience necessary to handle the 

various lines? 
Have you decided on your price policies? 

Are you going to make a price appeal? 

What price appeal do competitors use? 

Are you going to compete on price, or on quality, or on service? 

What price ranges would best appeal to most of the people in the com- 
munity? 
Have you decided on your store hours? 

What hours do competitors remain open? 

Would you attract trade by opening earlier? Remaining open later? 
Being open on Sundays or holidays? 

Will you have the personnel to be open on these hours or days? 
Have you decided on your promotion policy? 

Are you going to do outside selling? 

Are you going to advertise in the newspaper? 

Are you going to rely on display windows to attract trade? 

Are you going to do direct mail advertising? 

Are you going to use radio advertising? 

Your financial arrangements: 

Have you made an estimate of the capital you will need? 

How much will you invest in merchandise inventory? 

How much will you invest in equipment? 

How much will you invest in fixtures? 

How much will you need to modernize? 

How long will it be before the business will start making profits? 
Have you funds to pay the operating expenses until the business pays its 

way? 
Have you funds for the salary you will pay yourself during the period the 

business is getting started? , ^ - < 



HOW TO BUILD FOR PROFITS 13 

Have you figured out where you can get additional capital if it is needed? 
Is there any reserve available for unexpected needs? 

Estimate of sales and profits: 

What are the sales you can reasonably plan to make the first month? 
What are the sales you can reasonably plan to make the first 6 months? 
What are the sales you can reasonably plan to make the first year? 
What is the gross profit you can make on this volume of business? 
Can you forecast the necessary expenses? 

How con you use the tax laws for greater profits? 

Chapter 4 tells you how good tax management can help profits. For exam- 
ple, any repairs to business property are allowed as tax deductions today. 
They cut your taxes. You can deduct any costs to keep property in an efficient 
operating condition, such as 

Recurring costs like painting, patching, plastering, decorating 
Construction to meet safety requirements, to eliminate hazardous condi- 
tions for customers or employees, or temporary construction that has a 
short life 

Replacement of worn parts of machinery 

Alterations to meet changing conditions or attract customers or employees 
Changes to correct mistakes in construction or installation or to repair for 
casualties like thefts, hurricanes, storms, etc. 

You can get a deduction today for the cost of moving machinery from one 
place to another. Perhaps this is the time to move and take your losses. 

The cost of resetting machinery pushed aside is a present deduction it may 
be advisable to attend to the rearrangement now. Other important points 
are 

You can get rid of anything that you will not need later and get a full de- 
duction for it now that may be more profitable than waiting for a lower 
tax year to get tax aid in your replacements 

It may pay to check your equipment now to find what sales or abandon- 
ments will result in reserves through tax savings 

Immediate replacement of machinery available may give you many advan- 
tages, for example 

New installations permit depreciation at the present high tax rates 

this may mean a large tax saving 

It avoids arguments as to the amount of accelerated depreciation on 
old equipment used in overtime production, when new machinery 
will do the job without plant strain 

If you have high-priced or excessive inventories, nothing prevents your im- 
mediately selling your excess inventory and taking your deduction. You can 



14 HOW TO RUN A SMALL BUSINESS 

settle commitments now, pay what you must, and get a deduction for the loss. 

The net operating loss carry-over can be of vast importance in changing 
your current business operations. 

If you have a loss this year, you may have a carry-back giving you a refund 
of your two prior years' taxes and a carry-forward cutting your taxes for 
the next five years. Here is how this works: The law says you apply this 
year's loss against the income of two years ago. Then, if part of the loss 
still remains, you apply the remainder until it is used up against the 
income of a year ago and the income of the next succeeding five years. See 
your CPA. He will show how you may get a quick refund of your prior 
years' taxes if you have suffered a loss this year. 

Perhaps that suggests the following points about changes you might under- 
take to reorganize your business: 

Business ventures which may result in possible losses may now be under- 
taken, if sound policies dictate, with the certainty of quick refunds of 
taxes previously paid. These taxes can often be recovered with sufficient 
speed to aid in the financing of the business loss. 

Profitable business departments can be bought by a company losing money 
or with a carry-over with the certainty that part of the investment will 
be returned through reduced taxes on the operations. 

A profitable business can acquire a losing business, if sound policy dictates, 
with a reasonable assurance that net losses created for the business will 
be paid for in part by refund of the prior year's taxes. 

Study of the possibility of your taking losses this year rather than in later 
years becomes very important. A loss gives you the carry-back. Review 
possible abandonments, claims for obsolescence, loss of useful value. 
Possibly sell discarded equipment. Do not store equipment or worthless 
assets when you have a carry-back. You may not get it later. 

Conversion of business operations may be undertaken with more assurance 
when you have a carry-back. Study the list of possible development costs 
and advertising costs which you may undertake in order to build up 
future earnings. 

This may be a period to spend for 

Extensive expenditures for research and business development 

Expenditures in the study of new markets and new products 

Quick settlement of expenses that will give you a deduction this year 

rather than in a later year 
Clearance of defective and obsolete inventory 



2. HOW GOOD ACCOUNTING AND OTHER RECORDS 
CAN HELP CONTROL AND DIRECT A BUSINESS 

Useful accounting records can be simple. They require little time to keep 
the successful small businessman well posted on the condition of his business. 

Bad use of accounting controls is one reason so many small businesses fail. 
Some studies of small-business bankrupts show that almost one-third kept no 
records. Less than one-fourth kept adequate records. 

A vast percentage of small business firms discontinue business within their 
first year or before reaching their second anniversary. Inadequate records 
are an important cause. In one check of 30 "failed" druggists, only two had 
ever attempted to prepare statements of profit and loss and balance sheets 
from the records maintained in their business. Three kept no records what- 
ever. Others had notebooks in which they recorded only purchases and sales. 
Most of the "failed" druggists, although on the road to ruin for many months, 
were not aware of their ultimate failure until it arrived. 

How to get good records 

Don't try yourself. Call in a local certified public accountant 
Tell him what you want. Tell him, too, that the U. S. Department of 
Commerce, many states, your trade association, and perhaps your sup- 
pliers have systems, standards, and guides that will help him 
Let a CPA set you up. And get him to come in regularly to watch what is 
being done 

Why the certified public accountant can help the businessman 

Why use the CPA? Let me quote here from a booklet issued by the Ameri- 
can Institute of Accountants: 

Running a successful business these days is a lot more complicated than it used to be. 
That goes for the small and medium-sized business as well as for the big concern. 

Costs are high* And as competition returns to normal, the job of maintaining the 
profit margin between costs and income will require a lot of business brains. At times 
it will take special handling and special skills. 

The paper work alone, much of it financial paper work, is often so enormous that 
one is reminded of the aircraft manufacturer who ruefully said he could always tell 
when a plane was finished at the moment the plane and its paper work both weighed 
the same. 

When special skills are needed, the smaller-sized businessman is turning increasingly 

15 



!6 HOW TO RUN A SMALL BUSINESS 

to the accounting profession for practical help. The accounting profession, in step with 
the times, is providing more and more help in solving problems the average businessman 
faces. 

Let's take some examples. . . . 

Businessman Robinson said that he really ought to be doing all right. His kind of 
retailing wasn't very complicated. He knew what things cost, and he knew what it took 
to handle them: then he just had to make a reasonable markup, and he had a selling 
price. Still, somehow, there didn't seem to be as much margin as there ought to be. ... 

Robinson's certified public accountant, in the course of an audit which included a 
special analysis of the company's affairs, began to uncover some reasons for the trouble: 
hidden costs. 

It was not Robinson's habit to buy stock out of town, for example, but he had been 
doing so quite frequently to fill special orders. That meant "now and then" freight bills 
which had been disappearing into overhead instead of being allocated to the cost of 
goods sold. The profit margin wasn't really what it seemed to be. 

And another thing Robinson maintained a crew of servicemen, whose area had 
been expanded to get business. Naturally it cost more to send the men farther away 
from home base; but these costs, too, were being absorbed and not by the customers. 
In short, the special orders and the extra service trips looked profitable when sold or 
billed at the usual rates, with the usual margin. A careful analysis of the figures showed 
that they were not profitable they were losing money. 

The CPA helped Robinson set up his books so that he could make a proper charge 
for the special services to his customers. These charges didn't add much to any single 
order from any cuitomer, but taken all together, they made a lot of difference to 
Robinson. 

Now take a more complicated case George Brown and his inventory. 

A small wholesaler, Brown had been expanding gradually for ten years or so, but 
had never bothered to take a physical inventory it didn't really seem necessary. Every 
year he estimated his opening and closing inventories at an even $5,000. 

But Brown overlooked one fact. His inventory was growing as his business grew, 
and so, when he carelessly kept his estimate at $5,000 in his tax return, he was mis- 
takenly including amounts which went into building up stocks under "cost of goods 
fold." 

Finally he did take inventory and discovered to his amazement that goods on 
hand came to something like $52,000. His bookkeeper told him that he faced the pros- 
pect of an $18,000 tax bill! Reason: if he reported opening inventory at $5,000 and 
closing inventory at $52,000, for one year, the $47,000 difference presumably repre- 
sented income that year. 

In something of a panic, Brown sought the advice of a CPA. The CPA satisfied 
himself and the Bureau of Internal Revenue that no fraud had been involved, and 
arranged to file amended tax returns for previous years showing a more gradual growth 
of inventory and recomputing the actual cost of goods sold each year. 

On this basis, with one year of off -setting losses, the total additional tax liability was 
cut down very substantially. "1 . 

This particular story ended more or less happily, but if Brown had' not discovered 
the discrepancy and reported it himself before the Internal Revenue agents did, and if 
he had not had the advice of a tax expert, he might have found it difficult to prove that 
he had not intended to defraud the government, and a penalty might have been assessed 
in addition to the tax. He decided that a regular audit by a CPA would be a very 
good idea. 

Tom Brady was president of a small manufacturing company which made furniture 
and farm wagons. The original business had been farm wagons entirely, when it was 
started by Brady's grandfather many years before. There was still some demand for the 



HOW GOOD ACCOUNTING CAN HELP YOUR BUSINESS 17 

wagons, and since they had always been a profitable item, the firm kept right on making 
them. 

But in this case, too for different reasons profits were not what they should have 
been. 

When his certified public accountant came in to make an annual audit, Brady com- 
plained that he didn't seem to be making as much money as he thought he should. 

"It's going to be a bit difficult to trace your trouble from your books," the CPA said. 
"You don't keep your cost records separate for your different lines, and you probably 
have a loss somewhere that you don't know about. For example, how do you figure out 
what to charge for a farm wagon?" 

"Well," Brady answered, "it's really a matter of history. We've always made a profit 
on the wagons, so when lumber goes up, or when wages go up, I add a reasonable 
amount to the price to cover the higher cost, and figure that should be about right." 

But it wasn't as simple as that. When the main business of the firm had been mak- 
ing farm wagons, the prices were right to show a fair profit. But when the volume 
dropped off, the actual cost of making wagons went up considerably more than the in- 
creases in lumber and wages. 

The thing Brady hadn't figured was a proper allocation of his overhead. Making 
only a few wagons on special order meant disrupting his regular schedules on furniture 
and took a lot more time and plant space per wagon than it had when they were in 
larger volume production. The wagons were also using up expensive materials which 
did not average out the same as the over-all increase in lumber costs for the whole 
factory. 

So Brady was not making any money at all on wagons he was losing money on 
every one he made. 

But, as he said himself, he might have gone on doing it for years if he had not had 
the advice of a specialist in the analysis of costs. 

Farm wagons, of course, are a specialty. Not many people make them these days. 
But a lot of small manufacturers do face similar problems when they make several 
different products, using the same basic raw materials, but selling in different markets 
to meet different demands. Under such circumstances, finding out the actual cost of 
each item and so what its selling price should be requires special record systems 
which take a lot of technical skill to install. 

These three examples which have been given all of them, incidentally, based on 
actual cases are typical of problems which certified public accountants can help the 
small businessman to solve. 

Hidden costs, special tax liabilities, unbalanced inventories, losses in one line eating 
up profits from another all of these can create problems in any business, and the solu- 
tion is not always apparent to the naked eye. 

Every small businessman must be a specialist in several fields: he must know 
where to buy goods and materials, how to make or merchandise his products, what 
prices he can charge in the markets which are open to him, and when he must change 
his lines to suit his customers. In most cases, he doesn't have time to keep up to date 
on taxes, cost accounting, and efficient record keeping. 

It is surprising, for example, how many businessmen pay more taxes than they really 
owe. And of course there are many others who fail to set aside funds to cover tax 
liabilities because they just don't know about them. 

When it comes to these increasing complexities of paper work, more and more small 
businessmen are finding that it saves them time and money to turn to a specialist in 
that field the certified public accountant. 

What to get from your records fAey should be more than mere bookkeeping 

Plan your accounting system so that it gives you far more than good book- 
keeping. Get from it a continuous analysis of your business records that are 



it HOW TO RUN A SMALL BUSINESS 

vital to intelligent planning and control of your business. What should you 
seek? 

Make sure the system is so constructed as to give the results of all operations 
clearly, quickly, and with full explanations of what has occurred 

Be certain that it permits quick comparison of accomplishments with the 
prior year's figures 

Create the whole system as a device to aid you. Make sure it quickly "red- 
flags" all variations from the ratios and standards you know to be essen- 
tial for profits 

Design it to show periodically all possible employee frauds, wastes, errors, 
spoilage, and bad conditions that must be brought to your attention 

Make sure the system permits prompt filing of accurate reports and tax 
returns required by government 

Make sure it aids in the development of an efficient production and sales 
policy; for example, concentrating on the more profitable sales 

Keep the system modern, economical, and useful. Be sure it results in the 
daily, weekly, monthly, and annual reports necessary to get an analysis of 
facts. Be sure it gives information swiftly, continuously, and accurately. 

Insist that financial reports be out on schedule. Stale figures are useless. 

Let's apply these principles to record keeping for a store. To operate at a 
maximum profit, it must keep total expense down and total margin up. 

You cannot do that without some plan of operations. Here is where records 
enter the picture. 

The record-keeping system is first designed to: determine net profit, net 
worth; get financial statements needed to obtain a credit rating; prepare 
income tax returns; account for social security taxes, withholding taxes, and 
unemployment insurance; get ready for excise taxes, state and city sales taxes. 

But that is only the beginning of the job. It should guide and control 
operations throughout the year, by means of figures on sales, stocks, markups, 
and expenses. Good records and good operation go together. The expe- 
rienced operator knows the value of records and how to use them to obtain a 
fair return on the capital risked. He watches sales, margins, stock, and con- 
trollable expense by records that tell him 

Sales for the current day, week, month, or the year to date compared with 
those for the corresponding preceding period. This comparison will indi- 
cate whether the sales trend is up or down 

Costs, stocks, and margin ratios compared with planned ratios, witty the 
preceding year's ratios, or with desirable standards to get a fair profit 

You will find accounting aids to good management all through thi$ book 

Just a few of the aids are in this chapter. It seemed more appropriate to 
put the rest in other places; for example 



HOW GOOD ACCOUNTING CAN HELP YOUR BUSINESS 19 

See 
Chapter 

How good accounting records will stop employee plundering 3 

Why good records are essential to good credit management 5 

What kind of records you need to help you in your financing 6 

What records you need to help you cut your tax costs 4 

Records that are so essential to good store management 10 

How to buy 

How to figure price and markup 

How to control your inventories 

How to take inventories 
Records that are so essential for good plant management 11 

How to fit good costing into the plant 

How to keep maintenance costs down 

How to keep accidents down 

How to buy 

How to inventory 

How to know the cost of your selling 

How to find your best market for profits 

How to keep records of what your promotion and selling efforts do 
How records help wholesaling for profit 12 

How cost records are essential to find what and where to sell and 
how to service 

How inventories are controlled 

Consider the simple problem of how you will run your mail promotion. 
That is covered in Chap. 12. Records are essential if you seek to reduce costs 
and improve results of future campaigns by 

Elimination of unsuccessful copy 

Elimination of unsatisfactory names from active lists 

Information as to success or failure of 

Kinds of paper 

Methods of reproduction 

Cards vs. letters 

Stamps vs. meter machines 

Mailing dates 

Premiums 
Analysis of costs to determine saturation points 

(diminishing returns) 
Comparison, with previous campaigns 
Budgeting the expenditure 
Comparison with others 

Or assume you have salesmen. Records are essential to do these kinds of 
jobs: 



20 HOW TO RUN A SMALL BUSINESS 

Ensure the direction of the salesman's activities through routing calls to be 
made weekly, budgeting his production, and budgeting his traveling ex- 
penses 

Measure his worth by comparison with quota or budget and compare the 
relation of his cost to his income with his previous record 

Check his expenses through careful scrutiny of the reasonableness of the 
expense item and comparison of cost to income produced 



How to prepare useful operating statements 

Your accounting system should give you (quickly) a monthly comparative 
profit-and-loss statement. It should tell you data for several years in parallel 
columns, to show the changes among items from year to year. Here is a com- 
parative statement presented in a very condensed form: 

Operating Profit and Loss for January, 1955 and 1954 





1955 


1954 


Increase 
or de- 
crease, 
per cent 


Per cent of total 


1955 


1954 


Gross sales 


$50,000 
800 


$40,000 
700 


25.0 
14.1 


102.0 
2.0 


102.0 
2.0 


Less: Returns and allowances. . 
Net sales 


49,200 
34,100 


39,300 
28,300 


25.0 
21.0 


100.0 
69.3 


100.0 
72.0 






$15,100 


$11,000 


37.0 


30.7 


28.0 


Operating expenses: 


$ 4,500 
5,474 
140 


$ 3,200 
3,400 
100 


41.0 
61.0 
40.0 


9.1 
11.1 
.3 


8.1 
8.6 
.3 


Administrative and general . . . 


Total expenses 


$10,115 


$ 6,700 


51.0 


20.5 


17.0 




$ 4,985 


$ 4,300 


16.0 


10.2 


11.0 





A useful device on comparative profit-and-loss statements is that of per- 
centage figures showing growth or decline in the various items making up the 
statement. These enable you to comprehend readily the trend of the sales, 
cost of goods, and expenses from one period to another. A comparative profit- 
and-loss statement also should show a percentage distribution based Oil net 
sales as 100 per cent. * 

The figures enable you to note the proportion or number of cents from 
each dollar of sales that go for goods purchased and for various expenses, and 
the amount remaining as operating income. Percentage figures of operating 
data are of great value in checking efficiency trends of a concern. 



HOW GOOD ACCOUNTING CAN HELP YOUR BUSINESS 



21 



Each small businessman ordinarily prefers to determine for himself the 
amount of detail which he desires in the comparative profit-and-loss state- 
ment and the number of years for which he wants data. In the ordinary situ- 
ation, it is not especially useful to carry a comparison of current data further 
back than the two previous fiscal periods. An exception to this might be 
where a bank or credit rating agency is examining the growth of a concern 
for the purpose of granting a loan or establishing a rating. 



What your balance sfteefs con tell you 

Your system should give you a monthly balance sheet. Comparing this 
with those of one or more previous dates enables you to see the amount and 
direction of changes in items on the statement. You can interpret the results 
of latest operations upon financial conditions. 

The increase or decrease of a balance-sheet item from one period to the 
next, however, is more informative in most cases if it is stated in terms of the 
percentage increase or decrease instead of the change in number of dollars. 
For example, a statement that total assets increased $100,000 between 1954 
and 1955 provides certain information. But the statement that the increase 
in total assets was 10 per cent has more meaning. 

For this reason, a comparative balance sheet should show the asset, liability, 

Condensed Comparative Balance Sheet for January 31, 1955 and 1954 





1955 


1954 


Increase 
or de- 
crease, 
per cent 


Per cent of total 


1955 


1954 


Assets 
Current assets 


$15,380 
18,000 
1,750 


$12,200 
14,100 
2,100 


260 
27.6 
16.6 


43.8 
51.2 
50 


43.0 
49.6 
7.4 


Fixed assets 


Other assets 




$35,130 


$28,400 


237 


1000 


1000 


Liabilities and net worth 
Current liabilities 


$ 6,000 
10,000 
10,000 
5,000 
4,130 


$ 4,000 
8,000 
10,000 
4,000 
2,400 


50.0 
25.0 
00.0 
250 
72.1 


17.1 
28.5 
28.5 
142 
11 7 


14.0 
28.1 
35.2 
140 
87 


Fixed liabilities 


Capital stock 


Surplus 


Reserves for contingencies 


Total 


$35,130 
$ 9,380 


$28,400 
$ 8,200 


23.7 
11.4 


100.0 


100.0 


Working capital 



22 HOW tO RUN A SMALL BUSINESS 

and capital figures as of two or more dates ending successive fiscal periods. It 
should, in addition, show the percentage change in each of the items. As a 
small businessman, your primary interest is the amount of the item on the 
latest report and the percentage change from the last previous statement. 

A comparative balance sheet also shows the percentage distribution of the 
total assets among the various individual assets, and percentage distribution of 
the total liabilities and net worth among the several items in those categories. 
The percentage distribution figures for two or more dates enable a small busi- 
nessman to analyze his statement more readily for purposes of determining 
the nature of changes in financial status. They will reveal whether current 
assets have grown or decreased in proportion to total assets over several years 
in comparison with similar proportionate changes in current liabilities. 

Comparison of three or four, or even more, years may be made depending 
upon the needs at a specific time. 

Wow your financial and operating ratios can help you 

A useful source of information for the small businessman is a method 
known as ratio analysis. This involves comparing one item with another on 
the balance sheet or on the operating statement, or comparing items selected 
from the two statements. Where two items from the balance sheet are com- 
pared, the resulting figure is called a financial ratio. 

, -, , . . A . current assets - . , 

For example, the current ratio, that is, r .... . , is a financial 

r ' ' ' current liabilities' 

ratio. 

When a ratio uses one item drawn from the operating statement it is called 
an operating ratio. It relates to some phase of the current operations. An 

.... ^ . cost of goods sold 

example is the inventory-turnover ratio, r -S : 

merchandise inventory 

Current ratio. This is the most commonly used and perhaps the most 
significant ratio for indicating financial conditon. It shows the ratio or pro- 
portion of the current assets to current liabilities; for example: 

Current assets $15,380 ~ 

n ,.! I*!*,* * c WXA 2.56 current ratio 

Current liabilities $ 6,000 n 

In computing, prepaid expenses should be omitted from the current assets 
even though they are shown under that heading. Prepaid expenses usually 
cannot be turned into cash as can other current assets. 

The current ratio also gives the amount of working capital the excess of 
current assets over current liabilities. The working capital in the example 
above is the excess of $15,380 over $6,000, or $9,380. The working capital 
reflects the ability of a business to finance its current operations after allow- 
ing for payment of its current liabilities. 



HOW GOOD ACCOUNTING CAN HELP YOUR BUSINESS 23 

It is commonly agreed that the current or working-capital ratio for a store 
or a factory should ordinarily be at least 2. This means that current assets 
should be at least twice current liabilities. That provides $1 of extra current 
assets for each dollar needed to cover the current liabilities. 

This 2 : 1 ratio is meant to be a safeguard to the business. A part of cur- 
rent assets may consist of slow merchandise not yet sold and of receivables 
which may be subject to discount for possible poor accounts. 

A business which maintains current assets barely equal to its current liabil- 
ities will be in a weak financial condition if half or more of the current assets 
consist of merchandise and receivables. In an emergency requiring payment 
of all current debt, the merchandise and receivables would need to be sacri- 
ficed, or the business might find itself in the hands of its creditors. 

A current ratio of less than 2 may be satisfactory in some situations. A 
ratio higher than 2 should be maintained where the current debt is of an 
extremely short-term or demand character. 

Acid-test ratio. This ratio is similar to the current ratio but shows cash 
capacity more sensitively. It expresses the relation between the quick assets 
(cash, collectible receivables, and readily salable securities) and the current 
liabilities. The ratio is derived by dividing the quick assets by the current 
liabilities; for example: 

Quick assets $7,350 1 . . A . 

n i r u-r+- = Icnnn = *' 2 *Cld-test ratio 

Quick liabilities $6,000 

Inventories, prepaid expenses, and longer-term investments are excluded 
from current assets in computing the acid-test ratio. 

When this ratio is 1, a business is considered in a satisfactory liquid condi- 
tion. That means that cash plus marketable securities and current receiv- 
ables are equal to the current liabilities. 

Unless there is a special reason for accumulating liquid funds, such as pay- 
ing of maturing debts, it is well for management to examine the cash receiv- 
ables periodically. Perhaps investment of some surplus cash in income secu- 
rities or expanding operations is called for, in order to put its liquid funds to 
work. 

Ratio of inventory to current assets. This percentage ratio is obtained by 
dividing the inventory figure by the total current assets; for example: 

Inventory _ $ 8,000 
Current assets ~ $15,380 " ^ per CCnt 

This percentage serves as a check upon overinvestment of current funds in 
inventory. You may use it, along with the inventory-turnover ratio, to deter- 
mine a rational inventory policy in your business. 
Ratio of liabilities to net worth. This ratio reveals the relative proportions 



24 HOW TO RUN A SMALL BUSINESS 

of business ownership belonging to all types of creditors, on the one hand, and 
to the proprietor, on the other; for example: 

Liabilities $16,000 



When computed for several successive business periods, this ratio reveals the 
trend in proportion of debt to ownership. It shows whether a larger share 
of business assets is being held by the owner, or whether business assets are 
being acquired through borrowing from creditors. 

In general, it is always preferable that business operations from year to 
year result in an increased proportion of ownership in the hands of the pro- 
prietor. This rule is subject to qualification. It may be changed as a result of 
temporary or periodic borrowing on favorable terms to meet specific 
situations. 

Whenever a business retires some or all of its debt, this debt-to-net-worth 
ratio is reduced. When, however, a concern finds itself sufficiently established 
in its field, it may prefer to increase its debt financing for expansion purposes. 
Then the liabilities will again bulk larger in relation to net worth. This situ- 
ation may be particularly desirable if: equity capital is unavailable; surplus 
earnings are insufficient; and borrowing can be done at favorable interest 
rates, leaving a considerable portion of net earnings for stockholders. 

Inventory-turnover ratio. This ratio has significance because of its useful- 
ness in controlling inventories. 

The smaller the stock of merchandise a business can operate on, and still 
meet all customers' demands, the smaller will be its requirements for working 
capital. 

This policy also reduces the storage space for merchandise and the expense 
for insuring goods in stock. 

This ratio, therefore, is designed to enable a business manager to measure 
his efficiency in purchasing, handling, and moving his stock in trade. 

Merchandise turnover is computed when the cost of the goods sold during 
a fiscal period is divided by the average of the opening and closing inven- 
tories. This gives the number of times the average inventory has been 
"turned" during a period. For example, if tlie cost of goods were $120,000 
and the average of the initial and ending inventories were $20,000, the mer- 
chandise inventory turnover would be shown thus : 

Cost of goods sold $120,000 - . ^ , 
Merchandise inventory ~ $~20o6 - 6 *" turned 

The average age of the stock would be 2 months. This does not mean that 
every part of the stock has been sold and new stock purchased six separate 
times during the fiscal year. It does mean that the equivalent of this has been 



HOW GOOD ACCOUNTING CAN HELP YOUR BUSINESS 25 

accomplished in terms of the total goods handled during a 12-month period. 

It is obvious that some parts of inventory stocks may not have been turned 
at all. Others would have been turned more than six times. 

The rate of merchandise turnover varies greatly with different types of busi- 
nesses and with different degrees of management efficiency in terms of pur- 
chasing, inventory, and sales technique. 

A new business should keep a record of this ratio on its operations for each 
fiscal period, preferably 3 or 6 months. It should watch closely changes in 
the turnover rate. Then it can soon determine what the typical inventory 
turnover rate is and whether it can be improved by careful management. 

In the ordinary merchandising concern, the inventory turnover may be 
figured for all the merchandise combined. Or a separate rate of turnover 
may be figured by departments on main types of merchandise. The latter is 
desirable. It enables management to spot slow-moving goods that should 
either be pushed more aggressively by sales technique or discontinued entirely. 

For this reason, every business manager engaged in distributing a variety 
of products should keep informed on the turnover trends. He should figure 
turnover ratios for the main commodity groups. 

In a manufacturing concern, inventories normally consist of raw materials, 
goods in process, and finished products. It is necessary here for the turnover 
rate to be calculated for each of these classes of goods if the ratio is to have 
any meaning for management. 

A lower-than-average inventory-turnover ratio is usually an unfavorable 
sign. The stock may contain so much old merchandise that sales of new 
goods are slowed up. 

An extremely high inventory-turnover ratio may sometimes be attained by 
buying in quantities so small that the best prices are not obtained. It may 
also be gained by taking excessive markdowns. 

Ratio of net sales to receivables. A valuable index of collections is the ratio 
of net sales for period to the amount of unpaid accounts and notes receivable 
at the end of that period. For example, if a company had net sales of $49,200 
and total receivables of $5,850, the ratio of sales to receivables would be 
shown thus: 

Net sales $49,200 
Receivables $ 5,850 

This means that annual rate of sales is about eight times the amount of re- 
ceivables on hand, or that the average period represented by unpaid accounts 
and notes receivable is one-eighth of a year's sales, or about 40 days' sales 
volume. 

This ratio is most valuable in a concern which makes sales exclusively on 
credit. 



24 HOW TO RUN A SMALL BUSINESS 

In companies which do a cash, as well as a credit, business, this ratio of 
receivables should be calculated in relation only to the portion of the sales 
handled on credit. 

In situations of expanding receivables the manager should have before him 
either an annual or quarterly ratio on sales turnover or receivables. 

Ratio of net profit to net sales. This is one of the more significant ratios, 
showing the number of cents of profit for each dollar of sales. This percent- 
age reflects the efficiency of operation in terms of expense control as well as 
efficiency in purchasing goods handled by the business, The ratio is figured 
by dividing the net profit by the net sales; for example: 

Net profit $ 4,810 
= $49^00 S 



The variation in net profit per dollar of sales presents a situation requiring 
close study by management of all factors in the business. Comparison of the 
operating statements for the last several operating periods affords a basis for 
detailed analysis of factors contributing to profits. 

This ratio, coupled with the dollar sales volume, is the real measure of 
store efficiency. 

A 2 per cent net profit on sales of $100,000 is better than a 5 per cent profit 
on sales of $30,000. 

Since the ratio expresses the difference between the gross-margin percent- 
age and the expense percentage^ obviously either a high markup or a low ex- 
pense will combine to produce a high net-profit ratio. 

Bear in mind, therefore, that a high markup may be depriving you of sales 
volume because your prices are too high. 

A too-low expense ratio, on the other hand, might mean that you are not 
spending enough for advertising, promotion, care of stock, or selling to pro- 
duce the sales volume that could be obtained at your location. 

Compare your ratio* with other* carefully 

When your individual amounts are expressed as ratios to sales, several com- 
parisons are possible. Current ratios may be compared, for instance, with 
those of the preceding year, or with those of similar businesses. Your whole- 
saler or trade association, too, may be able to give some assistance. They 
have contacts with a large number of small businesses. 

Be very careful, however, when comparing your ratios with standards 
based on national or broad group averages. They include a diversity of 
businesses, and individual variations may be great. 

Get a comparison of your figures so as to show the difference in net profit 



HOW GOOD ACCOUNTING CAN HELP YOUR BUSINESS 27 

between your profit-and-loss statement and the standard. The next step is to 
analyze the reasons for variations. 

First, the purchasing, pricing, and selling plan should be thoroughly exam* 
ined to discover why the gross margin is low. Next, the individual expense 
items should be examined with a view to taking corrective steps. 

Often there are sound reasons why the ratios for an individual business 
vary from the standard ratios. 

A high gross-margin ratio may result from buying at lower prices or selling 
at higher prices. Thus, a high gross-margin ratio and a low sales volume in- 
dicate the possibility of gaining more sales by reducing the margin. Lower 
selling prices or better merchandise values might attract more customers and 
increase both volume and net profits. 

A low gross-margin ratio may be caused by paying more for goods, or by 
intentionally selling at a lower price. If greater sales volume and reduced 
operating expense result, the lower price policy is certainly more profitable. 

Profitable stores obtain a higher-than-average gross-margin ratio and have 
a lower-than-average operating-expense ratio. 

A high total-expense ratio, if accompanied by a high gross-margin ratio 
and satisfactory sales volume, is not objectionable. It might, for example, 
indicate that you are emphasizing the merchandise that offers a high margin 
and requires considerable handling or processing. Usually, however, a high 
total-expense ratio is caused by poor control over expense items. In other 
words, wages, supplies, and all other costs are higher than average. 

Ordinarily a higher-than-average wage ratio is a danger sign. It may mean 
that labor is not being used efficiently, that the store is not properly arranged, 
that too much service is given for the markup obtained, or that there are too 
many employees. 

A high wage ratio may indicate a policy of obtaining sales by providing 
more or better clerk service, which is offset by smaller expenditures for rent, 
fixtures, or advertising. The success of this plan can be determined by study- 
ing the sales volume, the gross margin, and the net profit. With a high gross- 
margin ratio, a high wage ratio may signify that emphasis is placed on high- 
markup goods requiring more handling and sales effort. 

A low wage ratio is usually evidence of capable management. Generally, 
it is accompanied by better-than-average gross-margin, net-profit, and inven- 
tory-turnover ratios. If the sales volume is unsatisfactory, the low ratio may 
mean that not enough workers are employed, or that more efficient employees 
are needed. 

Higher-than-standard ratios for expense items other than those already 
covered usually indicate an opportunity for expense reduction. 

A cash-shortage or coverage (surplus) ratio of any significant amount, for 



21 HOW TO RUN A SMALL BUSINESS 

example, points to improper safeguarding of the cash, or negligence on the 
part of employees in keeping a strict account of cash. 

A high depreciation figure might mean that the amount of fixtures and 
equipment being carried is too heavy for the volume of business. 

A high miscellaneous-expense ratio usually indicates lack of control on such 
expenditures. 

Heat, light, power, and water, however, like rent, can be controlled only 
at the start. Once the building is occupied these facilities must be supplied 
adequately, or sales will suffer. 

Effective advertising yields more sales at a profit. The advertising ratio 
will automatically indicate a gain in sales, as they should expand along with 
additional expenditures for advertising. The gross-margin ratio should also 
be watched as regards the profit factor of a greater sales volume, for the 
increase should not consist only of low-margin goods. 

Where you can get standard ratios with which to compare yours 

It is important to make careful comparison of financial statements and 
ratios for a current business period with the same statements and ratios of 
previous periods. That comparison determines trends, weak points, and 
needed improvements. 

Perhaps, too, you can compare your data with those of other businesses in 
the same line of activity and of approximately the same size. It is frequently 
possible to get coded comparative data for a number of concerns through 
trade associations and similar organizations. A necessary safeguard in making 
comparisons is that the businesses whose figures are used should have a stand- 
ard or substantially uniform system of accounts. Otherwise a comparison 
with an individual concern having different accounting forms would be en- 
tirely misleading. 

How do you get the data? 

When a concern becomes well enough established to have membership in 
a trade organization, it usually will have no difficulty in finding sources 
of such comparative data for other business units in its field of activity 

Tables regularly prepared by organizations like Dun & Bradstreet of New 
York (write them) may be used to good advantage. They determine an 
individual company's operating position in comparison with that of a 
large number of concerns 

Figures for certain trade lines may be had in a number of the Inquiry 
Reference Service leaflets of the U. S. Department of Commerce. Avail- 
able copies of these leaflets may be had gratis by request directed to the 
nearest field office of the Department. (Check your telephone directory 
for address of nearest office) 



HOW GOOD ACCOUNTING CAN HELP YOUR BUSINESS 21 

How a budget con aid you in efficient management 

Budgeting is an important tool for small business. It ensures considered 
planning before acting (by acquiring knowledge of the business) and using 
foresight as well as hindsight. 

Budgets give you a yardstick with which to check results against expecta- 
tions and estimates. They coordinate all the activities of the business. They 
make for the most effective use of your resources with minimum costs. Budg- 
ets are an aid to efficient management in these ways: 

Reducing waste, since money is to be spent only for purposes carefully con- 
sidered in advance 

Fixing responsibility, since all participate directly in formulating budgets 
covering their activities 

Restraining unwise expansion. Each undertaking is based on cold facts be- 
fore commitments are made rather than on overenthusiasm and loose 
thinking 

Establishing a proper relationship between income and expense. While a 
budget guides the expenditure of money to make money, it also acts as a 
definite check against the undue mortgaging of future income 

Giving the opportunity, when actual results are checked periodically, to 
concentrate on the weak spots showing need of attention 

Talk with your CPA about how to prepare your budget. He'll show you 
how to do it; how to limit the length of time to be budgeted according to 
your ability to forecast sales and costs. Then go ahead this way: 

Assign practical people who are in charge of any part of your business to 
prepare budgets. Their concrete experience is invaluable. For example, 
the salespeople in direct contact with customers are best fitted to deter- 
mine what they can foresee after careful analysis of their accounts and 
available business. The concentrated study and attention required of 
them to prepare the budgets force them to use their own valuable expe- 
rience. Then they can, and logically should, assume the responsibility 
for completion and performance. 

Have your bookkeeping people cooperate only to furnish the past year's 
experience in detail to serve as a basis for the new figures and any other 
data required to enable a practical businessman to review past per- 
formance and fix his goal. But the completion should not be laid upon 
the doorstep of accountants. They are capable of assembling the mate- 
rial submitted and supplying the figures on performance, but no more. 

Give the budget a painstaking review. Without it, the budget may not con- 
form to your plans for the business. Give the budget the stimulus of your 
goals. But be sufficiently temperate to bring it within measurable accom- 
plishment. 



10 HOW TO RUN A SMALL BUSINESS 

If you have a budget, make sure you accompany it with controls of opera- 
tions. That means systems to discover and curb unfavorable departures from 
budgetary plan. Certainly you want accounting reports comparing the actual 
results for each month of each activity with budget estimates. Also you prob- 
ably need to do this: 

Get accounting breakdowns that reveal and assign the reasons for any 

variations from budgets 

Hold your people to strict accountability for variations 
Periodically review variations and trends indicated to determine possible 

need of modification of parts of the budget 
Take corrective measures courageously and quickly 

How long should you keep records? 

Preserving some records is essential. You must have what you need if you 
ever get into litigation, claims, or disputes. In addition, you should maintain 
necessary records for possible government investigation. 

Your GPA will explain that to you. Good businessmen keep some records 
permanently to help work out long-range policies. In doing that, the use of 
your own experience records is needed 

To show the changes in the organization, sales, and costs of the business 

To show changes in sources of materials, suppliers, customers, and con- 
sumer demand 

To show changes in the attitude of competitors, the general public, and 
employees toward the business 

To preserve the lessons learned during all the firm's history for future use 

Why you should keep your records on your natural business year 

A natural business year for your record keeping has many advantages. 
Financial conditions can be most accurately ascertained. Smaller inventories 
make for fewer errors in inventory valuations; results of operations can be 
most accurately determined inventory inaccuracies in count and valuations 
are largely eliminated. Other important advantages are 

Inventory work is easier (more people may be available; they do not need 
to hurry so much; greater accuracy is bound to result) 

Cash position is stronger 

Credit statements are made at most favorable point; most liabilities will 
have been liquidated 

Income-tax determination is more accurate, because results of operations 
are most accurate, and there is less stress of business at the time of mak- 
ing return 



HOW GOOD ACCOUNTING CAN HELP YOUR BUSINESS 11 

Auditing by Certified Public Accountants is less costly and more promptly 
done. CPA's are busiest at the end of the calendar year. Consequently, 
fees are higher. Verification of inventories and accounts receivable are 
easier at the end of natural business year and hence less costly. Less 
business pressure on CPA's during the year allows them to be more com- 
prehensive and constructive 

Select a 12-month period fitting your enterprise. It may or may not coin- 
cide with the calendar year. Generally you should close your year: when in- 
ventories are at their lowest ebb; when you have the strongest position; when 
your accounts receivable have been largely collected. 



3. HOW TO AVOID FRAUDS BY EMPLOYEES. 
CUSTOMERS, AND OTHERS 

The bonding companies (which pay out for only 5 per cent of the 500 mil- 
lion American business losses because of employee thefts) will tell you this: 
the average employee who regards his bosses* money as his own pork barrel 
is pretty generally your next-door neighbor. 

From all appearances he is a decent citizen, bringing up his family in a 
normal manner. He has held his job for nearly 10 years. He is highly re- 
garded by the firm he is looting, even though an average of 3 to 5 years 
elapses before he is caught stealing. When he first begins "embezzling," the 
employee would be horrified at the use of that term. He is merely "borrow- 
ing," with every intention of paying back. 

What, then, makes him leave the normal road and become an embezzler? 
There are many reasons. Experts tell us gambling, extravagant living, and 
undesirable associates are most to blame. But we have known lots of other 
causes improvident investments, severe illness of a member of the family, 
unfortunate outside business activity, and a hundred others. 

How employee* sfecr/ 

To complete a list of all the ways used to steal is impossible. We learn a new 
one from a smart crook each day. But it is possible to put down the most 
used tricks: 

Plugging the petty-cash box with false vouchers to cover thefts 
Pocketing cash paid by customers across the counter or in sales on the road 
Stealing money sent in by mail or "forgetting" to enter cash sent in by a 

customer as payment 

Creating false bills from nonexistent vendors to secure payment for mate- 
rials or services not delivered then cashing the check. (This favorite 
method of employee pilfering reached grand larceny dimensions in a case 
we had a year or so ago. We once knew a $60-a-week voucher clerk to 
pile up a terrific shortage. The method was simple. Bills were made out 
on the billheads of nonexistent companies. When the checks were drawn, 
the cashier deposited them in accounts of the fictitious companies, using 
rubber-stamp endorsements. Then he withdrew the money. When a 
check he made out was questioned, he disappeared, and the fireworks 
started.) 

32 



HOW TO AVOID FRAUDS 33 

Paying out salaries to nonexistent, discharged, or dead employees 

Alteration of legitimate creditors' bills to get a new or added payment, 
which is then cashed by the cheater; or raising bills after they have been 
paid to get another check to be cashed 

Sending goods to an imaginary customer and then selling the materials; or 
reducing the amount entered as the customer's bill in books, then keep- 
ing the difference when the customer pays 

Kickbacks, split commissions, and other splittings with suppliers of mer- 
chandise and similar deals with customers to give them a favored posi- 
tion even not billing them for what they received 

Making all sorts of adjustments and write-offs of customers' accounts, 
sometimes in cahoots with the customers, (A good example of this is the 
fraud involving the adjustment manager of a store. He started by put- 
ting through fictitious returns to cover alleged costs he was paying. The 
amounts were for the most part under $10. It was more difficult to 
detect them because they were so small. The total theft reached over 
$150,000 before he was finally apprehended.) 

Selling business property (by-products, fixtures, machinery, and automo- 
biles, or even investments) and withholding the proceeds 

Direct theft of material from the supply rooms or a store 

Raising the amount on checks given the employee for a legitimate pur- 
pose, then destroying the vouchers when returned by the bank 

Purloining stamps, often in large quantities, charging them to legitimate 
expense then selling them in the black market found in most cities. 
(The purchase of postage stamps offers a convenient means for misap- 
propriation of funds. One of our cases concerned an officer who per- 
sonally signed a check voucher for $225 each month. He received a 
certified check payable to the postmaster. Upon inquiry at the bulk 
postage window at the post office, we found that he purchased rolls of 
3-cent stamps. We caught up with the theft because we found that the 
stamps were not delivered to the company. Eventually we found they 
were sold in the black market. This procedure was followed for at least 
5 years before it was uncovered. At $225 a month the theft was $13,500.) 

Lapping cash using receipts of today to cover up yesterday's embezzle- 
ments, until the employee is hopelessly involved 

Thefts are often encouraged by tried relationships. The saddest frauds are 
those that come when a lot of money is stolen by trusted, old employees. I 
remember two cases: one a bookkeeper who had been with a publisher 28 
years, the other a cashier with a retail furniture house for 30 years, before the 
thefts were discovered. 

One we caught because some of us could not understand her reluctance to 
let a substitute take over her work during, any vacations or illnesses. We 
became certain that this was based on fear of detection of fraud. 

The other we caught because he always had night work to do. Some of us 



14 HOW TO RUN A SMALL BUSINESS 

are experienced enough to know that arrears in work may be caused by 
frantic jugglings to cover up. 

Overintimacy sometimes invites collusion. It is essential to rotate employees 
now and then, "Trusted old people" cause more grief than the ones you 
don't trust. 

All employees trusted with valuables should be bonded. If you do not take 
this precaution, you miss a valuable restraint. Bonding companies probably 
reduce frauds by 50 per cent. 

Sometimes the hiring system goes wrong. It is best to engage employees 
through the personnel office rather than directly through shop foremen. That 
obviates "kickback" arrangements. 

The leak in one case was valuable dies and tools that were being stolen 
out of a storeroom. The clerk hired, and the foreman hiring, were in cahoots. 
The same hiring system once found a company paying for nonexistent labor- 
ers. That means you have to do two things: where practicable, have mechan- 
ical time-recording devices to avoid "faking" time spent on the job; in addi- 
tion, make an occasional independent check to see that all employees on the 
payroll really exist and are at work. 

Internal check* that will help sfop plundering 

One of the ways to rob an unsuspecting employer is permitted when there 
is no internal check. All decent systems affecting cash or collections must be 
set up so that at least one person checks the work of another by using a dif- 
ferent procedure. 

I knew an office manager who opened the mail and made entries in the 
books. The office was a small one. The manager had been with the com- 
pany for 15 years. He was a "trusted employee," a highly respected member 
of the community, and married with two children. The company's profits 
had been advancing slowly but steadily over the years. Unaccountably, the 
profits fell off. He was eventually caught because CPA's asked the owner of 
the business to personally approve a lot of accounts written off. The "trusted 
employee" had been pilfering money sent in by mail, instead of crediting the 
customer. The amounts involved were substantial before his employers caught 
up with him. The excuse: he needed more money for the children and to 
keep his place in the social life of the community. 

It is easy to avoid that kind of fraud when the work of the office, or the 
plant is set up to secure full inside internal check of one person by another; 
for example, methods in which 

One employee records a sale, but another charges the customer's account 
One employee receives the collection, but another records the credit to the 
customer 



HOW TO AVOID FRAUDS 35 

One employee handles the cash, but another keeps the cash ledger account 

One employee accepts an order, but another receives the goods 

One employee approves the invoices for payment, but another issues the 

check 
One employee makes up the payroll, but another issues pay checks and 

takes receipts 

Be on guard for cash frauds they are most common 

Among the stupid acts of businessmen that have caused great grief when 
the thief finally confessed are these: 

Careless signing of checks in advance of seeing bills just because you are 
"sure of the honesty of the bookkeeper" that always invites fraud 

Not getting a full review by yourself or a CPA of your bank accounts; not 
guarding against borrowing from one account to cover a shortage in 
another. To do that, you have to make sure your method of inquiry 
questions all transfers between your banks, particularly those at the end 
of the month. Usually the deposit, but not the withdrawal, may be 
recorded in the current month. (I saw a dishonest insurance agent run 
up a loss of $100,000 by switches of that sort.) 

Using a till or cashbox instead of a modern register. The use of a cash 
box sacrifices all our desirable control features. Clerks have an easy 
time pocketing change unless the system protects the employer 

Careless recordings of cash transactions. These are usually the beginning 
of shortages, whether by design or otherwise 

Making "pay-outs" from receipts. Be sure you promptly deposit receipts 
intact in the bank 

Not maintaining a petty-cash working fund, but using some other method. 
Make the cashier account for funds regularly 

Not guarding vigilantly against unauthorized conversion of assets or 
assignments 

Not prenumbering checks, requisitions, sales slips, and all like forms and 
then making sure that all are accounted for and that none is used in an 
unauthorized manner 

Not maintaining a follow-up on accounts that have been written off, to be 
sure that recoveries are properly accounted for 

These are only the beginning steps to avoid fraud by people who handle 
cash. Experts sometimes use the following list of devices to ensure safety of 
cash: 

Segregate the person handling cash and operations from the rest of the 

office 
Provide adequate safe room; make certain that the safes are modern, bur- 

glarproof, and fireproof; permit only authorized persons to know the 

combinations; change the combinations periodically 



34 HOW TO RUN A SMALL BUSINESS 

Make use of the protection given by mechanical equipment cash registers, 

analysis machines, autographic registers, check registers, automatic 

cashiers, paying machines, change-making machines 
Make sure that the cashiers are required to give a full receipt for all funds 

taken in 

Educate the payer of funds to get a receipt for proper credit of his payment 
See that the cashier registers funds immediately upon receipt 
If the registry is by a duplicate receipt, number it serially so as to control 

it fully 

Make sure to place cashiers under bond 
Have independent persons in office or have CPA's balance the cashier's 

funds and salespeople's registers 
See that the cashier does not make disbursements from receipts; an imprest 

fund is usually more advisable 
See that the cashier, if he receives money on charge accounts, does not have 

access to the ledgers 
Make sure that the person making deposits is protected and bonded. Be 

certain that the firm has full insurance to cover highway robbery. Make 

use of the most accessible bank 

Sfeps to take to crvo/'c/ stealing of mail receipts 

Mail openers have many opportunities to steal money or stamps. The 
process is usual where the mail is not opened under systems that recognize 
all the trouble such as we have had. Actual cases of fraud have taught us 
that it is necessary to do this: 

Open the mail under competent supervision away from other people 
Sort it immediately; fasten all papers and mailing documents together with 

cash or checks received 

Place coin or stamps received in envelopes to prevent loss 
Follow up carefully all complaints that cash was sent but not received; use 

the facilities of the post office in investigating such complaints they do 

a competent job 
Find out whether a modern registering machine, which creates a cash 

record and registers the customer's remittance documents, would be an 

economy and a protective device 
Make check indorsing only "for deposit" and make it simultaneous with 

cash recording 
Have entry into bookkeeping record done, if possible, by someone otfyer 

than the mail openers. Then insist both people prove cash-receipts books 

daily with entries in customers' ledgers 

Let me tell you one story of how the post office helped us catch up with a 
crook. He took half the incoming cash on orders and destroyed the orders. 
He forgot that complaints might come direct to the boss rather than to his 



HOW TO AVOID FRAUDS 37 

friends. They did. We turned the case over to the post office. They knew 
exactly what to do. They planted a couple of pieces of mail with cash in the 
regular incoming sack. From there on, the clerks were busy confessing. 

To avoid trouble we usually segregate the cash and customer's order at 
once when received. Then we deposit the cash and furnish other clerks 
only with a record of what has come from the customers. I once knew of a 
case where the same clerk opened the mail, entered the customer's record, and 
entered the cash book. It was a cinch for her to write off a lot of small cus- 
tomers' accounts for noncollection (she actually kept the cash). We might 
never have caught her except for this: a CPA's wife sent in her cash to settle 
on a book she ordered. The clerk stupidly kept it and wrote off the amount. 
And the auditor was amazed to find his own name in the write-offs. 

How to stop the most common t A/every from petty cash 

Thefts from petty cash are the best known methods of employee larceny. 
This is the way we caught up with Helen G. Originally she got into her 
taking ways because she needed money for some kind of operation that could 
not be discussed in the open. When I met her, Helen was the cashier in a 
printing plant, paying out all sorts of money upon slips bearing approval. That 
meant she furnished the cash for traveling, for discharged employees who 
were paid on the spot, for sundry supplies, and for a lot of small costs that 
were part of the daily routine. Helen's methods were simple. She knew she 
had to have a voucher countersigned by some brass hat for each penny she 
gave out. Why not, she reasoned, do this: when the bigwig made the slip 
out in pencil, just raise the amount moderately. When that didn't give her 
enough money, she just got out one of the old slips she had paid last year, 
changed the date, and reused it. We caught up with her only because she 
forgot that one official was off on a long trip when she let his last year's 
voucher go into her current payment file. But before we did, she had a merry 
2 years of juggling. 

From there on it was easy to get the head of the company to change over 
to an effective control of petty cash. That meant that we had only to get his 
approval to four simple steps the ones for which auditors always plead, to 
stop Helen and her brand : 

1. Require that any request for payment from the petty cash be made out 
in ink to prevent forgery and reuse 

2. Insist that it be supported by invoices or receipts in every possible case 
and be approved by some competent official 

3. Mutilate the petty-cash voucher after it has been paid, showing the 
date of payment, to prevent reuse 

4. Take the vouchers away from the control of the cashier or else you 
invite easy pickings 



31 HOW TO RUN A SMALL BUSINESS 



Common errors made In handling checks 

A very usual fraud begins with permitting too free use of checks. We had 
a company president once who signed all checks before making a trip* In 
addition, he permitted the same clerk to balance the account. He made it 
easy for that person to carry off a lot of money. And he did. But there are 
many other stupid acts by otherwise sound businessmen; for example 

They forget that once in a while someone ought to make certain that 
vendors' names and indorsements are in accord with vouchers or in- 
voices. If they don't, the clerk can easily pay a friend or ally twice as 
much as the vendor's bill, permitting him to settle with the vendor. I 
saw that done twice. The cashier paid the purchasing agent $100 for a 
$50 bill, and then the latter settled with the vendor. It was a cinch. 

They sometimes permit checks to be issued to cash or bearer. That invites 
trouble. It is easy for the clerk to pay a fraction of the amount for your 
legitimate bill. 

They neglect to observe this simple routine: have checks numerically 
printed; retain all voided checks; route checks paid and returned by the 
bank to a clerk other than the issuing one; have the bank reconciliation 
made by a disinterested person. That catches frauds by forgery, when a 
clerk signs a check and could get away with it. 

They fail to consider the advisability of requiring more than one signature 
on a check; making sure checks are signed by one who thoroughly audits 
vouchers; and seeing that he studies the voucher or invoice to make sure 
to avoid forgery. That eliminates a lot of trouble, particularly against 
clerks who: use false invoices; reuse old invoices; raise totals of invoices 
in cahoots with vendors. 

/.ones that come from poor customer relationship* 

A great deal of loss is the result of poor relations between employees and 
customers. For example, we had the following occur: 

Credit references of customers were occasionally faked to pave the way for 
improper transactions 

Clerks sold one quality of goods and delivered another inferior stuff. That 
gave an opportunity for "adjustments" that did not find their way into the 
accounts 

Improper "kickbacks," split commissions, and like arrangements all bene- 
fited some person at the expense of the business 

Clerks charged for something they should not charge for. (Take the case of 
B. G., the repairman in a jewelry store. It was the store's practice to do a 
reasonable amount of repair work for its customers without charge. Or, 
at least, that was the manager's intention. The repairman had other ideas. 



HOW TO AVOID FRAUDS 3* 

He charged the customers and pocketed the collections. This worked so 
well that he branched out. On repairs for which the store usually charged, 
B. G. "upped" the charge and kept the difference. A casual remark by a 
regular customer caused the manager to investigate. It was not possible to 
determine the exact amount of the misappropriation, but a good guess 
placed it at about $8,000. The amount of customer goodwill that was lost 
could not be computed.) 

Outside men collecting cash from customers simply reported the customer did 
not pay. (We once caught that by investigating carefully all instances in 
which the customer indicated that a salesman had already been paid and 
following carefully failure of customers to pay accounts billed on orders 
taken by salesmen. One case concerned A. D. His employer was well 
aware of the danger of having road salesmen make cash collections. His 
salesmen had to make up all sales slips in triplicate. The original went to 
the customer as his receipt. The duplicates were mailed to the office daily. 
The third copies were totaled and turned in weekly with the cash collected. 
But A. D.'s wife couldn't manage on his salary and commissions. So, A. D. 
found a way to get around the sales-slip system. He made the customer's 
original slip for a higher amount than the other two slips. Then he simply 
pocketed the difference. It was a good scheme, but very short-lived. A. D, 
got sick. His customers were delighted with the lower prices his substitute 
gave them and said so. The substitute checked with the office to be sure 
he was using the correct price list and so put an end to A. D.'s "gold 
mine.") 

Some experiences warn how to restrict the activities of outside salesmen. 
Don't allow outside men to receive cash from customers if you can find some 
other way to collect. If you must use them, you should indicate clearly on 
all receipts given to customers that checks must be made to the order of the 
company and not the salesmen. Use these rules, too: 

Make sure that all cash-collecting salesmen are bonded 

See that their receipt books are serially controlled in duplicate 

Investigate carefully all instances in which the customer indicates that a 

salesman has already been paid 
Follow carefully failure of customers to pay accounts billed on order taken 

by salesmen 
Have salesmen's orders and cash carefully balanced by someone outside 

the selling department 
Don't permit salesmen to use sums collected for their expenses; if this has 

to be done, make sure that it is properly controlled and recorded 

How you can stop over-the-counter so/es thefts 

I had this experience with Miss M. K. She was a combination salesclerk 
and cashier in a women's accessory shop. One day, just before payday, she 



40 HOW TO RUN A SMALL BUSINESS 

was short of money. Instead of making a sales slip for a $5 balance, M. K. 
merely pocketed the money. Her intention was to make up a slip and pay the 
money back as soon as she got her salary. 

But on payday she saw a dress she liked and bought it. Result she could 
not pay back the $5. Unfortunately for her, it was not discovered, and so 
M. K. went on to bigger and better things. When we caught up with her after 
a couple of years, she had piled up a tidy little shortage of approximately 
$2,600. 

Sales across the counter always offer this trouble. The customer pays a 
bill and the employee pockets the money. You have to do this: 

When salespeople must take the cash, have them give a receipt that is 
serially controlled in duplicate 

Educate the customer to understand the necessity for a receipt and to 
demand it 

Inform customers that a receipt is essential to secure subsequent adjust- 
ment of accounts 

Maintain a perpetual inventory of stock in stores where counter sales are 
made 

Make sure that counter salespeople can secure stock from no other 
source 

Don't permit collecting counter salespeople to disburse any funds received 

Utilize the protection of modern equipment for counter sales, particularly 
cash registers, autographic registers, charge registers. Balance sales regis- 
tered with cashier's funds daily. If possible, have the actual balancing 
performed by persons other than the sales or cashiers' group 

What to watch for in cosA handling 

Study the way your employees handle your daily receipts. Control is ob- 
tained by a combination of several steps: 

Have someone other than the cashier take deposits to the bank 

Make deposit slips in duplicate to receive bank proof and prevent forgery 

Prove daily deposits to bank records. If possible have this done by someone 

other than the person receiving the cash 
Reconcile all bank statements regularly. If possible, have the reconciliation 

made by a person other than the cashier 
Reconcile bank balances occasionally at periods other than the close of the 

month 
Make certain that "lapping" (the holding back of funds despite entry in 

the receipt records) is not possible 
. Compare your receipts with budgets, standards, and ratios in daily or 

periodical reports. Investigate all unusual divergences from forecasts or 

normal trends 



HOW TO AVOID FRAUDS 41 

Make certain that it is impossible for cash to be taken by not reporting 

sales 

Be sure that unauthorized or improper allowances cannot be entered 
Make certain that it is not possible for cashbooks to be juggled or forced, 

particularly in the discount columns 
Be certain that it is not possible for a charge to be made to an expense 

account to cover abstracted cash which is to be credited to a customer 
Be sure that articles cannot be lost; for example: goods sold without an 

entry in your books; interest received from customers on their notes and 

accounts and not entered; proceeds from sales of by-products, waste, etc., 

not properly protected; interest or dividends due on investments not 

received 
Check all deductions from remittances such as cash discounts, commissions, 

disputed sales, account payable contras, etc. Make certain that a cashier 

or salesman cannot misappropriate any payments received on accounts 

that have been charged off 

One way to avoid fraud in your collection of charge accounts is to divorce 
the people handling the customers' ledgers and those who handle collection 
of charge accounts. And you should require rigid approval of all reductions of 
customers' accounts for bad debts, allowances, discounts. Do this, too : 

Review all reductions of accounts carefully 

Make the mailing of customers' statements a function of the accounting 

department 
Make certain that reduction can be charged to no place other than the 

account provided 



Use your bonding company fully 

You want to make full use of the protection and services afforded by the 
commercial casualty companies. They keep trying to tell us that they do more 
than pay losses, including the damage to insured property, premises, and 
fixtures resulting from actual or attempted crime. The insurance companies 
also 

Assist in "screening" employees, both present and prospective 

Exercise moral restraint on employees, both old and new 

Assist in developing effective, efficient preventive measures against loss from 

dishonesty 

Assist in recovering if the loss exceeds the insurance 
Inspect the premises and recommend proper physical protection against loss 

by burglary or robbery; i.t., safes, alarms, watchmen, bars, locks, and 

other safeguards 
Provide complete protection of assets against criminal attack, from both 

inside and outside crimes 



42 HOW TO RUN A SMALL BUSINESS 



How to stop customers' shoplifting 

The growing number of thefts should serve as a warning to retailers to 
strengthen their defenses against the shoplifter. The retailer who adopts an 
"it can't happen here" attitude may discover too late that it has happened, 
and to the extent of several hundred dollars 9 loss in stolen merchandise. 

Who is the shoplifter? Foiling the shoplifter is not an easy job for retailers. 
It is complicated by the fact that the shoplifter frequently is not a habitual 
criminal but is instead a respected citizen. In many instances, apprehended 
shoplifters have turned out to be professional workers, businessmen, well-to- 
do matrons, and other persons of good standing in the community. Unlike 
the professional shoplifters, they often have no real need for the items taken 
and sometimes can give no explanation as to why they took them. The retailer 
must be on guard against both the professional shoplifter who steals for a 
living and the amateur shoplifter who takes the merchandise simply to be 
taking it or because he might otherwise have to do without it. This means 
that the retailer must be ever watchful, never assuming that a shopper is 
honest simply because he or she is well-dressed and appears respectable. 

How do you thwart the shoplifter? There are a number of steps which you 
can take to thwart shoplifters. First familiarize yourself with some of the 
more common methods by which they take merchandise. Armed with a 
knowledge of their tactics, you stand a better chance of detecting and appre- 
hending them. Here are the mechanics they use: 

Perhaps the most common way in which the shoplifter steals merchandise 
is by concealing it within an innocent-appearing object he is carrying. 

Frequently used receptacles for stolen items are shopping bags, boxes, 
closed umbrellas, and brief cases. 

More ambitious shoplifters who take greater pains in the preparation of 
their equipment sometimes prepare boxes with ingenious false tops or 
bottoms. 'They slip stolen items into the boxes by raising the false tops 
or bottoms, which are pulled back into place by strong rubber bands 
attached to the inside of the package. 

Articles of clothing that he carries or wears are another tool of the shop- 
lifter. 

A person carrying a coat on one arm deserves careful observation by the 
retailer, for shoplifters often carry garments over tbeir arms in order to 
conceal stolen items beneath them. i, \ 

Other shoplifters wear specially prepared clothing with concealed pockets 
into which they drop stolen merchandise. >' 

The seller of women's apparel must keep particularly close watch on gar- 
ments taken into dressing booths by customers. For example, many a 
store has discovered too late that a customer who took several dresses into 



HOW TO AVOID FRAUDS 43 

a booth failed to return them all. The customer walked out of the store 
wearing the missing dresses beneath her own dress. 

Jewelry shoplifters often use specialized methods. In one method, the 
shoplifter, while examining a valuable item, swiftly conceals it, substi- 
tuting for it a cheap but accurate imitation. In another method, the 
shoplifter has concealed in his hand a clamp attached to strong rubber 
bands which run up his sleeve and are fastened to his vest. While exam- 
ining a ring or other piece of jewelry, he fastens the clamp to it, and the 
next instant it has vanished up his sleeve. 

Shoplifters sometimes work in groups, several appearing in a store at the 
same time. As one or two of them distract the salesperson's attention, 
the others busy themselves taking merchandise. 

Those are some of the more common ways in which the shoplifter operates. 
He has, of course, many other methods some quite simple, others very in- 
genious. You should watch for these other methods and remember accounts 
of them so that you can be on guard against them, too. 

How can you cut shoplifting? To cut shoplifting you should organize to 
ensure the safety of your merchandise by keeping display counters and tables 
low. That permits close observation of customers and their actions. And 
do this, too: 

Instill in salespeople the necessity for keeping careful watch of their mer- 
chandise and their customers. This can be done by making theft preven- 
tion a part of the initial training of every new salesperson and by 
periodically reviewing the subject. 

Keep valuable items in protected showcases. Train salespeople to show 
only a few such items at a time to a customer, returning unwanted items 
to the showcase immediately. 

Instruct salespeople to report promptly" any suspicious actions of a cus- 
tomer. The retailer can then decide personally what steps to take. Un 
less he is reasonably certain that a shopper has taken merchandise anc 
still has it in possession, it may be wise for him to avoid taking any action 
Erroneous accusations may lead to serious suits against the store. 

Engage the services of a reputable protection agency. A sign stating mereb 
that the store is protected by "such-and-such agency" may serve tc 
frighten away shoplifters. If thefts do occur, the protection agency cax 
investigate and possibly recover the merchandise. 

How to protect against robberies 

This part is paraphrased from an excellent booklet by the Continental 
Casualty Company of Chicago, 111. 

Secrecy is the best messenger protection for the average small businessman. 
Trips to the bank or other regular exposure should not occur at the same 
time every day and, if possible, not always on the same day. 



44 HOW TO RUN A SMALL BUSINESS 

Routes should be changed frequently. Several people should alternate in 
carrying the money. Another good practice is for the custodian to carry the 
money in several places on his person, assuming that a messenger satchel is 
not used. 

Checks and money orders should not be included in the package or pack- 
ages containing cash. The average thief destroys checks and money orders. 
He takes them only when they are in, or attached to, the packet containing 
cash. A separate package for these items frequently prevents complete loss. 

Bank deposits should be made as late as possible each day. Before closing 
for weekends or holidays, all cash but what is necessary for reopening should 
be removed. Armored car service may be necessary for the removal. Or a 
large part of these funds may be deposited in a convenient night depository, 
if one is accessible. 

The most effective measures available are these : 

The use of an armed guard is a matter of judgment. In some neighborhoods 
a $500 exposure would make guard protection mandatory. In other dis- 
tricts a custodian traveling a short distance could safely carry several times 
that amount without a guard. Guards, if used, should never walk beside 
the custodian or ride in the same conveyance with him. They should fol- 
low the custodian at a distance of 50 feet if on foot or 50 yards if traveling 
in a car. 

It is preferable that money or other valuable property be transported by 
private automobile or armored car, depending on the circumstances and 
the amount involved. In addition to affording better protection, use of a 
conveyance facilitates transport of the property. 

Handbags designed to frustrate messenger holdup are available on the 
market. Approved bags are lined with steel or mesh and are attached to 
the custodian or to the vehicle by means of a steel or wire strap or chain. 
A very effective bag is equipped with a harmless gun which shoots loudly 
and emits a trail of smoke when taken from the messenger. 

A small steel safe or box commonly called a locker is obtainable from most 
safe companies. Designed for the use of custodians making cash collec- 
tions, these safes or boxes are bolted to the car and have slots through 
which the funds received can be deposited so that in event of holdup they 
are inaccessible. This is excellent protection for collectors, salesmen, and 
drivers. 

Holdup alarm systems are in common use to avoid store or shop robberies. 
Unfortunately, however, these devices are not very effective in preventing 
robbery. Because of the speed with which modern bandits operate, it is 
usually impossible for the police to respond in time to prevent loss. An 
alarm may frighten the inexperienced holdup man, however, particularly if 
a loud gong is set off. Other useful aids are 



HOW TO AVOID FRAUDS 4S 

A slotted safe of the round-door, so-called "burglary-proof ' type, has an inner 
slotted compartment into which money can be deposited. The door to 
this inner compartment is locked either with a delayed-control time lock 
or with two keys. The combination of the delayed-control type has to be 
set from 15 to 30 minutes before the door can be opened. Most bandits, 
as experience has proved, will not wait that long. If the two-key type is 
used, one key should be in charge of someone usually off the premises or 
at least well removed from the vicinity of the safe, When this type of safe 
is used in connection with the pickup service of an armored car company, 
one key may be given to them. 

A tear-gas system of an approved type is effective in preventing robbery 
losses. These systems are usually operated by hand buttons or foot levers 
located in hidden places but easily accessible to the merchant or his clerks. 
In event of a holdup, pressing the button or lever releases tear gas from 
guns strategically placed about the premises. This renders the bandits 
more or less helpless* 

A bandit-resisting enclosure may be needed, in places handling large amounts 
of money. It is wise to explore the practicability of such an enclosure. It 
can be constructed of bulletproof steel, wire, and glass. There should be 
two doors, arranged in vestibule fashion with electrical controls from in- 
side, so that only one can be opened at a time. When such enclosures are 
used, money must be delivered after the enclosure is occupied by the 
cashier or paymaster to frustrate early-morning kidnaping. 

Casters should be removed from safes and, when possible, safes and chests 
should be embedded in concrete or bolted to the floor. This precaution 
prevents removal of the safe from the premises, to be blown open at leisure. 

Safes and chests should be visible from outside the premises. A light should 
be kept burning above them at night. Local police should be notified of 
this practice. 

Time-recording locks are used by many stores. Operated by a key and con- 
taining a tape on the inside, the lock automatically records the key number 
and the times of opening and closing the premises. These locks provide an 
excellent check on employees. They also identify an employee entering 
the premises after hours, thus acting as a preventive against theft by him, 
whether acting alone or in collusion with others. Where this lock is used, 
an ideal arrangement is to install it on the front entrance and to deadlock 
and crossbar all other doors. 

An auxiliary lock, operated independently of the ordinary spring mortise 
lock, should be installed on all doors. The bolt of these locks cannot be 
moved except by use of a key or an inside knob. A double cylinder dead- 
lock is one which can be operated only by a key on either side of the door. 

A crossbar of heavy wood or iron, placed horizontally across the inside of a 
door, is a good idea. The ends of the bar are held in sockets or supports 
securely bolted in place. If possible, the bar should be permanently fast- 
ened at one end and padlocked at the other. These bars are particularly 
useful for alley or poorly lighted entrances. 



4t HOW TO RUN A SMALL BUSINESS 

Sheet-metal reinforcement is sometimes desirable. When used, the metal 
should be at least 16 gauge (% 6 inch thick) and should be screwed to 
inside of the door with heavy screws or bolts not over 4 inches apart on 
all sides. 

Screened or barred windows are good protection against breaking and enter- 
ing. This is particularly true for windows opening on alleys or other poorly 
lighted areas, skylights, and occasionally display windows. Screens or bars 
are most effective when installed on the inside. 

Grills (demountable screens of No. 9 gauge wire or light iron bars) should 
be used to protect glass door panels, show cases, or show windows contain- 
ing valuable displays. 

Electrically operated burglar-alarm systems are available on the market. 
Used on doors, windows, and other openings, and occasionally on vulner- 
able walls, floors, or ceilings, these devices are very effective in ringing 
loud alarms. They also signal a central office when entry is forced into 
the protected premises. Substantial discounts in burglary-insurance pre- 
miums are allowed for approved types. 

Watchmen, if employed, should remain within the premises at all times after 
closing. A central station watchman signals an outside alarm company sta- 
tion or police station hourly to indicate all is well. A clock watchman 
records hourly rounds of the premises. The clock should be checked the 
following morning for omissions. 

These and other protective measures will not completely eliminate the 
danger of burglary or robbery. The professional criminal is both well versed 
and well equipped in carrying on his business. But no experienced criminal 
takes unnecessary risks. The more effectively you set up safeguards, the less 
danger there is of a loss. 

And watch out for these confidence men 

The credulity of many Americans was recognized by P. T. Barnum when 
he made his famous remark about a sucker born every minute. 

Swindlers are constantly planning to separate gullible people from their 
money. There are a wide variety of business frauds whose complexity varies 
with the art of the swindler and the simple-mindedness of the victim. Various 
schemes are presented so plausibly that not only inexperienced men but even 
the most wary are frequently induced to make investments, only to find 
the promised fabulous returns are a will-o'-the-wisp. Here are a few of 
the more common frauds: 

The advance-fee scheme has been used by many swindlers in a variety of 

. frauds. Confidence men advertise in a trade journal that they are in a 

position to finance new business ventures through the right connections 

in the world of finance. A charge is made to all victims who respond 



HOW TO AVOID FRAUDS 47 

to cover a "prospectus" and other "costs." The prospective businessman 
never hears from the promoters again. 

Businessmen seeking sales have been solicited to put up a bond. The 
swindler never accepts a surety bond but always requires cash. After 
handing over the money to the confidence man, the victim never sees 
his slick friend again. A responsible bonding company will issue a surety 
bond for a small fee. Don't bite for the cash-bond racket. 

Mail-order schemes offer a lucrative field for swindlers. These swindlers 
require payment in advance, either in whole or in part. There is little 
hesitancy on the part of the businessman, particularly when the goods 
are in short supply. Recently, some 8,000 dealers contributed to a swindler 
vast sums for the sale and delivery of alarm clocks, toasters, and electric 
irons. A payment of one-third down was demanded of each victim. When 
the fraud was discovered after the swindler had departed to new and 
undeveloped territory, the unopened mail was estimated to contain more 
than $25,000. These mail-order frauds vary only with the amount and 
type of goods sold. 

Many frauds find their victims in men who are anxious to get into busi- 
ness. Here are some of them: 

A common fraud is to sell the rights to an exclusive distributorship, which 
proves to be anything but exclusive. In fact, upon investigation, the 
victim finds equally industrious residents of the community are also 
"exclusive distributors" of the same product. In this type of fraud where 
goods are shipped to the so-called "exclusive distributor" the goods turn 
out to be inferior, shoddy, and usually unsalable. 

One of the schemes in current vogue is the sale of exclusive territorial rights 
for vending machines. The territories are soon found by the purchaser 
to be exhausted, and, in many instances the vending machines are in a 
virtual state of collapse. 

Catch slogans in persuasive advertising are used by a swindler to stimulate 
the victim's spirit of individual enterprise in purchasing an interest in a 
fake partnership or business. Some of these enterprises are nonexistent. 
A swindler may say a store is for sale. The shop is filled with confederates 
of the swindler who create an atmosphere of false business activity. In- 
vestigation after purchase by the victim discloses that even the boxes 
on the shelves, which were supposedly filled with merchandise, are empty. 

A wide variety of stock frauds are practiced, varying in detail with the skill 
and ingenuity of the operator. These promoters, on the basis of mis- 
representations and distortions, sell securities for enterprises which are 
destined to fail. A simple investigation by the victim* would clearly show 
the lack of merit in the enterprise. 

The state of New York (in connection with its stock-fraud activities) has 
bsued the following cautions: 



41 HOW TO RUN A SMALL BUSINESS 

Know or find out the responsibilities of the person or firm or company asking you 
to purchase. 

When the person is unknown to you, demand references and investigate. Do not 
be a victim of the one-call system. Take your time when strangers try to sell you 
securities. 

Do not hesitate to ask your banker or your lawyer, the chamber of commerce, the 
board of trade, or the better business bureau what they think of the proposition. 

Inquire of some reliable person or firm familiar with the character of the business in 
question for an opinion of both the standing and prospects of the company. 

Do not believe that the sensational success of one company is a guarantee that any 
other company will succeed in the same business. 

Remember that bonds become just as worthless as stocks when the security they 
represent is impaired. 

Take notice that what may seem to you to be guarantees by promoters or stock sales- 
men may, after all, be legally considered nothing more than opinions or hopes or a 
statement of mere prospects. The value of a security depends upon the integrity and 
financial strength of the guarantor. 

When printed agreements are offered for you to sign, remember that separate prom- 
ises by salesmen, if not in the printed agreement, are not binding upon the company. 

If you become victimized by swindlers or are suspicious of the actions of any com- 
pany or individual in transactions in securities, do not delay in notifying the Office of 
the State Attorney General. Not only do you thus place the crooks in the way of 
punishment, but you also protect other persons as well as yourself. 

And above all else do not swap your safe investments or savings for worthless 
securities! 

What can you do about it? The schemes tried and tested by confidence 
men and productive of rich returns to swindlers are repeated time and time 
again. As you read the reports of these swindlers, you will find that they 
do not vary much. The old vehicle is given a new coat of paint. But the 
skeleton of the old familiar scheme is always there. 

The Post Office Department urges this: if you receive literature through 
the mails advertising a fraudulent promotion, if you have reason for sus- 
picion, or if you have been victimized by a swindler by use of the mail, 
immediately communicate with the Post Office Inspection Service. 

Better business bureaus, chambers of commerce, and banks are ready to 
offer their services and advice in connection with promotional schemes. 

In addition, the following warnings should be heeded: 

Before you sign a contract, read it and make certain you understand it. 

And don't fail to get a copy of the contract. 
Many unhappy losses have resulted from turning over a signed blank to an 

unscrupulous promoter. Refuse to sign a blank form which is to be filled 

in later. 
Do not hesitate to consult an expert concerning any problem about which 

you may be in doubt, even though the promoter may tell you that the 

matter is simple and that a man of your profound comprehension can 

easily understand it 
If the promoter says that you only have a limited time to act, or that you 



HOW TO AVOID FRAUDS 4* 

must decide right away, do not fall for this obvious bait. Don't be high- 
pressured into a financial venture which mature consideration will show 
cannot possibly succeed. 

If a promoter flatters you, telling you what a brilliant fellow you are, and 
how quick you are to discern real value, beware! 

Demand references. If the promoter hesitates or tries to evade the question, 
watch out the chances are he is unable to provide them. 

If a promoter is unwilling to disclose the terms of his proposal, claiming 
that it is a secret which will revolutionize the industry, do not make any 
investment until you have a full disclosure of the facts. In short, insist 
on proof at all times. And beware of promotions which will revolutionize 
an industry. 

Finally, remember you won't get anything for nothing that is, anything 
of value. 



4. HOW GOOD TAX MANAGEMENT CAN INCREASE 
YOUR NET PROFITS 

Tom Clarkson, foreman of the assembly department of the big Ace 
Manufacturing Company local plant, had saved and planned for years 
before he quit his job to go in business for himself. He'd be his own boss, 
with a filling station at a likely spot on the Boston Post Road. Getting 
enough capital together to realize his dream of his own business had taken 
years of prudent saving, but he was sure that being in business for himself 
would be worth the sacrifices. 

Dick Clayton, machinist in another Ace plant, had the same dream of 
independence, being his own boss, getting away from bench work and back 
to automotive service and repair. He didn't have much money, but his 
family was back of him and his credit at the bank was good. 

Harry Aubrey, ledger clerk in the Middle Western plant of the Ace 
Manufacturing Company, looked down a vista of long years of sitting at a 
desk, writing figures in a ledger, and decided he wanted no part of it. He 
wasn't a trained businessman, but he knew that there was money to be 
made in operating a service station, and he figured that he could make up 
in enthusiasm, hard work, and common sense what he lacked in actual 
experience. 

Here they are just three men out of the hundreds of thousands who each 
year realize their dreams of going into business for themselves. Tom set 
up his station in the busy competitive thoroughfare between New York and 
Boston; Dick's station was also well placed, on the highway below St. Augus- 
tine, Fla., and Harry's was in Wisconsin's vacationland, north of Madison. 

At the end of a year, each had done about $20,000 in business, with profits 
close to the normal expectancy of 16/ a per cent. 

But 
Tom, who knew more about car servicing than either of the others, was 

in need of more money. 
Dick was in only fair shape financially. 
Harry was doing fine, thank you. The answer: Taxes. 



Tom, who knew the business, had gotten good advice on such matters as 
station display, auto supplies for sale, and servicing equipment. But he 
had neglected to get information on methods of reducing his tax liability. 

so ify; 



HOW GOOD TAX MANAGEMENT CAN INCREASE YOUR PROFITS 



II 



Dick, with less knowledge of automotive servicing, had the benefit of some 
information on saving tax costs from relatives who owned a store. 

Harry, wisely realizing that he lacked information on all phases of operat- 
ing his own business, consulted his CPA as well as advisers on running 
a service station. As a result, at the end of the year he was able to realize 
a good income without painful tax involvements. 



Tom, with only his son helping him to start out, felt it was unnecessary to 

incorporate and considered no other alternatives. He bought his service 

station and equipment outright. 
Dick organized a partnership with three other members of his family and 

divided the profits evenly. He too bought his station and equipment. He 

came out with a small tax bill. 
Harry, on the advice of his CPA, organized a partnership. He leased his 

equipment from the oil company on a profit percentage basis instead of 

buying the station outright. He paid no taxes. 



Poor fox planning can easily offset fcus/ness efficiency 

The accompanying table shows tax scales to which each was subject. 
Remember the facts 

Tom Sole owner of business assets and operations. 
Dick Partnership with three relatives, jointly owning all business assets 

and dividing profits evenly. Tax is total for all four. 
Harry Similar joint partnership of four. All assets leased (none owned) 

at a rental of 20 per cent of the profits earned. Tax is total 

amount for four partners. 
Here is what each group paid: 





Taxes paid for 1955 


Net profits 






Tom 


Dick 


Harry 


$ 5,000 


$ 660 


None 


None 


10,000 


1,636 


$ 848 


$ 488 


15,000 
20,000 
25,000 
30,000 
40,000 
50,000 
70,000 
100,000 


2,960 
4,532 
6,344 
8,434 
13,354 
19,002 
31,390 
52,056 


1,760 
2,640 
3,576 
4,564 
6,544 
9,112 
14,840 
25,376 


1,220 
1,940 
2,640 
3,376 
4,960 
6,544 
10,672 
18,128 



IS HOW TO RUN A SMALL BUSINESS 

Private small business offers large profits in an expanding economy. 
Ownership of business assets serves as a good hedge against inflation. The 
banks are eager to make sound loans to promising young businesses. With 
all these inducements the blank areas in the nation's business machine a 
real temptation is always furnished to seek the dignity of owning a business. 

But there are drawbacks. Only one out of four of the ambitious novices 

has the qualifications of business experience or training and the capital to 

carry through. The records show that one out of four retail ventures fail 

in the first year, half succumb within 3 years, and only two out of ten last 

' through a decade. 

Taxes being what they are, good tax information permits sizable savings. 
The problem of how can best be expressed by this sort of question (there 
are many others) : 

Does it pay to incorporate? to operate as a proprietorship (single owner- 
ship) ? to organize a partnership? to form several units, as partnerships 
or corporations? 

Will a family partnership cut taxes enough to make it worth while? 

How should costs of building and equipment be financed? 

Do tax savings make leased equipment cheaper than outright purchase? 
Should the building be rented or purchased? 

How may the business be financed most cheaply? How should books 
be kept cash or accrual? With what tax year? 

Can dependents help out without losing tax deductions? 

Tax effecfs from renting vs. owning 

Many new businesses have been able to secure bank loans to finance pur- 
chase of equipment. But the path of tax wisdom may be to lease the 
equipment on a graduated percentage basis. As sales income grows, the 
cost of the leased equipment goes up. Tax deductions are also on a grad- 
uated scale; when the income is low, there are lower deductions. When 
income goes up, the deductions increase even as their importance to the 
businessman increases. 

Such advice would have been particularly helpful to the new service 
station operators. Some of the major oil companies are particularly agree- 
able to leasing arrangements. 

Many businessmen who purchase buildings on an FHA or similar long- 
term plan assume that their monthly payments are rent a necessary, de- 
ductible evil. But only that part of the monthly payment which represents 
interest and real property taxes is deductible. The balance of the monthly 
payment is not deductible. It is repayment of a loan. The same breakdown 
applies to mortgage payments. 



HOW GOOD TAX MANAGEMENT CAN INCREASE YOUR PROFITS 8 

Another example: should you buy the automobiles you need for business 
traveling? It may be tax-wise to pay a rental. There are some places that 
give you brand-new, small cars for a $55 per month plus 1 cent a mile. In 
these deals the lessor pays for all insurance and licenses. You pay for gas 
and oil and repairs. That may be a much better tax deal than to invest 
$2,500 in a new car. If you rent, all your costs are deductible. When you 
buy, annual depreciation at probably 20 per cent takes the place of the 
$55 and 1 cent a mile. 

If investment and tax considerations are important, take the rental. In 
fact, it is always a good motto to invest only in a tax deduction. 

Financing your business has direct tax impacts 

Many new businessmen receive some of the money to start from rela- 
tives. They feel obligated to offer stock in the business in return. Actually, 
from a tax standpoint, this is unsound. Dividends paid on stock are not 
deductible. The helpful relatives could receive the same return in the form 
of interest on loans, or promissory notes, or bonds. Interest repayments in 
all three cases are deductible. 

Employing your dependent children may have tax advantages 

You may employ your child in your business and pay him a reasonable 
salary. That gives you a deduction for the fair pay you give him plus the 
exemption you get for supporting him. On top of that, he gets a $600 
exemption on the pay he receives. 

You get the exemption even if you pay him $600 or more as long as he 
is under nineteen or a full-time student. If he is nineteen or over and does 
not go to school, you can still get an exemption if he earns less than $600 
during the year. 

How you keep your records has a tax effect 

A businessman's early problem is to decide whether to keep books on 
an accrual basis (income and expenditures are noted as soon as the trans- 
action is completed) or on a cash basis (income is noted, and expenditures 
deducted, when cash is actually received or paid out). Get your CPA to 
help you select the best method for you. 

Any business which has inventory such as filling stations must be on 
the accrual basis. When Tom Clarkion sells 10 gallons of gas to a charge- 
account customer, the item goes into the ledger immediately, although the 
money may be 60 days away. 



HOW TO RUN A SMALL BUSINESS 



What ytor thould you use for tax reporting? 



Another problem is to determine the tax year. For most people the tax 
year starts on Jan. 1 and ends on Dec. 31. This period is called a calendar 
year. But business reasons may determine a different reporting period. That 
is, if your natural business year does not coincide with the calendar year, 
you pick the period that gives you the best picture of your business. When 
you do this, your reporting period is called a fiscal year, which means a 
period of 12 months ending on the last day of any month other than 
December. 

You may even get some tax advantages when you pick a fiscal year. Let 
us suppose that Tom Clarkson and his son opened their filling station in 
January. By having the tax year end June 30, the Clarksons* CPA could 
have enabled them to pay taxes on only $3,000 for their first, critical busi- 
ness year, delaying the obligation on the remainder. 

But in choosing a fiscal year for a partnership form of business, we have 
to watch out for certain bars. A partnership cannot adopt or change to a 
taxable year other than that used by all of its principal partners unless it can 
show a good business purpose for doing it. For example, if the principal 
partners report their personal income on a calendar-year basis, then the 
partnership must use a calendar-year basis unless it can show a business 
reason for using a fiscal year. 

Your business might even call for a 52-53 week fiscal year. That is, you 
want to close your annual accounting period on a particular day of the 
week rather than on the last day of the month. Under this method, your 
tax year will be measured by weeks rather than months. So you will, on 
the average, have five 52-week fiscal years to each 53-week fiscal year 
under this method. 

Example. You close your weeks on Saturdays and you want your year 
to close in December. If the last Saturday in December is Dec. 25, your tax 
year ends Dec. 25 of that year. 

Taking your time in picking the proper accounting period will avoid the 
necessity of obtaining permission to change the tax period later. Watch 
these points: 

If there are inventories you will be bound by the valuation election you 
make in a first return as between cost and cost or market, whichever 
is lower* Find which is more advantageous for you. 

You will be bound by a choice between the method of deducting specific 
bad debts and deducting reasonable addition! to a bad-debt reserve. 



HOW GOOD TAX MANAGEMENT CAN INCREASE YOUR PROFITS 



Legitimate o/cfs in cutting your income for fox purposes 

There are other tax-deferring or tax-cutting ideas that are pretty useful 
to the small businessman. 

You can defer sales income to next year this way: arrange to ship mer- 
chandise on consignment this year to be sold next year. Or you may arrange 
to sell merchandise on approval this year, to be accepted next year. 

If you use the accrual basis of accounting (as you must do if you have 
inventories), trade and cash discounts give you a control of income. Give 
trade discounts on your sales if you want a deduction. Take cash discounts 
on your purchases if you want the income. A trade discount reduces 
your sales (or purchases) at the time of the transaction. A cash discount 
is a deduction only at the time payment is made. 

Example. In December, 1954, you sell $1,000 merchandise subject to a 
10 per cent trade discount; while you buy $1,000 merchandise subject to a 
2 per cent cash discount. Both bills are paid in 1955. You accrue, in 1954, 
$900 sales and $1,000 purchases. 

Can you use the installment sales method? If you regularly sell your 
merchandise on the installment basis, you can defer the gross profit to the 
year when you collect. Nor is it necessary to make all your sales by that 
process. You can use the installment method on your installment business, 
provided you regularly sell that way. If you sell refrigerators and pianos, 
and allow installment payments only on the first, you qualify. 

The income reported on installment sales is found this way: 



Year 


Total 
sales 


Cost of 
sales 


Gross 
profits 


Profit % 


Collection! 
in 1955 


Income 
reported 
in 1955 


1953 
1954 
1955 


$50,000 
80,000 
60,000 


$25,000 
48,000 
42,000 


$25,000 
32,000 
18,000 


50 
40 
30 


$20,000 
30,000 
10,000 


$10,000 
12,000 
3,000 



Expenses and other deductions are deducted in the year when paid (cash 
basis) or when incurred (accrual basis). They are not allocated to the 
years when income upon collection is reported. When would good tax 
management suggest that you use the installment basis? 

If you are on the accrual method of accounting and you want to change to 
the installment method, make sure you are not taxed twice in the change- 
over. When you change, your collections may include income that was ac- 
crued in a prior year. This income is reported asram ;rd 



It HOW TO RUN A SMALL BUSINESS 

Tou might use the installment basis You might not 

When you expect lower income in future When you are building an installment 

years business and your deferred income will 

When you want to avoid paying tax on a put you in too high a tax bracket in 

sale until you collect later years 

When you want to siphon off present in- When you are concerned that you will 

come and spread it over future years have a large income in a period when 

When you expect a declining tax rate business is really decreasing; you may 

trend have to pay a tax, if you use the in- 

When you are certain of the result of your stallment basis of accounting, when your 

step; once you select this method you income is very small, or when you really 

cannot change by filing an amended have a loss in operations 

return When you have losses; the law applies 

When you want to build up your working only to gains 
capital by deferring the tax to later 
years 

If you are in the installment business, you probably ought to use a 
corporation. 

Do not take advance deposits of any kind from your customers or con- 
tractors unless you are prepared to pay a full tax on those receipts* If you 
have use of the money, it may be taxed to you. But your deduction of 
expenses incurred to earn the deposit may have to be spread over the life 
of the contract or lease. This denies you the privilege of allocating income 
to a year other than the year of actual receipt. There have been pleas that 
inclusion of these amounts in the income of the year in which they were 
received prohibits a correlation of income and the expenses incident to the 
earnings, but these pleas have not been successful. 

Since unrestricted advance payments are income, you may take advance 
income in years when your business has lost money. Then taking advance 
income will eliminate income from taxed years. 

Tax economy in reporting your deductions 

Some expenses can be controlled and placed in the year in which they 
will give you the most benefit. You may elect to spend money this year for 
repairs, redecoration, advertising, etc. Or you can delay them until next 
year, if that will give you a greater tax benefit. 

Does good business dictate that any of your expenses be rearranged to 
a percentage of sales or of net profit? For example, can your rent be based 
upon a percentage of sales or profit? Your job is to control costs ,50 they 
will be low when your net income is low. 

If you own assets (say machines or automobiles used in your business) 
and are about to trade them in, remember this: a trade-in produces no 
gain or loss. If the allowance is more than the depreciated cost of your 



HOW GOOD TAX MANAGEMENT CAN INCREASE YOUR PROFITS 57 

asset, trading is best, since the gain is not taxed. But if it is less, sell the 
asset for cash and get the loss. Then use the cash to buy the replacement. 

You can get no deduction now for costs which you may have to make 
good later on present-day sales. The classic example is the contractor who 
must include his full contract receipts in income today, even if he remains 
responsible in the future for his guaranty of his work. But one 1951 case 
disregarded this rule and allowed the contractor a current deduction. 

Tax economy may mean detailed study of this list to find what you should 
do about clearing up in high tax years costs such as 

Guaranties and warranties that will carry on after this year they are 
a deduction if you pay this year 

Expenses contingent upon the customer paying his bill, like discounts, 
salesmen's commissions, etc. you might get a deduction only in the 
year when he makes a payment; the courts disagree on this point 

If you contest expenses you are not entitled to a deduction until the 
matter is settled. You have no deduction until your liability is fixed and 
certain. Contests of expenses must be studied if the deduction is important 
to you this year. For example, consider settlement now of 

An employee's claim for damages for breach of contract of employment 

Claims for accidents, guaranty of lease, and breaches of contract gen- 
erally 

Assessments on state and local taxes. You should pay these amounts 
together with interest accrued. (You may file immediate claims for 
refund of the taxes and the interest paid) 

Interest accrued on Federal income taxes. You should accept assess- 
ments on these taxes and pay them together with interest accrued. 
(You may file immediate claims for refund of the taxes and interest 
paid) 

Sometimes you can gain tremendously, taxwise, by liquidating (in high 
tax years) obligations that will carry into more difficult years. For example, 
you probably can get an immediate deduction if you settle in cash for 

Bad leases that are likely to be burdensome in later years 

Contracts for services or materials that eventually will be expensive and 
difficult to carry in later years, or sales contracts which may be dif- 
ficult to perform 

Many kinds of adverse litigation or contingent liabilities, and all related 
expenses. Liquidate them now when taxes are high 

Obligations for a purchased asset that will not be used in later periods. 
See if you can get a present deduction by returning the asset and tak- 
ing your loss now 



HOW 70 RUN A SMALL BUSINESS 



What is your fcesf bus/ness form for tax purposes? 

It looks good to see the sign over the business: "Tom Clarkson, Prop. 99 

Tom Clarkson thought so, even though his son worked part time and 
furnished some of the capital from his own earnings (an investment) . As a 
partnership they would have divided profits, cutting taxes below the levies 
on his individual proprietorship or a corporation. 

The tax liabilities of the individual, partnership, and corporation are 
vastly different. You want to know about that when you have the option 
of choosing any of the forms for doing business. 

The latter half of this chapter shows you the relative advantages of a 
partnership and corporation. 

When you study these forms, consider the possible use of other devices. 
For example, check with your CPA the tax help you can get by 

Selling directly to a locally financed independent merchant, manufacturer, 
or jobber instead of having separate entities where you do business 

Leasing your facilities for handling sales to local agent upon agreement 
to handle your product exclusively 

Check, too, the tax desirability of two or more corporations or partner- 
ships to handle your present business operations. See your CPA for possible 
advantages. Recognize that lawmakers today favor small enterprise. It is 
always best to fit yourself into the exemptions and credits by which they 
subsidize smaller companies. And consider, too, with your CPA the division 
of your business for tax purposes by 

Having both a corporation and a partnership or any other combination 
Leasing all or part of corporate assets to some established business for 

Part of gross sales 

Percentage of net earnings 

Flat annual sum 
Use of the parent-subsidiary company device, through 

One company merely owning stock of another 

Division of operating company into two or more parts 

Joint ventures can give cash-basis individuals a good deal of tax control 
of the year for taking a possible loss that may arise. Two examples can 
show the way: 

Example 1. A and B formed a small business. Profits and losses were to 
be shared equally. These losses were deductible when they occurred, even 
if one of the parties took 10 years to pay the other for his share. , 

Example 2. A and B formed a small business. A wanted to be sure to 
control the year of his loss if one were sustained. So B was given ownership 



HOW GOOD TAX MANAGEMENT CAN INCREASE YOUR PROFITS 57 

of the business. A told B that he would share gains and losses equally. A 
then got a loss when he paid B his share. In this case, the loss to B occurred 
in 1929. A gave B his note for his share of the loss in 1930. He paid the 
note in 1941. That, held the courts, was year of his loss. (A was not 
deemed a joint venturer. He was merely under an obligation to reimburse 
B for losses.) 

If you are in a joint venture, and your income is low this year, you may 
take the gain from the venture in this year. That is done by terminating 
the venture this year, even if the work is not completed. 

Example. Assume A, B, and C organize a joint venture. Before com- 
pletion of the work, B and C can withdraw from the venture and accept 
from A settlements of their shares of the profits. A alone finishes the work 
in a later year and reports on the completed contract basis. Despite this, 
the settlement with B and C terminates the venture and closes the trans- 
action in the year of settlement. 

Even if you expect to use the corporate form, consider starting your small 
business as an individual proprietorship or partnership if the first few months 
are likely to show a loss. The losses can then be set off against your other 
income. 

The corporation can use its losses through the 7-year net operating loss 
deduction given all business. But if you are in a higher individual bracket 
you usually can effect a much more substantial saving. 

Then later you can change your business to a corporation, without any 
tax cost. 

Suppose the early period proves the new business to be a "dud," with 
losses. If you wind it up, the individual proprietorship or partnership form 
permits you to offset the entire loss against your personal income. Had you 
used the corporate form, the only loss realized (from worthless stock or loss 
in liquidation) would be a capital loss. That may not give you much tax 
saving. 

Tax consideration* in operating a family fc(/s/ness 

Since much of the confusion about family partnerships has been removed, 
many family partnerships have been recognized for tax purposes where a 
partner gets his interest by a valid gift. This gift of part of the family 
business to children will split the family income. 

That the only reason for the gift of the partnership interest is to cut the 
family taxes doesn't mean a thing. But the transfer of the partnership 
interest must be real. No sham ownership will split the family taxes. 

These rules apply only if the partnership is one where capital is an 



60 HOW TO RUN A SMALL BUSINESS 

important income producing factor. So, they do not apply to personal 
service businesses. Also the partner who gives up the interest by sale or 
gift must be credited with compensation for his services. This is in addition 
to his share of the partnership income coming to him as a partner. Nor 
can the sharing of the net profits by the new partner after deducting for the 
compensation to the donor be greater than the ratio of the gifted share 
to the entire partnership capital. For example, a gift to a son by his father 
of 25 per cent of the capital can only give the son a 25 per cent share of 
the profits, after the compensation allowance to the father. 

If a person buys an interest in a partnership from a member of his 
family it is treated as if he got the partnership interest as a gift. The rules 
on the distribution of profit apply. The fair market value of the partnership 
interest bought is treated as his donation to the capital of the partnership. 

If you want to divide profits in a venture with members of your family, 
it is not essential to create partnerships. In one case, this fifty-fifty split of 
earnings was approved: a mother loaned her son money to start a new 
business. For the loan she took the son's demand note without interest. The 
son agreed to give her 50 per cent of the venture's profits. Still another way 
is illustrated by these methods: 

A mother and son (or other members of the family) may own an un- 
divided share in certain assets. There is no rule prohibiting the mother 
from renting her share of the assets, at a fair price, possibly including 
some share of the lessee's earnings. Or, she may rent to a proprietor- 
ship or corporation set up by the son; or to an outsider, not connected 
with the son. 

In this kind of division, you might give the working assets to the son 
to be used in the continued conduct of the business. Give the other 
assets like investments or real estate to inactive people (parents, chil- 
dren, trusts, etc.). Then have them charge a fair rent for the assets 
that are used by the son or any business he creates. 
If you do this, separate the assets so that there is no joint ownership. If 
that is not possible legally, divide the assets so that each has an un- 
divided interest in each asset rented. Then have each enter lease agree- 
ments. That prevents any claim of the existence of any kind of part- 
nership. 

A personal-service partnership can be operated by a family group. But 
the family members must play important roles in producing the partnewhip 
earnings by regular jobs perhaps services in contracts with customers or 
suppliers or running a part of the business. 

As a general principle, you cannot give a member of your family an inter- 
est in your personal-service partnership unless it is true that: 



HOW GOOD TAX MANAGEMENT CAN INCREASE YOUR PROFITS 61 

All the facts, the agreement, the conduct of the parties, and the observa- 
tions of outsiders indicate that a real partnership is intended. Intent 
becomes the controlling factor. 

A family member really takes the risks of a partner. Then it is particularly 
important that the gift creates a real partnership, that is, that it is one 
that completely changes the previous economic status of the donor and 
the donee. 

Each partner contributes present substantial control, policy making, and 
management regardless of the source of the capital. 

Each partner really does important work in businesses where partners 
would normally be expected to be actively engaged in contacts with cus- 
tomers, employees, and suppliers. The work must be regular, not 
sporadic. It should be performed daily. 

Sometimes members of a family can be part of a specific business venture. 
For example, in one case, two children were included as venturers in a group 
organized to buy and outfit a ship. When completed it was to be sold to a 
partnership in which the father was a partner and which advanced the 
money used to accomplish the venturer's objectives. The ship was later sold 
to outsiders not the partnership at a profit. 

You may be able to get family splitting of income by a real assignment 
of a piece of property you own without a partnership for example, assign- 
ing the building in which your store is housed. 

This will cause tax to the other members of your family, instead of your- 
self. As a general rule, unless the property producing the income is assigned, 
the income itself is not assignable. 

You may not avoid tax by causing your income to be delivered to an- 
other. If the assignment is merely of income when it is collected, the 
assignor is taxed. But a gift to a member of your family is recognized if 
the following can be proved: 

You are competent to make the gift 

They are capable of taking the gift and accept it 

You intend presently to divest yourself of the title and control of the 
property 

You make an absolute transfer of the present title and of the control of 
the entire property 

You deliver the physical property or the most effectual means of exercis- 
ing dominion over it 

You no longer can exercise dominion or control over the property 

There is a tax to the assignee only where the property giving rise to the 
income is also assigned. But there must be a full and complete delivery of 
all right, title, and interest of the assignor in the property. 

In family assignments of business interests, remember this important point: 
Do not tie strings to the gift or retain important attributes that usually are 



42 HOW TO RUN A SMALL BUSINESS 

associated with ownership of the property. Otherwise, you may find yourself 
taxed on income from that property. 

So long as the assignment is bona fide and the business is of a type 
where capital is an important income producing factor, an assignment of a 
business interest will successfully transfer some of the business income. Of 
course, the donor must be allowed reasonable compensation before any of 
the business income can be transferred to the donee. But these rules still 
permit great tax saving by assignments of business interests. 

Now you con gef maximum deduction* 

The proprietor includes his business income or loss in his own tax return. 
He adds it to or subtracts it from the rest of his income. 

The same rule generally applies to the partner in a business. He treats 
his part of the profit or loss as an addition to or subtraction from the 
rest of his income. But a lot of rules sometimes intervene to make that a 
bit more complicated than it sounds. Read the way partnership income is 
treated in Chap. 9. 

Let's assume you understand the occasional peculiarities of the tax ac- 
counting for partnerships. If you do, then the following principles also 
apply to their income. 

First, what deductions do you get from your business income? The gen- 
eral principle is that you can deduct all the ordinary and necessary expenses 
to earn your income. But watch these rules: 

Personal expenses are never deductible. That is so even if you pay for 
them out of your business. For example, if you write out a business 
check for the purchase of furniture for your home, that is not a busi- 
ness expense. It is part of your drawings from the business. Your own 
drawings or salary are not deductible. 

Typical business expenses of a mercantile establishment are amounts 
paid for advertising, hire of clerks and other employees, rent, light, 
heat, water, stationery, stamps, telephone, property insurance, and 
delivery expenses. The expenses of a manufacturing business include 
labor, supplies, repairs, light, heat, power, selling costs, administration, 
and other similar charges. 

Capital costs cannot be deducted. Generally, the cost of acquiring an 
asset or of prolonging its life is a capital expenditure. The current 
expenses of running a business are not capital expenditures. Strictly 
speaking, every purchase of an asset or property (other than inventory) 
is a capital expense. Yet the law permits a deduction if the useful life 
of the item purchased is less than a year. For this reason, the cost of 
small tools, pencils, etc., is deductible. Although capital expenditures 
are not deductible in the year paid or incurred, their cost may usually 



HOW GOOD TAX MANAGEMENT CAN INCREASE YOUR PROFITS 63 

be recovered. This is done through the deduction permitted for de- 
preciation. 

These deductions which you take in the business schedule are in addition 
to the normal deductions given everyone; i.e., taxes, interest, and con- 
tributions. You are not permitted to take a deduction twice. If you 
deduct interest or taxes as an expense of your business, you cannot 
again deduct them in another part of your return. 

You may pay and deduct reasonable salaries to your minor children if 
they perform services that would ordinarily require an outsider. Each must 
report the salary as income. Each files a return and pays a tax. Your child 
may receive less than $600 and have no other income; then he is not re- 
quired to pay a tax. You may still claim him as a dependent (if you meet the 
rules on page 53). You are, of course, always entitled to a deduction for 
compensation paid (in money, property, or shares) to your children who 
perform services. 

You can also deduct amounts paid for household help to the extent that 
their services are used in a business. 

Services of members of your family must be continuous and substantial 
in the operation of your business. They may not be slight or insignificant 
services such as any wife might perform for her husband or any son for 
his father. 

For compensation to You treat it this way 

Wife No part is deductible. But you can split your income with 

her. That is discussed later 

Adult children Any reasonable pay and board are deductible 

Minor children If you seek a deduction, be ready to prove that 

Real employee relationship exists 

You actually make payments for services (but payment for 
schooling or support might be in that class if it is really 
pay for services) 

The minor chooses to work with you rather than some- 
where else. The services must be voluntary, not enforced 
Actual services are performed not those ordinarily classed 
as part of the household duties 

Many businessmen use part of their residences as a place of business or 
office. Then a division of the various household expenses must be made 
between business and personal use. Only the portion allocated to your 
business may be deducted. No official ruling exists to guide the apportion- 
ment Any reasonable plan will be approved. Here are some aids: 

If you own the house in which is maintained both your business and your 
residence, you may deduct the portion of the heat, light, telephone, 
repairs, depreciation, etc., that may be fairly allocated to die business. 

If you rent die house or apartment, you may make a similar allocation 
of some of these deductions together with your rental expense. The 



44 HOW TO RUN A SMALL BUSINESS 

apportionment might be made on the ratio of the number of rooms 
devoted to business to the total number of rooms in the house. An- 
other method in use is the ratio of the area of the business rooms to 
the total area of all the rooms. 

You may have a place of business or office elsewhere and merely see a 
casual or incidental customer or client in your residence. That is not 
using part of your home as a business. Neither would there be business 
use if you rarely used your home for business operations. To get a 
deduction for the fair share of the expenses allocated to your business 
activities, you must actually maintain an office and regularly receive 
customers or clients. Or you must regularly conduct other business 
activities. You are then entitled to the deduction. You get it even 
though you use your residence as a place of business only during the 
evenings or during special hours, and even though your main business 
is elsewhere. 

When your automobile is used for both business purposes and personal 
uses, an apportionment of your depreciation, repairs, and operating ex- 
penses may also be made. Only the portion allocated to your business pur- 
poses may be deducted. It is advisable to keep records of mileage, number 
of trips, etc., in order to prove your fair apportionment. 

Sometimes individuals get their personal expenses all mixed up with 
their business expenses. Here is a check list of deductible costs. It may 
help you unscramble bad bookkeeping. 

Advertising expenses essential to earn your income 

Automobile expenses paid by you if your car is used directly in your 

business 
Books purchased for business if their useful life is short. (If they have 

a long useful life, an annual depreciation deduction may be taken) 
Cards, notices, and stationery paid for by you and essential to earn your 

income 
Coaching lessons. (Lessons for the general improvement of your talent 

are not deductible) 
Compensation for employees where paid by you and essential to your 

business 

Contributions and assessments paid to chambers of commerce and pro- 
fessional associations and made for business purposes 
Cost of attending meetings or conventions of your business or profession 
Cost of bonding employees or assistants 
Damages, court costs, and other expenses paid by you in connection with 

civil lawsuits affecting your business 
Depreciation on your tools, instruments, and equipment with a useful 

life of more than 1 year and used in your business 
Display expenses hotel and sample room costs paid for by you and 

required by your occupation 



HOW GOOD TAX MANAGEMENT CAN INCREASE YOUR PROFITS 65 

Embezzlement or defalcation losses to the extent they are not compensated 

for by insurance. (This may be deducted only in the year the loss 

occurs. The cost of apprehending the thief is not deductible) 
Entertaining expenses if necessary for your business. (Include dinners, 

drinks, flowers, lunches, parties, tickets to concerts, sporting events, 

and theaters, etc.) 

Fees paid to agents where essential in order to earn your income 
Fire, casualty, or theft losses to the extent they are not compensated for 

by insurance 

Gifts required for business purposes 
Instruments or apparatus necessary to earn your income which you rent 

or lease cost of renting or leasing 
Instruments and equipment used in your profession which you must buy 

cost, if the useful life is short; if not, annual depreciation charges and 

maintenance cost 
Laundering or cleaning working clothes or uniforms where the cost of 

purchasing them would be a deductible item 
Legal expense of defending suit against you except that if you are found 

guilty in a criminal action, no deduction is allowed 
Loss on sale or scrapping of old depreciable equipment or machinery 

used in your occupation. You may deduct its present depreciated 

value (cost less depreciation), less the amount received for it 
Machines and heavy equipment annual depreciation only 
Magazines and newspapers purchased for the use of customers 
Maintenance expense of business premises. Include cleaning, electricity, 

heat, insurance, light, paint, repairs, water, and incidental alterations 
Membership fees paid to your trade association for a business purpose 
Messenger service used in earning your income 
Miscellaneous or unusual expenses paid by you which were directly 

necessary to earn your income 

Moving expenses incurred in transferring your business to a new loca- 
tion 
Office furniture, if its useful life is short. (If it has a long useful life, you 

may deduct only the annual depreciation) 
Office supplies, postage, and stationery 
Patent infringement judgments if paid by you 
Patterns or designs purchased by you and required for your business 
Press agents' fees paid by you 

Professional or trade magazines, journals, and periodicals 
Publicity expenses paid by you, incurred in earning your income 
Rent paid for business premises. (If you use part of your residence for 

business purposes, only that portion of your rent is deductible) 
Repairs to tools, instruments, and equipment used in earning your income 
Royalties paid for the use of copyrighted or patented items 
Signs used cost if the useful life is short; otherwise annual depreciation 

charges 



** HOW TO RUN A SMALL BUSYNESS 

Telephone and telegraph expenses directly essential to earning your 
income 

Traveling and other expenses in earning your income. Include railroad 
and other fares, meals, lodgings, tips, telephone and telegraph, bag- 
gage charges, including insurance, attendance at business conventions, 
display expenses (such as hotel sample room costs), automobile ex- 
penses, etc. 

Know how to compute depredation of your assets for tax purposes 

Computing depreciation always bothers the small businessman. Capital 
expenditures are not deductible on your tax return. But you are entitled 
to a reasonable allowance for wear and tear of property. That is called 
depreciation. The purpose of depreciation is to permit the recovery of the 
capital sum over the useful life of the property invested. 

There are seven methods of computing depreciation: 

1. Annual installments of equal amounts the straight-line method. This 
is the most popular process 

2. Amortization of costs based on the number of units produced without 
regard to any element of time. This is used when the assets are con- 
cerned with property which will be exhausted, as for instance, oil- 
well machinery 

3. The job basis. This is ordinarily used when equipment has been 
acquired for special purposes 

4. Declining balance method. This seeks to apply depreciation to the 
years of greater productivity of the property. The annual rate is fixed 
so that the depreciation is greater in the earlier years and decreases 
with age 

5. Sinking fund methods. These generally seek by actuarial calculations 
to set annual depreciation amounts which, with accumulated interest, 
will build up the amount necessary to replace the equipment at the 
end of its useful life. This method is used infrequently 

6. The periodic appraisal method. Experts estimate the actual deprecia- 
tion that has accrued upon particular pieces of property during various 
periods 

7. The sum of the years-digits method. This method will give you about 
the same results as the declining balance method. But it has one ad- 
vantage: it permits you to fix your own salvage value. 

In addition, the law permits you to use any other method which is con- 
sistently applied. But, such method may not, during the first two-thirds of 
the useful life of the property, give a greater depreciation total than you 
would get under the declining balance method. 



HOW GOOD TAX MANAGEMENT CAN INCREASE YOUR PROFITS 47 

Use of the declining balance method or any other method giving a similar 
liberalized write-off is limited to assets with a life of 3 years or more. 

The Treasury always denies you the loss when you use a composite rate 
of depreciation for a group of assets. It insists that the composite rate 
includes an allowance for probable retirements. If you keep accurate records 
of depreciable assets, you can get your loss on retirement. 

For your guidance, the Bureau of Internal Revenue has prepared a bul- 
letin (Bulletin F) showing the estimated useful life of various types of 
property. This gives you the "straight-line" rates you can use. 

How to use your standard deduction fox-wise// 

Individuals in business often have an important stake in the "standard 
deduction." 

It was created by Congress as a substitute for proving deductions. But 
to take it as a deduction for that reason may be costly in business. The 
standard deduction (10 per cent of your adjusted gross income or $1,000, 
whichever is the lesser) is in place of the following items that would affect 
your taxes: 

All deductions that would ordinarily be allowable in determining your 

net income except business deductions 
Any credits for tax-free covenant bonds paid at the source and foreign 

taxes or taxes paid to United States possessions 

You do not have to substantiate your standard deduction. You get the 
allowance whether or not you had the costs. 

The standard deduction is in place of only part of your deductions. Some 
of them are not included in it. Most important, you are allowed your entire 
business costs as deductions to determine your adjusted gross income. If 
you are in a business, you get your adjusted gross income by subtracting from 
your total income: 

All your ordinary and necessary costs to conduct your operations 
All rent, interest, taxes, losses, contributions, and other costs directly con- 
nected with your business income 

It may be important to know exactly how you compute the last item. For 
example (as in many of the professions) some of your costs may be in part 
personal and in part business. Under this rule it becomes highly important 
to many people to get a proper split. When you use the standard deduction, 
the usual rule is that the higher the business deductions, the greater will be 
the total deductions. That is because you reduce gross income by busines! 
deductions to get adjusted gross income. Then you compute a standard 
deduction on that adjusted gross income. 



61 HOW TO RUN A SMALL BUSINESS 

Obviously it is tremendously important for some people to find whether 
they are in a trade or business. If they are, they may get far more deduc- 
tions than they would ordinarily claim. 

If you have expenses in the production of rents or royalties, you need 
not worry whether you are in a trade or business. Your costs are treated 
as business expenses* 

How you can get the greatest advantage from income splitting 

You want to know all about "splitting income" when you consider the 
advantages of not incorporating your business. (The same rules apply to 
partners 9 income.) The "splitting" accomplishes all that a full partnership 
with your wife can give you. 

Married couples now have a tremendous advantage by "splitting in- 
come." The "splitting" affects business income as well as all other income. 
The tax savings can be substantial. All you have to do to get them is: be 
married at the close of the tax year; and file a joint tax return. 

The way to get your reduced taxes is simple. All you do is to file one 
tax return which both you and your wife sign. That becomes a joint return. 
You are not required to do this. But you must do it if you want the tax 
savings. Under the law you find a tax for a married couple this way: you 
add up the husband's and wife's incomes; then you reduce the total by all 
your deductions and exemptions. This is divided in two. Your tax is then 
figured on this, and then multiplied by two. That gives you the total tax 
by the husband and wife. 

The tax you pay on a joint return is paid in one sum. It is not divided 
in half and each half paid by one spouse. The obligation to pay the full 
amount is placed on both spouses. Either can be called upon to pay the 
entire tax on the joint return. And when a husband pays the full tax he 
is not considered to have made a gift to his wife. There is no gift tax im- 
posed upon him for paying his wife's share of the combined tax. 

Filing a joint return does not penalize you if the income is over $5,000 
and you want the standard deduction. You can now deduct 10 per cent of 
your combined adjusted gross income but not more than $1,000. 

If your wife dies, you may still get the advantages of split income in both 
of the two years following the year of her death. 

A joint return, to get the tax saving, may be filed by a husband and 
wife in all cases except when 

Each has a different tax year. Married couples should use the same year 
in reporting. Only then can you split income. You can easily get per- 
mission from the Treasury to change. This bar to joint filing does not 
apply when your tax years begin on the same day, but end because of 



HOW GOOD TAX MANAGEMENT CAN INCREASE YOUR PROFITS 69 

the death of either or both spouses. A wife who has never filed a tax 
return may elect to use her husband's tax year as her first tax year. 
Then they can file a joint return. 

Either is a nonresident alien at any time during the tax year. 

They are legally separated under a decree of divorce or separation at the 
close of the tax year. Then husband and wife must file separate returns, 
and each is entitled to one exemption. The husband cannot get an 
exemption for his divorced or legally separated wife, even if he con- 
tributes all her support. 

Is it always cheaper to use this new method of "splitting income"? Yes, 
in most cases. There are a few instances in which it may cost you some tax. 
You'll have to do the figuring if you have such elements 



Capital losses in the sale or exchange of property 

Net capital loss from an earlier year 

Gains and losses from the sale of business property 

Medical expenses paid by each spouse when each has income 

There may possibly be other cases. Remember that you compute the 
income on a joint return by accumulating the income and deductions of 
both the husband and wife. 

How to find whether it is fox-w/se f o operate os o partnership or a corporation 

Businessmen who are alive to tax opportunities may be able to overcome 
economic disadvantages. 

It is all-important to seek tax economy when you organize. For example, 
the rate on small corporations is considerably less than it is on the larger 
corporations. If you can do it, then, it is highly advisable to have small 
units. 

Should you run your business as a corporation or a partnership? No rule 
of thumb can be given. The answer depends on many points. Here is how 
you go about finding the answer in your case: 

Compute the estimated future yearly incomes of the business and yourself 
Then figure what salary the corporation (assume a corporate form) would 

pay you and what dividends, if any, it would pay you 
Then compute the tax for both the corporation and yourself 
Now figure again what your tax would be if the partnership form were 

used 
In both cases cover a series of years. Then make your comparisons 

Here are some points to bear in mind in making your decision: 

Remember that you are guessing future incomes and that individual tax 
rates may go lower. 



70 HOW TO RUN A SMALL BUSINESS 

Consider closely the double tax (on corporations and then again to you 
as dividends when you try to get the corporate earnings out) . This bur- 
den is eased partially by the dividend exclusion and credit rules. 

But note also that you may control the dividend policy of the corporation. 
You may minimize double taxation by liquidating or selling the corpo- 
ration in a poor year when little tax will be due. Then you would only 
pay a 26 per cent tax on your long-term capital gains. 

If the corporation has a substantial loss and then dissolves, you may get 
the benefit of a double "deduction." The loss carryback gives the 
corporation a tax refund. The stockholders get a loss on dissolution. 

You may never liquidate during your entire lifetime. Then the cost basis 
of your stock to your heirs will be increased to the value at death. Sub- 
sequent sale or liquidation will result in a tax on proceeds only in excess 
of this increased value. 

Your business may be growing for a number of years before you attain a 
normal level of operation. It is then unlikely, if you use the corporate 
form, that you will incur double taxation. You may be able to avoid 
paying dividends. Thus you can build up a comfortable surplus at low 
tax cost. If you used the partnership form, you would have paid a 
tax on all earnings throughout the entire growth period. 

Perhaps reasonable salaries will use up the income of the corporation. 
This is often the case in small corporations. Here you might as well 
have all the benefits of the corporate form. Then no tax cost is involved. 

Do not use the corporate form where income is largely to be from capital 
gains or tax-exempt income. Here is the reason. When you pay out 
this income in salaries and dividends, the prior sources of the income 
are immaterial. The distributions are fully taxed regardless of the 
origin of the income. But the character of this income does not change 
where the partnership or single proprietorship form is used it remains 
capital gain or tax-exempt. 

Do not use the corporate form where you expect losses and you have sub- 
stantial personal income. In noncorporate forms these losses can be 
offset against your income. 

Transactions with your fully owned corporation may result in taxed gain 
to you though a loss would be disallowed. If you are a sole proprietor- 
ship there is neither gain nor loss. 

Tax advantage* of a corporation 

The tax on individual proprietors or members of a partnership is high. 
The tax on a corporation may be much lower. Cost of operation of a corpo- 
ration may be less than conduct of business by means of a partnership. Much 
depends on the dividend policy and on what are determined to be reasonable 
salary payments. 

Other advantages of incorporating your business are 



HOW GOOD TAX MANAGEMENT CAN INCREASE YOUR PROFITS 71 

Stockholders who are employees may be included in profit-sharing or pen- 
sion plans of the company 

Certain corporations engaged in foreign trade or in other ventures have 
special tax benefits 

Death benefits up to $5,000 can be paid tax-free to beneficiaries of a 
stockholder employee 

Only 15 per cent of dividend income is taxed to the corporation. Such in- 
come is not subject to full normal and surtax paid by partners 

The corporate form may facilitate saving income and estate taxes by gifts 
to children or to a family foundation 

Members of a family may be stockholders without many of the burdens 
and restrictions of family partnerships 

Perhaps you can avoid dividend payments to stockholders and reduce the 
double tax 

Reopening of the partners' tax years is possible in the Treasury examina- 
tion of partnerships. That is a serious disadvantage in a partnership 

Corporation stockholders can often control the dividend processes. There- 
fore they can dictate the year they will get income. They might often 
select the most favorable year. Control of the dividends by corporate 
holders permits averaging of stockholders' income over a long period 

The owner will have a capital gain when his corporation is liquidated 

The owner may be able to liquidate in a year when he has losses to offset 
the gain from liquidation 

If the owner dies, his estate can liquidate with no income tax because the 
value of the stock at his death will be its basis 

A new corporation is a new taxpayer. It can choose its fiscal period, ac- 
counting methods, etc. 

You get a postponement of taxes due by a corporation. Under pay-as-you- 
go the individual and partner pay in the year income is earned. The 
corporation pays in the next year. That gives you the income tax due as 
a base for financing a corporation 

Corporations may get an immediate refund if they sustain a net operating 
loss. They may reduce the tax due for their prior year if they have losses 
in the current year. Partners must wait a year to get the same treatment, 
since they pay as they go 



Tax advantages of a partnership 

The advantages of a partnership are many. The net tax cost may often be 
less in a partnership than in a corporation. The corporation distributes its 
profits in the form of dividends. These are also taxed to the stockholders; 
i.*., there is a double tax on the same earnings. Partnership earnings are not 
taxed twice. There is only one tax on each partner's share of the profits. 

Corporations are penalized by a tax if they accumulate earnings without 



72 HOW TO RUN A SMALL BUSINESS 

distributing them to the owners. The partnership can accumulate its earn- 
ings at will. Other partnership advantages include 

You decide how to divide profits among your partners without regard to 

investment. You can even do it at the end of a year 
Partners can deduct their share of partnership contributions (up to a 

possible 30 per cent of their adjusted gross income), while corporations 

are limited to 5 per cent 
Partners can also take their share of tax-free interest as exempt income 

instead of as taxed corporate distributions 
Capital losses of partnership businesses reduce capital gains of individual 

partners in preparing tax returns. This is not true in the case of 

corporations 
Income (for example, proceeds on sale of property below cost, proceeds of 

life insurance, canceled debts, etc.) may be exempt to the corporation. 

But it is fully taxed when distributed to the stockholder. That is not so 

with a partner 

Earnings already taxed increase the cost basis of the partner in his com- 
pany. That is not true of the stockholder 
There is often very great opportunity for manipulation of the profit and 

loss with payments in kind in and out of partnerships 
If the owner is also employed by the corporation he may have to draw a 

salary in loss years in order to justify its reasonableness in other years. 

Thus, he will have taxed income although the business does not show a 

profit 
Long-term gains are taxed at only 25 per cent to the partner, and to the 

corporation. But they lose their identity when paid as dividends by the 

corporation. Then they are taxed at ordinary income tax rates after 

the reduction for the dividend exclusion. 
Partnership losses can be offset against personal income. This can produce 

the carry-over and return of prior years' taxes 
Partners in community-property states should be sure to check their own 

state laws. They usually get a decided advantage in operating as a part- 
nership rather than a corporation 
Capital gain treatment varies. An individual is taxed on 50 per cent of 

the long-term profits over short-term losses. That may give a tax of 

less than 25 per cent. That is not permitted corporations. They pay a 

25 per cent tax (same as individuals) on the difference between 100 

per cent of the long-term gains and short-term losses. That may make 

a lot of difference in a given case 
There is likely to be difficulty in tradings between a stockholder and his 

corporation. These problems may not arise in transactions between a 

partner and his partnership 
Partners can deduct the carry-over of partnership capital losses up to 

$1,000 a year. This is not permitted to corporations 
Retention of fundf Jgr development is not dictated by tax considerations 



HOW GOOD TAX MANAGEMENT CAN INCREASE YOUR PROFITS 73 

How you can get corporate tax advantages without incorporating 

A new tax-treatment election has been given small businesses. These new 
provisions will eliminate the effect of the Federal tax laws on the form of 
organization adopted by certain unincorporated businesses. This is accom- 
plished by allowing certain proprietorships and partnerships the option to 
be taxed as corporations. 

If you expect to use the election permitting proprietorships and partner- 
ships to be taxed as corporations, you should know these rules: 

1. It applies only to a business enterprise where either 

Capital is a material income-producing factor (the operation of the 
business requires a substantial inventory or a substantial investment 
in plant, machinery, or equipment) or 

Fifty per cent or more of its income is derived from trading as a 
principal or from brokerage commissions from selling real property, 
stock, or commodities 

2. Partnerships with more than 50 members cannot qualify for the election 

3. No proprietor or partner may be a nonresident alien or a member of a 
foreign partnership 

4. The election has to be made not later than 60 days after the close of 
the year for which the election is first made. The election is irrevocable 
unless there is a change of ownership of 20 per cent or more 

But note this well : The enterprise is subject to the corporate tax on earn- 
ings, accumulated earnings, and the alternative tax for capital gains. It is 
considered to be a corporation with respect to operation, distributions, and 
sale of an interest. And a proprietor or partner of an enterprise taxed under 
this election cannot participate as an employee in any qualified pension and 
profit-sharing plan of the business. 

For the small, growing proprietorship or partnership, it may pay to hold 
off the election until a later year. The corporate rate is not graduated (ex- 
cept on the jump for income over $25,000). So, even though the corporate 
rate may be lower on the top dollar of business income than the highest indi- 
vidual rate on the same dollar, the graduated individual rate may produce a 
lower effective tax because of the averaging of the individual rates. 

Take a two-man partnership with business income of $100,000. Assume 
reasonable salaries are $25,000 for each. On a taxable partnership, business 
income will bear a $40,600 tax. As a partnership taxable as a corporation, 
current tax (individual and corporate) is $35,000. But that leaves earnings 
in the corporation subject to a future minimum tax of $7,500 as capital 
gains. So total tax (current and deferred) is about $2,000 more if the 
election is made. And, if the business suffers a temporary reverse so that 
income for a year drops, splitting earnings with a taxable business entity 
would mean even less in current savings. 



74 HOW TO RUN A SMALL BUSINESS 

Know the tax pitfalls in changing Me form of your fcus/ness 

Use your CPA when you change the form of doing business. It is often a 
very complicated business. Be sure you do not lose a lot in the change. 

Many advantages will be lost to the new business when you get its assets 
and it loses its identity. 

They include loss of the very important net-operating-loss carry-over. And 
the basis for depreciation gain or loss may be changed by the transfer. Cer- 
tain income, exempt from tax to the other company, may be taxed to a suc- 
cessor; for example: recovery of bad debts for which no tax benefit was re- 
ceived; life insurance processes. Seek advice of your CPA to avoid these 



If you are changing from a corporation to a partnership, you can make 
the change this way: 

Form the partnership first 

Transfer the corporate assets to it 

Then dispose of the proceeds secured to the stockholders 

And dissolve the corporation 

Or you can 

Distribute corporate assets to the stockholders, who then 
Form the partnership 

Each of these methods may result in different legal and tax problems. 
Sometimes this change gives a tax advantage: 

Stockholders take the assets at fair market value. They pay no more than 
25 per cent on their gain in liquidation. Sometimes fair market values are 
higher values than the corporation cost. Then stockholders might get imme- 
diate deductions at much higher rates than the corporation. 

This may be particularly helpful if inventories have risen. The corpora- 
tion might "have to pay ordinary income taxes on sales over cost. But the 
stockholders get the right to sell them free of tax by paying 25 per cent of fair 
value in liquidation. But here you have to watch out for the collapsible 
corporation rules, which may hit the distribution as ordinary income. Here 
the advice of your tax counselor is needed. Of course, there may also be a 
step-down in values as a result of a liquidation if inventory and other assets 
are worth less than the cost basis to the corporation. 

Your liquidation will give rise to a capital gain or loss. It will be a long- 
or short-term gain or loss, depending on whether the stock was held for 
more or less than 6 months. 

The amount of the gain or loss on which the stockholders are taxed is the 

difference between the fair market value of the property distributed and the 

.V*" /\ 



HOW GOOD TAX MANAGEMENT CAN INCREASE YOUR PROFITS 75 

cost of the stock to the stockholders. Value will include any fair value of the 
goodwill of the corporation. You may have to pay a tax on that value, even 
if it is not an asset on the corporation books. 

// you are converting to a partnership, be sure to review with your CPA 
the problems of partnerships. Your setup may be taxed as a corporation be- 
cause it may have the characteristics of the previous corporation. 

And if you are converting to a partnership with members of your family, 
be sure you understand the rules covering partnership interests created 
by gifts to members of the family. Recognized family partnerships are easy 
to form. The rules are covered earlier in this chapter. 

In changing from a partnership to a corporation, there are some common 
methods to proceed: 

The partnership is dissolved, and the individual partners exchange their 
share in the partnership for the stock of the corporation 

The assets of the partnership are transferred to the corporation. In ex- 
change, the corporate stock is distributed to the partners. In this step 
you can probably avoid tax liability on the exchange. Check this 
problem with your tax adviser. 

Sometimes it may be advisable to create a tax by the transfer. The partner 
may have some' advantage in taking a loss, due to depreciated value of the 
property, on his individual return. Or it may be highly advisable to pay a 
tax on a capital gain. This increases the basis of the property to the corpora- 
tion. That may reduce subsequent computations of income or gain. If you 
want to create a taxable gain or loss on the exchange, you may be able to do 
it if you make the transfer so as not to have a tax-free transaction. 

Tax overpayments because of lack of knowledge can destroy a business 

The high percentage of failures among new business concerns is attributed 
to management failures bad financing, failure to understand the sales 
market, unf amiliarity with problems of supply or competition, and very often 
to the overpayment of taxes. 

The small businessman who engages a competent doctor as a matter of 
course for his personal health is often too overconfident or too suspicious to 
call in competent counsel for the health of his business. Far too few seek 
such aid. 

Management service and accounting procedures that accountants can 
furnish may be the difference between continuation or shutting down for 
many new concerns close to the borderline of the 30 per cent that fail the first 
year. 



5. HOW BEST TO HANDLE YOUR CREDIT AND 
INSTALLMENT SALES 

If credit b granted and the customers pay their bills promptly, you normally 
can increase sales to steady, satisfied customers. But if customers are allowed 
to charge amounts beyond their ability to pay promptly, it is a drain on your 
capital. It may result in bad-debt losses. 

The small businessman must know the advantages and disadvantages of 
extension of credit to his customers. Factors to be considered are 

Larger working capital will be needed if the small businessman extends 
credit. His capital must be sufficient to carry the accounts receivable, to 
buy stock, and to pay for operating expenses. With active, paying ac- 
counts, most of a store's credit will be outstanding from 4 to 6 weeks. 
But most of the store's bills will be due on the tenth of each month. 
When determining the capital needed, the small businessman must pro- 
vide for this delay in collecting money owed him. 

In some cases, it may be possible for the small businessman to increase his 
business substantially through extension of credit without adding mate- 
rially to operating expenses. Where this is true, he may decide to grant 
credit. But he can limit charge accounts, insist upon prompt payments, 
and try to keep on hand sufficient cash to meet bills as they fall due. 

Sometimes the determining factor should be the kind of business. In some 
small businesses it may be possible to operate successfully on a strictly 
cash basis. But in others, such as an electrical appliance store, the very 
nature of the business may make it impractical to insist always upon the 
full purchase price in cash. 

Occupations and incomes of customers should influence the merchant in 
his choice of a cash or a credit policy. In a community made up largely 
of fanners or ranchers, a small businessman may have to give credit until 
his customers have sold their crops or stock. Lower-income, but steadily 
employed, families often find it necessary to charge purchases from pay- 
day to payday. Buying on credit is the preferred method among many 
higher-income families also. They like to charge purchases, then pay 
for all of them at the end of the month. 

Competitors' policies sometimes goverp. If competing retailers do a credit 
business, it is certain that they have found it a means of increasing sales. 
Undoubtedly, the policy has been a profitable one for them, or they 
would not continue it. 

76 



HOW BEST TO HANDLE YOUR CREDIT AND INSTALLMENT SALES 77 



What are the advantage* of selling on credit? 

The small businessman who sells for credit gains a number of advantages. 
First, he is able to build up a clientele of regular customers. The reason for 
this is that cash customers are anybody's customers. Charge customers are 
customers of record. Other important points are 

Charge customers usually are not as concerned with the prices of goods as 
are those who pay cash. They tend to buy a higher quality of merchan- 
dise, and they frequently buy more of it 

Credit is an accommodation to customers. Because of this, charge cus- 
tomers generally have a feeling of good will toward the store 

Goods can be sent on approval to customers 

Charge customers provide an excellent mailing and promotion list 

Adjustments can be made more easily 

A more intimate relationship can be built up between the customers and 
the store 

Along with these advantages come disadvantages, which the small business- 
man must also consider: 

Capital is tied up in merchandise charged by customers 
Credit adds to the interest charges on money borrowed by the merchant 
No matter how efficient the merchant's collection system, some losses are 
bound to occur. Credit customers may purchase beyond their ability to 
pay 

Credit customers have a greater tendency to return goods than cash cus- 
tomers 

Credit adds to the cost of operations, since an account must be maintained 
and monthly statements prepared and mailed 

Know the principle* of a sound credit system 

Credit can be either an asset or a liability to a businessman. Properly con- 
trolled, it can increase sales and bring a steady, well-satisfied customer. 
Handled in slipshod manner, it can cause an overinvestment in accounts 
receivable, large bad-debt losses, and certain failure of the small business. 

If you give credit, you should understand and apply the six principles of a 
sound or controlled credit system: 

1. Applicants for credit are investigated thoroughly. The first step should 
be the investigation of the customer, or an interview with the appli- 
cant, or both. How you do this is fully discussed on another page. 

2. Decision is made carefully. After completing your investigation, you 
should make a careful decision on the application. In this decision, you 



71 HOW TO RUN A SMALL BUSINESS 

should consider the applicant's character and credit record, his earning 
power and ability to pay, and his capital and property. Along with 
these factors, you may have to take into account the personal back- 
ground of the applicant his social standing, general reputation in the 
community, and business career. 

3. Limit on credit is set. You should not decide to open an account with- 
out considering the dollar amounts involved. The amount of credit 
granted to a customer should be based largely on his income, and will 
vary, of course, with the type of business. 

4. Terms of payment are defined. As a safeguard against bad-debt losses, 
you should have a definite understanding with the customer as to the 
credit terms. Stipulate that payments are to be weekly, monthly, or on 
paydays. In some cases monthly terms are satisfactory. In others even 
longer terms can be used successfully. What should be avoided in all 
cases is the selling of goods on credit without you and the customer 
knowing the exact time payment is expected. 

5. Account is controlled. From the day the account is opened, you should 
control it carefully to see that the customer upholds his part of the 
agreement. If credit is on a monthly basis, permit no further charges on 
an account if it is not paid by the end of the month in which payment 
is due. Others insist on giving personal approval to additional pur- 
chases on such accounts. How much credit should you give? 

Some hold that the limit should not exceed 30 per cent of the cus- 
tomer's monthly income 

Others, more conservative, prefer to start the account with a smaller 
limit, increasing it as the credit relationship with the customer 
proves satisfactory 

6. Delinquent accounts are followed up promptly. When a customer has 
not paid his account within the specified time, suspend the account. 
No further charges should be made until the account is paid or a new 
agreement reached. It is dangerous to allow old balances to be carried 
over indefinitely, or beyond a reasonable period. The main reasons for 
this are 

The older an account becomes, the harder it is to collect. When 

merchandise is no longer new, the customer feels that he is paying 

for a "dead horse" 
Customers have greater respect for the merchant who handles his 

business according to agreement 
Customers with unpaid accounts, fearing the merchant will ask for 

the money, avoid his store and buy elsewhere 
Carrying accounts beyond the agreed time increases the merchant's 

operating costs 

In deciding whether to suspend the account, considerable judgment and 
discretion must be used. In smaller stores, personal contact with customers 
is usually frequent. In the case of old customers with good credit records, 



HOW BEST TO HANDLE YOUR CREDIT AND INSTALLMENT SALES 79 

definite arrangements may be made to pay overdue balances, instead of plac- 
ing them on a cash basis. The amount overdue can be set up as a separate 
account. The customer can arrange to make regular payments on that past- 
due balance, along with the payment of current bills. For instance, if the 
customers owes $40, it may be arranged that he pay $4 a week for 10 weeks. 
Once a new agreement has been reached, the businessman should insist on 
its observance. 

When a customer is able but unwilling to pay, you should act decisively 
perhaps under competent legal advice. The customer should be warned that 
the account will be turned over to a collection agency or to a lawyer unless 
paid by a certain date. Having issued the warning, carry through with it. If 
a small business does not, it will acquire the reputation for being easily put off. 

How good record keeping will aid you in credit so/es 

Record keeping is not a remedy for bad credit practices. But record keep- 
ing can provide the information that will warn the retailer in time if his credit 
business is getting out of control. Record keeping cannot run a credit business. 
But a credit business cannot be run without record keeping. 

What should your records tell you? 

How much extra credit you are in a position to offer. You get this from the 
total amount owned by customers, compared to what you set as the limit 
your business can stand. You cannot do this without records. 

// charge sales during a week (or other p'eriod used to check) are more than 
collections, it may mean that the charge business is increasing. Or it may 
mean that collections are poor. If charge sales amount to more than 
collections the following week, and the next, it may be a positive danger 
sign. There should be a close relationship between collections and 
charge sales. The danger sign is when collections lag behind charges 
week after week. Your records should tell you where you stand. 

Your records should compare charge sales with the amount owed by cus- 
tomers on a given day during each week. That gives an idea of the age 
of the accounts. If terms are weekly, the outstanding accounts at the 
end of any week should approximate the amount of 1 week's charge 
business. Customers do not always pay their bills on time. For that 
reason the amount on the books may be in excess of the charge sales 
during the credit period. 

How fo conduct retail credit interview* 

The interview should be exploited to the fullest, to cement the best of future 
relations. Its importance cannot be stressed too strongly. Many times delin- 
quent accounts can be traced to incomplete interviews. 



10 HOW TO RUN A SMALL BUSINESS 

Tact is necessary at all times in handling actual or prospective customers, 
but especially during this interview. Some customers are sensitive about 
direct questions. They set up a mental resistance. It may injure the desirable 
good relations between store and customer. Indirect questions, in a conver- 
sational way, will more often produce the desired results, 

A New York Department of Commerce check list says you should cover 
these four points during this initial interview: 

1. Who is the applicant? The applicant's identity is of utmost importance 
to prevent mistakes so that the customer may be served promptly and 
efficiently. The full name, as well as wife's or husband's name, is nec- 
essary to identify the particular applicant. It avoids confusing the 
account with those of other members of the family or with other names 
with similar initials. The telephone number is also important for pur- 
pose of communication. The directory may show no telephone. Thr 
applicant may be rooming or boarding. Telephone contact is valuable 
for collection purposes and to verify orders on occasion. Having a tele- 
phone may bear on the question of credit standing and ability to pay. 

2. Can the applicant pay? The ability to pay is essential information. It 
is necessary to learn the applicant's earning capacity. The name of his 
employer, his position, and length of time he has been associated with 
the firm are all important facts. If his present employment has been 
of a relatively short duration, his former employment record should be 
obtained. This should give the interviewer a good picture of his earn- 
ings. If not, the customer should be questioned concerning his other 
income, such as pension, rental income, and earnings of other mem- 
bers of the family. The ownership of real estate, whether encumbered 
or clear, will indicate the strength of his capital position. Commercial 
bank information is of importance, particularly if based upon loan ex- 
perience with the customer. If his savings account is substantial, it is 
another indication of his ability to assume credit obligations. 

3. Will he pay? It is not difficult to determine the willingness of the 
applicant to pay. Local credit bureaus have records indicating how 
individuals have paid their bills in the past. How the customer has 
paid accounts with other merchants in the past is very important. 
Therefore, it is well to obtain the names of firms which have already 
extended credit courtesies to the applicant. They can be checked for 
his credit history. Some firms extend credit on paying habits alone. 
This is usually sound practice where an adequate record of prompt 
payment has been established. In this connection, it is in order to give 
a word of warning about the "pet reference." A credit applicant oftcptj 
refers to one or two stores where he has maintained prompt payment 
but purposely refrains from mentioning others where his accounts are 
delinquent. By clearing all applications through the credit bureau, you 
obtain records of slow accounts, suits, judgments, bad checks, domestic 
troubles, and othe^erogatory items. 



HOW BEST TO HANDLE YOUR CREDIT AND INSTALLMENT SALES II 

4. What credit terms should be given? An important phase of the credit 
interview is to have some definite understanding with the prospective 
customer regarding his estimated monthly requirements. This aids the 
credit manager in his control of the account. It also establishes a tact- 
ful opening for discussion with the customer in the event of unusually 
large purchases or special requests for extended terms. It is important 
that the customer understand the type of credit account he is obtaining. 

How fo check a customer's credit 

When the interview is over, the application should be investigated through 
the local credit bureau. It is an integral part in the extension of consumer 
credit. The bureau verifies the information contained in the application and 
checks the bank and credit references. It adds such other pertinent informa- 
tion as is found on file, such as legal records, claims for collection, newspaper 
clippings, and other information relating to the applicant's responsibility. 

The credit bureau acts as a clearinghouse for credit information in the 
community. It provides a dependable source of information on the credit of 
local customers. The records reveal the actual trade or credit experiences of 
individuals with banks, retail stores, material dealers, finance companies, 
physicians, dentists, or hospitals. Credit bureau files include such highly 
important public records as judgments and deeds, mortgages, chattels, and 
conditional sales. 

In cases where the bureau also operates a collection department, this pro- 
vides much information of value to the bureau files. 

Any reputable merchant, by arrangement with his local credit bureau, 
may obtain these important services. Since all credit bureaus are affiliated 
with the Associated Credit Bureaus of America, Inc., information can be 
exchanged on a national scale. 

The completed report will show whether the credit applicant has means 
sufficient to assume the obligation and pay it according to the terms. 

If there is no credit bureau in the community, the merchant may obtain 
information from other stores and businesses, the applicant's place of employ- 
ment, his bank, and his neighbors. 

When the information developed in credit investigation does not clearly 
suggest a decision, certain other factors might be considered before opening 
or declining the account. They might be 

Favorable factors Unfavorable factors 

Good record of parents Moves frequently 

Married Changes jobs frequently 

Pays rent promptly No bank accounts 

Owns home Slow in paying rent 

Stable employment record 
Maintains checking account 
Maintains savings account 



II HOW TO RUN A SMALL BUSINESS 



How you can earn profit* from installment so/es 

Properly managed, installment selling can increase a retailer's sales and 
profits. Handled haphazardly, it can cause an overinvestment in accounts 
receivable, large losses, and perhaps eventual failure of his business. 

What goods are sold on the installment plan? As originally used, install- 
ment selling was limited to durable or "hard" goods, such as refrigerators, 
ranges, home furnishings, and musical instruments. These have a long life and 
a relatively high value. They can be repossessed and resold by the retailer if 
the customer fails to make payment. - 

In recent years, the installment plan has been broadened to include many 
nondurable or "soft" goods, such as clothing, blankets, home furnishings and 
accessories, and sporting goods. Soft merchandise is often of low value and 
either cannot be readily repossessed by the retailer or is not worth repos- 
sessing. 

What is the cost of installment selling? When you do any form of credit 
business, your capital investment naturally must be larger than if you sold 
strictly for cash. 

If you sell on the installment plan, this investment must be considerably 
larger than when your credit sales are of the regular or open charge- 
account type. Money tied up in installment sales is "frozen" for a long 
time unless arrangements are made to transfer the installment contracts to 
a sales finance company. 

Many small businesses do this in order to cut down on their capital re- 
quirement. Thus they concentrate on their sales efforts. 

If a retailer's volume of installment sales runs to $1,000 a month and 
his terms call for customer payment of 10 per cent down and the balance 
in 12 monthly installments, he has tied up over $5,850 of his working 
capital in a year's time. That assumes all accounts are paid on time. 

"When he allows his customers a longer period in which to make pay- 
ment, his working-capital needs also are increased. If he allows payment 
over 24 months instead of 12, the working capital required to carry the 
sales is practically doubled, increasing to over $11,250. 

What are the principles of successful installment selling? Three prin- 
ciples are of great importance: 



The down payment should be large enough to make the purchaser 
that he is the owner, not merely the renter, of the merchandise 

If the article is repossessable, the unpaid balance on it always should be 
sufficiently below resale value to protect the retailer frtim loss if repos- 
session becomes necessary , / 

The monthly payment| should be large enough tcj increase the cus- 



HOW BEST TO HANDIE YOUR CREDIT AND INSTALLMENT SALES 1} 

tomer's claim to the article faster than it will depreciate from time 
and average use 

The down payment required by retailers on purchases of hard items varies 
considerably. That may depend upon the type of merchandise. They run 
from less than 10 per cent to 33J/3 per cent or more of the total price. A 
payment of about 10 per cent is the most common requirement. 

Retailers generally ask a higher down payment on soft merchandise. 
It decreases in value more rapidly through use, wear, or changes in fashion. 
The minimum down payment is usually about 20 or 25 per cent. 

Granting installment credit to your customers adds in several ways to 
your cost of doing business. For example 

You must pay clerical help to maintain records of installment sales 
You may have to borrow money, at interest, because much of your own 

capital is tied up in installment sales 
You must pay for legal services when collecting from customers who arc 

unwilling to pay 
You inevitably must bear some bad-debt losses 

In order to make your installment business pay for itself, you should place 
a carrying charge upon time-payment sales. It should be based neither on 
guesswork nor on the charges made by your competitors. It should be de- 
termined by a thorough study of the cost of handling your installment credit. 
When making an installment sale, you should explain carefully to the 
customer: the amount of the carrying charge; the saving that results if 
his down payment is increased and the period of the contract shortened. 
If a contract is paid out before maturity, you should make an equitable 
refund on the carrying charge. 

To sell successfully on the installment plan, you need a sound, effective 
credit system. 

The fact that you can repossess any "hard" articles you sell does not 
lessen the need for close control over your credit sales. Repossessions seldom 
are profitable. Time, labor, and legal expense are involved. In many in- 
stances, too, repossessed articles prove unsalvageable. 

Good installment credit operations require that you investigate new cus- 
tomers carefully. Before accepting a new installment customer, you should 
be certain that he is a good risk. The mechanics for this step are the same 
as in other retail credits. 

From there on, good management moves this way: It has sound terms 
and explains them carefully. It is essential that you be certain that the cus- 
tomer understands the rate and manner in which he is to make payments 
and the length of the contract. In addition to explaining carefully the terms 
to the customer, and as a further guard against misunderstanding, you 
should send him a written statement of them. 



M HOW TO RUN A SMALL BUSINESS 

You should have a prompt and consistent follow-up on installment pay- 
ments that become past due. 

In one effective method, used when contracts are on a monthly payment 

basis, the first notice is sent to the customer 1 to 5 days after due date 

of the delinquent payment 
If payment is not made, second and third notices or telephone calls are 

made at intervals of 10 days. If the account is still unpaid after the 

third notice, a collector is sent out 

When a customer falls behind in a payment, take action before the next 
payment is due. The customer who cannot make one payment seldom will 
be able to make two at the same time. 

If the purchaser of a repossessable article misses a payment, but has made 
a number of previous payments satisfactorily, you should attempt to get 
the past-due payment or obtain a new arrangement before the next install- 
ment is due. Repossession, in a case such as this, should be only a last 
resort. When a customer misses his first or second payment, however, you 
generally should obtain the payment or repossess the merchandise. Cus- 
tomers who miss either of these payments usually are poor credit risks. 

When the purchaser of a nonrepossessable article fails to make a pay- 
ment, you should either obtain the payment or reach a new understanding 
before the next payment is due. 

If a customer's installment payment is past due, you should suspend his 
credit privileges until payments are again being made promptly. The reason 
for this is obvious. The customer who cannot pay his present installments 
certainly could not pay additional ones. 

Instead of merely threatening a customer who has fallen behind in pay- 
ment or repossessing the merchandise, you often will do better to propose 
a plan by which matters can be straightened out. Perhaps a friendly talk 
will be enough. 

But if the customer is truly in financial difficulties, you may have to 
change the terms of the contract to make payment easier. You may reduce 
the size of the installments and lengthen the period of the contract; or 
extend the life of the contract, adding the past-due installments, plus a fair 
charge, to the end of it. Once a new agreement has been made, you should 
enforce its strict observance. 

Occasionally, of course, you will have a customer who is able but unwill- 
ing to pay. When this occurs, you should act decisively. 

In the case of durable merchandise, this action can be either repossession 
of the merchandise or a suit to obtain judgment. That always should 
be a last resort. But it never should be delayed when it is obviously 
the only solution 



HOW BEST TO HANDLE YOUR CREDIT AND INSTALLMENT SALES 91 

When the merchandise is nondurable, your collection efforts must be to 
press the customer for payment. Or turn the account over to a collec- 
tion agency or a lawyer 

How to check the credit standing of a businessman 

There are many sources of information concerning a customer's business. 
Especially important are the general mercantile credit agencies and the 
special mercantile agencies dealing with your particular trade. Others 
include 

Suppliers that deal with your customers 
Credit bureaus operated by trade associations 
Data collected by your salesmen 
Information secured from banks 
Data obtained from the customer himself 

Financial services such as Standard and Poor's, Moody's, or Dun & Brad- 
street's 

The general mercantile agency has much information. Its rating refer- 
ence books, special reports, and credit-checking agencies will help. The 
difficulties in dealing with the general agencies are these: 

Reports are generally not current unless you request special data 
The mercantile agency cannot secure financial information in all cases 
Reports do not cover your customers' credit completely enough so that 

you can find out the exact 'status of the accounts 
The agency cannot furnish exact ledger transcripts to permit you to have 

detailed information 

It does not cover the personal side of the individuals or give a generaliza- 
tion as to their standing in trade circles 

Sometimes you can use the special mercantile agencies. If there is such 
an agency in your own trade, you will find it of great use. As a general 
rule, their reports are somewhat prompter than those of the general agency. 
On the other hand, they often have too limited facilities to permit thorough 
analysis. 

You will probably find that an exchange of credit information with other 
suppliers is likely to give you the best analysis of the current status of your 
customers. It is one of the best methods of gathering opinions about the 
management, character, and quality of your customers' business. Generally, 
the information is more up to date than that normally secured from general 
agencies. 

Use your salesmen to secure all possible information. You will get results 
if you instruct your salesmen on how to 



86 HOW TO RUN A SMALL BUSINESS 

Obtain current financial condition 
Study the character and trade practices of a customer 
Avoid excessive purchasing or overstocking by the customer 
Aid the customer in the development of his business, particularly in ex- 
tending sales and goodwill 
Furnish customers with exact information as to the manner in which 

your firm will deal with them 

Adjust any difficulties that arise between your firm and the customer, 
thus gaining further knowledge of how much credit you ought to 
extend 

But be careful of the usual difficulties when you permit salesmen to be- 
come credit reporters. Normally, salespeople are difficult to instruct. They 
simply do not understand the need for credit information. Too often their 
compensation depends on the volume of sales produced, and they may 
extend credit too freely. Sometimes they are unwilling to offend customers 
by the type of inquiry you may require. Too often they do not like to be 
bothered with credit information. On occasion they are decidedly antago- 
nistic to reducing their volume and are not cooperative. But in a lot of 
cases they get results that are very important. 

Sometimes you can use local attorneys to considerable advantage. A 
simple request to local counsel for a report on a credit status may be of 
considerable value. Use local attorneys particularly to discover if liens, 
claims, judgments, or actions are pending against the debtor. Sometimes 
reports by local attorneys are prejudiced in favor of their neighbors. And 
too often compensation is insufficient to permit a proper study. 

You may find that personal interviews with proposed customers yield first- 
rate credit information. Use the meetings to encourage complete expression 
by the customer about his prospects, finances, and policies. Use them to 
formulate personal impressions of the risk and as a basis for analysis of 
financial statements. Interviews at the customer's store or office are most 
effective in Securing first-hand impressions of his management and business 
practices. 

Get a financial statement of your customer, if that is possible. If you do, 
be sure you know the full use of the false-statement laws. He may be 
subject to prosecution if: he makes a false financial statement; he gives it 
to you intending that you should rely on it for credit purposes. Know, too, 
the Federal mail statutes that make it a crime to send a false statement 
through the mails. 

How fo evo/</a/e a ias/nesj for credit purposes 

Extend credit only on the basis of present ability to pay, but make credit 
policies flexible. Expand credit in recovery phase of business cycle; contract 
when recession is imminent. 



HOW BEST TO HANDLE YOUR CREDIT AND INSTALLMENT SALES 87 

Your first rule in the determination of the amount of credit to extend 
is the customer's character and ability. You should 

Evaluate characters, reputations, and business abilities of those directly 
concerned with conducting the business. Are they conservative? Ven- 
turesome? Intelligent? Have they high living standards? 

Take salesmen's credit information with a grain of salt don't forget 
they want to earn commissions 

Good management also studies collateral circumstances: 

Determine whether the credit requested is unseasonable or otherwise 

unusual for the type of business concerned 
Check on the credit prospect's location and, generally, business and other 

relevant conditions in that neighborhood 
Note whether credit information is readily furnished and if answers are 

to the point and unevasive 
Check on other enterprises of prospective debtor; do they enhance his 

credit risk? 
Avoid extending too much credit in one territory or creating competition 

with others of your customers in that territory 
Check the highest credit line at any time to a particular customer with 

what he wants now, under current business conditions 
Check hazards of fire and other disasters to see whether insurance is 

adequate 

Good management in small business requests periodic financial statements, 
preferably those certified by reputable independent accountants. It uses an 
efficient and complete printed form in credit-checking routine, avoiding the 
more costly individualized correspondence. 

It may do a lot of other important things: 

Participate actively in the work of various associations compiling credit 

data 
Devise a method of automatically "flagging" an account for attention 

when approaching its credit limit 
Look for and analyze distress signals, such as part payment being made, 

or notes offered in payment 
Know in advance what guaranties or securities may be required, should 

the circumstances suggest their need 
Know the business of the customer its hazards, its personnel, its sponsors, 

and its links to other enterprises 
Check on outside mortgages, liens, or control on the management by 

other creditors or interested parties 
Understand the nature of the business of the customer. If the extension 

is for a new venture or side lines, find out if they are hazardous 



88 HOW TO RUN A SMALL BUSINESS 

See whether the customer's business is subject to unusual price cutting 

and excessive risks 
If the customer is in a town with one industry, determine its condition 

before extending too much credit 

See if persons alleged to be in charge of management are actually figure- 
heads to cover incompetent backers 
Find out if financial houses or banks have representatives in the business, 

and why 
Understand the connection of the officials of the company with other 

organizations 
Ask for copies of the corporate bond indentures and mortgages to find out 

what assets can be relied on in the event of difficulties 
See whether the company is tied in with any other companies likely to 

affect the risk 
Get the facts of any bankruptcies or receiverships mentioned in the history 

of the credit prospect 
Be guided by whether or not others have ever had to institute legal action 

for collection 
Gather all available particulars about any fires in the history of the credit 

prospect 
Search public records for judgments and other liens that may not have 

been mentioned in the customary sources of credit information 
Find out if there is any contest by insurance companies or underwriters 

about fire losses 

How to analyze your customer's financial statements 

Make sure the statement received reflects most recent conditions. See 
that it is received by mail, which gives full advantage of the penal laws. 

Be sure the statement is based on fact rather than on estimate. Place 
more reliance on statements that are certified to by independent, reputable 
accountants. Read their certificates and comments. 

Ascertain whether or not the statements are recent and contain informa- 
tion in sufficient detail to enable proper analysis. You should insist on 
sufficient detail. Weak spots are obscured by generalities and broad classi- 
fications. Also ask that supporting schedules be furnished on important 
items, such as a schedule and analysis of receivables, investments, inven- 
tories, or creditors. Be sure your data offers comparisons with preceding 
periods and helps to discover trends. 

Many essential facts do not customarily appear on financial statements. 

For example, it is up to you to find out: what contractual commitments 
the customer has at higher- than-market prices; if the customer has unful- 
filled contracts for sales at too-low prices. 

It is up to you to inquire if "cash items" such as i.o.u.'s, payroll advances, 



HOW BEST TO HANDLE YOUR CREDIT AND INSTALLMENT SALES 89 

and loans to officers and employees are contained in what is represented as 
"cash on hand" Study these points, too: 

Find out whether the customer's money is on deposit with a bank that 

also carries an outstanding loan of his business. In such a case the 

money is usually encumbered directly to the extent of that loan 
Inquire how much of the available cash is earmarked for more or less 

immediate payment of wages, dividends, bonuses, loans coming due, 

and purchase commitments or expansion programs 
See if the cash position is adequate for anticipated business requirements 
Check on unusually large cash balances to see if they are indications of 

inefficient use of capital 
Check to see if cash is really available or is held by subsidiaries, affiliates, 

trustees, or agents 
Check on unusually low cash balances to see if assets such as accounts 

receivable or inventories will have to be pledged for losses to the 

disadvantage of general creditors 

Accounts receivable on the customer's statement must be studied in this 
way to show what they are worth: 

Have them grouped into age groups, and compare them with Credit 

terms 
Ascertain with some definiteness what portion of the receivables may be 

classed as "good," which can be counted on for payment when due, 

and which are "bad" 

Find out which accounts are past due, and why 
Check credit of each substantial past-due account as well as unusually 

large current accounts. Check to see if the sales to them are bona fide 
Be vigilant as to whether or not some accounts have been sold or assigned, 

without being so indicated 
Eliminate from the total of receivables any accounts that represent goods 

shipped on memo or consignment or accounts for goods sold but not 

shipped; these charges do not constitute proper receivables 
Look into the treatment of goods shipped to branches, which should be 

shown as inventory rather than as a receivable from the branch 

Set up reserves for discounts and allowances, if they are not created by 
the customer. View with disfavor any attempts to obscure loans to officers 
and employees by including them with trade accounts receivable. Also check 
the ratio of sales to accounts receivable for several periods. An increasing 
return reflects a favorable business trend. 

Study of notes and trade acceptances receivable includes the inquiry to 
find what portion is fully negotiable and what portion is restricted, what 
notes are worthless and should be written off, and a great many other steps; 
for example 



*0 nOW TO RUN A SMALL BUSINESS 

Find out if the practice is to hold notes until maturity or to discount 

or sell them 
Ask, in case of notes discounted or otherwise pledged, what the pledger's 

contingent liability amounts to, because of indorsements or other forms 

of guaranties 
Break down the total notes receivable into three classes 

Those originating directly from sales 

Those in payment for open accounts 

Those representing renewals of old notes 
Insist that notes from officers and employees be clearly shown separately; 

scrutinize dates, and compare with earlier statements to spot renewals 
Find out whether presence of notes receivable is usual in the business. Or 

is it indicative of laxness in collecting, or bad accounts? 

Segregate trade acceptances from notes. Review them on their own 
merits. Trade acceptances arising out of original transactions are usually 
considered better than trade notes. 

Use your findings to determine what amount should properly be shown 
under current assets and what should be shown among noncurrent assets. 
Beware of notes that may be stuffed in to inflate current assets. In that 
category look into notes that may represent unpaid stock subscriptions. 

Many steps ought to be taken about inventories before their value is 
judged. That may include these steps: 

Inquire whether inventories are kept under control by means of accurate 
and detailed stock records 

Guard against the inclusion, in inventories, of goods received on consign- 
ment 

Ascertain if slow-moving, obsolete, or shopworn items are regularly elimi- 
nated from the inventory accounts 

Inquire whether all items of inventories have been billed for and paid or 
liability included in accounts payable 

Make sure all items sold and billed, but retained for customer disposition, 
are omitted from inventory 

Insist that the method of evaluating the inventories and any changes in 
method be clearly set forth 

If method of inventory valuation used was unsatisfactory cost, lowering 
of cost or market, last-in-first-out adjust valuation accordingly be- 
fore proceeding with analysis 

Ascertain whether inventories are pledged or encumbered 

Estimate liquidity of inventories with consideration of seasonal changes, 
priorities, freezing orders, or other factors 

One of the important problems is to see that finished goods and goods 
in process are costed under approved tenets of cost accounting. Cost used 



HOW BEST TO HANDLE YOUR CREDIT AND INSTALLMENT SALES 91 

should not be in excess of market price, less the cost of selling and dis- 
tributing. 

Important, too, is computation of significant ratios: inventories to cur- 
rent assets, to total assets, to sales, to receivables, and to purchases. Then 
comes the job of comparing these ratios to the corresponding ones of prior 
periods. Reasons for any considerable variation should be reviewed. And 
the ratio should be reviewed with averages currently prevalent for success- 
ful firms in the industry or trade. 

Don't assume investments are cash. Obtain, whenever possible, a detailed 
schedule of investments. Then examine the quality of the investments to see 
if they are speculative. Other important tests are 

Check current yield on cost and on market values 
, Find if the securities are free or pledged 

Inquire why they are held 

Calculate the ratio of investments to total working capital 

Determine if funds are tied up when they should be put to use in the 
business, rather than in someone else's business 

See if the securities are quoted in local markets and on exchanges; if not, 
their value may be discounted, and they should not be shown as cur- 
rent assets 

Segregate investments in subsidiary or affiliated companies; these should 
under no circumstances be shown as current assets, no matter how 
marketable, because the intent is probably not to market but rather 
to hold for control 

Do not include a company's own shares among current assets 

Separate insurance on the lives of officers from investments; proceeds 
due from insurance company may be a long-deferred receivable 

You should then review the other assets listed. See that investment in 
furniture, fixtures, and plant equipment is reasonably proportionate to the 
size of the business. See that adequate allowance is made for depreciation. 
Find out if fixed assets are kept in good serviceable condition through ade- 
quate repairs and maintenance. 

Check whether unpaid taxes or assessments are liens that are not shown 
in the statement; if recent alterations or improvements are indicated, check 
also for possible mechanics' liens. 

Be cautious in evaluating such intangible assets as patents, goodwill, fran- 
chises, rights, trade-marks, etc. Their real worth is usually in the future 
earning power. That may have no relation to the book value. 

Point one in your study of debts is to segregate accounts payable into 
such natural classifications as trade accounts, loans, taxes, wages, etc. Then 
compare each classification with earlier statements to ascertain principal 
fluctuations. Ascertain the reasons. From there on you can make this study: 



92 HOW TO RUN A SMALL BUSINESS 

Look into any amounts shown as due officers and stockholders, and get 
all the facts on how these obligations were incurred 

Investigate the reasons for past-due unpaid accounts 

Make certain all known and determined liabilities are reflected in the 
statements 

Inquire as to nature and amount of all contingent liabilities 

Inquire into the status of taxes that may be in dispute, for which no liability 
is shown 

Find out whether obligations are secured in any manner, and, if so, de- 
termine the collateral given; the pledged assets may be shown either 
on the asset side or as a deduction from the liability, but you may 
annotate it as improper to show the liability as a net figure 

Obtain a schedule of ratios showing how current average monthly in- 
debtedness compares with current average monthly cash collections 

Determine what portion of the current liabilities relates to merchandise 
or materials included in inventories 

Satisfy yourself as to whether loans due officers and stockholders indicate 
that bank credit is not available or whether the lenders have particular 
confidence in the business 

Get a full explanation of why any past-due obligations have not been paid 

Get a clear understanding of how long-term obligations were incurred. 
To what extent has borrowed money been used to acquire fixed assets? How 
is it proposed that such borrowings be repaid? Then look to these points: 

If there is a mortgage indebtedness, find whether or not the mortgagor 
is "on the bond" and has "personal" liability to pay. If not, only the 
encumbered property can be looked to for liquidation of the debt 

Inquire into release clauses, contingent modifications, and, of course, date 
of maturity, interest rate, and amortization provisions 

With bond issues, determine in what manner they are secured, i.e., by 
mortgage or by lien on anticipated future income 

Ascertain the principal terms and relevant facts of agreements, indentures, 
and prospectuses concerning a bond issue 

Compare the total authorized bond issue against the total issued and out- 
standing. Inquire if additional issuing is contemplated 

Obtain the terms and provisions of any sinking funds that have been 
established. Determine if sinking-fund provisions have been lived up to 

Look into any conversion provisions in all instruments representing out- 
standing indebtedness. Attempt to estimate the effects of exercising 
the conversion privileges 

Find out who holds the outstanding securities and how they were dis- 
tributed 

Be cautious of "contingent" liabilities. They may become actual if the 
contingency occurs. Determine the extent and status. See if they are ade- 



HOW BEST TO HANDLE YOUR CREDIT AND INSTALLMENT SALES 93 

uately disclosed in the financial statement. Determine, specifically, whether 
le company whose statement is being analyzed has indorsed or otherwise 
uaranteed any obligations of others. This includes negotiable instruments 
>ld or discounted. 

If the statement is that of a business other than a corporation, inquire 

individual firm members or partners have become contingently liable by 
idorsements and guarantees on obligations of others. 

Do not overlook damage claims, lawsuits, and disputed assessments. They 
ften are not recorded on the books until suits are settled. 

Ascertain if the business is liable on a mortgage bond in a case where the 
lortgaged property has been sold to others subject to the mortgage. At- 
;mpt to estimate the probability of a deficiency judgment. 

Composite balance sheets and income statements of successful firms of 
pproximately the same size as that of the prospective customer may help, 
lany such figures are now available. Good management often checks the 
gnificant ratios on composite statements. Then it compares the ratios of 
le prospective customer and seeks an explanation of unfavorable variations. 

An especially sensitive indicator is the ratio of current assets to current 
abilities. When this ratio falls continuously, it is a sign of deterioration. 
Another important ratio is that of net worth to total debt. If this ratio con- 
nues to fall, it may indicate disaster. 

r ow to collect overdue accounts 

The small businessman must be informed about the causes of the de- 
nquency, not guess or follow stereotyped routine. 

Then he must determine with intelligence whether slow rehabilitation or 
ecisive action is more desirable. Collection often takes special aptitudes 
nd knowledge. They include 

Insight into the behavior of people; a knowledge of psychology 

Ability to be persuasive and stimulate others to action 

Capacity for following through; absence of indecision or tendency to 

dawdle 
Ability to write letters and use telephone with firmness and conviction, 

yet without loss of respectfulness 

Cold logic of mind but friendly manner and sympathetic disposition 
Knowledge of the ruses and tricks of delinquents 

Collection pointers. A sale beyond the ability to pay means the unhappy 
irth of a bad collection problem. But suppose you have done it. Now 
ou must collect. Perhaps you can use these time-tested aids: 

Call upon your debtor personally, telephone him, or write him. The size 



*4 HOW TO RUN A SMALL BUSINESS 

of the claim, the relative danger of loss, the cost involved are all fac^ 
tors in determining which to do 

Get in writing, by responsive letters if possible, or by taking security notes 
or other instruments, admission of facts that eliminate possible claims, 
defenses, or counterclaims 

See if it is advisable to charge interest sometimes this gets action 
Offer some bargains; this may induce a debtor to clean up his account 
Use the telegram; it spurs and suggests action and successfully competes 

for attention 

A person-to-person telephone call may do the trick 
Sometimes a good heart-to-heart talk after a good dinner is effective 
Shrewd inquiry to debtor's bank sometimes impels action 
Sympathetic help often encourages more effort to pay up. Help the 
debtor save face; have a whipping boy handy. This often helps you 
get paid 

Get him to start with a token payment, to start collection ball rolling 
If he is sluggish, prod him first gently, then become increasingly firm, re- 
taining his goodwill for future business. If he is on brink of disaster, 
don't dally; act swiftly to save him if you can 

If he is dishonest, "beat him to the punch" by frustrating his designs, with 
or without cooperation of other creditors. Don't "pussyfoot." If con- 
fronted with bad account, get collection department under way 
Make your plan of debt payment an accomplished fact. Exact promises, 

and press him to fulfill them 

Get collateral security, notes, dated checks, sureties, or other feasible 
assurances of payment perhaps return of merchandise or extra allow- 
ance is acceptable 
Never be satisfied with signed papers that merely presage a business 

funeral; get signatures of responsible persons 

Watch debtor's pattern of action after plan of payment is placed into 
.effect to see if he is mulcting the business, giving preferences, etc. 

One collection practice that might work is offer of prizes to salesmen on 
basis of points, for collections on old accounts. The older the account, the 
larger the number of points. Other tricks that have worked include: 

Write the debtor saying you guess he is withholding payment to get your 
whole sheaf of collection letters you are sending them all at once to 
get the payment now. Enclose a set of such letters 

Send a debtor a hat or cigar with a personal note explaining that you 
(the collection man) bet your boss this accou^^ould be paid by this 
week and lost 1 $?;*;' 

Telegraph, telephone, or write the debtor that his account is about to be 
sold to a tough collection agency in his community but before subject- 
ing him to merciless methods will he arrange to settle 

Offer a special gift to debtor if payment is made this week 



HOW BEST TO HANDLE YOUR CREDIT AND INSTALLMENT SALES 95 

Use funny, plaintive, and figurative cartoons, pictures, etc., stuck to col- 
lection letters, such as baby crying, a sphinx, etc. 

Legal-looking forms demanding collections, personally served or deliv- 
ered by registered mail, may be effective for installment collections. ' 
Check if this is legal in your community 

Offer to get some orders for delinquent customer to reduce his stock, etc. 

Send huge letter or scroll that in oversized letters requests payment 

In your collection letters "talk turkey" about Thanksgiving time, have 
heart-to-heart talks around Valentine Day, and stress golden rule about 
Christmas season 

Send checkerboard to debtor telling him to make next move 

Much has been said about collection letters. Experts list these rules: 

Don't write anything that you will be sorry for later 

Avoid bad taste, insults, recriminations, and defamation 

Be friendly, yet firm and confident in tone 

Use impersonal forms when prodding is needed 

Turn complaints into goodwill by being helpful 

Where appropriate, show that effective collection policy is followed to 
keep up quality of service or product at minimum prices for all cus- 
tomers 

Remember that a soft answer turneth away wrath. Whether to be solemn, 
humorous, angry, or gentle in tone depends on the personality of the 
recipient as well as the occasion for the letter 

Experts urge that letters be easy to answer. Perhaps stamped envelopes 
should be enclosed, or notes already filled out. 

Know the important laws affecting your collection methods 

The small businessman and his lawyer ought to have a couple of sessions 
talking about the way the law affects collection efforts. We got these notes 
that way: 

The acceptance of a promissory note from a debtor, particularly if it 
is indorsed by a third party, will usually prevent you from taking action 
until maturity of the note. Extensions induced by fraud will not be binding. 
An extension by you may release indorsers, sureties, guarantors. If you are 
using trade acceptances 

See that they are called trade acceptances. The face of the documents 
should contain a statement that the debt arises from the purchase and 
sale of merchandise 

Make them definite orders to pay, without any qualifying conditions 
See that they are "accepted" in writing across the face 



96 HOW TO RUN A SMALL BUSINESS 

Don't use the words "per invoice of" or any other restrictive language 

beyond that absolutely necessary 
See that acceptances mature not more than 90 days from the date of 

presentation 

Here is the way to make full use of the false-statement laws and the 
Federal mail statutes: 

You can prosecute if your customer made a false financial statement, 
intending that you rely on it for credit purposes, and you parted with 
value relying on it 

The statement should be in writing. Consider the use of financial state- 
ments for your customers, so printed that when folded they make their 
own mailing envelope. That furnishes proof of mailing required when 
false statements are used 

When statements are received by mail, preserve the envelopes. Note on 
them the date received and the signature of the person receiving them. 
Have these witnessed and attached to the statements themselves 
Statements of opinion are not actionable. They must be statements of 
material fact, misrepresentations as to 
Amount and nature of assets and liabilities 
Basis of valuing assets 
Character of assets and liabilities 
Profits made 

Amount of sales and terms of sale 
Percentage of profit on sales 
Amount of goods produced 
Nonexistence of liens and assignments 

See that all blanks are filled in on your statements and make inquiries 
as to guaranties, indorsements, and other contingent liabilities. The 
debtor's failure to mention them may not be actionable 
Get new statements periodically. Statements are generally effective for 

a reasonable time only 

Make use of public statements those to stockholders, articles of incorpo- 
ration or partnership 

Statements made to mercantile agencies are generally treated the same 
as though made directly to the creditor. But in replying on these state- 
ments, consider their age and find out which statements were made by 
the debtor and which by the agency 
Enter into a stipulation with the debtor that he, will notify you of any 

material unfavorable changes in his financial condition 
If you know of any facts that might reasonably throw some doubt on the 
truth of the debtor's statements, you should make appropriate inquiries 
before you rely on them. If you know that the debtor made some 
material false statements, don't deliver merchandise or part with value 



HOW BEST TO HANDLE YOUR CREDIT AND INSTALLMENT SALES 17 

relying on them. Do nothing that might be a waiver of your right 

of redress 

In dealing with partnerships, the firm signature is generally equivalent 
to the signature of all the partners. As a rule, it is not necessary to exhaust 
the firm assets before proceeding against the individual partners. But you 
can proceed against a retired partner if you have not received proper notice 
of his retirement and if you had been doing business with the firm prior to 
that date. Be careful to note whether you are dealing with a limited part- 
nership. In that case, not all the partners are personally responsible for the 
firm's debts. 

If you have a judgment against an individual partner, you may levy 
against his interest in a partnership but not against the firm's assets. The 
partnership's creditors will get priority over you with respect to the firm's 
assets, and generally, the reverse is also true you will get priority over 
them with respect to the partner's private property. 

Check the laws as to marshaling of assets between firm creditors and 
individual creditors of partners. A partner has no authority to transfer to 
you any of the firm's assets in payment of his personal debts. If he does, 
the firm can generally recover the property transferred. Your lien will 
attach only to the surplus remaining after the affairs of the firm have 
been settled. 

In transactions with social clubs, hospitals, cooperatives, and other unin- 
corporated associations, make sure the party you deal with binds the other 
members. See whether the obligation incurred is within the scope of the 
organization's purposes. 

When dealing with corporations, make sure the person you deal with can 
bind the corporation. And remember these points: 

Stockholders who have not fully paid for their stock are directly liable 
to the corporation for any unpaid balance and therefore indirectly 
liable to the creditors 

Directors of corporations are personally liable to creditors when corpo- 
rate assets have been depleted through unlawful acts committed with 
their knowledge or consent, or there is illegal' payment of dividends 
or gross mismanagement 

Officers of corporations are personally liable to the stockholders and the 
corporation for loss or damage arising out of: any acts beyond their 
powers, unless later ratified by the corporation; losses resulting through 
their neglect, mismanagement, or wrongdoing; breach of trust 

In taking an assignment of your debtor's accounts receivable or other 
assets, see whether any future accounts are included. If so, check whether 
the law in your state permits the assignment of such accounts. Find out 



* HOW TO RUN A SMALL BUSINESS 

from counsel how much "dominion and control" you may safely allow the 
debtor to retain over his accounts. 

Is it necessary for you to notify the accounts of the assignment? Does 
the law require your debtor to file a notice of intention to assign and to 
maintain certain records, etc.? If so, check to see that he complies. 

If any of your claims are, or can be, secured by a guarantor or surety, 
see that the guaranty is in writing. Here are some points: 

If the guaranty is given after the debt has been incurred, it should be 

supported by good legal consideration 

Make it a practice to notify the guarantor that the guaranty has been 
accepted. Before accepting a guaranty 
Check the right of the guarantor to act as such, particularly in the 

case of corporations 
See that the surety is advised of any facts which might deter him 

from acting as such 

Notify the guarantor promptly of the debtor's default. If there is more 
than one surety, be careful about discharging any of them. If you do, 
you may also be discharging the others. Here are some rules: 
Don't make any change in the terms of the obligation or otherwise 

alter the guarantor's risk without his consent 
Don't grant the debtor an extension of time without the guarantor's 

consent 

Don't surrender any collateral security deposited by the debtor 
Don't discharge the principal debtor unless you also want to dis- 
charge the guarantor 

In trying to collect past-due accounts^ don't use a post card if you are 
threatening legal action or reflecting on the debtor's character or conduct. 
Don't use envelopes or displays obviously intended as a reflection on the 
debtor's character. In writing or speaking to or about your debtors, see that 
what you say or write doesn't go beyond the truth, even by implication. 
Don't repeat slanderous or libelous statements originally made by others, nor 
say or imply that the debtor is bankrupt, dishonest, has no credit, etc. 

If you must make such statements, see that no one but the debtor hears 
or reads them. This includes your own stenographer and the debtors secre- 
tary, clerks, associates, etc. Don't take the attitude that you are through 
with a matter when it has been turned over to an attorney fo? collection. 
You should know the legal remedies available in order to help yqF attorney. 
Your knowledge of the particular facts will frequently be of great assistance. 
Particularly, discuss remedies with counsel in cases where 

Title has passed but you still have possession you may have a lien 
Title has passed but possession is with public carrier you $iay have 
special rights 



HOW BEST TO HANDLE YOUR CREDIT AND INSTALLMENT SALES 99 

Title has passed and delivery has been made and the buyer refuses to 

pay in accordance with your agreement 
The buyer refuses to accept and pay for the goods 
The buyer breaks the contract before you finish 

You might discuss with your attorney attachment proceedings (i.e., a pre- 
liminary levy on the property of the debtor) when the debtor- 
Is a nonresident of the state and the property to be attached is within 

the state 

Has left the state with the intention of defrauding his creditors or pre- 
venting legal action against him 
Goes into hiding 

Has removed or concealed his property 
Is about to do so, for the purpose of defrauding his creditors 
Has secured goods from the creditor by fraudulent means, such as the 
making of a false financial statement 

You should know about third-party proceedings under which money or 
property due your debtor is applied on your claim when the debtor has an 
established right to the money or property, or a third party has possession 
of the property by means of a fraudulent transfer. 

Avoid proceedings in bankruptcy if you can find other and better reme- 
dies. See if another plan will realize more money for you than is possible 
through bankruptcy. You then will keep an honest debtor in business and 
might make up any losses through subsequent dealings with him. 

Do you want to give your customer a chance to save his business or get 
a fresh start in a new business, free of debt and without the adverse pub- 
licity and effect of bankruptcy? You have a choice of a private agreement 
between the debtor and his creditors without the intervention of the courts, 
or with the assistance and protection of the courts. In these cases, study 
with counsel 

Alternative procedures provided by other Federal and state laws, such 

as assignments for benefit of creditors 

The possibility of using the Federal bankruptcy law (Chandler Act) itself 
Use of the equity and chancery courts 



6. HOW TO FINANCE YOUR BUSINESS 

Your business needs capital for two main purposes to acquire JixedassstE 
f r -WgjfcfefcJCftPtek The latter is the operating capital you use for 
salaries and wages, purchasing supplies and inventory, and extending credit 
to your customers. ""* .*-- 

There are three ways in which you can obtain capital: 

1. Through investment by yourself and others interested in the business. 
This should be sufficient to secure the fixed assets which cannot be 
financed upon long terms at reasonable rates of interest. It should 
also provide an important portion of your working-capital needs if 
possible, the initial or minimum working funds, so that loans need 
be used for only seasonal or expansion purposes. 

2. By borrowing money from one of many places which are reviewed in 
this chapter. These might include: government sQurc^.Jik..RFC or 
Federal reserve banks (our government is very conscious of the need 
to Kelp^smalTliusihess today and is constantly shifting financing plans 
and laws to give aid) ; insurance brokers (life insurance companies 
are often anxious to mate loans; your broker may be able to check 
through for you) ; full use of the "business opportunity colurrjju #/ 
J^*P&&!> a very useful source for financing (keep reading the ad- 
vertisements of those with funds to lend). Other sources include: 
extending your terms with creditors; getting advances from your cus- 
tomers; taking negotiable paper from customers as soon as you "can 

"get it, ai&fSlof of others discussed in this chapter. 
3." Through retaining profits in the business from year to year. 

Should you use capital stock or long-term obligations for equity capital? 

How should you determine whether to secure permanent capital by issu- 
ing capital stock or some kind of long-term bonds or notes? You should 
seek capital through stock 

If you want to avoid debts; you can raise what you need from sale of 
some of the many kinds of stock described in Chap. 9 

If the economy is heading for a period of deflation 

If the maturity date or the fixed charges will be a burden that cannot 
be met 

If your capital position and credit are weak 

100 



HOW TO FINANCE YOUR BUSINESS 101 

Obtain capital by long-term bonds or notes, borrowing only when you 
are certain to be able to refinance or pay the loan when it matures if the 
effective long-term interest rate is below the probable rate of future earn* 
ings. But use these pointers on the kind of permanent borrowing you do: 

Borrow for short term only for working capital. See that debts mature 

as they can be paid 
Borrow for long term only for financing fixed assets, land, and buildings 

essential for profitable production. The term of such indebtedness 

should approach the productive life of those assets 
Give no mortgages or pledges if doing so harmfully and substantially 

affects your sEort-term "credit 

Don't overcapitalize. It may cause: extra interest cost, thus raising costs; 
extra tax burden on issuance and in annual payments to the Federal and 
state governments; depression in value of other classes of securities of the 
company. 

In determining the amount of stock, avoid the pitfall of issuing too much 
or too little. Recognize the disadvantages of overcapitalization: 

If the stock is watered, it will sell below par and the company's credit 

rating will be low 

It will be difficult for the company to secure additional capital 
It will result in a large tax liability on organization and state franchise tax 
It may lead to difficulties through failure to maintain proper reserves and 

the eventual evaporation of the "water" 

What are your sources for equity capital? 

The individual private investor is the most important. Your job is to 
find one willing to purchase an interest in your business. That may be 
a relative, a friend, or an outsider or one of the sources on the first page 
of this chapter. 

While a new partner or investor is often the best solution for a business 
needing capital, ask your lawyer if the kind of^ securities you sell him make 
it advisable to use care in selecting him. Maybe you should not take a man 
into your business just to get more capital. You must work with him and 
share the control of your business with him. You must be sure about his 
personality, temperament, honesty, and business ability. 

If you deal with a private investor or promoter, ensure protection and 
goodwill on both sides by making certain that all papers are drawn by 
an attorney whom you can trust. 

If"^ou"are seeking to increase your company's permanent capital, you 
may want to place your problem before an investment banker. It is not 
generally easy for the small concern to acquire equity funds by selling 



IQ2 HOW TO RUN A SMALL BUSINESS 

securities. But sometimes a banker can arrange a private issue of securities 
or a small public issue. Issues of $300,000 or less, and those offered purely 
within your state, do not require registration with the Securities and Ex- 
change CommJssjoriL though you must notify them in advance. 
"^" In seeking to raise money from investors, you should ask yourself these 
questions: Will it cost me more in the long run to deal through an invest- 
ment banker, with a reasonable commission? Or will it cost me more to 
deal directly with individual investors, who may try to get a large interest 
rate on the money they put up, and perhaps a sizable block of stock as well? 

Often you will decide that it is better to work through an investment 
banker. He already knows people with money, and he knows how to interest 
tnemln promising ventures. 

Your banker, attorney, or business associates may be able to recommend 
a nearby investment banker to you. You can also write the small business 
committee of the Investment Bankers Association in Chicago or the Na- 
tional Association of Securities Dealers, Inc., in Philadelphia. 

Choose your investment banker not merely by reputation. Consider 
knowledge of actual accomplishment, especially in your type and size of 
business. 

Rules tor finding the working capital you need 

How do you make your plans for working capital? First, keep thinking 
of contingencies that cannot be forecast strikes, fires, unusual competition, 
unexpected tax assessments. Next, try to be able to take advantage of inven- 
tory-building opportunities. Ample cash will permit this. Think, too, of 
these points: 

You should have enough cash so that you can take all your discounts 

and keep up your credit to the highest basis 
You should not have so little leeway that you can't do special promotion 

work when you feel that a fiftfe Investment will do a lot of good 
Your bank is likely to be far more receptive to working capital excess 

than to fix capital of unusual size it helps your quick and current 

financing 
You should constantly watch for the opportunity to convert inactive or 

obsolete assets to cash 

But if you have an excess, remember 



It is a wMt^j[|^DtCr--banks pay no interest today 
Keep iFguardcd carefully from foolish investments in unneeded inven- 
tories or activities outside your own field 



HOW TO FINANCE YOUR BUSINESS 103 

Look out for waste in handling your money when you have once felt 
that you are very prosperous 

How do you determine the amount of working capital you require? 

Do it by studying your cash requirements in the rise and fall of your 
inventories and accounts receivable. 

Ascertain the point of largest investment in inventories and accounts 
receivable. At that time, the amount of all your current assets, minus your 
current liabilities, is the minimum working capital required. Current 
assets are your cash, inventories, marketable investments, and good receiv- 
ables. - " " "" " " ' ~ ** ' -.. , w .~ 

Some working capital may be borrowed. But what cannot be readily 
and surely borrowed must be invested capital. 

If you cannot raise it that way, you must plan your business on a 
smaller scale. 

Before you seek outside aid for working capital, cut down your need 
for financing. See if any of these ideas will help you: 

Speed up sales and collections to procure needed funds (sales, cuts in 

prices, special events, etc.) 
* Increase the turnover of inventory 

Keep the inventory timely and modern 

Standardize and simplify as much as possible 

Avoid retailing to satisfy whims 

Keep enough control to clear it up regularly 

Cut down the buying put it on a hand-to-mouth basis 
Get the most advantageous terms in purchasing 

Perhaps some part of your buying can be on consignment or deferred 

payment " ~~ 

Consider changing the method of selling to, say, installment deals or any 

other process that will give you customers' negotiable paper for discount 
Maintain collections at the greatest possible rate 

Make sure the collecting process is diligent and modern 

Check your customers in advance 

Keep the follow-up forceful, courteous, and productive 
Withal, keep a reasonable balance in extensions to customers, if you pro- 
pose to move your inventories 
Think also about the possibilities of extending your terms with creditors; 

getting advances from your customers; selling any assets you do not 

need in your business 
In manufacturing, see if you can cut down the period of production as 

much as possible. Keep the jobs moving from raw stock into, sales as 

quickly as possible. In periods of stress, cut out experimentation, and 

concentrate on more profitable work. Watch waste and possible use 

of by-products 



104 HOW TO RUN A SMALL BUSINESS 

Cut down dividends or any other stockholder drain 

Sell any investments or assets not pertinent to your operations 

Here is Rule 1, to tell you when you need more working capital: You 
need it when you can use it to cut costs or increase efficiency by more than 
the cost of obtaining the additional funds. 

If you are thinking of using loans to expand your business, bear this 
rule in mind. Also avoid getting out of line on the ratio of fixed assets to 
inventory, current assets to current liabilities, net investment to total in- 
debtedness. 

Notice that the rule doesn't say, anything about the rate of interest. In 
some cases it will be bad business for you to borrow funds even if you can 
get them for 3 or 4 per cent. In others it will pay you to obtain additional 
credit, even if you have to pay substantially more for it. 

The only time you should violate this general rule is when your company 
runs into a serious but "temporary" financial reverse. Then you may have 
to borrow purely to extricate yourself. But make sure, if this should happen, 
that the "temporary" financial reverse is really temporary. It might be 
that there are some new developments afoot such as the redesigning by 
your competitors of their products that can wreck your business unless 
you make quick adjustments to meet them. When an individual firm is 
in difficulty, more than financial pump-priming is generally necessary to 
redeem it. Some businesses fail simply because of a lack of capital. Fail- 
ures result more frequently, however, because of a lack of some manage- 
ment "know-how." 

The best way to get your bearings is to think of a loan as you would 
a piece of equipment, such as a commercial refrigerator or a lathe. It may 
pay you to put a new lathe in your shop or a new refrigerator in your store; 
it may increase efficiency and output. In the same way, it may pay you to 
install another business tool, called loan capital or credit. The interest 
charge is the amount you will have to pay for the use of this important tool. 

It is poor economy to skimp on money for your business. The most suc- 
cessful businesses use plenty of fixed capital and operating money and 
use it efficiently. They must have it to operate successfully. 

Don't hesitate to borrow, so long as you can put the money to efficient use 
and pay it back when due. 

Here is Rule 2, to tell you when to borrow: Borrow when it will protect 
your credit. 

Do it, too, so you can take all your discounts, keep up performance of 
contracts, purchase materials at attractive prices, meet your current ex- 
penses when collections are not keeping up, maintain facilities during dull 
seasons, and cover normal seasonable 



HOW TO FINANCE YOUR BUSINESS 105 

On the other hand, if the need is to purchase plant equipment, effect 
major alterations, meet old obligations, pay interest or other charges on 
obligations, or pay taxes, then loans are possible, but they require careful 
consideration. 



Shop for your borrowed money 

You are always competing with other concerns in designing, producing, 
or marketing products and services, or some combination of these. You 
also compete in obtaining the funds with which to operate and expand. 

Capital is vital to the future of your business. The company that gets 
what it needs, on the most favorable basis, has a great advantage. 

It is hard to give specific figures on what you should pay for loans. The 
charges vary tremendously (all the way from 1 per cent per annum for 
commercial paper houses, which make loans solely to large corporations, 
to 42 per cent per annum for some small-loan companies.) That depends 
upon the type and size of borrower, the type and size of lender, and other 
factors. This chapter lists a great many possible sources for loans. As you 
study them, use these pointers to get the best deal: 

"Compare before you buy"; that is, compare the prices quoted by all 
those alternative sources which may be able to supply the type of loan 
accommodation you need. Try to do this without needlessly offending 
your regular suppliers of credit. 

In comparing prices, always reduce each to a per cent per annum effec- 
tive interest rate on the average amount of the loan. There are many 
different ways of quoting interest. The situation is further complicated 
by investigation charges, minimum deposit requirements, service charges, 
and collection charges on delinquent accounts. The one sure way to 
make valid comparisons is to reduce the total charge to this basis. 

Also make careful comparisons of collateral and security requirements 
and any other conditions for credit. 

What c/oes the bank want to know when you apply for a loan? 

Like all good selling, obtaining a business loan requires a complete pres- 
entation of the product. In this case the product is you, your managerial 
ability, and your business. Banks, as well as other lenders, usually require 
applicants for business loans to be able to show 

Good personal character and reliability 
Sound business ability 

Success in past business ventures or sufficient knowledge of business 
methods to give promise of future success 



10* HOW TO RUN A SMALL BUSINESS 

Adequate investment on the part of the proprietors 
Reasonable need for the loan; reasonable probability of repayment on 
time and in full 

Bankers expect you to give factual information which may be evaluated 
and verified preliminary to making a loan. Most banks have application 
forms upon which the information may be listed. They vary somewhat 
from bank to bank. 

You will be able to comply with all requests for information if you or- 
ganize your information and thinking along the lines outlined below. 

What is the information required by banks? They usually seek the 
following: 

How your business is organized (corporation, partnership, or proprietor- 
ship). This makes a difference in the liability feature. Lending insti- 
tutions are not in complete agreement as to which form of organiza- 
tion they consider best 

The nature of your business and when it was organized. Have there been 
any recent changes in your business name or nature of operations? 

Personal data concerning the principal owners. For example, the age 
and marital status of yourself and your partners or principal stock- 
holders. Where do you have your personal bank accounts? In what 
business and civic organizations do you have memberships? Do you 
and your associates carry life insurance? In what amounts, and who 
are the beneficiaries? Is any life insurance carried by you or your 
associates for the benefit of the business? 

Business banking connections: Where does your business maintain bank 
accounts? What is its bank indebtedness? Is there any indebtedness 
other than with bankers? If the business is organized as a partnership, 
do the partners have any contingent debts outstanding? 

How you propose to repay the loan and what its purpose is 

In many ways the purpose of the loan is the most important feature of 
the loan application. The lender wants to be sure the loan will be used 
for a necessary business purpose. Your ability to establish that will be 
extremely helpful. To prove your business need for a loan, you should 
cover such points as the following: 

Is it for a business operation of a self -liquidating character? For example, 
is the loan needed to finance the purchases of merchandise which can 
be sold before the loan is due? 

Do you have orders for merchandise which will require additional work- 
ing capital to manufacture? 

Will the funds be used to purchase equipment having a general purpose 
or a specialized one? 



HOW TO FINANCE YOUR BUSINESS 107 

How did you arrive at the amount of the loan requested? Is it the 
minimum necessary for the intended purpose? 

Your bank will want to talk about your prospects. You want to be 
ready to 

Give a brief account of the future of your business in terms of such ques- 
tions as the probable demand for its product or services, and the pres- 
ence, absence, or prospects of competition 

Show what will be your probable future ability to obtain raw materials 
or supplies of merchandise and what the costs will be 

Show what you think future price levels will mean to the valuation of 
your present inventories 

Point out any other items which will shed light upon your business 

Your bank will, of course, ask you for a balance sheet. In it, you will 
list your business assets and liabilities as of some recent date and for com- 
parative purposes, the same information for the previous year. In doing 
that 

Show proper reserves for depreciation 

State how your inventories have been stated. Ordinarily they should be 

valued at cost or market, whichever is lower 
Give the dollar amount of accounts considered past due or doubtful, or 

show an adequate reserve for bad debts 

Your bank will also ask for a summarized statement of last year's sales, 
costs of doing business, and net profit before income taxes. At least one 
previous year must be shown for established businesses. If several years' 
data are offered, it will be helpful. This should include information on how 
much you and your partners are drawing from the business, or how much 
dividends have been paid in recent years. 

If yours is a new business, you will not have much of the foregoing in- 
formation. What should you collect? 

Have some ideas about how you will use the financing to operate your 
business with success 

Prove that you have built up a reputation for paying your obligations 
when due 

Show you have had adequate business experience in this or a similar line 
of effort 

Show you have sufficient financing of your own to warrant a lender 
taking a reasonable risk in advancing part of your financial needs 

Perhaps show you have on hand unfilled orders or business prospects of a 
character giving reason to believe that you can produce sufficient in- 
come to repay the loan 



(0* HOW TO RUN A SMALL BUSINESS 

Aids in cheating the bank best for you 

It is important to choose your bank wisely. Here are points to watch: 

If you can, choose a banker who is willing to assume a risk, providing 
there is a reasonable assurance of repayment 

Choose a progressive banker one who is alert to current industrial 
trends, willing to make loans for new products and more efficient 
processes. He knows that, in the world of rapid change, risk is a 
matter of careful analysis, not merely of traditional soundness 

Choose a banker who is interested in your line of business. Some bankers 
tend to specialize in certain types of businesses and may not be espe- 
cially interested in your line 

Choose a banker who has confidence in the future of your community 
and thus is willing to invest in it 

Make sure the bank is the proper size for your business, taking into con- 
sideration its lending ability under the statutes. Some banks are for- 
bidden by law from investing money in your business they can ad- 
vance money only when assured the loan will be repaid within a short 
time 

See whether it can buy securities for you or take them for safekeeping if 
you want this done 

Find out if it has vault services 

Be certain that its officers are accessible for conferences with you when 
you require them 

Find out if its deposits are guaranteed under the Federal statutes 

See if it discounts satisfactory customers' notes 

Find out if the cost of collecting out-of-town checks is acceptable 

Find out if the bank makes an excess activity charge, i.e., a charge for all 
checks issued in excess of a certain number 

See if it will willingly furnish you the data you need concerning your 
customers or trade 

Make sure the bank is so located as to 
Facilitate moving your funds for deposit 
Cash checks for the office or employees 
Cash payroll and petty-cash funds at a minimum risk 
Be of assistance to employees in savings accounts and other matters 

Your community banker, who is more often than not a small businessman 
himself, may be more receptive to you than olifc in a large city. On the 
other hand, large banks sometimes charge rates below those of their smaller 
competitors. Your only answer here is to compare. 

Many banks are now setting up special small-business departments. These 
are helpful, so long as the rates are favorable. 



HOW TO FINANCE YOUR BUSINESS 109 

Don't change a seasoned banking relationship without good reason; on 
the other hand, don't remain dependent upon your present connection if 
you are sure you can do better elsewhere not only now, but over a period 
of time. 

How to set up good relations with your bank 

Once you have chosen your banker, consult him frequently. Visit him 
at his office and invite him to visit you at your plant or store. Offer to show 
him around. Freely explain your plans to him, especially if they involve 
expenditures out of the ordinary. Don't try to conceal difficulties from him. 
It is part of the banker's code not to betray confidences. Don't be secretive; 
mutual frankness is the first basis of good banking relations. 

To keep your banker's respect and to run your business efficiently, take 
these five steps: 

1. Make sure your accounting system really tells you how things are go- 
ing. You should know what it costs you to produce everything, to sell 
everything, to maintain everything 

2. Supply your banker with an annual audit of your company's books 
by CPA's. This service is one of the best investments a small business 
can make. It may also prove beneficial from a tax viewpoint. You 
should understand your CPA's report thoroughly. Be ready to offset 
the unfavorable points disclosed. If the audit indicates an unsound 
financial condition, a poor credit policy, a poor turnover, and a poor 
trend in earnings, be ready to show your plans for revision and ex- 
pected savings 

Don't overstate your case show the bad side, too. Get it on record 
when the bank is considering your loan 

3. Construct a financial budget showing your company's plans for the 
future. The plan for each department of the company should be re- 
duced to dollar-and-cent terms in this budget. Include in the budget 
your best estimate of sales, expenses, capital expenditures, needed 
operating capital, and credit and capital needs to be met by borrow- 
ing. The bank wants to see that you maintain that type of control 
and to know where you are going 

4. Be ready to furnish concrete evidence of the peculiar nature of the 
business, particularly the credit ratings of the customers and the 
normal ratios in the industry. See Chap. 2 for the kind of ratios to 
assemble. Be sure your bank also knows 

Trend of the business 

Status of your company in the industry, its goodwill and competitive 

position 

Conventional terms of sale in the business 
Production methods and other techniques used 



110 HOW TO RUN A SMALL BUSINESS 

5. Do not abuse a line of credit. When it is granted for seasonal pur- 
poses, do not try to use it for equipment. It is bad business to use 
short-term money for such things anyway. On the other hand, you 
should not hesitate to use it whenever it is profitable 

What kind of bank loan can you get? 

If you establish and keep up good banking relations, you ought to be 
"in the running" for most types of loans. If your bank thinks it cannot 
make the type of loan you want on its own, it may be able to do so through 
arrangement with others with which it maintains a correspondence rela- 
tionship. What kind of loans can be made? 

Character loans. A character loan is actually an "unsecured loan," made 
without collateral, and based upon the applicant's production, sales, and 
management ability; earning capacity; business standing; and general 
integrity. 

When your banker has confidence in you, he is likely to arrange short-term 
character loans for you as you need them. A better way may be to ask for 
a line of credit. It is an advance commitment by your banker to lend you 
money up to a certain maximum. Usually it is on a revolving basis, so that 
you can have more than one loan out at a given time as long as you keep 
within the agreed-upon maximum. This will also save you in interest cost in 
comparison with a single loan equal to the maximum sum required at any 
one time. 

Term loans. A term loan is one which is repayable, according to an 
agreement between lender and borrower, over a period of more than 1 year. 
The maturity period averages around 5 years. Sometimes it runs up to 
10 or 15 years. Life insurance companies and industrial banks, as well as 
commercial banks, make long-term loans. Advantages are 

These loans are one of the best ways to make up for equity capital de- 
ficiency in your business. The duration of the loan can be arranged 
to fit your special circumstances 

The repayment schedule may be scaled to fit your earning power. In 
this way, you may acquire needed assets and pay out of earnings 

Loans on accounts receivable. Small businessmen often make wide use 
of loans secured by the pledge of accounts or notes receivable. Your banker 
may make such loans. They are on either a notification or a nonnotification 
basis: 

On the notification basis, the bank not only tells those who owe you money 
that it is lending to you on the security of your receivables, but it also 
undertakes to secure payment directly from them. Some states have laws 



HOW TO FINANCE YOUR BUSINESS III 

requiring notification, either always or wherever necessary to protect the 
loan 

On the nonnotification basis, the bank does not tell your debtors anything 
about the loan. They remit to you in the usual way and you to the bank 
to pay back the loan. You may prefer a nonnotification loan, even 
though the charges on it are usually higher on account of the greater 
risk to the bank 

Loans secured by warehouse and field warehouse stocks. If you own readily 
salable goods anything from eggs to hardware which are in a commercial 
warehouse (or can be put there for the purpose) , your banker may be willing 
to lend you money, using as security a receipt issued by the warehouse certify- 
ing that it holds the goods. 

Or you can sometimes store the goods on your own premises, under a field 
warehousing arrangement. In this case you can have a commercial ware- 
house, or some other third party, take formal custody of the goods and issue 
a warehouse receipt which the bank will use as security for the loan. 

Some banks also make warehouse and field warehouse loans on stocks of 
raw or semifabricated materials, 

Equipment loans. Manufacturers of durable equipment can probably get a 
loan using installment notes receivable as collateral, or can discount these 
notes with a bank or finance company. 

If you are purchasing new or secondhand equipment, you can probably 
finance the purchase by a bank loan secured by a lien on the equipment. 
When considering such a purchase, compare the terms offered by the equip- 
ment manufacturer, distributor, or other seller with the cost of buying for 
cash and financing the purchase through an equipment loan from your bank 
unless, of course, you are in a position to pay spot cash. Equipment loans 
often run for 2 or 3 years, or longer in the case of heavy equipment. 

Other bank loans for business purposes. Commercial banks make a num- 
ber of other kinds of loans which differ mainly in terms of the type of security 
offered : 

Your banker will probably accept the cash value of a life insurance policy 
as security for a loan. Loans against life insurance are increasingly fre- 
quent 

Chattel mortgages are a common form of security for bank loans. The 
chattel mortgage is an assignment of title covering something you own 
refrigerators, machinery, or other movable personal and business prop- 
erty to the bank, which uses it as collateral for the loan 

Some national banks make first mortgage loans on improved business 
property. State banks are also allowed to make mortgage loans accord- 
ing to state statutes. Mortgage loans are related to term loans but are 
generally for longer periods. Saving* banks, trust companies, savings 



112 HOW TO RUN A SMALL BUSINESS 

and loan associations, and insurance companies also make mortgage 
loans 

A loan may also be obtained on the strength of some other type of security 
that you and your banker may devise, perhaps bonds or stocks you or 
your company holds, or on the indorsements or guaranties of out- 
side individuals or companies having good credit standing with your 
bank 

Other bank sources. Nearly all commercial banks have well-developed 
'correspondent" relations with other banks both locally and in the larger 
inancial centers. This makes it possible for a bank to give better service and 
landle more and larger loans. If your bank is unable to make the size loan 
pou request, it may offer part or all of the loan to other banks in your com- 
munity or to a bank in a neighboring city. This "share the loan" policy has 
been useful in making possible a large number of loans which could not have 
teen made otherwise. 



Should you use industrial banking companies for loans? 

An industrial bank is an organization that specializes in consumer install- 
ment loans. It gets its working capital from customer deposits or the sale of 
investment certificates. Many resemble ordinary commercial banks. Morris 
Plan banks were formerly typical industrial banks. Today many of them 
accept checking deposits and do a general banking business. 

Note this about industrial banks: 

Many states limit the size of cash loans industrial banks can make 

The length of time for which loans may legally be made also varies from 
'state to state. Typically, it is a year or two. Some states have no legal 
limitation 

Charges on loans are also regulated by law in many states; but competition 
with commercial banks and small-loan companies often brings industrial 
bank rates down to well below the legal maximum. Industrial banks 
commonly quote their charges as a certain number of dollars discount 
per hundred. Often there is a charge for credit investigation. Some 
companies omit the credit investigation fee; others vary it inversely with 
the size of the loan. A common rate of discount is 6 to 8 per cent of the 
face value of the loan, deducted in advance on a per annum basis 

Loans are generally paid off on a regular schedule. Since the loan is 
typically half paid off when half its term has elapsed, the "average" 
amount of money you have out is only about half the face value of the 
loan. This means that the effective interest rate (not counting any 
credit investigation fee) is about double the stated rate of discount, or 
typicaljy l&^tq 16 per cent or more 



HOW TO FINANCE YOUR BUSINESS III 

Installment loans for business purposes are, therefore, a relatively expensive 
way to obtain capital. Ordinarily it is not advisable to use them unless other 
sources of loans are not available. 

But the rates vary in different parts of the country and among different 
institutions, so it is worth while for you to investigate the terms offered by 
the industrial banks in your area. They are usually listed in the classified 
telephone directory. Remember that in some localities industrial banks are 
operated as regular commercial banks. 

Small-loan companies as o source of loans 

Small-loan companies operate under state regulations and license and are 
also known as personal finance companies or consumer finance companies. 
Some states limit these companies to loans of $300 or less. But larger loans 
are permitted in other states. In addition, many small-loan companies also 
do a discount or sales finance business under other laws. Note this about 
them: 

The rate of charge for small loans is necessarily higher than for large busi- 
ness loans, but rates are limited by statute and are paid on the unpaid 
principal balance only, without compounding or additions 

Prepayment at any time is permitted without penalty 

Under competitive conditions, the small-loan companies make a substan- 
tial proportion of their loans to business proprietors. Their installment serv- 
ice and careful help in budget planning make them useful in many situations 
where loans are required for business purposes. 

Factoring companies as a source of loans 

Factors specialize in buying outright the receivable accounts of their clients. 
The client a textile manufacturer, for instance usually relies on his factor's 
advice as to what trade credit he should extend. Then he sells all his accounts 
receivable to the factor "without recourse" ; that is, the factor agrees to take 
any losses on the receivables he has purchased. 

Most factors operate on a notification basis. A few of them do not notify 
the client's customers when they purchase the receivables. 

Small businesses comprise a large percentage of the customers of factoring 
companies. In the past, most of the clients of factors have been manufactur- 
ers, mainly textile manufacturers. Lately, the factors have begun to serve 
other kinds of manufacturers, including producers of shoes, radio tubes, home 
furnishings, and metal products, and also wholesalers. Here is how they 
work: 



114 HOW TO RUN A SMALL BUSINESS 

Factors usually advance funds on a short-term basis. Generally they expect 
to convert the purchased receivables into cash within 30 to 50 days. They 
sometimes extend special medium-term loans to their regular clients 

Factor charges include a rate of interest and usually a fee or commission. 
Interest rates are commonly 5 or 6 per cent. The fee or commission, 
which may run from 0.75 per cent to 2 per cent of the sales cashed, is 
designed to remunerate the factor for advising his client on the selection 
of risks as well as for collecting the receivables when they are due from 
the client's customers 

Factors also frequently render other management consultant advice 

Since there is usually frequent turnover of receivables, the commission may 
run up the effective interest rate to a considerable figure. For example, if you 
paid a 2 per cent commission eight times in a year, the commission would in 
effect be 16 per cent. But the credit and collection service rendered by the 
factor might be well worth this commission. 

Depending upon the nature of your business and your existing credit con- 
nections, it may pay you to get information and appraisals from one or more 
factors. If you are operating with inadequate equity capital and are having 
difficulty in obtaining bank loans, you may find that a factoring arrangement 
will provide a solution to your problem. The interest cost will be relatively 
high. But adequate financing may permit a larger volume of business. The 
profits derived from the larger volume may be sufficient to make it possible for 
you to get on a properly financed basis eventually. 

Commercial credit companies as a source of loans 

Another source for short-term loans may be found in the concerns variously 
known as commercial credit, discount, or finance companies. They do not 
buy receivables and usually do not furnish collections service or management 
advice. 

Commercial credit companies will usually lend money secured by assign- 
ment of accounts or notes receivable in much the same way as commercial 
banks, industrial banks, and small-loan companies. They will also make 
loans secured by warehouse receipts or field warehousing arrangements. 
They may lend to finance the purchase of certain types of equipment which 
may be used as security for the loans. Here is how they work: 

The cost of borrowing from commercial credit companies is not as high as 
from factors because of the lower risk assumed and the absence of exten- 
sive special services. Tby usually compute their interest on a daily basis 
for the funds actually advanced. Where this policy is followed, there is 
no padding in the interest charge. The nominal rate is the effective rate, 



HOW TO FINANCE YOUR BUSINESS US 

As a result, commercial credit companies may be a comparatively low- 
cost source of funds in some situations 

Like factors, commercial credit companies usually limit their loans to 
manufacturers' or wholesalers* receivables. Unlike factors, they operate 
rather widely and can be found in any fair-sized city. Their terms and 
practices vary materially. You should analyze a loan offer carefully 

Sales finance companies as a source of loans 

Sales finance companies specialize in buying installment receivables at a 
discount. For example, suppose you are a retail furniture dealer. You sell a 
piece of furniture to a customer on installment terms. You require the cus- 
tomer to sign an installment contract or note. You sell the contract or note 
to a sales finance company, which then receives the customer's periodic pay- 
ments on it. Thus you receive cash for your installment sales. 

Sales finance companies have grown up rapidly with the growth of install- 
ment selling. Most of them handle a variety of accounts arising from the 
sales of durable goods, such as automobiles, farm implements, and office 
equipment, as well as consumer goods, such as furniture, jewelry, and home 
electrical appliances. They work this way: 

Some buy the installment paper "without recourse." You are not liable 
even if your customer's account becomes delinquent. In other cases you 
are partly liable on delinquent customer accounts. 

Under most plans the customer deals only with you, the seller of the goods; 
he usually does not even know you have sold his account. But if the 
account should become badly delinquent, the sales finance company may 
get in touch with the customer direct. 

Charges vary greatly. They are usually stated as a per cent per month of 
the original unpaid balance. You should investigate carefully the actual 
cost both to you and your customers. Figure your total per cent per 
annum charges arising from the sale of your installment paper. Then 
check the terms your customers would receive when buying from you, 
against the terms they can get from your competitors. Your larger com- 
petitors may have enough working capital so that they can offer their 
customers installment terms which you cannot profitably match if you 
have to sell your paper at discount. If you can borrow working capital at 
reasonable rates, you may find it wise to carry your own installment sales. 

Sales finance companies are listed in classified telephone directories. Some 
not only discount installment accounts receivable, but also make loans on ac- 
counts receivable. Some also make loans of the personal finance company 
type or conduct still other types of business. Some industrial banks and other 
lending institutions engage in sales financing activities. 



116 HOW TO RUN A SMALL BUSINESS 



Miscellaneous finance companies as a scarce of loans 

In addition to the private sources already mentioned, there are in many 
cities various other financing companies offering credit for business purposes. 
Many of them provide accounts-receivable loans and other working-capital 
loans. Unfortunately, some of them are in effect "loan sharks" charging exor- 
bitant rates; others offer credit at reasonable prices. You will find them listed 
in classified telephone directories under "Financing," "Loans," and similar 
headings. It may be worth your while to canvass some of these concerns just 
to see what kind of services they offer. 

Insurance companies may be a source of loans 

Insurance companies often make mortgage loans on industrial properties 
as well as on residential and commercial properties. If you own a place of 
business or are thinking of purchasing one, you may be able to arrange such 
a loan. 

Insurance companies also make term loans which resemble commercial 
bank term loans. As a rule, they are interested in larger loans and longer 
terms than most small concerns can justify. Nevertheless, it might pay you to 
investigate this possibility, especially if you can offer adequate security. 

Equipment manufacturers as a source of loans 

Manufacturers of store fixtures, cash registers and calculating machines, 
delivery trucks, industrial machinery, etc., offer financing plans. Under 
these, the purchaser of the equipment can buy on an installment basis and 
pay out of income. Equipment distributors often offer similar terms. Though 
the cost varies widely, credit of this type is often expensive. 

When you are buying equipment on terms, compare the terms offered by 
different suppliers just as carefully as their products. It is equally important 
to compare the cost of buying on terms with the cost of borrowing from a bank 
or other lending institution and paying cash. 

Wholesalers and suppliers as a source of loans 

Trade credit supplied by wholesalers and other suppliers is highly important 
to the retail trade. Wholesalers in turn rely on manufacturers for such credit. 
There are several cautions involving the use of trade credit which you may 
want to consider. 

Many companies buy from high-priced suppliers who provide extended 



HOW TO FINANCE YOUR BUSINESS 117 

trade credit rather than from low-priced ones who do not. Often they never 
take the trouble to calculate in per cent per annum terms what the credit is 
actually costing them. Without knowing it, they may be paying a price that 
is exorbitant compared to the cost of credit from alternative sources. 

Where attractive cash discounts are offered, the firm which fails to take 
advantage of them may in effect be obtaining a very expensive form of 
credit 

Much trade credit is really bank credit furnished indirectly through the 
wholesaler or other supplier as an intermediary; the retailer or other 
customer may pay two charges on such credit 

Trade credit relationships are sometimes used for coercive purposes, For 
example, a supplier may impose on those who owe him money by filling 
orders with inferior goods; or he may threaten to close credit if his cus- 
tomers try to carry competing brands 

Keep your eyes open when you make use of trade credit. Do not let it cost 
you too much money or force you into a position of dependency on specific 
suppliers. If it does, you may do well to pay off your suppliers even if you 
have to borrow elsewhere to do it. 

Use judgment in selecting your suppliers. Narrow down the number to a 
few in whom you can place complete confidence. They in turn will learn to 
have confidence in you. You can rely on their help in case of sudden difficulty. 

Remember that the habit of paying cash on delivery or within a few days' 
time (or even advancing money to help finance a supplier trade credit in 
reverse, this might be called) is one of the main reasons the big company 
often gets goods for less money than the small company. 

Corporations seeking affiliates, branches, or outlets as a source of loans 

Many larger manufacturers, mail-order houses, and the like are on the look- 
out for small manufacturers especially those making more or less unique 
products which they can take over as branches or affiliates. Similarly, oil 
companies, chain drugstores, grocery chains, and similar concerns are looking 
for retailers whom they can buy out, take a financial interest in, or establish 
as more or less independent outlets. Credit relief is often stressed as an advan- 
tage in such proposals. 

Some offers would allow you to retain a measure of control over your busi- 
ness. Others would involve your selling out completely. Carefully weigh the 
loss in independence against the possible increase in financial stability. 

The Small Business Administration as a source of loans 



The Small Business Administration is authorized by Congress "to pur- 
chase the obligations of and to make loans to any business enterprise." It 



IIS HOW TO RUN A SMALL BUSINESS 

provides a lending hand where the financial assistance applied for is not 
otherwise available on reasonable terms. The law requires that all obligations 
purchased and all loans made must be of such sound value or so secured as to 
reasonably assure retirement or payment 

It should be noted that the Small Business Administration is the successor 
to the Reconstruction Finance Corporation. And at the time it took over the 
RFC operations, the SBA gave preference to loans which fostered "military, 
defense, or essential civilian requirements." However, its present policy is to 
put on an equal footing all businesses applying for Federal aid whether or 
not they are engaged in retail, wholesale, or manufacturing activities. 

The SBA may make loans directly to business enterprises or in cooperation 
with banks or other lending institutions. When you are seeking a loan, you 
should always get in touch with a bank first, ordinarily the one with which 
you do business. If it cannot or will not make the loan, and if no alternative 
private source is willing to make the loan on satisfactory terms, you may then 
apply to the SBA office serving your territory. It is important to note that as 
a matter of policy, the SBA emphasizes "participation" loans in which the 
agency assumes a part of a loan made by a private lending institution. How- 
ever, direct advances are made. For example, typical of the small businesses 
recently getting direct advances from the SBA was a California welding 
company. This concern got $18,000 from the agency for working capital and 
the purchase of welding machines. 

If you are interested in SBA aid, get in touch with the nearest SBA office. 
It will advise what it can do under the law. 

Federal reserve banks as a source of loans 

The 12 regional Federal reserve banks are authorized to lend directly to 
business enterprises when they cannot get money from the usual sources on 
reasonable terms. These loans are at present limited to 5 years or less and 
are for working capital purposes only. The loans are available only to estab- 
lished businesses. New concerns cannot be accommodated. 

The regional Federal reserve banks also enter into commitments with com- 
mercial banks and other financial institutions to participate in their business 
loans. If your local bank cannot make you a loan on its own, it may be able 
to do so in cooperation with one of the regional Federal reserve banks. 

The Federal Housing Administration as a source of loans 

There is special interest to the small businessman in several functions and 
activities of the Federal Housing Administration. Hundreds of small busi- 
nesses throughout the country have found these FHA financing aids very 
valuable. 



HOW TO FINANCE YOUR BUSINESS ft* 

It is important to keep in mind that FHA does not lend any money. It 
does assist and stimulate lending of money by private institutions through the 
insurance of such lending agencies against loss. 

As applied solely to business needs, FHA guarantees the loans this way: 

Loans for modernization and repair of commercial properties. The maximum 
amount that can be borrowed from a lending institution is $2,500, repay- 
able in equal monthly installments over a period not to exceed 3 years and 
32 days. The loan may be used for almost any sort of structural alteration 
or repair work, such as repairs to the roof, the foundation, or the floor, the 
enlargement or reduction of the size of the structure, etc. It may also be 
used to install new fronts and show windows or a new heating and air- 
conditioning system. No proceeds of the loan can be used for the purchase 
or installation of machinery, equipment, or store fixtures. However, a loan 
can be made to strengthen foundations, walls, and floors of a structure in 
order to accommodate heavy machinery. The maximum amount the lend- 
ing institution can charge for the loan may not exceed a discount of $5 per 
$100, payable in 36 equal monthly installments. 

Loans for erection of new commercial structures, exclusive of machinery and 
equipment, include buildings, such as gasoline stations, wayside stands, 
service buildings, and the like. The maximum size of such loan is $3,000 
and the maximum term is 3 years and 32 days. 

Loans under this program, like all other FHA loans, are made exclusively 
by private lending institutions. For information on these loans, see your local 
bank, building and loan company, industrial bank, or any other lending insti- 
tution authorized by FHA to make such loans. Or write to the Federal 
Housing Administration in Washington, D. C. 

The "Gl" bill as a source of loans 

What are popularly referred to as "GI" loans are actually loans made by 
private lenders, as well as by the Small Business Administration. They are 
insured by the Veterans Administration. The loans may be made by any 
of the usual lending agencies and the loan procedure is essentially the same. 
One important feature is the fact that the rate of interest is restricted to a 
maximum of 4J/2 per cent on real-estate loans and 5.7 per cent on insured 
non-real-estate loans. Another is the fact that the VA guaranty may result in 
banks or other lenders making some loans which would have been refused 
without the guaranty. 

The VA guaranty is available to any veteran who had 90 days' service or 
more between Sept. 16, 1940, and July 25, 1947, or after June 27, 1947, and 
was discharged under conditions other than dishonorable. If you had less 



120 HOW TO RUN A SMALL BUSINESS 

than 90 days* service but were discharged as a result of injury or disability 
incurred in the line of duty, you will also be eligible. 

Sixty per cent of a loan for the purchase or construction of a home may 
be guaranteed up to a maximum of $7,500. Real-estate loans for business or 
farm purposes may be guaranteed for 50 per cent, up to $4,000. "GI" home 
or business real-estate loans may be made for periods up to 30 years. 

"GI" loans can also be made for purchasing property other than real 
estate, such as machinery, tools, and equipment, and for working capital 
required in the operation of a business or farm. The guaranteed portion of 
a non-real-estate loan may be 50 per cent of the amount of the loan, with a 
maximum of $2,000, for each veteran participating in the loan. A non-real- 
estate loan can be made for a period up to 10 years. 

Important: In certain areas of the country where private capital is not 
available for "GI" loans, the VA may make direct loans to eligible veterans. 
Check with your local VA office to see if you qualify for a direct loan. 

You will probably find that the lender is more interested in your basic 
credit rating, assets, business experience, and know-how than he is in the 
guaranty. But you may find the guaranty helpful in your case. It is well 
worth investigating. 

Community industrial development groups os a source of loans 

Another source of small-business credit and capital is the community in- 
dustrial development or financing group. If there is no such group in your 
area, you might want to play a part in starting one. 

Some of these groups are technically private, while others are public; they 
are mentioned together for convenience. In Albert Lea, Minn., for example, 
the Jocal committee for economic development led in setting up a private 
group called Jobs, Inc. It was capitalized at $100,000 for the purpose of 
providing fixed and operating capital for new and old local industries. 

In Louisville, Ky., the community has for years successfully run an indus- 
trial financing corporation. Baltimore has a similar group called the Balti- 
more Industrial Corporation. 

There are a number of other examples of local industrial development 
groups. Some of them provicte not only long-term and other capital but also 
technical and managerial counsel. Many believe that they offer real promise 
for assisting and strengthening small businesses. 



7. HOW TO PLAN THE BEST INSURANCE PROGRAM 
FOR YOUR BUSINESS 

Insurance is a personal and economic necessity in any business. Without its 
protection you may lose part or all of your investment in your business. Or 
you may become liable for lawsuits that may be brought against you and 
your business. 

Getting the most economical insurance rates fAese may not be the cheapest 

How can you be sure you are carrying all necessary coverages, under 
properly written policies, at the lowest possible cost for sound insurance? 

Most important is to move only upon the advice of a competent, reliable 
insurance agent. This is one problem on which you need expert advice. 

If you place insurance directly with nonagency mutual or reciprocal com- 
panies, have a disinterested adviser check the correctness of contract condi- 
tions, rates, premiums, etc. 

Ask your broker if all insurance companies used are legally able to do busi- 
ness in the state where the property or risk insured is located, and if they are 
so sound financially that there can be no doubt about their ability to pay any 
and all losses in full. You can check with your state insurance commissioner 
or your lawyer. You can check the insurance company's rating in rating 
books such as those published by Best and Company. Find particularly what 
the reputation of the company is in regard to settling losses fairly and 
promptly. 

Be sure you divulge all material facts when the policy is negotiated. Then 
the policy will not be voided on the grounds of fraud or misrepresentation. 

Be sure you get a binder or acknowledgment as evidence that you are 
insured between your order and delivery of the policy. And do the same 
with renewal policies. 

Examine your policies when they are issued. Do it from time to time there- 
after to see if insurance company and form of policy are approved by your 
state's insurance department. You ought also to get your broker to do this : 

Check the terms, conditions, and rates of new and renewal policies, espe- 
cially those which are directly negotiated mutual policies 

Read the policy exclusions for things not covered or not permitted under 
each kind of policy. Your broker or agent can readily point these out to 
you 

121 



122 HOW TO RUN A SMALL BUSINESS 

Review the forbidden actions, etc., from time to time. Changes in your 
business since the policies were issued may have technically voided some 
policies 

Get a permit for you if one is necessary. He can obtain the necessary in- 
dorsement from the insurance company 

Avoid paying larger premiums than necessary because of overlapping 
coverage of policies providing similar protection 

Take advantage of changes in rules, rates, and classifications to reduce your 
premium cost or obtain broader coverage at the same cost 

Keep adequate records of all data necessary to comply with the require- 
ments of your policies and a record of the policies themselves. Do that this 
way: 

Include a tickler or some follow-up system that will notify you well in 
advance of each policy expiration. This should include a second re- 
minder on the expiration date in case the policy or a binder acknowl- 
edgment has not yet been received 

Include a record of each policy, showing the name of the company, num- 
ber, coverage, rate, premium, expiration, and changes, if any, during 
the policy term 

Have books of account showing the original cost of buildings, machinery, 
equipment, furniture, and fixtures, and the date and cost of additions or 
disposals 

Have a record to help in proving a merchandise loss, showing insurable 
value of inventories, monthly if possible, so that the amount of insurance 
may be adjusted if necessary 

Remember that many kinds of insurance specifically require that adequate 
records and books of account be maintained to prove and collect for a 
loss under the policy 



Steps to take when you have a loss 



Whenever you have a loss that you believe to be covered by your insurance, 
be sure to notify your broker or the insurance company immediately. In most 
cases your broker will promptly report for you. 

If the loss is under a fire ot similar policy, do what you can to prevent fur- 
ther loss or damage. If possible, separate the damaged from the undam- 
aged property. Make temporary repairs or replacement, if permitted or 
called for by the policy, to prevent further loss 

If the loss is a personal-injury or property-damage claim (except under 
the workmen's compensatibn law) , provide first aid if necessary and per- 
mitted by the policy. Forward all such information, including the sum- 
mons, if any, as promptly as possible to the insurance company 

If the loss is by burglary, holdup, or theft, also notify the police authorities. 



HOW TO PLAN AN INSURANCE PROGRAM FOR YOUR BUSINESS 123 

If a loss occurs through an employee's dishonesty and a bond is carried, 
notify the surety company as soon as the loss is discovered 

File your proof of loss within the time specified in your policy. Get profes- 
sional help in filing adequate claims. Keep a tickler memo of the date your 
claim is due, so that an extension may be obtained if it is not possible or 
advisable to file the proof by that date. 

What are the usual policies a small businessman needs? Here is descrip- 
tion taken, in part, from an excellent booklet issued by the New York State 
Department of Commerce. 

How to buy fire insurance 

All-important is fire, lightning, and windstorm insurance to protect against 
financial loss because of damage or destruction of merchandise on hand, or 
buildings, as a result of fire, lightning, or windstorm. Damage caused by 
smoke or water accompanying a fire on your own or adjoining property is also 
covered by this insurance. 

The charge per $100 of valuation depends on the construction of the build- 
ing, the kind of business being operated, the nature of adjacent buildings and 
their occupancy, local fire protection, and other elements of risk. 

You want to be sure that insurance carried on building, machinery, equip- 
ment, fixtures, and stock is adequate. You will have to watch especially rising 
replacement values if you hope to collect in full in case of total loss. Remem- 
ber that, if a coinsurance clause is attached to your policies, you can collect 
partial losses in full only if the agreed-upon ratio of amount of insurance to 
value is correct. Here is how to keep costs down: 

Adjust the amount of insurance regularly in order to be fully insured when 
inventory values are up and to avoid paying unnecessary premiums 
when they are down. You may be able to obtain a "reporting" form of 
policy under which the amount is adjusted automatically at prorata cost 

You will gain nothing by overinsurance. The amount of protection should 
be based on the actual replacement value of the property at the time of 
the fire 

Review your coverage from time to time to ascertain whether you are pay- 
ing excessive premiums on property that has decreased in value 

Check your stock against insurance coverage to see whether policies can- 
not be adjusted downward, unless current higher prices make up the 
difference. Spread the coverage properly among actual values of stock* 
building, and fixtures 

Give extra attention to fire prevention. You can get suggestions from in- 
surance companies through their inspectors or from the National Board 
of Fire Underwriters. Get your broker to arrange for it and for the 
cost cutting that follows 



124 HOW TO RUN A SMALL BUSINESS 

Reduce fire hazards by keeping all trash cleaned up, by having all wiring 
properly insulated, by installing fire shelters and extinguishers, and by 
using approved containers for inflammable liquids. Be sure "no smoking" 
rules in prohibited areas are lived up to 

Check the possibility of premium savings through improvements in build- 
ings, equipment, and services, as 
Fireproofing of your buildings 

Installation and improvement of automatic sprinklers or other fire- 
fighting apparatus, fire escapes, etc. 
Improvement in your water supply 
Maintenance of watchmen and private fire brigades 
Arrangement for adequate inspection of premises 
Provision for first-aid room or emergency hospital for industrial acci- 
dents 

Installation of proper guards on dangerous devices or operations 
See if your policies are eligible for cheap supplemental endorsement cover- 
ing losses from tornado, explosion, riot, or aircraft damage. 

What other forms of business insurance do you need? 

Take the time to consider other losses you might have. Here is a check list 
of important types of policies: 

Business-earnings insurance. This protects against incidental losses directly 
resulting from a fire. It provides: payments to meet expenses which con- 
tinue while the place of business is being repaired; compensation to cover 
the profits lost because of suspended business operations as a result of a fire. 
Types available are 

Business-interruption insurance, which pays a business for loss of earnings 
resulting from a shutdown of the business caused by fire or other named 
peril 

Extra-expense insurance, which pays a business for the extra expenses 
necessary to prevent a cessation of the activities of a business following 
damage by fire or other named peril. This kind of insurance is commonly 
needed by businesses such as newspapers, laundries, and dairies, whose 
customers depend upon them for uninterrupted service 

Rent or rental-value insurance, which indemnifies the owner of real 
estate for the loss of rental income or of the rental value of his property 
should it be destroyed by fire or other named peril 

Workmen's-compensation and employees-liability insurance. This is a re- 
quired coverage in many states for specified employers. It covers the lia- 
bility of the employer imposed by law, regardless of fault, for injuries or 
occupational diseases sustained by his employees. Employers' liability cover- 
age is afforded in the compensation policy to cover the liability of the em- 
ployer to the employee where the compensation law is not applicable. 

Casualty insurance. This protects the insured against loss from an unfortu- 



HOW TO PUN AN INSURANCE PROGRAM FOR YOUR BUSINESS 125 

nate occurrence which happens without design or without being foreseen. 
It includes 

Contractual liability. Covers claims resulting from the liability of others 
which the assured has assumed under the terms of a lease, purchase, or 
other contract 

Products' liability. Covers the liability of the assured for damages re- 
sulting from the consumption or use of any product manufactured, sold, 
or distributed by the assured 

Druggists 9 liability. Covers the liability of the assured for the preparation, 
compounding, dispensing, sale, or misdelivery of drugs, medicines, or mer- 
chandise customarily handled by drugstores. (A similar form is available 
to cover optometrists against claims resulting from improper fitting of 
glasses) 

Elevator liability. Covers the liability of the assured resulting from the 
maintenance or use of elevators, hoists, escalators, etc. 

Comprehensive liability policy. Provides all needed protection in a single 
contract. The assured pays a premium based on his actual exposures to 
loss hazards. Automobile bodily injury and property damage insurance may 
be included in the comprehensive policy 

Burglary and theft insurance. This covers the assured for loss of or damage to 
property resulting from burglary, theft, larceny, robbery, forgery, fraud, 
vandalism, malicious mischief, confiscation, or wrongful conversion, and 
against loss or damage to money, securities, and other valuable papers re- 
sulting from any cause. Various forms of coverage are provided under this 
type of insurance, such as: 

Dishonesty, disappearance, and destruction policy 

Broad-form money and securities policy 

Safe burglary and robbery policy 

Storekeepers' burglary and robbery policy 

Merchandise burglary policy 
Glass insurance. This covers the assured for loss or damage to glass, including 

the frames or sashes in which the glass is set. 

Water-damage insurance. This covers the assured for loss or damage caused 
by water or other fluid to any property resulting from the breakage or leak- 
age of sprinklers, or resulting from water entering through leaks or open- 
ings in the buildings, and includes coverage against accidental injury to 
sprinklers, pumps, and other fire apparatus. 

Boiler and machinery insurance. This covers the assured for loss or damage to 
any property of the assured resulting from the explosion of a boiler, heater, 
or other fire-pressure vessel. 

Credit insurance. This covers the loss to the assured resulting from the exten- 
sion of credit or from the nonpayment of debts owed to him. 
Fidelity bond. This guarantees an employer against loss caused by dishonesty 
of employees. There are different forms of fidelity bond designed to cover 
various types and sizes of business establishments. Your agent or broker 
will gladly recommend the particular form best suited to your needs. 



12* HOW TO RUN A SMALL BUSINESS 

License, franchise, and permit bonds. You may be required by Federal, state, 
or local government to file this class of bond. License bonds are sometimes 
required to guarantee compliance with regulations, laws, or ordinances. 
Franchise bonds are needed, in some instances, to grant the right to con- 
duct a business for the common good under certain specified conditions 
and guarantee that service will be maintained. Permit bonds usually grant 
privileges to perform certain acts incidental to the conduct of certain types 
of business. 

Bid and contract bonds. If you are going into the construction or manufac- 
turing business or into certain types of mercantile business, you may need 
bid and contract bonds. These bonds are usually required from those who 
supply foodstuffs, fuel, building material, etc., to the Federal, state, and 
local governments, corporations and large industrial organizations, etc. 

Comprehensive dishonesty, disappearance, and destruction policy It covers 
loss through the dishonesty of employees. In addition 

It will protect you against loss of money and securities caused by destruc- 
tion, disappearance, or wrongful abstraction and also against loss of other 
property due to safe burglary and robbery from your business premises 

It will protect you against loss of money and securities caused by destruc- 
tion, disappearance, or wrongful abstraction while being conveyed outside 
of your business premises by you, your partners, officers, or employees, and 
also against loss of other property due to holdup or robbery while being so 
transported 

It will protect you against loss of securities caused by destruction, disap- 
pearance, or wrongful abstraction while within a leased safe-deposit box on 
the premises of a depository (bank, safe deposit company, etc.) or from 
within the premises of the depository while temporarily outside the safe- 
deposit box 

It will protect you against loss through forgery of your checks or other 
negotiable paper issued or alleged to have been issued by you 

Bodily-injury and property-damage liability insurance. This covers liability of 
the assured for bodily injuries and property damage in the operation of 
vehicles owned by him or vehicles of others occasionally operated by him. 

Nonownership liability insurance. This covers the liability of the assured for 
any loss arising out of the use in his business of automobiles not owned or 
hired by him. 

Hired-car liability insurance. This covers the liability of the assured for loss 
arising out of the use of automobiles hired by him. 

Medical-payments insurance. This provides for payment regardless of legal 
liability of medical, surgical, hospital, and nursing expenses necessitated 
by accidental injuries to any occupant of the insured automobile, including 
the assured himself. 

Collision^^mrance. This covers the loss through damage or destruction of 
the assure^! car by collision or upset. 

Garage liabi^ insurance. This covers the liability of the assured for loss 
arising out ^ his operations as an automobile dealer, repair shop, storage 



HOW TO PLAN AN INSURANCE PROGRAM FOR YOUR BUSINESS 127 

garage, or service station. It covers public liability not only for the opera- 
tion of automobiles but also for all work necessary in the conduct of the 
business. 

Owners', landlords', and tenants' liability. Covers public liability on mercan- 
tile buildings, apartment houses, stores, vacant lots, etc., and provides pro- 
tection to the assured resulting from the ownership, maintenance, or use 
of the insured premises. 

Manufacturer? and contractor? public liability. Covers the liability of the 
assured for damages on account of accidents to persons not engaged in the 
employ of the assured due to any business operations of the assured. 

Owner? or contractor? protective public liability. Covers claims against {he 
assured caused by operations performed for the assured by independent 
contractors or subcontractors or their employees. 

Consider life insurance for your business 

Business life insurance is insurance used to meet the hazards of loss by a 
business from death of someone associated with it. This insurance involves 
nothing different from the basic life policies. But it does require a special 
application to meet the problems peculiar to the business. 

It usually involves more than the simple act of taking out a personal 
policy payable to the business. The many legal, financial, tax, and technical 
complications require careful study of the case by experts. Each business 
life-insurance policy must be custom tailored. Specific purposes for which 
business life insurance is written are 

Key-man protection to reimburse for loss or provide replacement in the 
event of the death of a key employee. Almost every business has one or 
more men upon whom it depends heavily for its major success. Frequently 
it is the proprietor or manager. It might be: the financial man, upon 
whose shoulders rest the firm's credit, either for providing new financing or 
for temporary credit needs; the sales manager or, in the case of a retail 
shop, the leading salesman; a chemist, engineer, or scientist whose techni- 
cal efforts produce the firm's lifeblood of ideas. Any one of these people 
could be of such importance to the business that his death would cripple 
it, or at least cause a setback until a replacement was secured. Key-man 
insurance provides insurance benefits at the death of this vital employee, 
so that the firm has resources provided with which to employ the successor 
in the competitive market. 

Partnership insurance, to retire a partner's interest at death. A partnership 
automatically dissolves at or shortly after the death of any one of its part- 
ners. There is an especially vital need for life insurance protection to safe- 
guard the business against forced liquidation. The adequate partnership 
insurance program accomplishes several objectives: it enables the surviv- 
ing partners to reorganize at once and continue in business; it liquidates 



128 HOW TO RUN A SMALL BUSINESS 

the interest of the deceased partner without loss; it enables the beneficiaries 
of the deceased partner to secure full, fair value for his interest in the firm, 
at once and with a minimum of trouble; and it lends support to the credit 
standing of the firm. 

Corporation insurance, to retire a shareholder's interest at death. A corpora- 
tion is not so directly and immediately affected by the death of a share- 
holder as is a partnership by the death of a partner. But unfortunate conse- 
quences are a distinct hazard. With the transfer of the shares of the de- 
ceased stockholder, new stockholders, new to management and possibly an 
unknown element, may come into the picture. Sometimes, too, the stock- 
holder's death may deal a severe blow to the firm's credit. An adequate 
corporation insurance program on the life of the shareholder, to provide 
retirement of his interest at death, meets both these situations. It gives the 
deceased shareholder's heirs full value of his interest at once. It reduces 
the shock of changes in ownership. This is of special concern to the small 
corporation where the shareholders are few. Their interests keep them 
close to the management of the firm, shareholders and management pos- 
sibly being one and the same. 

Proprietorship insurance, to provide for maintenance of a business upon the 
death of a sole proprietor. This effects continuity for the business. It 
provides the proprietor's dependents or heirs with sound valuation of the 
business at his death. It is the nearest to ordinary personal insurance of all 
types of business insurance. In the sole proprietorships, there are special 
considerations that should be recognized when writing the business policy: 
Adequate provisions must be written into the policies to meet the con- 
ditions of a will or trust agreement concerning sale or liquidation of 
the business 

Selection of the beneficiary must be made according to the particular 
situation; payment of premiums should be established definitely ac- 
cording to the best interests of the plan 

- One plan may call for sale of the business to stated employees, with 
the purchase money provided by the insurance; another may pro- 
vide that the business be run by the executor of the heirs; in still 
another, a trust company may be named as beneficiary and manage- 
ment control may be established. The specific plan is important, 
however. Many a small business flounders upon the death of the 
sole owner merely because he did not provide the business insurance 
with which to maintain it 

Insurance to aid the firm's credit status, covering the owner or key man 
during the period of a loan or the duration of a mortgage on prop- 
erty held 

Insurance for emergencies. Most business life-insurance plans utilize life 
insurance which has cash values. These cash values, growing over the 
years, provjde the firm with a valuable reserve for emergencies, in the 
event of attiharp dislocation in business conditions. Where necessary, the 
policy casK?vmlues can be used as the basis for loans. 



HOW TO PLAN AN INSURANCE PROGRAM FOR YOUR BUSINESS 129 

If you contemplate the business life-insurance plan, call for advice Con- 
sult three experts to make certain that every angle of the firm's interests 
is being safeguarded your CPA, attorney, and life-insurance agent. The 
last-named gives the technical advice concerning the arrangement of policies. 
The first two provide the essential information on which the plan is based 
and double-check it when it is completed. Remember this: 

Tax factors, both income and estate, are involved in almost all business 
life-insurance arrangements. A plan should not be set up which will 
unnecessarily involve additional taxes. On the other hand, too much 
weight should not be given to the tax angles. They often change, and 
the plan set up today on the basis of a certain tax advantage may prove 
to be disadvantageous next year, if a new tax law is enacted. This, 
too, is a matter that should be left in the hands of the experts 

Once established, the business life-insurance plan should receive, care- 
fully and periodically, a checkup by experts. Financial conditions 
change, tax laws vary in effect. Valuations of the interests of the 
owners are never constant. A host of changing conditions can affect 
the plan and it is important that the details of the plan be kept up 
to date at all times 

Revaluations should be written in, whenever necessary, on partnership 
and corporation policies 

Every new tax law suggests need for a special checkup to make certain 
the tax angles are still adequately covered 

At least once each year, the plan should go through this careful screening 
by the life-insurance agent 

Favorable tax laws make pension or profit-sharing plans advantageous 

Favorable income-tax laws have made it highly advantageous for small 
business to provide directly for its own people through the creation of pen- 
sion or profit-sharing plans. Most of these involve insurance. 

The law does not hamper the ingenuity of those who want to draw these 
plans. However, it gives its preferential treatment only to employers who do 
not discriminate in favor of higher-priced employees or the officer or stock- 
holder group. An employer's plan must benefit a large percentage of the 
employees generally if he is to gain any advantage from the law. 

There are two very broad schemes used today the pension plan and the 
profit-sharing plan. The first is usually adopted where the earning record 
of the business shows a reasonable amount of stability. It envisages a more 
or less regular contribution by an employer to the pension trust or fund, 
regardless of the extent of the profits. 

A pension plan must be "actuarially sound." That is, the contributions must 
be substantial enough to fulfill its purposes for example, payment of a 



130 MOW TO RUN A SMALL BUSINESS 

fixed monthly sum when a person reaches a predetermined retirement age 
and retires, or when he can no longer work because of infirmity. These 
pension payments then continue until his death. 

A profit-sharing plan, on the other hand, is more responsive to the 
changes in the employer's business. The employer is not obligated to pay 
a fixed annual amount into the fund. He contributes in accordance with a 
formula (set forth in the plan) which is keyed to his profits. Thus, in bad 
years he may contribute nothing, while in good years the contributions may 
be substantial. The profit-sharing fund is not "actuarially sound," since the 
employee is not promised a fixed or predetermined amount of benefits. 

Profit-sharing plans create an incentive in the employee to help increase 
the employer's profits. 

Pension plans give the employee peace of mind through fixed and pre- 
arranged future benefits. Many additional advantages flow, both to em- 
ployer and employee alike, from the operation of either or both of these 
types of plans. 

The type of plan to inaugurate in each case depends on the probable 
future of the business. A small businessman should consider the problems 
likely to arise in a future period, such as the financial aspect of operations, 
the rate of labor turnover, the proportions of young and aged workers em- 
ployed, the rate of mortality, and the tax burden. 

The plans usually provide for a trustee. They usually provide that the 
arrangements be tied in with insurance contracts. 

Why should a small business take the initiative to create its own pension 
or profit-sharing plan? What practical advantages have businessmen already 
experienced from the adoption of their own private systems of benefits? Here 
is the record: 

The cost is relatively insignificant in years when tax rates take so much of 
income. The expense of building the plan is a good tax deduction 
High tax rates thus stimulate the creation of retirement systems 

Experience establishes that when pay rates are fixed by community 
standards, workers naturally gravitate toward employers who have 
created a retirement system. That means so much additional com- 
pensation to employees 

The creation of an effective plan often diminishes demands for wage 
increases. At least, it often blocks them. The argument that the benefits 
under a plan are more advantageous to the workers than an immediate 
pay increase is forceful and logical 

For the first time, employers have a decent way to ask workers whose 
efficiency is diminished by the infirmities of age to give way to the 
more aggressive. With retirement pay assured, the difficulty of discuss- 
ing retirement with old people is avoided 



HOW TO PLAN AN INSURANCE PROGRAM FOR YOUR BUSINESS 131 

Properly presented to employees, private social-security plans become 
potent factors in building loyalty and enthusiasm 

Most of the established plans have been adopted by corporations. But 
small business partnerships and sole proprietorships can also derive sub- 
stantial benefits from some of these plans. The individual partners 
and proprietors cannot participate in the plan because they are not 
employees. In partnerships, they have the following advantage, superior 
to that given to a corporation: contributions are deductible in propor- 
tion to their interests; if they are in the higher tax brackets, these deduc- 
tions will give them a much greater tax benefit than would be given to 
a corporation earning the same income 

If the plan is drawn and operated to conform with the very reasonable 
requirements of the law, a goodly portion of employees' income earned 
today (when the tax rates are extremely high) will be taxed many years 
later. Then the tax rates, presumably, will be lower. 

While these deferred-compensation plans cannot be used as a device for 
tax avoidance, they are not taboo merely because many of the stockholders, 
officers, or high-priced executives incidentally benefit as employees. Yet 
this windfall may be very substantial. Many of these persons have large 
injcomes at present. They are hit exceedingly hard by our present-day pro- 
gressive tax rates. 

If some of their present income is deferred until a future date, to be 
then paid to them as a pension, it is unlikely that their income will then be 
a part of the higher tax brackets. Presumably, they will then be retired and 
will probably have a more moderate income than they had at the peak of 
their activity. 

How do you organize your employee benefit plan? Before you start, check 
over with your CPA, lawyer, and insurance experts to find what kind of plan 
you want and 

What termination rights you want to retain 
Whom the plan will benefit what employees 
What investments the plan can make 
How you will avoid discrimination in your plan 

When you know about these, here are some aids to your planning: find 

What employees should be covered. Classify them by length of service 

or amount of salary 
Date of benefits to employees. Should you make it 65 or even less in 

high-pressure jobs possibly accelerate the date if an employee desires 

to have it moved up, or provide that you can defer it for a long period 

if men elect to remain on their job? 
Benefits. Determine how you will pay. What percentage at retirement 

age? How much per month; how much in a flat sum? 



02 HOW TO RUN A SMALL BUSINESS 

Other benefits* See if you want to have any part of the trust paid to 
employees as emergency loans, or as health and accident insurance, 
so that you can really use the funds in periods of distress 

What happens at death, discharge, or disability before retirement. Usually 
the benefit should go to the employee or his estate 

How you are going to pay the cost. Sometimes it is paid entirely by the 
employer and at other times by a contributing arrangement with em- 
ployees; the latter plan may be desirable to impress your employees 

Trustee. The handling of the funds by outside trustees permits assurance 
to your employees and the Treasury that you have a bona fide plan 

Find how you want to make your contributions. There are a great many 
processes: annual contributions to provide a fixed annual sum at retirement 
for each employeej appropriations of profits for distribution to the accounts 
of employees on the basis of their annual compensation, or their compensa- 
tion plus years of service. This type of payment plan may or may not 
produce a definite sum for individuals at retirement. They simply get every- 
thing in their account. 

Your experts will discuss your proposal thoroughly with the Treasury. 
They need to be certain that: your own contribution to the plan will be 
deductible; the amount set aside for employees will not be taxed to them 
until they receive it. 

After creating the plan, announce it to your employees. Do that by a 
simple announcement in plain English without any legal complications. 
Furnish them with copies, of the agreement, and ask them to complete any 
blanks that may be necessary to secure their participation. 



8. HOW TO BUY AN ESTABLISHED BUSINESS 

One of the most customary methods of going into business is to buy a 
going concern. Advantages of this method include the following: 

The business may be bought at a bargain. Someone who is desirous of 
getting out, for reasons such as health or advancing age, may be 
anxious to sell and willing to take a low price 

The previous owner has brought together those assets which are necessary 
to conduct the business. The new owner can benefit from his knowledge 
and experience, and avoid making some of the mistakes which he might 
otherwise make 

When buying a going business, the new owner acquires patrons. Thus, 
a certain volume of business can be accurately predicted. To that 
extent the risk is reduced 

Stepping into a going business gives the new operator the benefit of a 
running start. He does not have that initial waiting period. The in- 
come can start more quickly. There will be less drain on the resources 
during the period when trade is being developed 

Advantages and disadvantages of buying an established business 

As with so many things, these benefits may be offset by disadvantages. 
Some of these are 

The previous business may have been a failure. Such a business would 
carry a handicap because it is difficult to overcome its reputation 

There are some locations where a business venture is almost certain to 
fail. It may not always be wise to take advantage of the bargain 
offered by a predecessor. It may be that sufficient business could not 
be developed at that location, regardless of the owner's ability 

While it is an advantage to step into a going concern and receive the 
benefit of someone else's skill and judgment, buying a going business 
may result in saddling the buyer with his predecessor's mistakes. The 
previous owner may have made poor choice of equipment or been 
unwise in his inventory purchases 

Although the going business inherits certain customers, it also penalizes 
the new owner. Potential customers may have formed the habit of not 
trading with it. It may be some time before they have a chance to 
become acquainted with the new owner or even become aware of the 

133 



134 HOW TO RUN A SMALL BUSINESS 

fact that the business has changed hands. This difficulty may be over- 
come by good management and advertising 

But even though a going concern is bought, it can become a new ven- 
ture under new management and new policies perhaps with a new 
front and new interior layout. The new venture, clearly so labeled, often 
attracts people who like to try new things and trade at new places. 

The new business bright and shining, with new fixtures, fresh stock, 
and new faces has an advantage in attracting people who often say: "Let's 
go in and try this new place." 



Steps you ought to take when you investigate another business 

What are your steps in a purchase? Here is a useful list of things to do : 

Make your plans to study at least three things: your opportunity for 
profit if you go ahead; the history of the business (its legal, financial, and 
other points) ; the tax aspects of your purchase. 

How do you find your opportunities for profit? What first, are the risks 
in the purchase? That requires you to find: the long- and short-term 
chances for profits; your chances of getting a fair return on your investment. 
It means study of extra investment you might have made in rehabilitation, 
repairs, and improvements to get profits. Is the return on the total invest- 
ment adequate? 

You should audit the business thoroughly. Break this process up into 
four parts: 

L Get a competent CPA who knows the business to give you a full record 
of its financial and operating history. Make sure he finds out all about 
the following things for you: 

Contractual commitments at higher-than-market prices 
Unfulfilled contracts for sales at too low prices 
Contracts and claims that affect future financial conditions of 

prospective customers 
Whether or not some accounts or inventory have been pledged or 

assigned, without being so indicated 
Receivables for goods shipped on memo or consignment or accounts 

for goods sold but not shipped 
Status of contingent liabilities if they are adequately disclosed 

in the financial statement 
Whether the company has indorsed or otherwise guaranteed any 

obligations of others. This includes negotiable instruments sold 

or discounted 
If individual firm members or partners have become contingently 

liable by indorsements and guaranties on obligations of others 



HOW TO BUY AN ESTABLISHED BUSINESS 135 

Damage claims, lawsuits, disputed assessments, or possible tax liabili- 
ties 

If the business is liable on a mortgage bond where the mortgaged 
property has been sold to others subject to the mortgage. At- 
tempt to estimate the probability of a deficiency judgment 

Amount of cumulative dividends in arrears 
2. Get a lawyer to check 

The chain of legal title 

Leases, and machinery rented or leased 

Patent arrangements and registration of patents; trade-marks, form- 
ulas, and copyrights, franchises, and transferability 

Encumbrances on the property mortgages, liens, chattel mortgages 
against machinery and fixtures, judgments against the seller, con- 
demnation proceedings under way, taxes in arrears 

Zoning restrictions, (for example, those which may come into effect 
for the first time with change of owner, whether area may be 
restricted to residences or as to type of building material, sewage- 
disposal arrangements) 

Ask, too, for a check on 
Restrictions on ownership 
Public use of property for street, alley, highway, etc. 

Renting regulations 

Smoke-nuisance legislation 

Other building regulations sprinklers, fire escapes, roofs, and 
sidewalks 

Whether you have the right of way over someone else's land to get 
to your property 

Rights to oil, gas, minerals, and timber; quarrying rights 

Legal duties and obligations you will become subject to; for example, 
filing frequent and numerous reports to government agencies 

Labor restrictions, health laws workmen's compensation, fire, lia- 
bility, and automobile insurance; workmen's-compensation law; 
local health and inspection laws 

3. Get a full record of the labor relations of the business. Make sure you 
understand 

Government agencies to which the business is subject 
Relationship that exists as to compliance or violations 

Fair Labor Standards Act, National Labor Relations Act, state 

labor laws, etc. 
Union contracts in force, previous labor disputes, present relations 

with the union 

Wages, hours, and working conditions 
Age and sex of employees 
Possible turnover in postwar period 

4. Make sure you fully investigate the business among its banks, cus- 
tomers, and creditors and in its community. Determine the real 



136 HOW TO RUN A SMALL BUSINESS 

reasons the present owner has for wanting to sell the business; try tc 
find out from his creditors, competitors, bank, business agent, em- 
ployees, trade associations, etc. Take nothing for granted double* 
check every possible contingency 

How to buy a business tax-wisely 

Consider your own tax problem by what method shall you buy the busi 
ness? Shall it be one to give you the seller's tax basis of assets? Or shall ii 
be one giving you the fair market value of what you buy as your tax basis: 

If you use cash to buy, that determines the value used later in depreciat- 
ing or in selling. If you use stock or securities, you might get considerable 
tax advantages in some cases to the seller or yourself. Study, too, whethei 
you should buy stock of the company or its assets. They may make a greal 
difference in your tax position. This section is an effort to aid you in making 
these decisions. 

Sometimes a business has been made successful because of the persona 
efforts of one or two principals in that company. It may be advisable tc 
employ these principals. Your payment of their compensation gives you a 
full tax deduction. Perhaps agreement to pay them the highest possible 
reasonable compensation for a long period will get you a good reduction 
in purchase price. 

Consider a long-term lease instead of a purchase of the assets of the 
other business. You will still get a tax depreciation deduction, if you 
also agree: to replace losses caused by depreciation or obsolescence; 01 
return the property in as good condition as when delivered. 

Control your interest deductions carefully in your purchase. It may be 
to your advantage to decrease the annual installments of selling prices and 
increase the yearly interest. The latter is a tax deduction when paid ovei 
a period of years. 

If you buy real estate, make sure that you are entitled to a deduction foi 
the property tax that you adjust with the seller at the closing. Turn tc 
page 140 to see when and how you and the seller may be able to share the 
deduction for the same tax. 

If you buy a building or other property with the intention of demolish- 
ing, neither the cost nor the expenses of demolition are deductible. They 
are added to your cost of a new building. But if you do not have this 
intention at the time of purchase, but later decide to demolish, you get the 
loss deduction. This means you want a good record to show your inten- 
tions. 

If you are buying a business and you have an agreement that the sellers 
or others will not compete, be sure that you get a value on this part of the 



HOW TO BUY AN ESTABLISHED BUSINESS 137 

sale. And set a definite period of time for the restraint. This kind of 
payment to an individual can be deducted over the period of the restraint. 
Arrange your transaction to avoid paying a tax on part of the purchase 
price. Here is the sort of planning you can do: 

Assume you agree to buy corporate stock. Assume, too, that your price of 
the stock reflects the higher market values (over corporate costs) of in- 
ventories, real estate, etc. When these assets are sold both the corporation 
and you (when dividends are distributed) will pay a tax on a book profit. 
That contains a return on your capital invested. Make sure your buying 
plan does not include that penalty. Seek a purchase of assets, or get an 
adjustment for the penalty you are assuming. Of course your deal to 
buy stock may give you a real advantage. You may pay $100 for stock 
of a company whose assets cost it $1,000 and are worth only $100. Then 
you may get deductions based on the $1,000. 

Take another case you want to purchase the stock of a company that has 
an accumulated surplus. When any corporate distributions occur they will 
be taxed as dividends to you. This is so, even though in reality they 
represent in whole or in part a return of your capital. Assume your stock 
will cost $100. The company has assets costing $50 ($40 of surplus and 
$10 of capital) which are now worth $100. If it pays dividends you will 
have ordinary dividend income up to $40. You really should get no in- 
come until you have recovered your $100. You ought to avoid that 
penalty. 

But the seller may insist on selling the stock of his corporation. You 
may want to buy the assets rather than the stock. You may be helped by 
having him liquidate his corporation. Then he sells the assets to you. If 
that is not possible, see if you can get a contract from the seller to indemnify 
you for your tax losses. 

When you buy a business you have to decide if you want the seller's tax 
basis of its assets. Or do you want the fair market value of what you buy 
as your tax basis? That choice comes when you make your plans to acquire 
the property. If you acquire property or stock in a tax-free transfer, you 
usually take the other fellow's cost of property or stock. If you buy, that 
then is tax basis on your later sale of the property. You may get more or 
less than his cost basis. 

Get your CPA to explain these tax principles involving your cost basis: 

If you use cash or property to buy property, that determines the value 
used later in getting tax deductions, depreciating assets, or selling 

You may buy stock of a company, or buy its property by stock or securi- 
ties following it by a tax-free reorganization plan. Then you sometimes 
get considerable tax advantages by exchanging your stock for the seller's. 
In another case, you may get an advantage by purchase of property 



13$ HOW TO RUN A SMALL BUSINESS 

Whether you buy stock of a company or its assets may make a great 
difference in your tax posiiton. The method you decide on may involve 
material tax cost or tax savings. 

You have a bargaining point in preserving the seller's tax advantages 

There is another very important point to remember: many advantages 
accruing to your vendor may be lost when you buy the assets of the company 
and it loses its identity. Check this problem with your tax adviser. 

You may even face this same problem of preserving the seller's tax advan- 
tages when you continue the old business identity. Here you have to be 
wary of the following two rules: 

1. Tax-evasion or -avoidance rule. This gives the Treasury the power to 
take from you any deduction, credit, or allowance which you got on 
buying another corporation if it can show that you bought the company 
for the principal purpose of getting the benefit of the particular deduc- 
tion, credit, or allowance. For example, that means if you buy a loss 
corporation just to get its loss deduction, you could be hit with this 
rule and lose the deduction. To help prove its case, the Treasury can 
use this added rule: If what you pay for the corporation is substantially 
disproportionate to (a) the total of the tax basis of the corporation's 
property and to (b) the tax benefits which could only have been gotten 
through the purchase then this fact is prima-f acie evidence that the 
principal purpose of your purchase was to avoid or evade income taxes. 
If the Treasury can show this, then you have to show facts to rebut this 
presumption or lose the tax benefit received on the purchase of the cor- 
poration. For example, you might show a specific lousiness purpose for 
the acquisition like enlarging your productive facilities and show that 

- the price was a fair one, despite the tax benefits received. Note: You 
might clear this hazard but still be covered by the next rule. 

2. Change-of-ownership rule. Here you are safe as long as you continue 
the corporation's business or trade and do not run afoul of the tax- 
avoidance rule explained above. The net operating loss is disallowed 
where the corporation's trade or business is changed and 50 per cent or 
more of the corporation's stock changes hands during a period of two 
years as a result of purchases. 

How does the 50 per cent rule 'work? The law says that one or more of 
the 10 largest unrelated stockholders must own, at the end of the tax year, 
a percentage of the fair market value of the outstanding stock which is at 
least 50 percentage points more than such person or persons owned at either 
the beginning of the tax year or the prior tax year. This does not apply 
unless the 10 largest stockholders own at least 50 per cent of the fair market 
value of the outstanding stock. And then it is only applicable if one or more 



HOW TO BUY AN ESTABLISHED BUSINESS 139 

of such 10 persons has increased the percentage of the fair market value of 
the outstanding stock he or they own by 50 percentage points or more during 
the specified period. An increase of 50 percentage points does not mean 
the same as a 50 per cent increase. For example, a stockholder who owns 
4 per cent of the fair market value of the outstanding stock and who increases 
his ownership to 6 per cent as had a 50 per cent increase in ownership but 
only a 2-percentage-point increase. 

You cannot avoid the limitation through the purchase of an interest in 
a corporation, partnership, or trust owning stock in the corporation with the 
net-operating-loss carry-over. But an increase in percentage of stock owned 
resulting from a purchase by some other person, a tax-free reorganization, a 
gift, or a devise is not counted. The law says that persons so related to each 
other that the stock of one is attributed to the other shall be considered as 
only one person solely for the purpose of selecting the 10 persons (more or 
less) who own the greatest percentage of the fair market value of the stock. 

How to break down the purchase price to your best tax advantage 

You may be buying an entire business. Then you generally get your 
greatest tax advantage by insisting that the seller allocate your purchasing 
price to assets that give you your greatest tax deductions and the greatest 
capital gain on disposal. To do that, you should seek to place the following 
values: 

Value merchandise inventory, stock in trade, at a high price. A high 

cost will reduce profit since your costs would be fully deductible 
Value supplies and similar items not used in the manufacture of the 

product at a high price. These supplies will be used as expense items 

in the ordinary course of the business your cost is fully deductible 
Value accounts receivable at a high price. Loss from bad debts would 

be business bad debts and fully deductible 
Value machinery and equipment of short life at a high price. The short 

span of depreciation gives you little time to recover the cost. Loss on 

sale or abandonment is fully deductible 
Value buildings, building improvements; machinery, equipment of long 

life at a low price. You have a long period of depreciation to recover 

cost. The loss on sale or abandonment will be fully deductible 
Value land at a low price. You get no depreciation deduction to recover 

cost. Gain on sale would be a capital gain 
Value patents, copyrights, franchises, etc., amortizable intangibles, at a 

high price, if the remaining life is short. You recover cost rapidly by 

getting reduction of income over the short period left for amortization. 

But value these at low figures if you propose to sell the asset. Then 

you may get the 25 per cent rate on a sale 



14* HOW TO RUN A SMALL BUSINESS 

Value stocks, bonds, and securities at a low price. You get no annual 
depreciation. Gain would be taxed at capital gain rates 

Value goodwill at a low price. You get no annual deduction for deprecia- 
tion. The cost would be recovered only through eventual sale of the 
business. But place some value on goodwill in order to have a cost 
basis. Any profits in a sale would be capital gains 

Value any covenant of the seller not to compete with you at a high price. 
The payment is fully deductible over the period of the covenant. This 
covenant must be carefully defined (sum and period covered) in the 
contract or else the sum for it may be held to be payment for goodwill 

Zheck list when you close title 

Pretty generally, you must have counsel approve what you do and how 
rou get approval of a seller's stockholders, partners, creditors, etc. Essentials 
o study with him or your CPA are- 
What is the closing date of the payment and what do you get on that 
day? 

If you are buying personal property (merchandise, stock in trade, fixtures) , 
check with counsel on how to comply with the state bulk-sales act. 
How does the seller (or do you) satisfy any chattel mortgages, liens, 
conditional bills of sale, etc.? 

If you are buying real property, consider whether you want a full cove- 
nant and warranty deed; consider assuming the mortgage. You will be 
responsible for the payment of interest and amortization. Provide for 
risk of loss between the period of the contract and closing in the event 
of a fire or other casualty. Make sure you get adjustment for all pay- 
ments of land taxes, water rents, payments to mortgagee, utility services 
(electricity, gas, telephone, etc.), insurance payments on policies of 
' fire, casualty, plate glass, etc. 

Note this well about your real-estate taxes when you are buying prop- 
erty: You can buy real estate and still get a deduction for taxes paid by 
your seller if you and the seller are both on the cash basis or if you or 
the seller is on the accrual basis and have elected prior to the date of 
sale to prorate the real-estate taxes over the period covered by the tax. 
Real-property taxes for property sold during the year are divided 
between the seller and buyer. Each gets a deduction for a portion of 
the current property tax this way: the seller, for that portion of the tax 
up to the day before sale; the buyer, from the day of the sale. What 
about the seller's back taxes? These are the seller's deduction. The 
buyer gets no deduction for paying the seller's back taxes. It becomes 
part of the buyer's purchase price if he agrees to pay the back taxes 

How is the obligation to employees to be fully met? If there is a pension 
plan or profit-sharing trust, ask counsel what happens to it in a sale 

Check your union contracts to find if there is severance pay 



HOW TO BUY AN ESTABLISHED BUSINESS Kl 

How are the accounts receivable to be handled? The seller might do the 

following: assign them for collection; sell them outright, the buyer 

doing the collecting; sell them as part of the business; sell them to a 

similar business. Here you may get something for the possibility of the 

continuance of business from the customer 
How do you adjust all your uncompleted contracts and commitments 

deals with unions, sales, service agencies, contractors of every kind, 

insurance companies, creditors, etc.? 
If there are inventions, patents, or copyrights, or if the seller has been 

operating under licenses, do you want a release from your obligations 

under the license agreements? 
What government agencies must be notified (for example, Bureau of 

Internal Revenue, Social Security Board, state unemployment-insurance 

agencies, etc.) ? 
How do you get all legal documents (titles, leases, mortgages, etc.) to 

show the change? 

How are insurance policies to be converted to cover the new ownership? 
How should customers be advised? If possible, explain the reason for the 

change in terms of better service, products, etc. 
How do you tell employees? They will find out about it in due course, 

and it will help personnel relationships for you to tell them 
How do you tell suppliers to get full advantages from a credit point of 

view? Be the first to give the information, and present it in the most 

favorable light. First to be informed from this standpoint should be 

the seller's bank 

Every possible advantage should be secured from the change. Perhaps 
you should think of advertising it as a source of community goodwill and 
benefit to the general public. 



9. SHOULD YOUR BUSINESS BE A PROPRIETORSHIP. 

PARTNERSHIP, CORPORATION. OR SOME 

OTHER FORM? 

If you are organizing or reorganizing a business, you want to consider 
all the legal forms available to you. 

The most generally used are the corporation, partnership, and sole pro- 
prietorship, Variations of these to overcome difficulties in particular prob- 
lems are limited partnerships, joint stock companies, joint ventures, syndi- 
cates, and trusts. 

The tax advantages of each of these forms are discussed in Chap. 4. Here 
are the advantages of each of the legal forms you will want to talk about 
with your lawyer. Ease or type of organization may be essential in one case 
but a negligible factor in others. Similarly, other checking points are vital 
in one case and unimportant in others. 

The proper selection of the form of organization will depend upon such 
factors as 

How and when you propose to divide profits 
What liabilities you are willing to assume 
Ability to raise capital under the various forms 
Tax advantages and disadvantages 

Here are some notes to help you find the right way to do business. 

What fcus/'ness forms con you use? 

One form is an enterprise operated by a sole proprietor. It does not share 
profits with others. It is easiest to get under way. 

It has singleness of control and a maximum of centralized authority 
quick action. An individual can do business almost anywhere in the United 
States. He is not bound by restrictive laws, corporate charter, or partnership 
agreement he has freedom of action. 

Other ^advantages of this form are 

It affords the greatest amount of privacy 

Its responsibility is directly fixed 

It gives greatest personal contact with customers, employees, etc. 

It often has very real social-security and income-tax advantages 

142 



PROPRIETORSHIP, PARTNERSHIP, OR CORPORATION 143 

But it does have disadvantages: 

Death or disability of proprietor means drastic changes 

Personal life, domestic or economic, affects the durability and stability of 

the organization 
Natural limitation of the ability and energy of a single individual restricts 

its size and growth 
It has unlimited liability for its owner 

The advantages of the partnership form of organization lie in the ease and 
speed of its formation. The cost to set it up is small. 

Unlike the corporation, it has no limitation by charter. There are only 
self-imposed limitations by agreement. It usually can secure a greater aggre- 
gation of capital than the individual proprietorship. 

Other important advantages are 

It obtains specialization of functions by partners 

The policy making is less one-sided more balanced 

It is worthy of greater credit because of personal liability of partners 

It maintains a better personal relationship with customers, employees, and 

others than does a corporation 
It has opportunities for advancement that can be more readily offered to 

"key employees" 

But it does have disadvantages. All important is that : death, withdrawal, 
or bankruptcy of a partner and many other unpredictable elements end the 
life of partnership; there are difficulties in divorcing a partner from the 
partnership; there are possibilities for lack of unanimity among partners and 
serious complication if a deadlock occurs. Other important disadvantages 
are 

There is often divided responsibility 

Vicissitudes in the personal fortunes or life of a partner seriously affect its 

continuance 

The partnership interest is not readily marketable 
It has limitations on organization growth because of the natural limit on 

the number of partners who can effectively work together 
Additional capital cannot be raised so easily as in the corporate form 

the admission of new partners may be necessary 
There is unlimited liability of each partner. He may be required to use 

his personal assets to pay the firm's debts. However, it is possible to 

obtain insurance against that liability 

Some of the problems in partnerships are avoided by limited partnerships. 
They have the advantage of limiting the liability of those who do not want 
to be general partners. Creditors must be notified of the limited liability 
provided in the partnership articles. 



144 HOW TO RUN A SMALL BUSINESS 

The advantages of the corporate form of organization are many. 

Liability is limited to the amount of stock issued. This advantage accrues 
primarily to stockholders in large corporations, interested in investment only. 
In a "close" corporation, owners may be made personally liable by having to 
indorse all loans made by the corporation. (Of course, proprietors or part- 
ners can protect themselves from liability by appropriate insurance.) Other 
important advantages are 

There is continuity of existence regardless of any change in ownership 
through transfer of stock. This, too, is a feature that is desirable from 
the viewpoint of investors rather than of those who are seeking to 
organize a business 

Management continues despite change in ownership 

Interest in the corporation can be readily transferred 

New or additional capital may be more easily acquired 

But the corporate form has many disadvantages. It must file many reports 
and various tax returns, is subject to much Federal and state regulation, and 
may be expensive to set up. It is difficult to expand into other states. The 
scope of business activity is limited by the corporate charter, although this 
difficulty can be avoided by making the scope of the business very broad in 
the original charter or by amending the charter. 

Joint ventures and syndicates are often used. They are temporary in char- 
acter, making possible sharing the risk of special ventures. But they have 
many disadvantages: 

Their organization is unstable and vague 
They have no real legal entity 
They have no accruing goodwill 
Their ventures smack of undue gambling risks 

'Syndicates may be suspected of violation of antitrust and regulatory 
rules 

How to operate a partnership 

Talk this page over carefully with your lawyer. 

In the absence of agreement with your partners, the law provides rules to 
find your rights and obligations. Better get your partnership agreement in 
writing, and include in it at least 

The kind of business to be conducted 

The amount to be invested by each partner 

The division of profits and losses 

The powers and duties of each partner 

The compensation, if any, to be paid to each partner 

Provision for partners' drawings 

The division of assets in case of dissolution 



PROPRIETORSHIP, PARTNERSHIP, OR CORPORATION 145 

The duration of the partnership and the manner in which it is to be 

dissolved 

Provision for the withdrawal of partners and the admission of new partners 
The manner in which differences of opinion are to be settled 
Anything else of importance about which there might later be some dispute 

Don't consent to habitual violations of any part of your agreement unless 
you want to lose those rights permanently. 

You want to exercise the utmost care in the choice of your partners* Their 
power to obligate the partnership is exceedingly broad. Their acts may cause 
you to lose, not only your investment but your private property as well. 
Private agreements among the partners limiting their powers are binding 
only on those creditors who receive notice of the agreement. After you have 
selected your partners 

Observe the highest good faith toward them 

Be sure to exercise the proper care and skill in the performance of your 

duties otherwise you will have to make good any loss 
Don't use the partnership business or property for your own profit or 

advantage 
Don't engage in any competing business without their consent 

Remember that your rights as a partner do not include the right 

To do anything that would make it impossible to carry on business 

To dispose of the partnership's goodwill 

To confess a judgment against the partnership 

To make an assignment for the benefit of creditors 

To submit the partnership rights or obligations to arbitration 

Generally, a partner cannot incur new partnership obligations after the 
partnership has been dissolved or to do anything else except wind up the 
business. The partnership is automatically dissolved and a new partnership 
agreement is necessary when any one of the partners is expelled, sells his 
interest, withdraws, dies, or is declared bankrupt. 

When you can't get your partners to agree on dissolution, a court will 
dissolve a partnership if 

A partner is shown to be of unsound mind or otherwise incapable of 

carrying on his duties 
A partner has been guilty of such misconduct as to make it impractical 

to carry on the business with him 
The business can be carried on only at a loss 

In dissolution, the firm's assets will be marshaled and applied first, to 
debts of outside creditors; then to debts of partners; then to capital of 
partners; and finally to profits, if any. In receivership of the partnership, 
partnership creditors have first right to partnership assets; private creditors 



146 HOW TO RUN A SMALL BUSINESS 

have first right to partners 9 private property; and partners whose assets are 
applied to pay debts of other partners have the right of contribution from 
those other partners. 

// you want to limit your losses to your investment in the partnership, 
form a limited partnership. Check with your lawyer on: how to conform with 
the formalities as to organization; how you subject your private property to 
liability for partnership debts if you take an active part in the management 
of the business or if your name appears in the firm name. 

If you want to withdraw from the partnership, don't do it in violation of 
your agreement. Don't withdraw in such a way as to injure your partners, 
unless you are prepared to make good the damage you have caused. You 
should notify the partnership creditors of your withdrawal. Or advertise it 
in a newspaper of general circulation in the place where you are doing 
business. If possible, try to get the creditors, your partners, or both, to release 
you from the partnership debts. 

How partners figure their Federal taxes 

Partnerships do not pay a tax. They merely file an information return. 
That tells the Treasury of the proportionate share of profits earned by each 
of the partners. This also shows some financial condition data to help the 
Treasury study of family partnerships. The partnership computes its net 
income (even though it pays no tax as an entity) in a manner similar to 
that of an individual 

Partnerships are not entitled to any personal exemption, credits for 
dependents, or the standard deduction given individuals. But partners 
get all these credits in making their own returns. 

As a general rule anything a partner gets from his company is part of 
the partnership profits. It is not taxed unless there are profits. 

How each partner makes up his tax return 

Each partner reports, on his own tax form, his proportionate share of the 
ordinary income of the partnership. This will not include charitable con- 
tributions, capital gains, and exempt income. These do not enter into a 
computation of partnership income on the information report filed by part- 
nerships. The partner includes on his return his share of ordinary income, 
plus his share of the following items of partnership income and expense: 

Charitable contributions. These, plus his own contributions, may be 
deducted from the partner's total income. But the aggregate contribu- 
tion cannot exceed the 20 to 30 per cent limitation 

Long" and short-term gains and losses from the sale or exchange of part- 



PROPRIETORSHIP, PARTNERSHIP, Oft CORPORATION 147 

nership capital assets, iftese are added to tne partner's own items of 
the same nature to find his tax. Each partner gets a $1,000 reduction 
of ordinary income as a result of these combined losses. This may 
be of great advantage to members of a partnership. But you get only 
one $1,000 reduction not one for partnership losses and one for your 
own losses. Any doubt that a partner's own capital gains may be 
reduced by his share of partnership losses has been eliminated 

Exempt income. It remains exempt to the partner. Partially exempt 
income becomes the partner's own income. This concerns income sub- 
ject only to surtax and not to the normal tax. If a partner takes a 
credit here, it cannot exceed the partnership net income. If the part- 
nership has elected to amortize these government bonds, each partner's 
share of interest is reduced by the proportionate amortization 

Net operating loss. This is not allowed to the partnership. In computing 
the individual partner's net operating loss he takes into account his 
respective share of the income and losses of the partnership 

A partner's proportionate share of the partnership profits is part of his 
gross income. He reports the income even though, in fact, it has not yet 
been distributed. He reports his partnership income even though he is on 
a cash basis while the partnership is on an accrual basis, or vice versa. 

A partner can report salaries and interest on capital contributions received 
from the partnership as salary and interest if they are guaranteed regardless 
of profits. 

For tax purposes, each partner can deduct his usual exemption on his 
own individual return. He would also be entitled to his share of the part- 
nership's 

Credit for interest obligations 
Credit for taxes paid on bonds 

Credit for taxes paid to foreign countries or possessions of the United 
States 

If a partner pays business expenses he gets a deduction unless: his dis- 
tributive share from the partnership is reduced by the same amount; another 
partner reimburses him for his share of the expense. A partner may deduct 
legal expenses paid in defense of a suit for: misconduct in the operation of 
the partnership business; failure to account for the profits earned by the 
partnership. 

Sometimes operating partnerships are taxed as corporations 

Business groups often call themselves partnerships when, in fact, they are 
corporations. For tax accounting, partnerships may be taxed as corporations, 
unless it is shown 



l HOW TO RUN A SMALL BUSINESS 

That the partners "contribute" to the organization in the form of capital 
or services. These contributions must be real, though some partners 
may be inactive 

That profits and losses are shared on a definite basis 

That there is both joint and several liability for debts. Limiting the lia- 
bility of a partner approaches the corporate form 

That the partners' participating interests cannot be sold or inherited. 
Death ends the partnership. Where these interests can be disposed of 
as can shares of stock of a corporation the organization may be 
taxed as a corporation 

That the partners are directly responsible for the conduct of the business 
each partner being agent for the others. The managing partners may 
be representatives, not agents, of the others (as the directors of a cor- 
poration are representatives of the stockholders). Here there is danger 
that the Treasury will disregard the partnership form 

That the partners act really as coproprietors. If there is strong centraliza- 
tion, characteristic of the corporate form, the Treasury disapproves. 
It will tend to find that a corporation rather than a partnership exists 

Turn to page 73 to see how a partnership can elect to be taxed as a cor- 
poration while still retaining its true partnership form. 

As pointed out on page 59, a partnership can be used as means of splitting 
income so as to free each distributive share from the high surtax rates. 

A husband and wife, father and son, etc., may form a real partnership. 
This is true even though it is conceived as a means of tax reduction. The 
only objection is where the partnership is a sham and a "mere paper realloca- 
tion of income among the family members." 

A real gift of a partnership interest will be recognized. But all the facts 
at the time of the gift will be scrutinized. That the donor keeps the big 
part of managing the partnership or is trustee for the new partners will 
not of itself knock out the new arrangement. 

So long as capital is an important income producing factor and a reason- 
able allowance is made for the salary of the donor-partner, a gift of capital 
creates a valid partnership, even though 

The family members really take no risk. Capital that comes by gift creates 

a real partnership 

They do not contribute control, policy making, and management 
They do no important work in businesses where capital would normally 

be an important income producing factor 

In some businesses, capital is the all-important earning factor; in others 
it is skill and knowledge; in others, downright hard work, long hours, etc. 
In personal service businesses, the family member should play an important 
part in producing the partnership earnings by doing regularly 



PROPRIETORSHIP, PARTNERSHIP, OR CORPORATION 149 

Services in contacts with customers or suppliers 

Running a part of the business 

Regularly conducting the office 

Services wholly independent of what the managing partner does 

Your partnership reports on its own tax year 

A partnership's tax year may be different from that of the partner. Then 
the partner includes in his tax year his share of the partnership income for 
the partnership tax year which ends in his tax year. For example, one 
partner has a tax year ending Dec. 31. The partnership year ends June 30. 
The partner includes in his Dec. 31 tax return, the partnership earnings for 
the period ending June 30. 

Dealings between you and your firm 

When you deal with your firm, you have to be aware of the tax conse- 
quences of these dealings: 

Services. Where the partnership deals with a partner as an outsider and 
charges him for services rendered, it is income to the partnership. The 
partner will report his share of the partnership income, although it may 
include payments he has made to the firm. The partnership is recognized 
as a separate entity. If it is income to the partnership, it is income to 
the partner, even though he may have contributed to the income. 

Losses. Deductions for losses are denied where there is a sale or exchange 
of property between a partnership and a controlling partner. A con- 
trolling partner is one who has more than a 50 per cent interest in either 
the capital or profits of the firm. You meet the "over 50 per cent test," 
if you are considered as owning the interest of the other members of the 
partnership who are related you. Such partners include your wife, 
children, grandchildren, parents, grandparents, brothers, and sisters. 

Know the tax problems on the distribution of partnership assets 

Considerable caution is necessary in partnership distribution of assets 
upon liquidation. Partnership profits, salary, or interest on capital accounts 
are determined at the end of the partnership year. They are treated as 
ordinary income to the partner in the year ending with close of the partner- 
ship tax yeaj> not that of the individual. All items are treated as distri- 
bution of partnership profits. On other partnership distributions a distributee 
partner generally recognizes no gain or loss on his receipt of a partnership 
distribution. And this is true whether or not the distribution is a current or 
partial liquidation payment or a payment in complete liquidation. However, 
there are several important exceptions to that general rule: 



150 HOW TO RUN A SMALL BUSINESS 

In a current distribution or one in partial liquidation, a loss is never 
recognized, but gain is recognized when the cash distributed exceeds the 
basis of the distributee's partnership interest. For example, where a 
partner with a partnership basis of $10,000 receives a distribution of 
$11,000 in cash, a gain of $1,000 is recognized and taxed at capital-gain 
rates. But no gain is recognized where he gets $3,000 in property and 
$8,000 in cash. However watch out for this problem: Where a partner- 
ship holds appreciated inventory or unrealized receivables or both, a 
disproportionate distribution of assets may result in tax to both the 
distributee partner and the nondistributee partners. 

In a complete liquidation, as in the case of a current distribution, no gain 
is recognized except where the cash received exceeds the partner's basis 
in the partnership. Loss is recognized where the distribution consists 
solely of money and unrealized receivables or inventory or both and 
where these items exceed the partner's interest in the partnership. But 
loss is not recognized if property other than inventory or unrealized 
receivables are distributed. Here, too, you have to watch out for the tax 
consequences arising out of a disproportionate distribution of assets 
When the partnership assets include unrealized receivables and appre- 
ciated inventory. 

When you finally dispose of the distributed property, you have to de- 
termine how the sale or exchange is taxed. The general rule is that the 
character of the gain or loss on the disposition of distributed property is the 
same as would be realized by the partnership if it had made the disposal. 
That is, where the sale of property would be treated as ordinary income if 
made by the partnership, the sale of that property by the distributee partner 
is also taxed as ordinary income. So where you get a distribution of un- 
realized receivables and you later sell them, any gain or loss realized on the 
sale is ordinary gain or loss. The same rule holds for the sale of distributed 
inventory unless it is sold after you have held it for more than five years. In 
this' case, you would realize capital gain or loss. 

When the interest of a retiring partner or of a deceased partner is 
liquidated, ordinary income is realized on the amount of the distribution 
attributed to the partner's distributive share of income, guaranteed salaries, 
or interest. Capital asset treatment is extended only to the value attributed 
to the partnership interest. And for this purpose, the partnership interest does 
not include payments for unrealized receivables, which if present will be 
reflected as ordinary income. However, if goodwill is present, it may be in- 
cluded as part of the partnership interest if the partnership interest provides 
for such payment. But it cannot be more than the reasonable value of the 
distributee partner's share of the partnership goodwill. 

If a partnership interest is sold to an outsider or to the remaining partners, 
the law says that there is either a capital gain or loss with this exception: 



PROPRIETORSHIP, PARTNERSHIP, OR CORPORATION 151 

To the extent that the partnership holds unrealized receivables or appre- 
ciated inventory, part of the gain or loss is treated as ordinary income or loss. 
Appreciated inventory is inventory whose value exceeds 120 per cent of its 
basis to the partnership and 10 per cent of the fair market value of all the 
partnership property. Unrealized receivables are rights to payment for goods 
or services that have not been reported in income. 

How to operate a corporation 

If you are doing business as a corporation, ask your lawyer to tell you 
how you must conduct the business. The powers of the corporation are 
expressed by its charter. If you want to do anything not authorized, you 
must amend the charter. Before doing business in another state, find out 
whether it is necessary to obtain permission from that state and, if so, how 
to go about it. Failure to do so may make it impossible to collect bills 
and subject you to other penalties. You should 

Adopt bylaws outlining the rules and regulations to be followed 

Make sure that your board of directors is legally qualified and that you 

have the required number 

Find out if you have the officers the law requires you to have 
Hold the stockholders' and directors' meetings required by the state law 

or your bylaws 

Keep the stock books and other records required by law 
Make it a practice to keep minutes of stockholders' and directors' meet- 
ings and to put important decisions in the form of written resolutions 

In transferring stock you should be sure to see that it is properly indorsed 
and witnessed and that the transfer is recorded in the stock record books. 
Don't transfer stock of a deceased person without an authorization from 
your state. 

In your choice of directors, remember that for all ordinary purposes 
they have the power to run the business without interference from the stock- 
holders. The powers of a director usually cannot be taken away by an 
agreement to act merely as a "dummy." They are not responsible for 
honest errors in judgment. What are the duties of the directors? 

They should attend meetings regularly and make it their business to know 
what is going on 

They cannot make secret profits or commissions out of any business trans- 
action by the corporation, nor use their position to obtain any unfair 
advantages 

They should not unlawfully borrow money from the corporation or 
authorize loans to other directors, officers, or stockholders 

They can pay dividends only out of profits and not out of the capital 
invested in the company 



IS2 HOW TO RUN A SMALL BUSINESS 

Generally, they should not take part in any acts that are unfair or beyond 
the powers of the corporation 

If they cannot agree with the action taken by the majority, directors must 
see that their dissent is noted or be ready to assume the liabilities pro- 
vided by law 

Directors and officers should know that minorities may take advantage of 
their legal rights to injunction or damages in cases of: 

Fraudulent, illegal, or negligent acts of directors or officers 

Violation of their rights in reorganization, liquidation, merger, etc. 

Losses sustained through acts not authorized by the charter 

Wrongful withholdings of dividends 

Secret profits made by directors or officers 

Disadvantageous contracts entered into with other organizations in which 

the directors are interested 
Wrongful increases in officers' or directors' salaries 

Stockholders have the following rights: 

To have a certificate of ownership of shares 

To transfer ownership to others 

To vote for directors 

To vote on questions involving the corporation's property 

To restrain the corporation from performing acts beyond its authority 

To protect their interests against wrongful acts by the majority 

To receive dividends that are declared 

To subscribe for new issues of stock in the proportion of their present 

holdings 
To share in the proceeds of the dissolution of the corporation 

Know the securities a corporation can issue 

The various types of stock that can be issued and the kinds of dividends 
you can pay are 

Par- and nonpar-value stock. The fiction of a declared value is eliminated 
by the no-par stock. This permits sale of stock at different times at 
fair-value price, thus overcoming problem of selling par-value stock in 
fallen market. But it may raise litigation by stockholders claiming im- 
pairment of their interest when additional stock is issued. The Federal 
issue stamp tax on par- and nonpar-value stock varies. Some states 
treat nonpar-value stock as though it had a par value of $100, which 
may create large tax burden. You should consider also the Federal and 
state taxes on stock transfers 



PROPRIETORSHIP, PARTNERSHIP, OR CORPORATION 153 

Preferred stock. The right to receive a dividend before profits are dis- 
tributed to common stockholders is usual with preferred stock 
Participating and nonparticipating preferred stock. Sometimes this stock 

can participate in profits after payment of the dividend to preferred 

stockholders 
Cumulative and noncumulative preferred stock. Dividends not declared 

in any year will generally accumulate. They must be paid before 

profits are distributed to common shareholders 
Redeemable stock. The right to redeem is in the corporation. The price 

may be fixed or possibly determined by specific conditions. The price 

usually includes all dividends in arrears 
Convertible stock. The right is usually held by the stockholders, but may 

be held by the corporation, to convert into some other stocks or bonds. 

If the right extends to convert to bonds, the option is usually held by 

the corporation 
Guaranteed stock. Dividends are guaranteed by some corporation other 

than the one that issued the stock for example, by a parent company 

to the stockholders of a subsidiary company 

All sorts of dividends can be paid to stockholders. Some are 

Cash dividend paid in cash 

Stock dividend where additional stock is issued to stockholders on a 

prorata basis 
Liquidation dividend paid out of the assets of the corporation upon 

dissolution 
Scrip dividend paid in notes that are to be redeemed at a later date, 

usually in cash 
Consent dividend where the stockholders consent to be taxed as if they 

had received a stated sum of money, but get no actual payments of 

any kind 
Elective dividend where stockholders may take cash or a stock dividend 

at their option 

Dividends in property for example, capital stock or bonds of the dis- 
tributing company; other shares of stock or bonds owned by the 

company 

The power to declare dividends rests solely with the board of directors, 
who can declare them only out of surplus. It is necessary to examine the 
law of your particular state on this point. Generally, past deficits from opera- 
tions must be made up before a dividend can be declared. In most states, 
the directors are personally liable to creditors if capital is impaired by 
declaration of a dividend not out of surplus. But this rule does not always 
apply to companies engaged in an industry involving wasting assets, as 
natural resources. 



154 HOW TO RUN A SMALL BUSINESS 



How corporation* figure Federal taxes 

Federal corporation-tax problems are complex. Political expediency, plus 
an effort to deal equitably in special cases, plus unwillingness merely to 
increase rates when new taxes are imposed, have given us all sorts of labels, 
mechanisms, and technicalities. 

In operating a family corporation, beware of becoming a personal holding 
company. These are popularly referred to as "incorporated pocketbooks." 
They are subject to a surtax of 75 to 85 per cent. Your corporation will be 
classed as a personal holding company if it fits the law no matter how honor- 
able your actions and innocent your intentions. Even legitimate business 
reasons do not help. If 50 per cent or more of the corporation's stock is 
owned by five or less people, and 80 per cent of its gross income is from inter- 
est, royalties, security or commodity transaction gains, income from estates 
and trusts, annuities, dividends, personal-service contracts, or rents under 
certain conditions then your corporation is that burdensome creature, a 
personal holding company. 

If you fit into one of the following types of businesses, check this problem 
before you incorporate. For the reasons given here, these types of businesses 
should not incorporate: 

Family partnership in the investment business 

A speculator or trader (not a dealer) in securities 

An engineering or similar partnership. The designation of one of the 

members to perform a contract would risk personal service standing 
A company that collects for use of its building, equipment, patent, license, 

etc., from one of its members whose ownership is 25 per cent more and 

more than 10 per cent of the company's other gross income is held to be 

personal-holding-company income. 

This part of our law is intended to discourage individuals from incorporat- 
ing their income-producing properties or abilities to avoid the higher surtax 
on individuals. It was also intended to "pressure" existing companies to 
distribute their total income, to dissolve, or to abandon the characteristics 
which make them holding companies. 

Your corporation may be subject to the prohibitive surtax if two require- 
ments exist one involving the source of its gross income and the other con- 
cerned with the stockownership. If you meet these tests you must then 
determine the net income under the special rules in this section. It is quite 
different from the normal-tax net income. 

The basis for the surtax is the net income which is undistributed. You sub- 
tract certain credits from the net income and the balance is subject to this 
special tax. 

This surtax is imposed in addition to corporate normal and surtaxes. But 



PROPRIETORSHIP, PARTNERSHIP, OR CORPORATION I5S 

personal holding companies are exempt from the surtax on corporations im- 
properly accumulating surplus explained below. 

How to avoid a tax on failure to pay dividends 

Corporations are often used to accumulate surplus for the purpose of 
helping stockholders avoid the payment of a tax on dividends. The penalty 
tax is imposed to force distribution of corporate earnings. It is avoided by 
showing that the accumulation was not for the purpose of avoiding a tax 
on the shareholders. This tax is distinct from all other corporate taxes. It 
is imposed in addition to the ordinary income tax and surtax. 

There are two sides to the problem of building up a corporation's surplus 
by not paying dividends. 

One side of the problem concerns the stockholders who are taxed in the 
high-income tax brackets. They get very little out of a dividend payment, 
especially when the individual tax rates go as high as 91 per cent. To avoid 
this bite, corporations can be used to hold on to profits until a payment 
becomes less costly. And we can accumulate with complete safety as long 
as the accumulation does not top $60,000 . But over this amount, we may 
run smack against a penalty tax for an improper surplus accumulation. This 
tax is distinct from all other corporate taxes. And it is imposed in addition 
to the corporate normal and surtax rates. We may still avoid the penalty if 
we can show thai the accumulation meets the reasonable needs of the 
business. 

What reasonable needs are leads us to the second side of the problem. 
How far can earnings and profits be accumulated to meet needs without a 
business being hit with the charge that its real purpose is to avoid the indi- 
vidual surtax rate imposed on the stockholders? 

The law says that reasonable needs can include reasonable anticipated 
needs of the business. This covers your future plans for buying buildings or 
equipment which are specific and definite. It does not apply when the 
plans are vague and indefinite or when you indefinitely postpone the execu- 
tion of those plans. 

Important: There is no requirement for an immediate investment of cor- 
porate profits as long as there is evidence that the future needs of the busi- 
ness call for the accumulation. 

If you use your funds for the reasonable and current needs of your busi- 
ness you need not worry about distribution of dividends. But when your 
surplus is over $60,000, you may court trouble if 

Cash piles up beyond prudent requirements 

Investments are made in securities, etc., of businesses unrelated to your 

own needs 

Earned surplus has accumulated in substantial amounts for prior years 
There are dealings between the corporation and its shareholders, e.g., 



156 HOW TO RUN A SMALL BUSINESS 

individual withdrawals by the shareholders; personal loans to them; 

or the expenditure of funds for the personal benefit of shareholders 
There is too little dividend distribution in the light of the nature or 

financial position of the company 

Expansion and improvements are contemplated but not actually made 
There is use of the corporation entity for incorporating the "talents" of 

an individual or to hold his personal securities 
There is investment in assets having little direct relationship to the 

business 

The same facts often seem to produce different tax results in decided 
cases on this part of the law. The decisions deny a tax where evidence 
establishes an absence of purpose to accumulate income or avoid surtax. 
Most of our decisions have arisen on facts establishing that- 
The purpose of accumulating unreasonable funds, condemned by the law, 

is obvious 

Unnecessary loans exist between corporations and stockholders 
Accumulations are really for the benefit of the stockholders rather than 

the corporation 

There is absence of a specific plan, objective, or contingency which, in 
the exercise of good business judgment, demanded the accumulation of 
the earnings and profits 

There is a corporate practice of accumulations adopted for mere con- 
venience and without tax significance when adopted you may have 
difficulty if it is continued. You are then open to the charge of avoid- 
ing surtax on the stockholders. A court may conclude: whatever the 
motive when the practice of accumulations was adopted, the purpose of 
avoiding surtax induced, or aided in inducing, the continuance of the 
practice 

Accumulations are too large for the fair needs of the business. This is so 
. even though the profits arise out of normal business. If business divi- 
dends are too small it may be alleged that the purpose was to accumu- 
late profits for the benefit of shareholders. The fact that the taxed 
surplus was accumulated beyond the reasonable needs of a business, 
and the further fact that stockholders, who were wealthy men, saved 
a large income tax that would have been imposed upon them had the 
taxed surplus been distributed, are evidence enough to uphold the tax 

What reasons can you use to avoid paying dividends? The job is to 
prove that: you did not permit earnings or profits to accumulate beyond 
the reasonable needs of your business; your corporation was not availed of 
for the prohibited purpose. One recent case held that it was proved by 
convincing the court that the company adopted, by appropriate corporate 
action, a policy of accumulating a part of its net profits each year to be 
added to surplus "so that the company have funds for expansion or any 



PROPRIETORSHIP, PARTNERSHIP, OR CORPORATION 157 

unseen depression that might occur." This policy was carried out in all the 
taxed years. The court held that a corporation's earnings were not accumu- 
lated beyond the reasonable needs of the business where it is shown that the 
purpose of accumulation is: to make improvements which will add to the 
convenience and efficiency of operation of the business; to accumulate some 
cash reserves as a bulwark against future depressions; to meet unknown 
risks. 

Decisions suggest there is a chance to eliminate the penalty if there is 
anxiety about losses ahead. Apparently you may prove the need for 
accumulation by what happened in the period after the dividend years. And 
you may fairly use any of the following as a good basis for small payments 
of dividends: 

Needed improvements cannot be financed without borrowing 
Changing laws or regulations will require more money for financing cus- 
tomers or your purchasing. Or the change may permit restoration of 
your inventories or other assets to their normal status rather than the 
depleted state which the regulations or law required 
Your earnings available for distribution are not fairly stated in view of 
current cost to replace fixed assets. In an era of sharp price advances, 
replacements of plant and equipment require much more capital than 
the accumulated reserve for depreciation. The accumulated deprecia- 
tion of low-cost assets cannot meet higher replacement costs 
Small surtax would have resulted to stockholders if dividends had actually 

been paid 
Accumulations are essential to provide for proved expansion of the 

business 

Surplus was set aside in order to have it available for depressions reason- 
ably expected or to meet the troughs of normal business cycles 
Funds were necessary to construct a new plant 
Funds were necessary to take care of new business 
Funds were necessary to invest in a different character of business 
Funds were necessary to make required advances to a related company 
Maturing obligations' payments made dividends impossible 
Sales on long-term credit basis made dividends impossible 
Poor financing conditions (following accepted trade practices) made 

dividends impossible 
Repayment of loans are made by stockholders. Particularly where their 

loans aided the corporation to meet interest and principal payments 
Illegality of dividend declaration prevented payment 
Possibility of operating losses required accumulations 
Existence of bona fide obligations needing annual amortizations is proved 
Retention of large cash sums is proved to be necessary to meet specific 

emergencies 
Advances have been made to suppliers to insure a continuance of opera- 



158 HOW TO RUN A SMALL BUSINESS 

tions. In one case there were substantial advances to another company 

engaged in a similar business. Here supplies and raw materials had 

been purchased from each other to the advantage of both 
Sales have been made to one or few customers whose loss would require 

extensive promotion to get new business and there is a possibility of 

losing the customer 
Increasing competition requires reserve to take care of losses or extra 

costs ahead 

Legislation is threatened which will be adverse to the business 
Violent upswing in costs of raw material or labor is expected 
Shrinkage in value of the assets is not included in the income on which 

the tax is based, due to inability to take anything but realized losses 

as deduction in tax return 

What steps can you take in the management of a business if you have 
accumulated large liquid earnings of over $60,000? Perhaps your equipment 
and fixed-asset purchase orders can be placed now to avoid the penalty. 
Or at least get a complete, written plan showing just why you desire to 
retain earnings. Our cases hold that any impairment of capital must be 
restored before any earnings are available for distribution to the stock- 
holders. Perhaps you cannot be taxed for unreasonable distributions in 
these instances. It is essential to ascertain whether you have any real surplus 
which can be used for distribution to the stockholders. Often our older 
companies find they do not have the accumulation they assume. You may 
avoid the surtax if you have no "accumulated earnings." Beyond these, 
the following steps may aid you to avoid the penalty tax if you do not 
distribute earnings : 

Check normal business steps to be taken like: speeding deliveries to your 
customers; cutting your cash and piling up inventories and receivables; 
buying all possible inventories or supplies needed for current produc- 
tion, to cut your cash; avoiding advance collections from customers, to 
keep your cash down 

What about converting your tax year to your natural business year? That 
may reduce your year-end cash balance. See if you ought not to change 
your reporting year. It should end at a point when your cash is lowest 

Make sure your directors' meetings fully explain by convincing reports 
and records of the discussions that led to failure to pay dividends 

Have the directors approve creation of actual reserves required; state the 
possible liability or loss for which you are providing 

See if your stockholders really would have a surtax by your payment of 
dividends. They might not, because of losses. In that case, you are not 
avoiding the surtax and will not be penalized if you do not pay dividends 

Check to see if you should dissolve the corporation and operate as a part- 
nership. Most likely you will have a capital gains tax. But that may 



PROPRIETORSHIP, PARTNERSHIP, OR CORPORATION 159 

be much cheaper than the penalty tax on undistributed earnings. (This 
assumes you have no substantial goodwill on liquidation.) Liquidation 
is repeatedly advised to avoid the penalties in this section. The accumu- 
lated earnings distributed in a liquidation secures a full dividend credit. 
It may wipe out the tax on undistributed income due for the year. It 
may be a very important move for some companies. This step should 
not be taken with young or new corporations. The Treasury might urge 
that the liquidation was part of the plan when the company started 

How can you pay dividends to avoid the penalty? If cash is paid, the 
credit is the full dollar amount of the dividend. The credit is allowed only 
if the dividends are paid before the end of the year. Declaration is not 
sufficient. 

You get no credit if the dividends are not paid pro rata to all stockholders 
of a class. If you distribute property, the test for prorata distributions is 
concerned only with the value of the property to the recipient not the cost 
of the property to the company. 

Maybe you would be willing to pay this tax. This penalty tax rate on 
corporations is often considered relatively low, and hence it may sometimes 
pay you to risk the tax. 

The rate is 27/ 2 per cent on the first $100,000 of "undistributed earnings" 
(a special calculation, set out in the law). Anything over that is taxed at 
38/2 per cent. 

Individual tax rates run up to 91 per cent. Therefore it is often figured 
that the combination of the tax of 27/a or 38J/2 per cent on the undistributed 
profits, plus the tax of 25 per cent that comes with eventually liquidating a 
company and giving all the assets to the stockholders will be much less than 
the tax that would be paid by the shareholder receiving the dividends. 

As a result some stockholders may risk the tax. These stockholders figure 
that the tax plus the cost of liquidation will be less than the cost of a 
dividend to them. 

How corporation* tax-wisely deal with stockholder* and bondholders 

When a stockholder advances additional monies to his corporation, he 
may want them treated as a loan. If the advance is a contribution to 
capital, the cost basis of his stock is increased. The stockholder's intention 
is very important. That may determine whether the payment was made to 
increase his stock investment or to create a creditor-debtor relationship 
with his corporation. There is a loan only if the advance is made with 
, expectation of repayment, even though 

The corporation is in financial difficulty 

The loan is made by sole or controlling stockholder 



160 HOW TO RUN A SMALL BUSINESS 

Redemptions of stock often involve the charge that a taxed dividend is 
really being paid to the stockholder. Then, of course, the stockholder may 
lose the opportunity of capital-gain treatment and be taxed as on an ordinary 
dividend. Where the dividend charge can be avoided, the redemption of 
stock is considered a sale by the shareholder of his stock to the corporation. 
In such case, he has capital gain for the excess of what he receives over the 
basis of the stock he gives up. 

Although the law does not specifically explain when a redemption is es- 
sentially equivalent to a dividend, it does set out some specific situations 
where, if you meet the rules, you can get capital gain on redemption. Con- 
sult your tax adviser when you plan any kind of stock redemption or liquida- 
tion. He can show you how your plan can meet these rules. 

In this area, we also want to be wary of the tax traps awaiting a stock 
deal which comes within the collapsible-corporation rules. Here, a sale of 
stock or distributions in liquidation that would otherwise give capital gain 
can give ordinary income if a collapsible corporation is involved. The col- 
lapsible-corporation rules are designed to prevent capital gains in a situation 
like this : A corporation is formed to build a house, produce a moving pic- 
ture, buy inventory, or build or produce anything else. When the building 
or production is completed, it is assumed the value will increase. Instead of 
the corporation selling the product and realizing the profit, the stockholders 
sell their stock or the property is liquidated to the stockholders. In this 
manner, the stockholders hope to get capital gains through the increased 
value of their stock or a capital gain on liquidation with a resale of what 
is distributed at no gain. The collapsible-corporation rules prevent this result. 

If you are going to buy out another stockholder, do not assume you can 
then get your corporation to acquire the stock from you. You must have the 
stockholder deal directly with your corporation. That gives these advan- 
tages: 

Your selling stockholder still gets a capital gain, he thus secures his income 
at bargain rates. For him to take what is due him as dividends might 
be very expensive. That might permit you to buy his stock very advan- 
tageously 

You avoid a tax to yourself at ordinary dividend rates if you try to pay 
for the stock out of money taken from the company. If you buy and 
then redeem, still holding on to the rest of your stock, that is likely to 
be termed a dividend 

Paying out a stockholder from the company cuts its cash. That may 
diminish the risk of assessment of the tax for failure to distribute profits 

Stockholders of a corporation frequently enter into agreements restricting 
the sale or other disposition of their stock. There are many business reasons 
for doing this. Among these are 



PROPRIETORSHIP, PARTNERSHIP, OR CORPORATION It! 

Ensuring continuity of control of the corporation 

Ensuring stability of management 

Preventing outside interests from becoming stockholders 

Interesting and retaining able officers and employees 

Fixing the price upon disposition of the stock after death of the holder 

Fixing the mechanics for disposing of stockholder's interest 

Many difficulties are involved in making these agreements. For example, 
the disposal price cannot be set at a figure out of the reach of the survivor. 
On the other hand, it cannot be set so low that it injures the decedent's 
family. Unless the agreement is completely effective, a dissatisfied executor 
may be inclined to contest it. 

In drafting restrictive agreements, if you desire to limit estate and gift tax 
evaluation to the agreed price, you should do these things: 

Eliminate opportunities for stockholders to transfer stock to other persons 
before the option holders can act 

Do not permit the stock of a stockholder-decedent to be transferred to 
his family without giving rise to the option 

Do not make transfers dependent upon consent of the board of directors. 
In a closely held corporation, this will leave in doubt when the approval 
will be had 

Indorse stock certificates with a notice of the agreement restricting dis- 
position of the shares 

Include the corporation as a party in the agreement, even if no option 
runs to it 

Deposit shares in escrow. This limits possibilities of nonperformance and 
litigation 

Make option effective at the election of others, if one attemps to transfer 
in violation of the agreement 

Make sure terms like "book value" or "earnings" of the corporation are 
carefully defined, if price is dependent upon them 

Provide for dilution of the stock by stock dividends, recapitalizations, 
mergers, extra ordinary distributions, etc., if a definite price per share 
is fixed. Otherwise it may be argued that the practical effect of the 
agreement was uncertain because the price was dependent upon con- 
tingencies not considered 

Avoid circumstances permitting the agreement to be indirectly invalidated. 
In one case the restriction was in the bylaws and would be eliminated 
by a change in the bylaws. Be sure a dominant stockholder cannot 
modify or remove the restriction by forcing an amendment, waiver, or 
even abandonment of the agreement 

Fix the events which make the option operative 

Do not permit sale of the stock to another even w^Ji the condition that 
he hold the stock subject to the same options as the transferor. This 
weakens effectiveness of the agreement 



1*2 HOW TO RUN A SMALL BUSINESS 

Do not set a number of option prices at different amounts dependent upon 
varying factors. That places an additional burden of fixing the price. 
Set a single option price to be used in all circumstances 

Remember that grant of unilateral options to employees sometimes limits 
value. But it must be shown that: the option was given to encourage 
the employee in continuing with the corporation; his services were 

needed in the business 

Wow fo finance your corporation and get the greatest tax deduction* 

Sometimes bonds are preferable to stock in financing your new corpora- 
tion. You get an interest deduction for bonds and not for stock. You gen- 
erally can pay off the bonds without tax liability attaching to the trans- 
action. If you redeem stock without disturbing the relative interest of 
stockholders, your payments might be taxed as dividend distributions. But 
the same theory does not apply to bond redemptions. 

How do you find out whether a given amount paid into or left in the 
business of a corporation by stockholders is a debt or is capital stock? 
Stockholders' money left in the business may be there either for investment 
or as borrowed capital. That depends upon the conditions attending the 
advance. 

Modern corporate practice frequently makes use of hybrid forms of securi- 
ties with overlapping characteristics. To discover whether you have an 
interest deduction, it is necessary to determine whether a particular security 
is a proprietary interest or a debtor-creditor relationship. For example, 
so-called "preferred" stock, which ranks with or prior to the interests of the 
general creditors, may be a debt. Whether outstanding certificates desig- 
nated by such names as "debenture preferred stock" or "guaranteed pre- 
ferred stock" are borrowed capital depends upon this point: whether the 
holder has a proprietary interest in the corporation or has the rights of 
a creditor, determined in light of all the facts. The name borne by the 
certificate is by no means controlling. 

The issue in most of these cases is whether the "interest" payments are 
deductible. If they are "dividend" payments, they are not deductible. The 
Treasury may claim that reorganization plans, under which the so-called 
debentures were issued, serve no business purpose of the corporation that 
the transaction is lacking substance. 

But this has no bearing upon interest deductions. If the instruments 
contain the following, they are not preferred stock and the payments made 
for interest are therefore deductible: 

Interest rate is fixed 

payment date of interest is fixed 



PROPRIETORSHIP, PARTNERSHIP, OR CORPORATION 163 

Payer is under a definite promise to pay 

Payment is not dependent upon earnings 

Payee has priority to stockholders on dissolution 

Upon default, all rights of payee may be enforced by suit 

Holder has no voice or vote 

Maturity of debt is definite in 5, 10, or 20 years, or some other reason- 
able date in the future 

Obligation gives the holder no share in the company's assets, or in its net 
assets on liquidation 

Sometimes companies issue bonds in a recapitalization. Or they may 
try to convert stocks to bonds. That may produce a tax to the receiver of 
the bonds. If the issuance of any type of security can be accomplished by 
a dividend, then it cannot be given tax immunity by calling it a recapitaliza- 
tion. 

A ^classification or other realignment generally cannot get you tax 
freedom if there are accumulated earnings. 

What is controlling is that a new arrangement shall not give the appear- 
ance of accomplishing a distribution of earnings. A corporation which has 
undistributed earnings may create new corporate obligations. They are 
transferred to stockholders in relation to their former holdings. That pro- 
duces the same result as a dividend of cash earnings. This usually cannot 
obtain tax immunity for the stockholder. You do get tax freedom in a 
recapitalization if 

It is designed to accomplish a general reshuffling of capital structures of a 
business for example, adjustment of securities by voluntary agreement 
of creditors and stockholders or a reshuffling of securities for a business 
benefit or purpose like 

Improving the credit of the company 

Making a bank loan possible 

Reducing corporate fixed charges 

Eliminating an obligation to retire securities for cash at fixed dates 

Making a market for corporate securities 

Improving the corporate financial structure 

Eliminating harsh preferences in existing stocks 

Getting a wider market for stock 

Making possible corporate redemptions to its advantage 

Providing financial encouragement to employees or management by 

increasing possibility of income from stock owned by them 
Securities are issued for a sound corporate (not shareholder) business pur- 
pose, and pursuant to a plan of recapitalization; for example, when 

Bondholders exchange their bonds for preferred stock 

Deferred stock is given up for exchange into common or preferred 
stock of the same company 



164 HOW TO RUN A SMALL BUSINESS 

There is a good business reason even when there is a substantial shifting 
of rights of stockholders. One case permitted a group of common stock- 
holders (an older group desiring to relinquish management) to give up 
their common stock to another and younger group and to take preferred 
stock in exchange 



10. HOW TO OPERATE A STORE MOST EFFICIENTLY 

The exterior appearance of the store and the interior layout can make 
or break a retail business. The arrangement and layout, the displays of 
merchandise, the merchandise itself, the conduct and appearance of the 
staff, are all so closely related that it is a little difficult to consider any 
one element separately. 

Together they mold an impression which is either good, ordinary, or 
bad. Here is a Department of Commerce check list of the characteristics that 
make for a good-appearing, smoothly flowing store operation: 

Good sidewalks, easy entrance, and store floor at street level 

Adequate illumination 

Sufficient department identification to permit easy customer progress to 
the department sought 

Sufficient aisle and circulation space to invite free movement about the 
store 

Use of light, color, and space to create the impression of size and spa- 
ciousness 

Easy point-to-point visibility throughout the store 

Relating departments and goods to create maximum number of multiple 
sales 

Placement of selected service and commodity stations to facilitate circula- 
tion and convenience 

Accessibility of shelf and counter merchandise to invite self-service where 
desired. Eliminating excessive floor fixtures helps 

More merchandise out in view, and less under showcases 

Absence of most of the larger fixtures designed exclusively for goods of 
one manufacturer. Such goods may be consolidated with regular in- 
ventory in standard fixtures. (Sales volume and margin produced may 
justify exceptions) 

Adequate ventilation to prevent unpleasant odors and to protect mer- 
chandise 

Temperature in the store kept within the range of comfort 

Adequate protection of goods against pilferage 

Elimination of hazards to life, limb, or property of customers and em- 
ployees 

Maintenance of sanitary conditions 

Absence of obsolete equipment, fixtures, decorations, displays, or non- 
165 



166 MOW TO RUN A SMALL BUSINESS 

essentials that interfere with operations or take customers' attention 

from buying 
Conformance to regulations governing sanitation, fire hazard, licenses, 

and other matters 
Separation of service departments that are separable from selling (a) to 

avoid confusion and customer dissatisfaction, and (b) to facilitate the 

operation of individual departments 
Limited use of uninteresting decorations, manufacturers' posters, window 

enamels, and decalcomanias 

Expected customers' conveniences such as telephone and washrooms 
Departmental arrangement calculated to promote the sale of high-margin 

commodities 
Use of display that is best calculated to promote the department, the 

item, or the kind of business 

Avoidance of unpleasant displays, or displays that may offend any impor- 
tant proportion of the patronage 
Adjustability to expected peak loads 
Conformance, in general, to habits of the people and the customs of the 

kind of business 

Are you going to open a new store or another store? 

The number of stores in the community will be a rough indication of 
the need for the store you want to open. The wholesalers in your line will 
help on that. They naturally have an intimate knowledge of the situation. 
They will know the type of goods sold and will have a pretty clear picture 
of how well the market is covered. 

Wholesalers' representatives will also be aware of any old stores that 
are dying. 

Let us suppose that all indications point to a need for another store. 
You will want first to think about how much business you are likely to do 
if you do open. 

Remember that your store will have to share its sales volume with that 
of other well-established stores in the town. The question then is: How 
much business do the existing outlets do? Estimating the business done 
in various stores is not an easy matter. You can scarcely expect existing 
retailers to open their arms to new competition and give all the facts about 
their sales. Nor can you hope to come to any reasonable estimate unless 
you have had considerable experience in the field you want to enter. If, 
however, you have had a well-rounded background, you will be able (aided 
by wholesalers) to size up fairly well what you can get out of their volume 
assuming you are going to have a store worth patronizing. 

Chain stores sometimes use the following method of estimating the volume 
for a store location: 



HOW TO OPERATE A STORE MOST EFFICIENTLY 167 

Plot the nearby towns on a map, including those towns from which you 
might expect to draw trade. Draw a line around these towns. This 
will give you a fairly good picture of your trade area. It is within this 
area that you will be most likely to get the bulk of your business. It 
is in this area that you might calculate the number of families or the 
total number of people for arriving at an over-all sales potential 

List the names of competing stores in your town and in the other towns 
outlined in your trade area. This list should include all stores that 
carry lines similar to those you plan to handle 

Estimate the volume of sales for each of these stores 

Then guess how much of it good planning and good merchandising will 
take from them and give to you 

In buying a going business, the problem is simplified. If experienced, 
you would expect to do about the same amount of business as the previous 
owner, and possibly more. Chapter 8 tells you how to go about a purchase. 

How to choose the right town for your store 

Regardless of your personal desires, you should be sure that you start 
your venture in a town which shows good possibilities of growing. In judg- 
ing the future of communities try to classify them along the following lines : 

The growing town. Such a town probably grew rapidly during its early 
beginnings and then had a long-term gradual but steady increase in 
population and business activity. It may be that this type of town has 
not yet reached its full growth 

The town that has grown to its present level for sound economic reasons 
and has more or less maintained this same level over a long period, 
with little likelihood of a sharp decline occurring in the future 

The town that grew fairly rapidly and then leveled off over a long period, 
but which recently shows definite signs of losing population because 
of economic reasons. We might find in this class a number of towns 
and cities in the Midwestern dust bowl. In these localities there was 
a general migration away from the towns 

The declining town which may have had a quick start at its beginning, 
perhaps because of some special event such as discovery of gold or oil, 
or some other industrial activity that caused many people to rush to 
the town. Usually a mushroom growth developed, and then the eco- 
nomic justification of the town faded, causing a rather sharp decline 
in size with no apparent reason for the town's ever becoming important 
again unless by some occurrence which cannot be foreseen 

The small or medium-sized town which is in the road of something that 
may cause spectacular growth. An example of this type of town might 
be a small place where oil might be discovered some day, or where 
mining activities might develop. Ideal resort locations which have not 
yet struck a popular appeal may also be classified in this group 



1*8 HOW TO RUN A SMALL BUSINESS 

After you have narrowed your selection, tentatively, to a particular town, 
analyze it carefully. The more specific you can make your appraisal the 
better. 

The following Department of Commerce list should bear on your decision. 
Other ideas will probably occur to you. But the details suggested will give 
a general picture of possibilities in a town. When you have completed your 
appraisal you can see whether the advantages outweigh the disadvantages. 

Check list for guidance in selecting a town 

Business factors (industry: farming-manufacturing-trading) 

Trend of industry. Highly satisfactory, growing, stationary, or declining? 

Permanence of industry. Old and well established, old and reviving, new 
and promising, or recent and uncertain? 

Diversification of industry. Many varied, many same, few varied, or en- 
tirely dependent on one major industry? 

Stability of industry. Constant, satisfactory, average, or subject to wide 
fluctuations? 

Seasonal industry. Little or no seasonal change, mild seasonal change, 
periodical (every few years) seasonal change, or extreme seasonal 
fluctuations? 

Future of industry. Promising, satisfactory, uncertain, or poor outlook? 
Population 

Trend of population. Growing, large and stationary, small and stationary, 
or declining? 

Wealth of population. Wealthy, well to do, moderately well off, or poor? 

Character of population. Native born, mixed, chiefly foreign? 

Mode of living. Home owners, pay substantial rent, pay moderate rent, 

pay low rent? 
Competition 
' Number of stores. Few, average number, many, or too many? 

Type of management. Not progressive, average, above average, alert and 
aggressive? 

Presence of chains. No chains, a few chains, average number, many well- 
established chains? 

Type of stores. Unattractive, average, above average, or very attractive? 

Nature of stocks. Incomplete, average, above average, or complete? 
Other facilities of the town 

Transportation facilities. Excellent, good, fair, poor? 

Merchandise supplies. Local, nearby, average distance, or long distance? 

Banking facilities. Excellent, good, adequate, poor? 

Civic associations. Aggressive, adequate, poor, or absent? 
The town or community as a place to live 

The following are: Excellent, good, adequate, or poor? 
Schools 
Churches 



HOW TO OPERATE A STORE MOST EFFICIENTLY 169 

Medical and dental services 
Amusements 
Climate 

The people will be congenial, are your kind of people rate excellent, 
good, fair, poor 

You can hardly expect to appraise the town you are considering without 
a good deal of expert advice. 

In fact, you will need to ask a great many questions of people who know 
the community, You will certainly want to visit the local chamber of com- 
merce to get an idea of the future prospects and the current situation in the 
town. If any businessmen's group has been formed expressly for the purpose 
of working out plans for general business prosperity, be sure to visit it. 

Talk also to experienced businessmen and a banker to get their views 
on general business conditions. 

But no matter how bright the future of the community appears, unless 
there seems to be a need for another store, you would be foolish to consider 
it. You should feel reasonably certain that there is room for the store you 
are planning to open. 

How to select the best store site 

The matter of neighborhood or street location is simple if you decide to 
settle in a small town. Retail stores are usually situated in a compact area. 
Regardless of where you locate, however, you should know what to seek 
and what to avoid when making your selection. 

Select a site where there is the necessary store traffic for your particular 
business. 

It may be possible to attract business to an out-of-the-way, low-rent loca- 
tion. But it costs money to get people to leave a beaten path. It usually 
takes considerable advertising or low prices, or both. These may eat into 
your profits if they are carried on to an unreasonable degree. Use these 
guides: 

There is a pretty direct relationship between location and rent; a good 
traffic location usually has a high rent, and an out-of-the-way location 
has a lower rent but a high advertising cost 

The balance of choice for a store seems to be in favor of the better loca- 
tion at a 'higher rent, provided it is within your means 

With a good traffic passing the store, you can be assured that out of these 
passers-by, some will be attracted by your windows. Of those entering 
your store a certain percentage will buy. How large the percentage 
will be, is up to you 

It is wise to locate near other retail stores and service establishments such 



170 HOW TO RUN A SMALL BUSINESS 

as drug, hardware, and grocery stores, restaurants, beauty shops, florists, 
and dry cleaners where other businesses draw the kind of traffic that 
you need 

Should you avoid setting up in business near aggressive competition? 
Your store can be a success despite competition by capitalizing on the 
principles or methods of operation in which competitors are weak: 

Offering better merchandise assortments and selections 

Offering more adequate service 

Using more aggressive and intelligent sales promotion techniques 

Carrying either higher-priced quality goods or lower-priced lines 

Arranging better displays 

Stressing departments in which competitors are weak 
Even though some communities may seem overcrowded with retail stores, 
there still may be an opportunity for a new establishment. A number 
of different kinds of stores clustered in a small shopping center adds to 
the location value of each store by drawing many customers to the 
locality 

Pedestrian traffic is important. The chains spend thousands of dollars in 
studying store location. 

One of the important parts of their studies is the counting of the number 
of people passing a given location. They also keep a careful check of the 
sex of passers-by, as well as of their estimated age and of other factors, such 
as whether they belong to low-, medium-, or high-income groups. 

They carry on these tests over a considerable period of time and in all 
kinds of weather. They use their established outlets in similar locations to 
estimate the number of passers-by who enter a store and buy. 

Conduct such a test, particularly if you are trying to decide on one of two 
or three sites. One way is by clocking each location for half-hour periods 
and at different hours during a number of days. You will get a fair idea 
'as to which streets offer the heaviest traffic. 

Experts advise selecting the location having the highest traffic count per 
half hour during the 1:00 P.M. to 5:00 P.M. period and on Saturday nights. 

There is no general rule that always applies, except to choose the side 
of the street carrying the heaviest pedestrian traffic the side that most cus- 
tomers prefer. If both sides attract an equal number of people, then you 
will be wise to choose that which is easier for automobile traffic to reach. 
And use these other guides: 

Take the "going home" side in preference to the "going to work" side 
Naturally a corner site commands a higher rent than does a site inside 
the block. Because it affords windows on two sides, it is particularly 
desirable for displaying a wide line of items, like that carried in a 
limited-price variety or general merchandise store. The decision as to 
a corner location, however, should be based on ability to pay the rent. 



HOW TO OPERATE A STORE MOST EFFICIENTLY 171 

If the costs are excessive, you might much better be situated in the 
middle of a block 

Locate in a thriving subcenter or neighborhood shopping section 
Pick a shopping district made up of the usual convenience-type stores 
drug, grocery, specialty, and hardware stores and the typical service 
outlets. A recent trend has been the establishment, in outlying cities 
and nearby suburbs, of branches of big city departments stores. Thus 
a fairly complete shopping service is provided people living in these 
neighborhoods 

A well-planned layout makes selling easier 

A good layout ensures that counters, tables, shelves, and other fixtures 
are so arranged that customers can see the merchandise without hunting 
for it. 

Putting merchandise out in the -open, where customers have access to it, 
creates sales. 

If a few items are stolen, the cost is generally far outweighed by the 
additional sales brought about by open display. No sales-minded merchant 
would keep other than extremely valuable items under lock and key. Of 
course, there should be supervision of the selling floor to prevent pilferage. 

Use these principles: 

Have the merchandise where the customer can see it. Of the thousand 
and one different things he might buy, the shopper can't remember 
more than a few specific things. The goods available in the store must 
be bought largely on impulse, and the impulse to buy them for home 
or personal use can be created only by the merchandise itself. This 
principle is supported by experience. 

Have a well-planned layout that actively promotes sales of impulse goods. 
For instance, the chain variety stores always place their candy, jewelry, 
toiletries, and notions just inside the door, while to the rear are the 
underwear, housewares, etc. The reason is easily understood. A cus- 
tomer enters the store and goes to the rear to buy the things he or she 
needs, but coming in and going out he or she must pass the profit- 
making candy, jewelry, toiletries, and notions departments. And shown 
there are items which the customer had not intended to buy, but sees 
displayed and often buys on impulse. 

See that fixtures permit the customer to see the merchandise as it actually 
is. If you want repeat trade, there should be no surprises or disappoint- 
ments, because of poor store lighting, when purchases are examined 
critically later. 

Induce people to go where you want them to go by using intensified, 
unusual lighting. In a test made by one store, nearly five times as many 
people as normally went to the back of the establishment were led 
there by increased lighting. 



172 HOW TO RUN A SMALL BUSINESS 

Call in a store layout man. His experience in layout, lighting, painting, 
and the multitude of things that go into a modern store can not only 
save money but ensure that your store arrangement is well planned. He 
can help plan counters that will be suitable for your merchandise and 
a counter arrangement that will save work in display and selling. 

If no layout expert is available, get advice from your fixture supplier. 
Remember that a dealer is in business to sell counters and other fixtures. 
Therefore, the layout suggested may not be the most effective for the 
expense involved. 

In the majority of stores, the greatest volume of profitable sales is pro- 
duced by well-balanced departments. Space cannot be added to one depart- 
ment without reducing another proportionately. For this reason, do not 
tend to overdevelop one department at the expense of another, unless you 
are convinced that total store sales volume will be increased. 

The following points should be considered when planning your depart- 
mental layout: 

The amount of space to be given to a department is determined, to a great 
extent, by its location. Departments composed of a large percentage of 
bulky items and low unit sales are naturally forced to the rear of the 
store. Departments made up of small items with a high unit sale 
naturally come to the front. "Call" merchandise is displayed in the 
rear. Impulse items, whose sales depend upon display and suggestion, 
should usually be near the front 

The physical requirements of the size and shape of the item may govern 
the location. So will the number of items in a department that can be 
displayed off the counter 

Sales of competitive stores in the trading area govern location. It is 
necessary to obtain as much data as possible concerning competitive 
sales before determining the space to be allotted to a department 

Advantage* of a self-service store 

Self-service stores reduce the labor in selling goods. They may take ad- 
vantage of mass displays of merchandise as a sales-promotion device. Other 
advantages of self-service are 

Self-service sells more goods because of the open-display feature. This 
method enables the customer to examine the merchandise at leisure 
without the pressure of sales clerks. Open display suggests purchases 
that the customer may not have thought about or planned 

Self-service usually results in a lower labor cost. This is an important 
consideration. Wages, principally of sales personnel, are usually about 
one-half of the total operating expenses of the retail store. The lower 
labor cost is possible because customers spend only their own time in 



HOW TO OPERATE A STORE MOST EFFICIENTLY in 

selecting goods. The fewer clerks needed can utilize their time more 
productively in actually completing sales 

Self-service permits more goods to be sold during the peak rush hours. 
The clerks can devote their time to completing sales and wrapping 
merchandise 

Sales clerks are necessary even in the more highly developed self-service 
operations: to assist customers in the selection of certain goods where 
a knowledge of the merchandise becomes important in completing the 
sale; where the question of size or fitting enters into the transaction 

Self-service in the small store provides open displays of all merchandise for 
sale, utilizing tables and the larger counters for the horizontal mer- 
chandise. Special racks and stands have to be provided for apparel that 
is displayed hanging up. A service desk, equipped with a cash register 
and preferably with a clerk in attendance, is needed for completing the 
sale and wrapping the goods 

In the smaller store having only one or two persons to serve customers, it 
is not feasible to have a clerk assigned to the service desk. Whoever is 
available at the time will have to watch for customers as they approach 
the service desk to have the sale completed 

In relatively small stores it is not uncommon to see small cash registers con- 
veniently arranged to serve the selling floor. Customers usually approach 
the cash register nearest them. As a precautionary measure, each cash 
register should be placed so that the clerk will have to slip in behind a 
counter to ring up the sale 

Prevent damage to your sfore and injuries to customers and employee* 

The average store is not a dangerous place in which either to work or to 
shop. 

But no matter how careful the storekeeper may be, there are times when 
the exercise of a little extra precaution will prevent damage to the store and 
injury to employees and customers. 

Accidents, for the most part, can be avoided by using a few precautions. 
Here are some suggestions on reducing or eliminating hazards which may be 
present in your store : 

Keep the store entrance clean: 
Trash, refuse, slippery substances, or obstructions should not be permitted 

to collect at or around entrances and exits and immediately inside of 

building 
Snow in front of the entrance should be removed as soon as possible, or 

sprinkled with ashes, sand, sawdust, or wood chips 
In the event heavy rain forms deep puddles in front of the door, mop up 

the water to prevent its being tracked into the store, where it may make 

the flooring slick and dangerous 



174 HOW TO RUN A SMALL BUSINESS 

Keep the floor, in good condition: 

Flooring should never be allowed to become uneven or splintery (if 
wooden) or overwaxed or too highly polished (if tile, linoleum, or similar 
substance) 

See that the floor does not become littered with trash or slippery substances 
Control pests and vermin: 

The structure containing the store should be so constructed as to exclude 
rats, vermin, and insects 

It is vitally important to screen all doors, windows, and entrances 

Traps should be provided for all sewer connections and covers for cellar 

drains 
Keep the stairways well lighted and unobstructed: 

Customers are not likely to venture down the cellar stairs or onto other 
stairways, but employees are, as this may fall within the line and scope 
of their employment. Stairways should be kept well lighted and com- 
pletely free of mops, brooms, boxes, cartons, trash, and obstructions of 
any kind 
Don't set up an "obstacle course": 

Some stores have shown a tendency to display certain hard-to-get items in 
cartons and boxes scattered indiscriminately about the floor. This is done 
probably on the theory that the turnover will be so fast that it is hardly 
worth the effort to place the items on shelves or on gondolas 

"Obstacle courses" are highly irritating to the customer who does not relish 
the idea of diving head first into a carton or box, or of running the risk 
of stumbling over it 
Use common sense in stacking shelves and gondolas: 

Do not overload shelves and display stands or carelessly stack cans and glass 
containers on them. Overloaded shelves may be disrupted and upset by 
customers, with resulting showers of cans and broken glass containers 

It is an excellent idea to check shelves and gondolas for the presence of 

' nails, tacks, rough edges, and splinters 
Don't make a firetrap of your store: 

Excelsior, boxes, rags, paper, inflammable liquids, and articles which may 
ignite from spontaneous combustion should never be permitted to ac- 
cumulate where they may cause a fire, especially near heating equip- 
ment or in a storage room 

If it becomes necessary to dispose of trash by burning, such burning should 

be done in an open metal container on bare ground 
Have heating equipment inspected: 

The majority of modern heating systems are provided with adequate safety 
devices, which are effective but will not operate indefinitely without 
attention 

Frequent inspections are advisable for proper care and maintenance of all 
parts of the heating system 

Heating appliances and equipment should be provided with proper insula- 
tion, including asbestos, magnesia covering, metal lath, and plaster 



HOW TO OPERATE A STORE MOST EFFICIENTLY 17* 

Planning a buying program for your sfore 

Real buying skill comes only from practice. Even with experience, you 
cannot hope to do a perfect job every time you place an order. People's 
desires are too varied. Every individual buyer, or even group of buyers, is 
bound to make some mistakes. 

The important thing is to keep errors down to a minimum. Recognize 
each one as it occurs, and make corrections. 

Your buying will be governed to a large extent by what your customers 
need and want. Only by satisfying the consumer demand can you hope to 
move merchandise and make profits. Here are time-tested aids: 

Guides to local preference are displays, both windows and interior, and ad- 
vertisements of other stores. Get the advice of suppliers' salesmen. They 
will tell you of any marked likes and dislikes which may be caused by 
climate, average income, traits of nationality, etc. 
A constant guide in buying wisely will be the requests of customers 
A stock balanced between nationally advertised and private brands is recom- 
mended by merchandising experts 

The advantage of nationally advertised brands is that the public is con- 
stantly reminded of their quality, durability, and general value. Thus a 
consumer demand is built for these goods, and they require comparatively 
little selling effort 

Because of this intensive promotion on the part of the manufacturer, 
rapid turnover is ensured. As a result, national brands can usually be 
merchandised at a narrower margin of profit 

With private brands, often a strong local demand is built up by a whole- 
saler 

Sometimes the value is better than that of a comparable nationally 
advertised item 

Sometimes it is possible to obtain exclusive local distribution of certain 
brands. Then the store is able to shave the margin of profit and offer the 
items at attractive prices. Low-profit leaders of this type are in keeping 
with sound merchandising principles 

In buying the large assortment of items necessary, guard against too close a 
similarity in both goods and prices. That will slow customers' selections. 
If the price intervals are wider and the styles somewhat varied, the cus- 
tomer will be less confused. Salespeople will then spend far less time in 
explaining or justifying prices 

How much should you buy? 

Intelligent buying requires a thorough knowledge of terms offered by the 
seller. It also calls for a clear understanding of how much to buy. Use these 
guides: 



176 HOW TO RUN A SMALL BUSINESS 

See that your stock is never more than the amount necessary to handle 
your expected sales 

Keep inventories low and cash high. That permits taking advantage of 
good deals good opportunities 

Think of your inventory as an investment. It must pay out or be elimi- 
nated 

Don't buy full lines buy particular items you can move quickly 

Avoid seasonal carry-overs if you can. Prices may drop 

To maintain proper inventories and avoid late overbuying, peak stocks 
ahead of demand. Because of the various peak and slack periods in con- 
sumer buying, goods never flow evenly through a store 

Work back from sales to purchase peaks. Successful retailers know when 
they can expect sales peaks. They schedule their buying far enough 
ahead so that they have the goods on hand 

Compare not oply price but terms. Take advantage of all cash discounts 
you possibly can. In many cases, it pays to borrow money in order to 
take discounts. The price of goods is really the net after all discounts 

To compare quotations from different sources where terms vary, reduce 
them to a net basis, and add transportation. Net landed prices and not 
quoted prices should be compared. Goods from a nearby source at a high 
list may be a better buy than goods with a low list from a distant source, 
after delivery charges are added 

Study carefully any offer to sell a large supply of goods at a substantial 
saving. The temptation to plunge is great. Overbuying of this sort at very 
tempting prices, in quantities far beyond the capacity of normal operation, is 
one of the first "don'ts" the retailer should learn. 

Some of the other good buying practices are described here: 

Advanced datings are sometimes granted by the seller to induce buying 
prior to actual needs. Goods may not be needed until just before the 
season opens. But manufacturers find it difficult to produce and ship 
to all buyers at the same time. This applies especially to seasonal goods. 
Sometimes the manufacturer will accept the retailer's order well in 
advance, ship the goods when they are ready, and send the invoice dated 
ahead. This date governs the beginning of the discount or net period 
for payment 

Some manufacturers make a practice of selling on a consignment basis. 
This provides for payment after the sale. Sometimes regular payments 
are required (say each month). The advantage to consignment buying 
is that you do not have to invest your own money in the goods you 
purchase 

Job lots, sample lines, and close-outs can be profitable. But be sure you 
analyze carefully the assortments and quality of the goods before you 
buy. These offers may be unbalanced as to sizes, contain off colors or 
outnof-d^te styles, or be so defective as to be unusable. The unsold por- 
lots might easily contain all the profit on the purchase 



HOW TO OPERATE A STORE MOST EFFICIENTLY 177 

Speculative buying is a form of gambling to be indulged in with only such 
money as is not required for the normal operation of a business. It is a 
dangerous risk for the average merchant with limited funds 

A good buyer will risk reasonable purchases of untried items. Some of 
these prove highly profitable; others do not. Here again, experience, 
judgment, and sufficient money are of prime importance 

Advance buying on a rising market is considered conservative merchandis- 
ing for experienced merchants. When the market is rising, the retailer 
who buys in advance has two choices: he can mark up his goods on hand 
in accordance with the increasing market prices and make an additional 
profit. Or he can maintain his former prices based on a lower market 
and thus undersell competitors who are compelled to price with the 
rising market. The latter is preferred by the more progressive retailers. 
It gives the public the benefit of the lower prices 

To buy intelligently, you must know how goods are packed as to quantities 
and assortments. Knowing this, you can avoid over- or underbuying. Goods 
are packed by the manufacturer for convenience in handling and shipping. 
Identical items may be packed in all sorts of cartons. Keep these points in 
mind : 

Sometimes the manufacturer or the wholesaler will prepare well-balanced 
assortments that will sell out clean. Often, however, in assortments are 
end sizes and less desirable colors and styles 

While the manufacturer's packing of an item is referred to in quantity 
units, you should always think of merchandise in units of time a week's, 
a month's, or a season's supply. The stock of the safe-and-sure volume 
items on hand and on order should be gauged for a longer time than 
that maintained on the items needed for variety, to complete assort- 
ments, to build customer interest, or to increase markup 

To help you keep well-balanced assortments, you should prepare your 
own guides. They will not only save time in preparing future Orders, 
but will give you facts that can be learned no other way 

Merchandise should be bought in quantities that can be sold within a 
reasonable length of time. 

The danger of depreciation and obsolescence is greater, the longer goods 
are held. In addition, more time is required to take care of them, and more 
money must be spent for rent, heat, and light for storing or displaying them. 
As an example, assume the following expense ratios to sales; 

Expense Ratio 

to sales 
Buying and selling (ordering, receiving, marking, selling, advertising, 

supplies, idle time) 0.09 

Occupancy (rent, heat, light, preserving stock, markdowns, shrinkage) 0.09 
Administration (unallocable expense) 0.05 

Total 1X23 



170 



HOW TO RUN A SMALL BUSINESS 



Let us suppose, further, that your average stock is a 3 months' supply. Occu- 
pancy expense above is 9 per cent for goods in stock for 3 months. That is 
equivalent to 3 per cent a month. Then the total expense chargeable to dif- 
ferent items varies according to the length of time they are in stock, as 
follows: 



Expense 


Time in stock, months 


154 


3 


5 


9 


12 


Buying and selling. . 
Occupancy .*..* 


$0.09 
0.04/a 
0.05 

$0.18% 


$0.09 
0.09 
0.05 

$0.23 


$0.09 
0.15 
0.05 

$0.29 


$0.09 
0.27 
0.05 

$0.41 


$0.09 
0.36 
0.05 

$0.50 


Administration .... 
Total 





The costs of holding merchandise in stock more than the average length of 
time, therefore, become more severe the longer a slow mover is kept in stock. 
In buying larger than normal quantities to secure extra quantity discounts, 
the additional costs of carrying the goods on an "overtime" basis should be 
weighed against the quantity discounts. You would be wise to figure that an 
item carried in stock twice the average length of time is unprofitable at the 
average markup. 



Aids in your baying program 

Your sources include wholesalers, manufacturers, and various buying 
agencies. 

The value of goods you get is determined by: the price you pay and the 
price you can charge; the service you get, such as speedy delivery, ability to 
buy a wide assortment in small lots, credit, and merchandising aids. 

The wholesaler's main functions are: to buy direct from the manufacturer 
a large stock of assorted goods; to maintain a warehouse for their storage; to 
cover every town, large and small in his territory; and to provide prompt 
delivery service. He prospers only if his customers do. The progressive whole- 
saler puts as much effort into serving as he does into selling. Be sure that the 
wholesaler you choose fits this description. The major advantages to be 
gained through dealing with a first-class wholesaler are: 

Some wholesalers have an efficient sales force made up of men who under- 
stand the retail business. They are well equipped to give practical 
advice and information on many phases of getting your business started. 
For instance, the salesman can suggest what merchandise you should 
stock. He knows the price ranges that will be the most profitable for 
your particular location and type of store. He is qualified to give good 



HOW TO OPERATE A STORE MOST EFFICIENTLY 179 

advice as to how much money you should invest in inventory and in 
store fixtures and equipment, and as to whether you should sell on credit 

Some of the larger wholesalers assist their retail customers in selecting a 
location. They may even supply, build, or help to choose the equipment. 
They also give suggestions as to financing, record keeping, and store 
operation 

Your wholesaler can be of aid to tide you over credit problems. Remember 
that your credit rating will be a big factor in your relations with sources 
of supply during critical times, and to a lesser extent in good times. 
When goods are scarce, the choicest and most needed merchandise 
naturally goes to those retailers who pay promptly and buy the most 

There are always bargains of one sort or another in the market. If you 
maintain close contact with your wholesaler, you will be informed 
when economical purchases can be made 

Many wholesalers can give valuable help in meeting competition through 
advising on how to be a better merchandiser. For instance, he can give 
you sales aids such as displays, booklets, training courses for your sales- 
people, and ideas for promotion. Some wholesalers have departments 
to provide sales promotional, educational, and self-help material and 
guidance for their retail customers. With this help, many independent 
merchants are able to meet the toughest competition 

Concentrating your own buying has the final advantage of permitting a 
close contact with your few sources of supply. You will have to see them 
often. They will follow your progress week by week. Thus they will be 
able to detect your weaknesses and help you strengthen them 

Most manufacturers sell only one item or a group of closely related items. 
They can usually afford to send salesmen to serve only their large accounts. 
Sometimes they sell to smaller stores by catalogue. 

Another source of buying is the drop shipper. He acts as a manufacturer's 
agent or broker. His function is to sell the merchandise but not to ware- 
house or handle it in any way, except in the credit and billing. The manu- 
facturer ships directly to the retailer. The broker collects a commission, and 
handles billing and credit. Retailers using the services of drop shippers must 
buy a specified minimum quantity. Through serving a number of stores in 
their territory, brokers are able to provide a sales service attractive to some 
manufacturers. Drop shippers are favored by some retailers who want wide 
assortments from specified manufacturers. 

Buying offices con help you 

Buying offices or resident buying offices can serve the retailer in the prin- 
cipal market centers. The proprietor of a store who cannot afford to be 
constantly in the market himself often affiliates with a buying office. He may 
visit the market once or twice a year. His buyer keeps him in constant touch 



1*0 HOW TO RUN A SMALL BUSINESS 

with what is going on and what is available. The arrangement is especially 
important for style goods. 
The services of a good buying office might be summarized as follows: 

The buying office maintains a staff of buyers, each specializing in certain 

merchandise 

It advises the retailer where and what to buy 

It reduces mistakes of the retailer when he comes to market, because the 
available goods are reviewed by the buyers constantly, and they know 
what goods and which styles are selling 

It saves the retailer time when he comes to market, because the buyers 
have lined up the best sources and best lines in advance. Through a 
buying office, a merchant can do in several days the work that would 
ordinarily require a couple of weeks 

It actually buys merchandise on a general or specific request of the retailer 
Some buying offices also extend to their clients advisory and bulletin serv- 
ices dealing with store operations. The principal ones are 
What goods to dispose of, and how to do it 
Markdowns to take at certain times 
How to operate on a turnover basis 
Keeping stock in good condition and well balanced 
Operating and stock-control methods 
Personnel training advice for retail managers 

The main types are the fee or paid membership office, the commission 
office, and the listing office. 

The fee or paid membership office is operated as an individual business. 
A store may subscribe for a yearly fee that is usually based on the annual 
sales of the store. It is generally expected that the fee office must provide 
more service for the large store than for the small one. The fee office is 
hired by the retailer and receives no compensation from the manufacturer. 

The commission office, on the other hand, does not charge the store a fee 
for buying. It charges the manufacturer a commission percentage for selling. 
The manufacturer pays this commission much in the same manner as he 
would pay his own salesmen. 

The listing office is an important buying-service setup for some stores. It 
serves retail members who pay a uniform fee for the service and receives no 
compensation from the manufacturer. Here is how it works: 

It furnishes a loose-leaf booklet or catalogue to members. Additional pages 
are provided weekly. On them are listed various types of merchandise 
with prices, sources of supply, and minimum order requirements. The 
merchant places his orders directly with the listed factories at the prices 
quoted in the service. The buying office supplies its own order blanks 
with the retailer's membership number stamped on the face of the forms 

To secure the listings, buyers comb the markets for fast-selling merchan- 



HOW TO OPERATE A STORE MOST EFFICIENTLY 101 

disc. Values and prices are sought that will enable the independent 
variety store to compete with the large chains 

The lists of merchandise and sources of supply thus compiled are, natu- 
rally, beyond the capacity of any individual variety store to compile and 
keep up to date 

The listing office may have its own wholesale house which keeps a stock 
of fast-moving staples and novelties for quick delivery 

Usually the listing office, or other types of buying services, are used along 
with the services of the regular wholesaler. None of the various types of 
buying offices described will supplant the service of a regular wholesaler. 

Wow to get good stock control for your sfore 

Stock control is the retailer's method of maintaining a balanced inventory. 
It permits knowing at all times the quantity of each kind of merchandise on 
hand. It also shows (1) what to buy, (2) when to buy, and (3) how much 
to buy. Thus stock control and buying are each a part of the other. To be 
effective a stock-control system should 

Provide a guide which indicates what, when, and how much to buy by 
style, color, size, price, and brand 

Reduce number of lost sales resulting from being out of stock on merchan- 
dise in popular demand 

Locate slow-selling articles and keep track of them 

Tell what goods to push for volume 

Indicate change in customer preference, so that you can either decrease 
the weak items or eliminate them entirely from your stock 

Indicate the need for store rearrangement 

A stock-control system will not eliminate the need for judgment. But it 
does provide a reliable background of facts on which to base decisions. 

There are many variations of stock-control systems. You may need to use 
more than one method if you handle many types of goods and buy from 
numerous sources. The plan used for year-round merchandise may differ 
in some respects from the control for seasonal articles. The size of your 
establishment and the number of people employed will also be determining 
factors. 

Talk with your CPA about the method you should use. Should it be a 
control kept by means of observation? Or should it be by the use of "on- 
hand-on-order-sold" records, detachable ticket stubs, check lists, and a 
physical inventory? 

As the name implies, the observation method consists of watching the 
physical layout of counter, shelf, and reserve stock. Generally a "want" 
book, in which items are recorded as needed, is used. While this plan 



112 HOW TO RUN A SMALL BUSINESS 

is obviously the simplest, it may often be the cause of losing sales. 
Merchandise may not be entered in the want book until stock on hand 
is almost or completely out. Without a better checking system, orders 
are usually placed only at the time of the salesman's regular visit. 
Unless you can develop skill and foresightedness in anticipating your 
needs, this method is not wholly satisfactory. 

The on-hand-on-order-sold record is a plan which enables you to know 
how to order sizes, colors, or styles in proper proportion. 

Detachable stubs on tickets placed on merchandise also afford a means 
of control. The stubs contain information identifying the articles to 
which they are attached. They are removed at the time the items are 
sold. The accumulated stubs may then be posted daily, or whenever 
desired, to a perpetual inventory. This analysis is particularly valuable 
as a guide to purchasing style goods. 

A simple check list, often provided by wholesalers, is an effective means 
of controlling purchases. The list provides space to record the items 
carried and the selling price, cost price, and minimum quantity to be 
ordered for each. It also contains a column in which to note at check- 
ing time whether stock on hand is sufficient, or whether an additional 
supply should be ordered. Minimum stock, which can be entered, may 
have to be revised from time to time, as, for instance, if the general 
volume of your store decreases or increases. Often the check list is 
the main control. It has been developed in great detail by some whole- 
salers. 

You must take a periodic physical inventory of your stock in order to 
prepare your profit-and-loss statement. This inventory involves count- 
ing the quantity on hand of each item in stock and determining its 
value. The total represents the value of the entire stock. The physical 
inventory should be taken at least once a year, although it may be 
taken more frequently. Strictly speaking, the physical inventory is not 
a means of controlling stock. But it can be used for that purpose, for 
when you are taking an inventory, you are actually handling each article 
in stock. 

How fo find if you have the correct stock tor your store 

To make any stock-control system work you must know the total stock 
on hand at the beginning of each month valued at the selling price. 

Why use the selling price? Principally for the sake of consistency. Every 
activity of a store is based on sales. Goods are bought and expenses incurred 
in anticipation of future business. Sales are 100 per cent, and everything 
else is a part. 

Current stock on hand, as well as sales, is then compared with the previous 
year's figure. Because of seasonal variation, stock is expressed as a ratio to 
sales of that year. 



HOW TO OPERATE A STORE MOST EFFICIENTLY 103 

Then use these guides to find the proper stock: 

The amount of present stock on hand is justified by anticipated sales. 
A ratio of beginning stock to sales for the period (month) represents 
the length of time (number of months) the goods would last if sales 
did not vary 

This ratio may be compared with the previous year's ratio to find whether 
the stock is more or less in proportion to sales than it was a year ago 

To find the rate of stock turnover, you divide the dollar amount of sales 
during a given period by the average of the beginning and ending inven- 
tories valued at retail prices for that period. The ratio may also be 
obtained by dividing cost of goods sold by the average of the beginning 
and ending inventories at cost 

The turnover rate is governed by the nature of the goods, the source of 
supply, and the buying policy of the retailer. Perishable merchan- 
dise must be bought in small enough quantities so that it will be sold 
before spoiling. This forces rapid turnover 

If articles are naturally fast sellers, it is easier to buy so the turnover will 
be high. Sometimes goods are packed in minimum shipping quantities, 
and when this minimum quantity is bought the turnover rate is auto- 
matically determined by the rapidity of sales 

For proper control of seasonal and occasional merchandise you need to 
study 

An inventory of items carried over from previous similar event 

A record of articles that sold out early, and an estimate of the additional 

amount of those articles that might have been sold 
The age of unsold items. That helps you to detect slow sellers. It may 

assist in determining when to reorder or not to reorder. The simplest 

method to do this may be to list the month and year of purchase by code 

on each package 

How fo use budgets to control stock of a store 

Regardless of how effective your stock-control system is, much of its value 
will be lost unless you do your buying on budget. 

An estimate of potential of your sales force, the amount of your advertising, 
and the size of your sales is the basis of all future operating plans. It will 
determine your stock and will be valuable regardless of its accuracy. Having 
an estimate available for comparison with actual results will indicate any 
necessity for revision. You will also discover that your forecasting will im- 
prove as you go along. Your operation will be titter because of your plan- 
ning. 

Develop your buying budget this way: 

Since sales are the beginning of planning, it is natural that buying control 



114 HOW TO RUN A SMALL BUSINESS 

should be at selling prices. After the sales estimate is completed for a 
given period, it is a simple job to prepare the buying budget. 

Your buying budget will be the sales figure, plus or minus any change you 
plan to make in your stock. 

Usually the buying budget covers a 6-month period. It could as well be 
for 3 or 4 months. The main consideration should be the peak selling 
period. Refer to sales of the previous season in determining the items 
and quantities you intend to buy and the prices you expect to pay. 

Make it your practice to order well ahead of demand. If you wait for 
the rush to develop you are likely to overbuy. And you may not receive 
the goods until the peak is past. As a result, you will be unable to 
estimate your needs for the next season because of the large carry-over. 
It, by the way, usually lasts until the middle of the next peak and again 
stimulates late ordering and overbuying. By ordering stocks in advance, 
you will have the goods you need for the mass displays in peak seasons. 

How fo price inventory for tax purposes 

Cost, and cost or market, (whichever is lower) can be used for inventory* 
ing by a store. 

But other methods are used by businessmen. For example, a popular 
method used by retailers is the retail basis whereby the retail value of inven- 
tory is reduced through adjustments for all markups and markdowns. 

Two methods of finding cost which have common usage in business are 
the following: 

Last-in-first-out valuing the closing inventory by assuming that it covers 
first, at cost, the opening inventory to its extent. There are comparable 
quantities remaining in the closing inventory. Then value anything 
more in the entry at earliest cost to buy the quantity remaining 
' First-in-first-out valuing the closing inventory by assuming that it covers, 
at cost, first, the most recently acquired stock at the cost of purchasing it. 
If there is any excess stock, value it at the next most recent purchase. 
Eventually you may have to value at prices used in the opening inven- 
toryonly if quantity of inventory on hand is less than quantity of 
purchases of a given stock during the year 

There is an illustration showing the way the last two methods work in 
Chap. 11. 

In valuing your inventory, you may not deduct a reserve for price changes 
o* estimated depreciation in value. You must use its full fair value. You 
may not omit any stock on hand. But you can do this: 

Value at estimated selling price, less the direct cost of disposition, the 
inventory which is unsalable at normal prices or unusable in the normal 
way because of damage, imperfections, shopwear, changes of style, old 



HOW TO OPERATE A STORE MOST EFFICIENTLY 115 

or broken lots, outmoded fashions, or other similar causes, including 

secondhand goods taken in exchange 
You may not take an arbitrary or blanket markdown from cost. But you 

can get a proper markdown of your inventory by showing that the 

goods are shopworn, or damaged, or outmoded because of style changes 
Or you can show their true market value (bona fide selling price, less 

direct cost of disposition), and show that this market value is less than 

their cost 
The last-in-first-out method is used a good deal by large stores. It assumes 

that the latest purchases are the first sold. That leaves the earlier 

purchases to be included in the closing inventory. Its use produces a 

higher cost of sales, and therefore it lowers income in periods of rising 

prices. The reverse is true if prices decline 

The right to use the LIFO (last-in-first-out) method of inventorying for 
tax purposes is subject to this condition: it must also be the method of annual 
accounting reports to shareholders, partners, or other proprietors, or to 
beneficiaries for credit purposes. Here is how it works: 

In a period of rising prices, your inventories will be below actual cost and 

also below the current market prices 
Therefore, your profits will be lower using LIFO than if you use the 

ordinary methods 
But in a period when prices are declining, profits will be higher when you 

use LIFO than when using inventories prices based on first-in-first-out 
Over a long period, the result may be the same. But by using LIFO, 

you may be able to get lower taxes in a year when you desire them 

When should you adopt this method of pricing? Do it when market prices 
are rising. If you do it when market prices are declining, you increase your 
income and increase your taxes. 

How to price inventory for profitable sales 

Retail merchants usually employ the "retail method" of pricing inven- 
tories. They can do this if: its use is shown upon the return; accurate 
accounts are kept; the method is consistently adhered to, unless a change is 
authorized by the government. 

Under this method, the total of the retail selling prices of the goods 
on hand at the end of the year in each department, or of each class of 
goods, is reduced to approximate cost. This is done by an adjustment to 
cut the amounts previously added to the cost -price for: selling and other 
expenses of doing business; margin of profit. ;?& 

If you maintain more than one department in a store, or deal in classes 
of goods carrying different percentages of gross profit, you should not use a 
percentage of profit based upon an average of the entire business. The 



186 HOW TO RUN A SMALL BUSINESS 

government expects you to use the proper percentages for each department 
or class of goods. 

Sometimes a company using the "retail method" adjusts the retail selling 
prices of the goods in the opening inventory and those purchased during 
the year for markups but not for markdowns. That practice is also approved. 
But adjustments must be consistent and uniform. Other rules to follow 
are these: 

Where markdowns are not included, markups made to cancel or correct 
markdowns cannot be included. Markups included must be reduced by 
the markdowns made to cancel or correct those markups. 

Markdowns which are not based on actual reduction of retail sales prices 
for example, those based on depreciation and obsolescence are never 
recognized. 

If you have not determined inventories by following the practice of 
eliminating markdowns in making adjustments to retail selling prices, 
you may adopt the practice only by Treasury permission. But you 
always may do it in a first return of income, subject to approval by the 
Treasury upon its examination of the return. 

The retail method of pricing requires that "accurate accounts" be kept. 
There must be consistency of method and proper handling of depart- 
mental profit percentages and of markups and markdowns. Regulations 
therefore require complete accounting orientation. This section and a 
good part of the law is couched in the language of the accountant. 
The effect is to force tax accounting to be in consonance with generally 
accepted accounting principles. Hint: Do not use this method unless 
you have good accounting advice. 

How to price particular merchandise items 

Profitable pricing of merchandise by the retailer is of the utmost impor- 
tance. A high degree of skill is a requirement for survival. 

In order to obtain the usual average markup, some items may have to 
carry more than average markups, and some lower than average. 

Prices so low that they do not average out to cover costs, or so high that 
sales volume suffers, can quickly put a retailer out of business. 

What governs markup? Some stores attempt to solve the pricing problem 
by merely following competition. Better sense says decisions on prices must 
be made on a more definite, day-by-day basis. Use these principles: 

Markup is essential to cover your operating expenses. It must be large 

enough to do it 
You buy to obtain value, but value is determined by what customers 

consider good. Their idea of value is relative. They compare your 



HOW TO OPERATE A STORE MOST EFFICIENTLY 187 

prices with those of other stores. Customers will judge your markups 
as fair, or out of line, by those on the items that can be compared from 
store to store, such as brand goods 

The greatest purchasing power for retail stores falls in the middle range 
of income. Therefore, in the nonluxury store, it is advisable to have 
a price level that will appeal to 

The thrifty or value-conscious segment of the well-to-do class 
The large middle-income class 
The upper level of the low-income class 

If the store is located in a high-income neighborhood it will probably 
do well to offer credit and delivery. You may assume that customers 
are willing to pay for these extra services 

If the store is located in a medium-income neighborhood and offers no 
special services or types of goods to differentiate itself from its com- 
petitors, prices will probably have to adhere rather closely to the general 
level of competitors' prices 

If the store is located in a low-income neighborhood where many cus- 
tomers require credit, and you provide credit service, you are justified 
in charging more than your cash-and-carry competitors 

Distance from competitors is an important factor in determining the 
prices that can be charged. If you own a small store, for example, you 
would be foolish to attempt to compete on a price basis with a super- 
market five or six blocks away. You will have to content yourself with 
the fill-in, pickup, and "off-hour" business. You may legitimately 
charge higher prices than competitors who do not render this type of 
service 

In addition to the problems of location and competition, you must con- 
sider three factors: selling price, sales volume, and expense. 

If you offer merchandise at a low price, you may get a large volume of 
sales. But you may not get sufficient revenue to cover the cost of selling the 
merchandise. On the other hand, if you have a high selling price, your 
volume of sales may be so low that you will be unable to meet your operating 
costs. 

Clearly, the best prices are those which yield the most dollars after all 
costs are subtracted. This does not mean the highest possible markup on 
each unit or a price that will yield maximum sales. It means that prices 
should be fixed at the point where markup per unit multiplied by the 
number of units sold will yield the maximum gross margin over operating 
expenses. 

The guiding principle should be that each item will cover its own extra 
costs plus whatever other contribution it can make to the general overhead 
and net profit. If demand for some items is small because competitors' prices 
are lower, an attempt to use the average markup would only make matters 



188 HOW TO RUN A SMALL BUSINESS 

worse. With the price for these items higher than that of competitors, sales 
will decline. As a result, there will be even fewer dollars of gross margin 
to contribute toward overhead expenses. 

Only experience can teach you the feel of the market. If you are to 
succeed in making up for the things that you are forced to sell at low 
markups or even at cost, you must learn which items you can sell at higher 
markups. 

For the most part, the average merchant limits his profit examination to a 
fairly simple routine. 

Assume you are planning to sell men's shirts white, plain colors, and 
fancies at $1.98. Fancies do well, white is fair, plain colors are fair. You 
have been paying $15.25 a dozen for all the numbers. You could pay more; 
this cost is low for the selling price. You are satisfied with your fancy and 
plain volume, but think you should sell more white shirts. 

Finally you decide that you will continue to pay $15.25 for fancies and 
plain but that you will promote white. So you pay $17.50 and get a notice- 
ably better shirt, explain it to the salespeople, and promote it. The results 
will help to decide what to do next season. 

Assume the cash discount equals the freight. During the previous season, 
75 white shirts were sold. $15.25 a dozen is $1.27 each. $1.98 $1,27 = 
$0.71 markup per shirt. 75 X $0.71 = $53.25. This season, 110 shirts were 
sold. $17.50 a dozen is $1.46 each. $1.98 $1.46 = $0.52 markup per shirt. 
1 10 X $0.52 = $57.20. Increased markup: $57.20 - $53.25 = $3.95. 

You are neither much better nor much worse off than before. Probably 

some additional supplies were required to sell the 110 shirts, but help, 

overhead, and management costs were not increased. You might go back 

to $15.25 next season and try to cash in on the $17.50 reputation, or you 

* might continue to pay $17.50. 

One reason you might continue with the better shirt is because you think 
the increase will continue. Or, you might consider the effect of this indi- 
vidual item on the business in general. Increase the sale of any line in 
the store and all lines usually benefit. On the other hand, expense grows 
slowly a little more paper and twine, a little extra help, but a lot more net. 
Here's about how it might work out: 

Store volume $22,500 Net 0.047 = $1,058 

10 per cent increase 2,250 

Cost (0.700) -1,575 

Additional gross profit 675 

Less: extra help and supplies, 

0.050 X 2,250 H3 

562 

Increase in net 562 + 1,058 = 0.531, or 53.1 per cent 



HOVy TO OPERATE A STORE MOST EFFICIENTLY 189 

This calculation sh^ws how a general store-wide gain in volume can build 
up net profit in much 'greater proportion than the sales increase. 

When volume declines, however, expense cannot be cut in proportion and 
net profit shrinks much faster than sales. The stock is reduced slowly and 
the markdown ratio goes up. 

There are certain special factors to consider in setting your prices: 

Leaders and loss leaders. A leader is an article given a special price, usu- 
ally below that charged by other merchants. The margin is less than 
normal. It is offered as a promotional item to increase store traffic- 
Leaders can be sold at a profit or at a loss. A loss leader, in its simplest 
terms, is one that is sold below its cost. It may be priced below its cost 
plus the estimated expenses involved in handling it. If the invoice cost 
of an item is 27 cents, the expenses are 9 cents, and it is sold for 
anything under 36 cents, it becomes a loss leader. A good leader 
sells itself. It should need no promotional effort. Items that are in 
everyday use, that are bought frequently, and that have a well-established 
value make good leaders. 

Staples have a higher-than-average cost, because the markdown expecta- 
tion is below the average. They are sold on value and price. Higher- 
price lines will cost less in proportion than the lower-price lines. The 
lower-price lines sell faster, are in the store a shorter time, and cost 
less to handle. Low-price lines should give value. People are more 
likely first to sample low-price lines. If these are found satisfactory, the 
same persons may later become steady users of both the popular and 
high-price lines. Staple volume depends on store traffic. Unless there is 
something distinctive about such merchandise, it does not benefit from 
promotion. 

Novelties that catch on show a good markup at the start and as long as 
they continue to be popular. Soon, however, other manufacturers come 
into the field. The price is then reduced, and customers begin to look 
for new items. To cash in fully during the popular stage you must 
anticipate your needs. If you are overstocked on novelties in the 
initial period, before the price is reduced, your profits will be reduced 
by the necessary markdowns. If they sell out and must be reordered, 
the reorder may not arrive until after everyone has purchased elsewhere. 

Extremely fashionable goods are in the same class as novelties. The fad 
may involve a color or a design. But its appeal depends on novelty. 
The markup is high. So are the markdowns at the end of the season. 

Fast-selling items usually carry a lower-than-average markup. This is only 
fair. Their rapid turnover reduces the handling expense. It is important 
to have competitive prices on fast-selling items. Customers are familiar 
with their prices and values, and are critical of small price differences on 
fast-selling popular goods. 

Slow-selling merchandise should carry a better-than-average markup. 
Customers generally are not critical of differences because they do not 



190 HOW TO RUN A SMALL BUSINESS 

have a well-defined idea of the prices and values. An item may become 
slow-selling, however, because the price is too high or the value is not 
competitive. This condition may be detected by comparing present with 
past sales, or by comparing with other stores. When you discover that 
an item is slow-selling, it is time to go shopping. See what your competi- 
tors are doing. Sometimes nothing can be done to improve the accept- 
ance of an item. In such cases it is well to consider dropping it. 
Prices fixed by manufacturers must be considered. Pricing sometimes is 
not left entirely to the discretion of the merchant. State and Federal 
laws governing retail selling should be checked with your supplier. 

Simple formulas to find profitable markups 

To understand the relation of costs, markup, selling prices, and gross 
margin it is necessary to restudy some retailing mathematics. You may not 
make constant use of the formulas and calculations which follow. But you 
should understand them. They are the ABC's in the language of the retailer. 
The terms to be dealt with are 

Cost of goods. Cost of goods is the landed cost at the store. It is expressed 
in dollars or as a percentage of sales. The cost divided by the selling 
price is the cost percentage. Thus, if an item costs $1 and sells at $1.50, 

the cost percentage would be 01 * -r = 67 per cent. 

Jpl.OU 

Initial markup. Initial, or original, markup is what is added to the cost to 
get selling price, or the difference between cost price and selling price. 
It is expressed as both a percentage of sales and a percentage of cost. 
Thus, in the case of a $1 cost and $1.50 selling price, the initial 
markup would be 50 cents. That is 33 5/3 per cent of selling price 
/$0.50\ P . /$0.50\ 

V$I3o )> or 50 per cent of cost pnce \ $Too J- 

Retail reductions. Retail reductions cover all reductions of the original 
retail price, including markdowns and shrinkage. They are expressed as 
a percentage of final selling price or as a percentage of cost. 

Additional markups. Occasionally it is discovered that an item has been 
priced too low in error. Or for some reason it is found desirable to raise 
the original price. Increases after the original markup has been taken 
are called additional markups. Downward revisions of the retail price 
are also common. 

Markdowns. A markdown is a reduction of an original selling price. After 
a retail price is established on an item (by adding a markup to its cost) , 
the price may have to be reduced for any one of a number of reasons, 
such as 
For special sales to stimulate volume 

i'out remnants, leftovers, poor assortments, and damaged goods 
t rid of poor buys 



HOW TO OPERATE A STORE MOST EFFICIENTLY 191 

To meet sudden changes in the market price 

Early markdowns are the smallest. The sooner you discover merchandise 
is not moving and start taking markdowns, the smaller your loss will be. 
The time to sell is when people want to buy and not at the end of the 
season after everyone has bought. When you start to mark down, it is 
best to forget all about cost and continue marking down until the goods 
are sold. 

Gross margin. Gross margin, sometimes called realized margin, gross profit, 
or maintained markup, means the amount realized after all retail re- 
ductions the difference between the final selling price and the cost of 
goods. It is expressed in dollar amounts and also as a percentage of sales. 

It is easy to determine the selling price from the cost if you know the cost, 
or markup, ratio you wish to achieve. The formula is 

Cost -r- costratio = selling price 

Work from the cost ratio, as it is simpler and less confusing, and your known 
figures correspond. You start with a cost price and get the selling price of a 
given cost ratio; for example: 
Assume that the item cost $0.72 and the cost ratio desired is 0.67. 

$0 72 

= $1.07 selling price 



Also, the appropriate cost may be determined for any selling price by mul- 
tiplying the selling price by the cost ratio; for example: 
Assume that the selling price is $0.98 and the cost ratio desired is 0.67. 

$0.98 X 0.67 = $0.66 cost price 

This same method may be applied to reduce the markdown ratio to cost in 
order to determine its net effect on profit, for profits are reduced by the 
amount of the cost of the markdowns. 

The average markup for the store is composed of numerous rates of mark- 
up for the different goods handled. 

Some goods will have to be sold at a close margin, either because they are 
competing in price with merchandise in other stores, or because they are used 
as leaders to bring in trade. Other items will be sold at or about the average 
markup sought. Still other articles will carry a long profit markup. Then 
there will also be variations in relative sales of the goods at different markup 
rates. 

A little arithmetic will show how to arrive at the average total store 
markup under such conditions. 

Let us assume for simplicity that there are three items, or three depart- 
ments, with sales and markups as follows: 



192 HOW TO RUN A SMALL BUSINESS 

Maintained 

Department Sales markup, 

per cent 

A $20,000 20 

B 10,000 25 

C 5,000 35 

Total $35,000 

The gross margins then would be: 

A $ 4,000 

B 2,500 

C 1,750 

Total gross margin $ 8,250 

= 23.6 per cent 

If the average maintained markup is not sufficient to allow for a net profit 
after expenses are deducted, then the sales volume must be increased to lower 
the expense percentage, expenses must be reduced, or some revisions in the 
lines must be made so that more goods are sold at a higher markup. Margins 
cannot usually be increased by arbitrarily raising selling prices. 

The next problem is to calculate an initial markup to establish original 
retail prices, making due allowance for markdowns and shrinkage which are 
known as retail reductions. For if goods are priced at the outset at the 
markup which is desired as a final maintained figure, and if markdowns or 
shrinkage later occur, you may find that the realized margin is far below the 
total you had planned to cover expenses and profit. 

The retail reductions will apply more to some lines than to others. Some 
staple lines in steady demand, with little or no spoilage, breakage, or theft, 
and on which no cut-price sales are made, will be no problem. The initial 
markup on such goods may be counted on as a maintained markup. 

But on merchandise having a style or use obsolescence on which mark- 
downs must be anticipated, or on goods subject to deterioration, pilferage, or 
other shrinkage, the initial markup will have to be higher than the planned, 
maintained, or realized markup. 

At the start you will have to make some rather arbitrary allowances for 
such anticipated retail reductions. As you gain experience, you will know 
more precisely what goods will be subject to the reductions, and how much 
the reductions will usually amount to. 

One object of good merchandising is to reduce markdowns to a bare mini- 
mum. This goal involves improvement in practically all phases of the store's 
operations, but principally in buying, selling, stock care, and pricing. 

The table on page 193 will serve as a guide to show what the initial markup 
should be m order to end up with a stated gross profit. This makes allow- 



HOW TO OPERATE A STORE MOST EFFICIENTLY 193 

ances for different rates of estimated retail reductions. The formula for 
calculating at any gross profit or any retail reduction is this: 
Per cent initial markup on selling price = 

per cent gross profit desired + per cent retail reduction to sales 
1.00 + per cent of reductions to sales 

Example: Per cent gross profit desired = 40 

Per cent retail reductions to sales = 5 
Find markup required as a percent of sales 



0.4286, or 42.86 per cent of sales 



X \J\J 



If a markup of about 43 per cent of sales is required, the per cent to add to 
cost price would be approximately 75. Thus, 

100 - 43 = 57 (cost) 

43 

^ = 75 per cent 

Initial Markup to Produce Specified Gross Profit, Allowing for Stated 
Retail Reductions 



Retail merchandise reductions, per cent of to net sales 



Gross profit to 
be realized, 
per cent 


5 


6 


7 


8 


9 


10 


Gross markup required, per cent 


25 


28.57 


29.25 


29.91 


30.56 


31.19 


31.82 


26 


29.52 


30.19 


30.84 


31.48 


32.11 


32.73 


27 


30.48 


31.13 


31.78 


32.41 


33.03 


33.64 


28 


31.43 


32.08 


32.71 


33.33 


33.94 


34.55 


29 


32.38 


33.02 


33.64 


34.26 


34.86 


35.45 


30 


33.33 


33.96 


34.58 


35.19 


35.78 


36.36 


31 


34.29 


34.91 


35.51 


36.11 


36.70 


37.27 


32 


35.24 


35.85 


36.45 


37.04 


37.61 


38.18 


33 


36.19 


36.79 


37.38 


37.96 


38.53 


39.09 


34 


37.14 


37.74 


38.32 


38.89 


39.45 


40.00 


35 


38.10 


38.68 


39.25 


39.81 


40.37 


40.91 


36 


39.05 


39.62 


40.19 


40.74 


41.28 


41.82 


37 


40.00 


40.57 


41.12 


41.67 


42.20 


42.73 


38 


40.95 


41.51 


42.06 


42.59 


43.12 


43.64 


39 


41.90 


42.45 


42.99 


43.52 


44.04 


44.55 


40 


42.86 


43.40 


43.93 


44.44 


44.95 


45.45 


41 


43.81 


44.34 


44.86 


45.37 


45.87 


46.36 


42 


44.76 


45.28 


45.79 


46.30 


46.79 


47.27 


43 


45.71 


46.23 


46.73 


47.22 


47.71 


48.18 


44 


46.66 


47.17 


47,66 


48.15 


48.62 


49.09 


45 


47.62 


48.11 


48.60 


49.07 


49.54 


50.00 



1*4 HOW TO RUN A SMALL BUSINESS 

Many goods are bought to sell at a designated retail price, in accordance 
with competition and with your analysis of what price lines will sell best. In 
buying goods to advantage so that you can sell at the desired prices, the initial 
markup is automatically set by the cost price. 

Suppose you want to carry a $1.95 line of men's dress shirts, and that the 
quality you want will cost $17.40 a dozen, or $1.45 each. The initial markup 
is set at $1.95 less $1.45, or $0.50. Thus, the initial markup would auto- 
matically be 25.6 per cent of sales. Excessive retail reductions would bring 
the realized margin dangerously low. 

If allowance must be made for markdowns and shrinkage, two questions 
arise: 

At a given initial markup and an estimated shrinkage, as a per cent of sales, 

what will the realized gross margin be? 
In order to realize a planned gross margin with a given initial markup, 

how much can be allowed for retail reductions? 

The calculation for the first situation is as follows: Cost of goods X retail 
reductions per cent = reductions at cost. Initial markup reductions at cost 
= maintained or realized markup. 

Example: Per cent initial markup = 40 
Per cent retail reductions = 5 
Find the maintained markup 

1.00 - 0.40 = 0.60 (cost of goods) 
0.60 X 0.05 = 0.03 (reductions at cost) 
0.40 - 0.03 = 0.37 (maintained markup) 

Suppose, in the case of $1.95 shirts, that you estimate the retail reductions 
would be 5 per cent. What would the realized margin then be? The calcu- 
lation follows: 

1.00 0.256 = 0.744 cost of goods 
0.744 X 0.05 0.0372, or 3.72 per cent reductions at cost 
0.256 0.037 0.219, or 21.9 per cent maintained markup, or gross 
margin 

If the 21.9 per cent gross profit is lower than you want to take, just what 
retail reductions may be taken to leave you the minimum realized margin, 
(say 23 per cent) ? 

The calculation to arrive at this answer follows: Initial markup per cent 
percentage of gross margin desired = per cent of reductions at cost; reduc- 
tions at cost -T- cost of goods = per cent reductions allowable at retail. For 
example: 

0.40 - 0.37 - 0.03 

rtr = 0.05, or 5 per cent allowable retail reductions 



HOW TO OPERATE A STORE MOST EFFICIENTLY 195 

Let us apply this calculation to the $1.95 shirts where the initial markup is 
set. You want to know just how heavy a retail reduction they will stand to 
give you a final stipulated gross profit, in this case 23 per cent. You know 
that the initial markup will be 25.6 per cent of sales, and you know the desired 
gross margin. Let us see in this practical example how far you can go in 
markdowns and shrinkage reductions. 

25.6 - 23.0 - 2.6 

=^7 0.0349, or 3.49 per cent retail reductions 
( 100-' 25.6) 

You know that at the cost and selling price of these shirts, you can afford 
to take retail reductions of only 3.49 per cent if you want to realize at least 
23 per cent gross profit. 

How fo keep your salespeople constantly alert 

Training is a continuing function. Emphasis needs to be placed on the 
training of new, inexperienced salespeople. That is, it is desirable to establish 
correct selling habits from the start. That is covered next in this chapter. 

Training must not stop with new salespeople. To be most effective, it must 
be a continuing process. Older, experienced salespeople must be kept on their 
toes. They must be given new merchandise information. They cannot be 
allowed to slip into the habit of serving your customers indifferently. 

To do that effectively, you will need to keep fully informed about new 
developments in your line of business. Your business paper and the salesmen 
who call on you can provide much new information about trends, merchan- 
dise, and merchandising methods. 

The kind of information needed by the salesperson depends on the types 
of merchandise the store carries. In general, the salesman's knowledge of 
his goods should embrace the points given in the following check list. Some 
of the points, of course, will not apply to every product. 

The product's uses How it is operated 

Company making it How to care for it 

What it is made of (composition) Services available with the product, 

How it is made (construction) if any 

Type of finish and style Its competitive features 

How it will perform 

Some salespeople will obtain much-needed merchandise information on 

their own initiative, provided you give them the right kind of encouragement. 

For example, the curious-minded will read, without prompting, the labels 



196 HOW TO RUN A SMALL BUSINESS 

and instructions on the merchandise itself, if they know the time taken up is 
considered in the store's interest. Others will have to be told to read such 
merchandise information, so that they can pass it on to customers. How can 
you help to enable salespeople to get additional guidance and information? 

You might set aside one place in the store for catalogues, circulars, business 
papers, and even books appropriate to your type of merchandise. Keep 
these materials up to date and encourage their use. Generally, informa- 
tion about the merchandise may be obtained from 

The labels, tags, and packages themselves 

Manufacturers' merchandise folders and catalogues 

Books (public library) 

General magazine advertisements 

Factory and wholesale house salesmen 

Customers and users 

Store buyer or other employees 

Competitors' stores and windows 

It may be desirable to hold regular sales training meetings with your em- 
ployees. Meetings may be devoted to presenting and demonstrating new 
or unusual merchandise about which salespeople need product informa- 
tion. These demonstrations may be given by salesmen from the factory 
or wholesale house, by you, or by one of your better qualified salespeople. 
Store and customer relations problems also can be discussed and ironed 
out at such meetings. Every employee should be urged to take an active 
part in the discussion. 

If your salespeople show an interest in taking part in a regular, organized 
training program in retailing and selling, it may be possible to arrange 
a part-time or evening-class course. If such courses are not now offered 
in your community, the local superintendent of schools might arrange 
for their initiation. 



How to tram new salespeople 

We have just talked of striving for better customer relations by all em- 
ployees. 

Success or failure in developing and maintaining good customer relations 
is largely in the hands of salespeople. Since this is true, the retailer must take 
every precaution to train new employees to treat his customers with the 
courtesy and thoughtfulness to which invited guests are entitled. He needs 
an effective training program, designed to meet the needs of his store. 

How do you start the plan of training with new salespeople in a store? 
The most important time in the training of a new salesperson is the first day. 
On that day he is full of ambition and enthusiasm. He wants to learn how 
to do his job. Do this for him: 



HOW TO OPERATE A STORE MOST EFFICIENTLY 197 

Take advantage of this interest. Tell him about the early history of the 
business, about your experiences and successes, about your plans for the 
future 

See that he gets acquainted with the other employees 

Encourage him to become generally familiar with the merchandise in the 
store while he is becoming acquainted with the general operations in the 
store 

Take as much time as is necessary to explain the policies that set the pat- 
tern for the store's relations with customers, employees, and other busi- 
ness concerns and organizations. This will include policies relating to 
the types of merchandise, quality, and price lines carried; advertising 
and promotion methods used ; customer services provided, including cor- 
rection of store errors and adjustment of complaints; employee regula- 
tions; salary and leave policies; and general business practices 

Explain how he can do a better jpb if he knows your policies 

Encourage him to ask questions. Then question him to be sure that he 
understands the policies so well that he can represent you in his dealings 
with the customers 

If you have a written statement of your store policies and regulations, this 
is a good time to give your new employee a copy so he can study it 

After introducing a new employee to the store and telling him about your 
policies, you should next start training him in the details of his job. For con- 
venience, the selling job may be divided into two parts : first, the mechanics 
of handling the transaction, and second, serving the customer. For training 
purposes, it is best to teach these operations separately. The inexperienced 
salesperson will find it easier to grasp the entire operation if it is first ex- 
plained and demonstrated in full. 

Delegate actual training to one of your more experienced salespeople 
one with the patience and understanding to instruct without destroying en- 
thusiasm. Move this way: 

Training in the mechanics of the transaction should include writing up 
sales slips, wrapping packages, using the cash register, and counting 
change back to the customer in the prescribed manner. Get the new 
employee to practice them until he does them with ease 

Teach him how to approach and greet the customer, determine his needs, 
show the merchandise and stress its selling points, meet objections, close 
the sale, and interest the customer in related merchandise 

Show him your own selling techniques those you have found particu- 
larly effective in your store 

Get the new employee to follow these rules: 

In approaching and greeting a customer: 
Approach the customer promptly and courteously 
Welcome him with a pleasant greeting. Address customers by their names 



198 HOW TO RUN A SMALL BUSINESS 

whenever possible. Try to remember their names, even though they do 

not buy from you frequently 

Show a friendly interest and a sincere desire to be of service 
If the customer is already examining merchandise when approached, make 

some comment about it, such as, "This is one of our new models." It 

provides a good opening 
Next, make an alert and pleasant inquiry, to lead the customer to indicate 

his interest in that or related merchandise 
Serve customers in turn, unless those entitled to first service agree to let a 

late-comer who is in a hurry be served ahead of them 
In determining the customer's needs: 

Ask a few well-phrased questions to lead the customer to explain his needs 
. Pay close attention to the customer's reactions and comments about the 

first merchandise shown 
Eliminate as quickly as possible any items which clearly do not suit his 

needs 

Concentrate on those which appear to meet his requirements 
In the presentation and demonstration: 
Display the merchandise to its best advantage 
Analyze the chief selling points in terms of the customer's needs 
Demonstrate the uses of the item get the customer to examine or handle 

it 

Show him how to use and care for it 
If the article is something that can be tried on, suggest that the customer 

do so, and be honest in expressing an opinion if one is asked 
In meeting objections: 
Answer objections fairly and completely 
Describe compensating features such as quality, manufacturer's reputation, 

economy, and special uses 
Never argue with a customer 
If possible, avoid mentioning competitors' goods 
In closing the sale: 

Close the sale promptly but without appearing in a hurry 

Do not overtalk 

Do everything possible to close the sale to the mutual satisfaction of the 

customer and the store 
Even if the customer does not buy, encourage him by your attitude to come 

in again 
Avoid high pressure customers like to "buy"; they are not likely to return 

if they feel they have been "sold" 
Suggestion selling: 

After the sale is assured, suggest additional items which might also serve 

the customer's needs. The merchandise best suited to suggestion selling 

is that which is seasonable and appropriate, near at hand, related to the 
goods purchased, and attractively displayed, and about which the cus- 
tomer does not have to deliberate long 



HOW TO OPERATE A STORE MOST EFFICIENTLY 199 

4ft er the sale: 
All promises as to deliveries, gift wrapping, trial use, service, and other 

store policies should be carried out to the letter 
The sale is successfully completed only when the customer is satisfied with 

his purchase and when he recalls the store favorably as a desirable place 

in which to trade 
To accomplish this, it is essential that the purchased item meet the need 

of the customer and that he realize, from the way in which he has been 

served, that his patronage is appreciated 

How to get the greatest benefit from your window display 

The purpose of your window display is to attract the attention of passers-by 
and make them want to come in and examine your stocks. 

Too often the windows are unimaginative and dull. They fail to do an ef- 
fective selling job. Sometimes the display is a conglomerate mass of different 
designs. It looks as if the dealer had tried to exhibit his entire stock. 

A recent poll revealed that 93 per cent of the customers interviewed had 
"window shopped" before they bought. Furthermore, 55 per cent of the pur- 
chasers had had no previous intention of buying. They did so only after they 
had seen the merchandise displayed. 

The average shopper's opinion of a store's merchandise, quality, price, and 
style is largely formed on the strength of its window displays. Arranging 
attractive "selling" displays is a challenge to any dealer. The money expendi- 
ture need not be great. Added sales will repay you in a short time. Look care- 
fully at your window display and see if you think it will sell your product. If 
not, you'd better do something about it. Use these aids : 

Effective use of color is your best means of attracting the attention of 
passers-by. But be sure the colors don't clash. They need not be bright 
colors. An atmosphere of quiet and tasteful simplicity often draws as 
much favorable comment as a brilliantly dramatic display 

Proper lighting also is important. There must be no glare or shadow cast 
on the goods displayed and no light shining on the eyes of the person 
examining the window. Fluorescent lighting comes nearer giving an 
appearance of daylight. Spotlighting can be used to advantage too, 
especially to call attention to the display at night 

If the display space inside your store is rather small, you will want to em- 
phasize your window displays even more strongly. With wall panels you 
can set up a room display. Paper the panels as if they were actually the 
walls of a room 

Other merchants in the town will probably be glad to lend you suitable 
pieces of furniture, pictures, draperies, and other accessories, in return 
for your placing a card in the window reading: "Furniture and acces- 
sories courtesy of the stores" 



200 HOW TO RUN A SMALL BUSINESS 

Window displays must be changed often. Wallpaper display can point up 

seasons and holidays 
Whatever kind of window you use, remember that the display featured 

there should arouse interest in the goods and create a desire for them. 

Better still, it should entice prospective customers into your store. There 

you will have a chance to find out what they want and to supply their 

needs 



How advertising can help you meet competition 

For any store, large or small, the most pressing problem today is the grow- 
ing competition. 

One of the ways to meet this is through advertising. Often the merchant 
cannot spend large sums on advertising. But, by careful planning and wise 
use of advertising best suited his needs, he still can achieve good results with 
a small outlay. 

Skillful advertising can be profitable in several ways. The most immediate 
and most direct benefit can be an increase in sales, both of advertised items 
and of additional items bought by the shoppers who are attracted to his 
store. Advertising can also bring him these gains (not so apparent because 
they are built up over a period of time) : 

Every store depends upon certain characteristics, such as convenience of 
location, to attract and hold customers. The advantages of a store which 
have strongest appeal provide a foundation upon which all the adver- 
tisements should be built. By using the same fundamental appeal in all 
his advertising the merchant can give his store an identity of its own. 
It sets it apart from other stores. 

Customers will come to associate the store in their minds with friendly, 
courteous service, quality items, or whatever characteristics and customer 
advantages are stressed in the advertising. The advertisements thus will 
do more than an immediate selling job. They will collectively build up 
public recognition, confidence, and goodwill for the store. 

Don't try to do the job yourself. See if you can find an advertising agency 
delighted to work with you. They are intensive students of retailers' prob- 
lems. And they will be of enormous aid in cost cutting. 

Have a fixed advertising allowance. The amount to spend on advertising 
during the year should be determined carefully in advance as a definite per- 
centage of net sales. 

The appropriation should be based on either net sales for the previous 
year or on the sales you hope to achieve during the next year. 

Manufacturers, wholesalers, and newspapers may help plan more attractive 
advertisements. They often provide excellent cuts, mats, and suggested copy 



HOW TO OPERATE A STORE MOST EFFICIENTLY 201 

slants. This expertly planned material generally will be furnished without 
charge. Make full use of it, for it will help to keep your advertisements up 
to date, appealing, and effective. 

Consistent advertising brings best results. Experience has shown that ad- 
vertising brings best results when used consistently. For this reason, the 
merchant will do well to spread his advertising over the entire year, instead 
of devoting his full appropriation to a few expensive advertisements for 
special occasions. 

Use smaller, less expensive advertisements at frequent or regularly sched- 
uled intervals, to keep your store and its merchandise and services regularly 
before the public. 

The methods open to advertisers are by direct mail, local newspapers or 
shopping papers, and spot radio announcements. The audience possibilities 
of each might be broken up this way : 

Newspapers and shopping papers publishers will furnish circulation state- 
ments 

Direct mail quantity is determined by you; recipients can be individually 
selected 

Spot radio announcements audiences primarily determined by what pre- 
cedes, what follows, and audience available at the time 

What about the cost per unit of coverage for each method? 

Newspapers and shopping papers fixed by publishers' rate cards ; cost per 
1,000 copies known in advance; percentage of useful circulation gov- 
erned by character of product or service advertised 

Direct mail cost per mailing piece is determined by you, but usually it is 
higher per 1,000 than other media 

Spot radio announcements cost per listener can be estimated through 
audience ratings of programs before and after the announcement 

All three methods can be timed to meet your sales needs, both as to dating 
and as to frequency. 

If illustrations are important to selling effort, direct mail offers almost 
unlimited possibilities. It gives you any size and treatment, within limits of 
format selected and reproduction process employed. With newspapers, the 
size is limited by insertion dimensions. Reproduction is through line cuts and 
coarse-screen halftones. Radio programs offer no pictorial appeal, but drama- 
tized commercials may give strong impressions. 

Consider the factor of competition for attention. Direct mail is opened 
and recipient's interest is aroused. It gets undivided attention. In news- 
papers, you are affected by the position in the paper and on the page; the 
size of insertion in relation to surroundings; the interest of adjacent editorial 
matter and advertisements; the effectiveness of lavout and display. 



202 HOW TO RUN A SMALL BUSINESS 

Radio programs hold a listener to only one broadcast at a time; a popular 
program can build a continuing audience. Almost complete attention is 
given to the commercial. 

What about the useful life of the message? 

Direct mail can be preserved for reference by interested recipient 
Newspapers little holdover value; ordinarily a paper is discarded within 

a few hours or one day after publication 
Spot radio announcements auditory suggestions are more effective than 

visual but no holdover except through repeated impression 

Newspaper advertising and shopping papers are particularly suitable for 
use by stores in smaller and middle-sized communities. They can be em- 
ployed to good advantage, also, by stores which are located in downtown 
shopping areas of large cities. 

Although neighborhood stores in large cities generally find advertisements 
in daily newspapers too costly, they sometimes advertise in neighborhood and 
shopping newspapers. Or they join with stores of other sections to run coop- 
erative advertising in daily papers. 

Here is what experts tell you to do in copy preparation for newspaper 
advertisements: 

Make the advertisements distinctive so distinctive that customers will 
recognize them immediately. Some tested ways to do this are by using: 
uniformly sized advertisements; the same distinctive borders and type 
face in each advertisement; a slogan tied in with an attractive store 
characteristic (for example, "The Store of Quality Foods") ; a boxed 
editorial or recipe in each advertisement. 

Schedule the advertisements. Advertising gains in effectiveness when used 
frequently and on regular schedule. Small advertisements appearing at 
regular intervals generally are more productive for the merchant than 
occasional large ones. 

Choose items to advertise. Offer customers the items that they want at the 
time that they want them. This means choosing: items that are timely 
because of seasons, holidays, local events, and national advertising of 
manufacturers and producers; items that have wide local appeal; items 
that are frequently purchased. Another factor is variety. Inclusion of 
varied items in advertising broadens its appeal. 

Plan a good selling advertisement. It must attract attention, arouse and 
maintain interest, create desire, and induce action. 

Some effective attention getters or "stoppers" that one can use are pic- 
tures of people, cartoons, recipes, pictures of attractive food items, serv- 
ing suggestions. Use headlines that appeal to the emotions of the house- 
wife, such as one that tells her "How to Be a Better Cook" or "How to 
Improve Your Cooking." 

Interest in an advertisement can be maintained by making it generally at- 



HOW TO OPERATE A STORE MOST EFFICIENTLY 203 

tractive. Good ways to do this are by leaving ample white space in the 
advertisement so that it does not appear crowded ; by varying type sizes 
to avoid a monotonous effect; and by using good illustrations freely. 

Use tempting pictures or word pictures of them. Effective word pictures 
of items can be built with such descriptive words as "creamy," "garden- 
fresh," "highly seasoned," and "flavorful." 

Lead the housewife to desire items and spur her to buying action. Induce 
her to buy by giving her, in a few words, a reason for buying each item, 
and by featuring daily specials, limited time offers, and quantity pricing. 

Be careful in wording the copy. Write briefly; use simple words; never 
exaggerate. Be truthful at all times. Whenever possible, give facts about 
the items, not just opinions. Write cheerfully and positively. 

Using outside salesmen may help you 

Some kinds of stores find it profitable to have outside salesmen. The job 
of instructing them is the same as that with inside people. But cost control 
is more important. 

Sales outside the store create a lot of special problems. You need to study 
your costs in the same way that wholesalers and small plants do (see Chap. 
11); for example 

Are you taking too many small orders or taking less than minimum quan- 
tity orders or giving undeserved "courtesy" discounts? 

Your whole sales plan should cut out costly practices; for example 
Needlessly long credit terms 
Premiums 

Overgenerous return privileges 
Excessive guarantee 
Unreasonable deliveries 
Concessions on freight and delivery charges 
Unrestricted service after the sale 

Control requires that you find out what each customer should be buying. 
Then see what the salesmen should do about it. Know when and how often 
the salesman should call on him. 

If an account proves unprofitable after a fair trial, take it off the salesman's 
call route, perhaps then soliciting by correspondence only. Watch this prob- 
lem particularly in connection with accounts which are "off route" and there- 
fore expensive to cover. Here are a lot of other checking points to eliminate 
waste: 

If your product is sold through dealers, study the mechanics (see Chap. 12) 
adopted by wholesalers 
Coach your salesmen to suggest practical sources of new income 



204 HOW TO RUN A SMALL BUSINESS 

See if they can help with dealer operating economies, upkeep and repair 
service, new lines, etc. 

Have all salesmen report to you suggestive examples they observe 

Give that information to your other salesmen 

Don't ship out sales literature and samples indiscriminately, at a salesman's 
request 

Keep the amount in proportion to dealer's or jobber's volume 

Make exceptions only when a salesman has secured a definite commit- 
ment for a special drive 

Find out whether your catalogue, if a large one, can be reproduced in 
smaller size or a less expensive process 

See if a smaller edition can be given by your salesmen 
If your goods are sold through retailers, show your salesmen how to 

Spot new, untrained salespeople 

Teach them how to sell your merchandise 
If selling to industrial customers 

Be sure salesmen do not take it for granted that buyers will know how 
to use your product to best advantage 

A complete educational job may be necessary with each new customer 

Use instruction sheets and wall charts, for distribution to customers and 
to established users with factory forces. Give them: detailed guidance, 
starting with the ABC's of how to get maximum service from your product; 
similar instructions about its protection and maintenance 

Point out to your salesmen that some of their customers and prospects 
may have the necessary equipment to complete articles delivered to them 
in "semifinished" form and urge them to keep watch for such opportuni- 
ties to increase your output of merchandise 

Watch salesmen's costs and the way salesmen work (Read Chap. 11.) This 
list of trouble spots may help : 

Concentrate on preferred accounts and nearby territories 

Abandon quickly personal sales work in territories not paying their way 
or near the danger line 

Schedule all efforts so as to get most economical selling 

Eliminate overlapping and backtracking in routing 

Lay out territories for minimum travel costs for desired coverage stop 
routing by past habits or salesmen's preferences 

Eliminate "jumping" from edge to edge of territory to cover an inquiry 
without the precaution of telephoning to ascertain if the call is really urgent 

Hold the reins tight on restless salesmen who prefer to move on rather 
than "mop up" where they are 

Stress the importance of making sure that the prospect or customer will 
be on hand when he calls 

Urge the use of advance cards, telegraph, and telephone to tnake specific 
appointments for interviews 

Coach salesmen, when making missionary calls with dealer or jobber 
salesman, to arrange that the local man furnish the transportation 



HOW TO OPERATE A STORE MOST EFFICIENTLY 208 

Consider rescheduling your salesmen so the greater part of their time is 
spent on "cream-skimming" trips by plane and train, covering easily 
reached customers and prospects, with only occasional automobile trips 
for intensive coverage 

Get a veteran salesman to recall how business was cultivated before the day 
of the automobile. Some devices may be suitable for revival 

Showing lines in sample rooms 

Fewer week ends at home 

Fewer concessions in connection with size of order 

Fixed minimums for acceptable orders 

More use of shoe leather 

If salesmen's samples are bulky, problems arise without an automobile. Con- 
sider having them carry photographs instead of actual samples 

Have the pictures actual size if possible 

If not, make them as large as can be conveniently carried 

Make them clear and descriptive 

Use color if that is desirable 

What are some danger signs to consider as you change your salesmen's activi- 
ties? Consider whether it is time to drop those salesmen who have proved 
disappointing. Or study a change in sales territories to realign with recent 
population and income shifts 

Think a long time before you curtail or drop your sales force in favor of 
side-line men. They are less amenable to control. They will tend to do a 
sales job on a short-haul basis. They give preference in allotting their 
time to their accustomed lines 

Move slowly in trying "combination traveling" with noncompetitive 
salesmen. It's cheaper but slower. Your men will be less available in an 
emergency 

On the other hand, be open-minded toward "sales caravans" in which 
a number of noncompetitive companies participate. Prospects are attracted 
into central points at which the caravan stops and displays its samples 

Is your procedure in maintaining contact with salesmen a heavy, though 
hidden, burden on selling costs, using up income that otherwise could be 
used to build stronger selling? Close supervision should be maintained on 
such questions as : 

Could smaller or cheaper letterheads be used for most letters? 

Are carbon copies being mailed to which nobody later refers? 

How many afternoon telegrams and long-distance calls can be avoided by 

having "rush" matters handled by letters dictated, typed, signed, and 

mailed by 10 A.M. or 12 noon? 
How many letters (particularly letters with bulky enclosures) go out late 

in the day by air mail which could just as well have traveled by ordinary 

postage if attended to earlier in the day? 
Can telegraph and long-distance telephone costs be reduced by routing a 



206 HOW TO RUN A SMALL BUSINESS 

carbon of every telegram across the desk of someone high in authority 
and by requiring that a memo be sent him justifying each long-distance 
call? 

Are all top executives cooperating in minimizing telegraph, long-distance, 
and air-mail expense, or are they setting an extravagant example to their 
subordinates? 

Are all letters to each salesmen or branch office except those on rush 
matters sent out earlier in the day collected together and mailed at 
minimum postage in a single envelope? 
Can a saving be made by having addresses printed or processed on the 

envelopes to save stenographic time? 

Because filling out call reports uses up time and energy, rcstudy the infor- 
mation you require from these angles 

Are any of the questions out of date in terms of today's business 

situation? 
Are the questions asked boiled down to include only those which bring 

in information of real value to the home office? 

Is there any systematic procedure to utilize the information contained 
in call reports? 

Does your accounting control watch salesmen's costs carefully? There is a 
detailed description of the way to do that in Chap. 11. 

How to cut your delivery cosfs 

You should organize for more efficient, more economical delivery. 

The first job is to get a factual study of the advantages and disadvantages 
to you of various methods of shipping. 

You have to consider every possible type of delivery: motor truck (your 
own or by established truck lines), parcel post, cash and carry or customer 
pickup, messenger, bicycle, motorcycle with sidecar or trailer, pushcart, and 
many others. Each should be studied to find 

Costs Effect, if any, on speed of collections 

Speed Suitability to the size and weight of 

Convenience to customers your normal shipments 

Protection to you against damage Usefulness in emergencies 
or loss 

Cutting your costs assumes you know good practices and are open for sug- 
gestions. It assumes you are watching rates offered and rates charged. It 
also assumes you are keeping watch against sources of trouble such as 

Shipping department delays "Short" shipments 

Damages due to faulty packaging Shipments not in accordance with 

Errors in addressing orders 



HOW TO OPERATE A STORE MOST EFFICIENTLY J07 

It assumes, too, you are carefully guarding against wasteful practices such 
as 

Using more wrapping paper than the package requires 
Using needlessly long strips of gummed tape 
Using excessive amounts of twine or string 

Adding unnecessarily to parcel post and express costs by superfluous or 
poorly selected wrappings 

If we can start on that premise, here are a lot of cost-cutting suggestions. 
Some of these may apply to you: 

Should you give an allowance to purchasers who call for the goods they 

order? 
What are your opportunities for substituting deliveries by boy on street 

car, bus, or bicycle for truck delivery? 
Can you drop daily delivery service in favor of delivery scheduled every 

other day or twice a week? 
Make no deliveries on half days. Induce customers to order their half-day 

requirements for delivery in the preceding day's delivery 
Find out exactly how far you can deliver without eating up your profit. 

Then establish that distance as a rigid limit 
Should you make deliveries within two or three blocks of store by pushcart 

instead of truck? 
Consider adopting the "carrying loop" of twine, so widely used in prewar 

England, to help your customers cooperate in carrying home their pur- 
chases 

Can incoming packages and containers be reused? 

Are you buying any "padding" or cushioning materials that can be re- 
placed by waste and scrap salvaged from your own operations? 
If you operate your own trucks 

Make an effort to arrange loads for return trips 

Provide for constant checkup and expert maintenance either in your 
own garage or best nearby service shop 

If your truck has idle time, find out where additional trucking capacity 
is needed in your locality and rent it out 

Discourage customers from insisting on special deliveries. Show them 
the imperative necessity for accepting scheduled stops on scheduled 
routes. Don't attempt to maintain "same-day" shipment unless it can 
be done without increasing costs, adding to traffic congestion, or wast- 
ing mileage 

Reduce number of pickups per day. Get down to one per day if possible 

Plan for capacity loads by concentrating shipments 

How to improve your customer relation* 
Of first importance is to check on customer attitudes toward you. Do cus- 



201 HOW TO RUN A SMALL BUSINESS 

tomers believe that: their orders are slighted and other purchasers get first 
deliveries; your service or credit rules are oppressive? 

Organize to sustain customer goodwill. Make sure your correspondence is 
carried on in such a way as to do a selling job for the future. And do this : 

Be sure the character of your handling of deliveries, orders, credits, and 

remittances is in keeping with changed conditions 
Express appreciation for prompt payments 
Be sure complaints are dealt with promptly and humanly 
Thank good customers for business don't let cranks monopolize your 

attention 
Make friends of all who contact you even in the humblest way 

Keep studying lost sales and lost customers. Don't depend on other people 
to keep you informed of customers' preferences. Find out for yourself. That 
assures a continuous tabulation of reasons given for lost sales. It assures a 
review of the score, made frequently and open-mindedly, to ascertain if: 
your popularity is slipping in comparison with competition; users are alien- 
ated by your selling, service, or credit policy. 

How do you guard against the easy-to-acquire tendency to underestimate 
the quality of competitors' merchandise, the ability of their salespeople, the 
sales appeal of their advertising? Part of the job, when others are competing 
with you, is to make open-minded comparisons. Part is to organize a system 
warning you when you are losing an account particularly one ensuring that 
you will be notified when a "star" customer's account shows signs of taper- 
ing off. 

As soon as it is evident that an account has stopped buying, try to find out 
exactly why. Move this way: 

If what you find out suggests that you, or your sales method, may have 

been at fault, offer restitution promptly and pleasantly 
If you have no reason to question the buyer's sincerity, give him or her 

the benefit of any doubt, the first time 
It is usually better policy to let a habitual shyster crook you once than to 

take a chance that an honestly disappointed customer can criticize you 

to his associates and friends 
If you suspect that a salesperson was the reason for the lost sale, consider 

assigning the account to another representative 
Study carefully the collection record and correspondence over the last few 

months before the breakoff. Resentment over collection policies and 

methods is a frequent cause, but one which the lost customer will rarely 

offer as the reason 

If direct action won't get the reasons for lost sales, maybe an advertising 
agency, not identified with your company, can get the information. If not, 
here are some ideas: 



HOW TO OPERATE A STORE MOST EFFICIENTLY 209 

Put lost customers' names on follow-up ticklers to get specially dictated 
letters the more personal the tone, the better 

Use every opportunity to send letters with a "news flavor" news items, 
new policies, new personnel, news services, new floor space. In other 
words, build up a definite impression of progress and improvement 

Have someone other than the salesman write letters at intervals, asking if 
they were in any way at fault for the customer's discontinuance of the 
account 

Try "anniversary" letters on date of customer's first purchase from you, 
on your firm's birthday, just before New Year's, etc. 

Try handwritten letters from yourself, a blank monthly statement with 
question mark or query as to why it is blank, letters with stamped return 
envelopes, etc. Be as ingenious and original as you please you have 
nothing to lose but much to gain. "Stunts," by amusing the recipient, 
may accomplish what the dignified approach fails to achieve 

Offer some useful premium for a frank statement as to why the customer 
has stopped buying memo book, special calendar, or suitable novelty 

When you have a selling piece for mailing, attach a handwritten memo- 
randum carrying your name or initials, and address the mailing to a 
definite individual in the organization 

If the lost customer is a business house, watch for opportunities to be of 
unexpected service mail them sales tips, clippings of articles, or news 
items which should interest them but which they might not see in their 
own reading 

At intervals give a lost account an opportunity to "pick up a bargain" of 
some item of which your supply is too limited to make a general offering 



11. HOW TO OPERATE A PLANT PROFITABLY 

How to run a small plant profitably is a many-sided study. It has to do 
with your production efficiency, your ability to market, your purchasing, 
your labor handling, and many other elements of good management. 

This section of the book is a check-listing of the essential procedures that 
can be adopted to cut costs and improve sales. 

Much of the approach here is in the technical aids toward a better, more 
profitable plant. 

Much is in the plea that good management and good accounting informa- 
tion are synonymous. If you are to have intelligent operation, you need your 
CPA to show you how your records of supply costs, other plant costs, sales 
costs, and distribution costs can be made vital to your control. You need to 
get- 

Systematic reports, immediately rendered to every person concerned with 
costs. And they should be in terms they can understand, so that they 
guide the way to intelligent planning 

Accurate costing preferably the sort that compares your results with de- 
cent standards you ought to adopt 

A method of red-flagging all variations from good practice, so you can 
quickly change bad spots 

An intelligent study of the way you sell, as well as the way you produce. 
Both are needed to cut unprofitable lines, unprofitable markets, and un- 
profitable customers 

A constant check of all wastes, spoilage, employee frauds, idle time, bad 
buying, bad supply handling, excessive absenteeism, inferior materials, 
incompetence, and other bad conditions that cause so much distress in 
small business 

Good small-plant management also is concerned with the effectiveness of 
location, layout, use of equipment, use of service facilities, purchasing, re- 
ceiving, storage, and accident prevention. 

All these are first checklisted here. 

Guides to good plant location 

What about the community and the site? A community friendly to your 
kind of a business is important. Are its taxes reasonable? Will it make any 
concession to bring you to it? 

210 



HOW TO OPERATE A PLANT PROFITABLY 211 

Check existing climate, flood and hurricane possibilities, local noise, odors, 
dust, smoke 

Check local ordinances as to hours, smoke, fire hazards, and sanitation 

Note whether facilities for fire fighting, policing, sewerage, sanitation, etc., 
are adequate 

Who are your neighbors do you want to be near them? 

Is the supply of water the type you need? 

Check the fuel and power available 

Is extension of plant possible if you require it? 

Study the natural contour of the land, character of the soil, and its drain- 
age to see if they permit more economical manufacture and should influ- 
ence your decision 

Check insurance costs in the area 

Even a small town may have zoning restrictions. Size up a town to find 
out if there are any that would affect the location of your shop. Plenty of 
good spots should be available outside the restricted areas. Sometimes, when 
there is a very good reason for it and the neighbors do not object, the town 
may consent to rezone a portion of a district to permit the location of a shop. 
If a shop is noisy or if it emits strange odors and gases, it can easily be a 
nuisance to the neighboring stores and shops and may cause them to lose busi- 
ness. Then the zoning laws might be used to force the offender to leave the 
neighborhood. 

What about traffic? Many towns restrict the use of their streets for heavy 
trucking and permit it only on certain routes. Think of this: 

If the shop is on a truck route, the company that will be delivering most of 
your supplies may be able to drop off the load at your door 

If you are located on a street where heavy trucks from out of town are not 
allowed, you may have to pay an extra charge to a local trucker or go to 
the trouble of picking up the supplies yourself 

Your time is too valuable to spend on picking up deliveries. Check with 
the principal suppliers and find out whether or not this particular pre- 
caution applies to you 

Rents may be cheaper along streets where heavy trucking is permitted be- 
cause there is likely to be less competition for space 

Most families do not like to live where the noise of heavy traffic bothers 
them day and night and comparatively few businesses find such locations 
desirable 

Proximity to a freight station or a railroad unloading siding is often of con- 
siderable importance to a business. Many of your materials and supplies 
may be coming in by freight. Frontage on a railroad siding may be necessary 
if you are going after big jobs or heavy work. 

One practical advantage in receiving materials by rail is that an l.c.l. (less 
than carload) shipment can be left in the freight station for a certain period 



212 HOW TO RUN A SMALL BUSINESS 

of time before storage charges are levied. If you are short of ready cash when 
a c.o.d. shipment arrives by railroad, you may have time to do the necessary 
collecting after you have been notified that the shipment is on hand. 

Stay close to your market in picking a location. Be accessible to your cus- 
tomers if that is possible. But more important, think of these points: 

Flexibility of transportation methods in case your particular system won't 

work 

Traveling expenses of your own salespeople in their trips to the plant 
Transportation costs and licenses. Measure costs of warehousing and stor- 
age at distant points against location of facilities there 

Consider the labor problem in your location. The supply should be ade- 
quate, skilled, and at a wage rate suitable for your job. Think of these points, 
too: 

Are housing and transportation facilities suitable? 

Can you use the female labor available? 

If you are going to move, what is the cost of taking your key people with 

you? How will they be received at the new location? 
What training and vocational schools are available in the neighborhood? 
Are restaurant facilities near you? If not, you may have to build them 



Should you lease, buy, or build your plant? 



Leasing has many advantages. The initial investment is lower, leaving you 
more cash for equipment and operating costs. There is less probability of 
your needing a bank loan. You enjoy freedom from such ownership risks as 
fires, tornado, or value changes. 

Ordinarily you would build only if space requirements are not obtainable 
or no existing plant could be bought on favorable terms. 

If you buy, your financial position must, of course, permit the investment. 
Keep in mind possible needs for plant expansion as the business grows. 
The time to check on sufficient space for expansion is before you buy or 
lease. 

What about lease provisions? If the location has been carefully selected 
and the rights and obligations of owner and tenant are fully and clearly 
agreed upon, in writing, you need have no hesitation in signing a lease for 
1 year or longer. Try to reserve the right to renew the lease for a fair period 
by giving notice before its expiration. 

Should you sign a lease for more than one year? It may happen that the 
building selected will require extensive alterations. The alterations may be 
paid for by the property owner if he has an occupant who promises to lease 
the place for a term of years. No such concession can logically be demanded 
on a short-time rental or lease agreement. 



HOW TO OPERATE A PLANT PROFITABLY 213 

On some long-term leases, provisions are included which permit the rental 
rate to be increased at stated intervals. The amount of the raise may be 
arbitrary, or may depend on the profits of the business, or some locally recog- 
nized index of business activity. 

Responsibility for maintenance of repairs to the building, the roof, plumb- 
ing, floors, walls, and other parts should be clearly agreed upon. The owner 
and the tenant may have opposing points of view on this subject and any 
differences should be brought into the open and fully discussed. 

What about rental rates? It is just as important to avoid extravagance in 
rental payments as it is to avoid miserliness. A man is proud of the business 
he is establishing and of the personal technical skill upon which he counts 
to make that business a howling success. He naturally wants to dress it up to 
reflect his confidence and pride. Remember these points: 

A reasonable appearance of economy is no liability to a new business. 
People are essentially conservative and will mistrust a new business which 
has spent too much on flash 

Rent has to be paid every month whether or not the business is making a 
profit. Therefore, rent is going to be one of your major items of fixed ex- 
penses. Don't cut down a limited working capital by obligating yourself 
to pay a discouragingly large rent bill every month 

High rent may not seem important during a period of good business a 
prosperity cycle but it may strangle your business if a slump comes 
along before you have been able to accumulate adequate reserves 

Is there any "catch" to the property you are planning to lease or buy? 
Specifically: are sewer connections available? Is the road paved so that access 
is possible at all times? Is there ample police and fire protection? How near 
is the property to a fireplug? If you buy, is the title clear? Before making a 
considerable financial investment in the community, it is important to know 
just what your tax dollars are going to buy that will be of direct value to you. 
And what about these things: 

Is the town generally favorable to the establishment of new businesses? 
The leading citizens of some towns resent the introduction of new busi- 
nesses and try to block the issuance of a license to a stranger. The old- 
timers control everything, own most of the property, and run the town 
council. Keep out of such a town and save your bank roll, your courage, 
and your optimism. Some other community nearby may be a better 
place in which to establish a new business 

Before you consider any building be sure that electricity, gas, and water 
will be available at all hours and seasons in the amounts required 
Is ample pressure maintained at all times? 

Find out whether or not the water charge is included with the rent; 
if it is not included, learn whether water is sold at a flat rate or on 
a metered basis. In some places water rates are extremely high 



214 HOW TO RUN A SMALL BUSINESS 

The cost of commercial electric current may be a measure for deter- 
mining how much of the shop equipment should be electric pow- 
ered. It may be necessary to buy a diesel generator set to ensure 
ample current for the shop's power and lighting requirements 

Most cities have blighted areas, usually old run-down residential districts 
on the fringes of the commercial section. In these districts hoodlums, 
petty thieves, moochers, panhandlers, and hobos may be numerous. The 
presence of such persons not only complicates the plant-protection prob- 
lems by day and night but tends to keep timid customers from visiting 
the shop even by day 

In such an area, petty thievery might make it impossible to store bulky 
materials outside the shop; tools might disappear too often. The dis- 
advantages and losses might amount to more than could be saved on rent 

Older cities are often situated on the lowlands at the fork of two rivers. 
Some sections of those cities may be imperfectly protected against flood- 
ing in time of high water. The record of a location with respect to the 
inconvenience and damage caused by floods should be investigated 

Some entire cities are below the level of the river levees and suffer periodi- 
call from uncertainties due to weather conditions. Even in cities which 
are not in the river bottoms poor surface drainage and lack of storm 
sewers can lead to damage from heavy rain or high water 

Aid* in selecting the building for your plant 

A factory or industrial type of structure is preferable to space in a business 
block or commercial type of building. 

For floors, seek concrete. The concrete floor may itself be a sufficient 
foundation for light machinery if the foundation bolts are set in cement. 

The thickness of the concrete should be checked. Drill a hole through it if 
it can be measured in no other manner 

Heavy loads should not be trusted on it unless it has a safe margin of 
strength. In comparison with concrete, wooden floors, whether of planks 
or blocks, are not as strong, durable, stable, or level 

While wood is softer and less tiring to the feet, it is likely to become oil- 
soaked; then the wood floor is extremely inflammable. You can't afford 
such risk of fire 

Ordinarily a ground-floor location is preferable, as it lends itself better to 
the provision of proper foundations for machinery 

Ample footings are especially important in the case of machine tools. 
They are assembled units and their parts can be thrown out of alignment 
by unequal lagging. 

Poor alignment creates strains and vibrations which make accurate work 
impossible 

Level, nonsagging floors are also necessary for maintenance of close toler- 
ances for welding heavy assemblies 



HOW TO OPERATE A PLANT PROFITABLY 2 IS 

These conditions may not be found on upper floors, except in the case of a 
steel and concrete building 

Your first effort should be centered upon finding a ground-floor location 
either without basement, or with only a part basement in which the heat- 
ing plant is installed 

Examine the ceiling. If it has exposed steel beams, that's all the better. To 
unload equipment and, later on, to load and unload heavy pieces of work 
entering or leaving the shop, a chain block or hoist is required. This hoist 
should hang from a beam strong enough to carry safely any load it will be 
called upon to support. Such structural features are not generally found in 
a commercial business block, and laboriously sliding or rolling heavy loads off 
or on a truck can add up to a lot of expense. Loading also slows down work, 
and takes men off more important tasks. 

What about walls? Proper consideration of the natural lighting of the 
building will pay dividends in the form of lower electric bills, better work, 
and lessened eyestrain. Saw-tooth roofs were developed to permit a great deal 
of light to enter the interior. 

A light-colored paint on ceilings and upper walls helps to reflect the light 
to working spaces, and makes the whole shop look shipshape, efficient, mod- 
ern, and well managed. 

The question of what color of paint to use on the inside walls and ceiling 
is worthy of special planning. 

Light colors are best for the ceiling and upper walls 

Lower walls which come in the normal range of vision should be darker in 

color, so as not to cause discomfort from glare 
Reflecting values of different colored surfaces are as follows : 

Light reflected, Light reflected, 

Color per cent Color per cent 

White (casein) 90 Buff 55 

White (flat) 84 Light blue 52 

White (eggshell) 82 Medium green 49 

White (gloss) 81 Tan 48 

Ivory white 79 Medium blue 49 

Cream 74 Orange 40 

Aluminum 73 French gray 32 

Ivory tan 67 Dark red 14 

Light green 62 Dark green 10 

Yellow 60 Dark blue 9 

Light gray 59 Black 2 

Windows are very important and are likely to be found properly placed, 
or can be easily installed, in the industrial type of structure. 

Have plenty of windows and keep them clean, not just for the sake of 
appearances and good housekeeping, but also because cleanliness will 
pay dividends in many ways 



216 HOW TO RUN A SMALL BUSINESS 

Good light from windows will cut down your electric bills, lessen the possi- 
bility of accidents that could result in loss of time as well as injury to an 
employee, and help to prevent mistakes in measurements 

If the window and skylight area take up less than the equivalent of 30 per 
cent of the floor area, the daylight inside the room is insufficient 

Actual measurements have demonstrated that vertical windows lose half 
their efficiency if left unwashed for 6 months 

If they are sloping, the light loss is much greater and might be as much as 
83 per cent in 6 months 

Some three-fourths of the dirt collects on the inside of the window. A 
washing is especially desirable in the fall of the year when the days be- 
come darker and shorter 

What about entrances, aisles, available headroom, or interior space? A 
cramped interior tends to restrict the amount of work which can be carried 
on or which can be stored until such time as it is repaired or shipped out. 

Crowding prevents the natural growth of the business 

It makes good housekeeping difficult, if not impossible 

Plenty of space should be provided both horizontally and vertically 

It is better to allow for too much rather than too little 

Employees' time can be more efficiently utilized if the shop is large enough 

to accommodate a number of jobs under way 
Both time and money can be lost in having to move unfinished jobs around 

to make space for new or rush ones 

The size of the entrances is also of prime importance. Can the largest 
truck used for delivery purposes by your suppliers drive inside to be unloaded? 
Can large castings brought to the shop be trucked inside and easily unloaded 
without excessive hand labor? Can the door be opened easily by one man 
for entry of trucks and is there a smaller door for persons to enter or leave? 

Large entrances also supplement the shop's lighting and ventilation facili- 
ties 

They offer easier escape routes in case of fire, explosion, or other unusual 
hazards 

If the space occupied is only a portion of a large building, are there fire 
doors and fire-resisting walls between your space and the rest of the building? 
Make certain that your fire-insurance rate will not be excessively high be- 
cause of a neighboring occupant's type of business. In case of doubt have an 
experienced insurance agent check the building and advise what the insur- 
ance will amount to and what, if anything, can be done to reduce the rate. 
Small technicalities, easily corrected, sometimes increase insurance rates ex- 
cessively. 

Wide aisles are essential along all traffic lanes in a well-managed shop. 



HOW TO OPERATE A PLANT PROFITABLY 217 

Often the aisle edges are painted a light color, and employees are pro- 
hibited from stacking anything in this space 

Work is speeded up, accidents reduced, and damage to work lessened if 
hand trucks operate only on aisles marked for them 

Passageways should not be skimped when estimating the floor area required 
for the shop at the start and as it grows 

Shafts, housings, pillars, braces, or other dangerous projections which ex- 
tend into the aisle space and which cannot be removed should be painted 
in attention-compelling colors. Yellow and black bands painted on such 
obstructions will prevent collisions. Use yellow striping also to mark the 
edges of open pits, elevator wells, and so on 

How you can get the most efficient lighting for your building 

When the equipment has been installed, you will probably have to call in 
the local power company to ensure that all general lighting and special job 
lighting will be properly placed and in the right amounts and intensities. 
Excellent artificial lighting costs about 1 cent per hour per workman. It is 
poor economy to work in badly lighted premises. 

Study the light requirements necessary for each type of your work, and 
whether your system is adequate at a low cost 

Consider the surroundings, presence of vapors, character and color of work, 
and effect of light upon the product 

See if a relatively simple relocation of present fixtures, change of both type 
or size, or addition of some gadget will be sufficient to furnish adequate 
light 

Consider whether supplementary lighting may be advantageous and eco- 
nomical at points where needed 

Observe what the conditions are with respect to glare, within and without, 
and what can be done to improve them. Glare is costly 

Note the places where change of ceiling and wall color would improve light 

Use the appropriate standard for normal requirements 

5 foot-candles where not required to see small details quickly 
10 foot-candles give good light on light-colored surfaces 
15 foot-candles make for fast and accurate production in all but the most 

exacting work 

20 foot-candles for average paper work 
50 to 100 foot-candles for high precision or very fine inspection 

Be sure it is the lighting system and not rearrangement of equipment that 
is necessary: get work benches, inspection tables located to take full 
advantage of natural light; see if additional windows, prism glass, glass 
brick, or monitors can be introduced with advantage 

If you are redesigning a building, get a full report on the best modern 
practice in shape of buildings, size, location, spacing, type of windows, 
monitors, and other features for maximum utilization of natural light 



218 HOW TO RUN A SMALL BUSINESS 

Study the newer lighting systems mercury, vapor, fluorescent they often 

produce excellent results at low costs 
To discourage theft of bulbs, use 220-volt lighting current, if possible. It 

takes bulbs which cannot be used in homes wired for 110-volt current 

The machinery and equipment will, naturally, have to be provided with 
motors suitable for the kind of electric current available. 

Power costs can be exorbitant unless studied constantly. Make use of the 
competitive information generously supplied by the manufacturers of your 
equipment. Here is the way to save money on electricity: 

Fit the motor to the job 

Have the motor big enough but not too big 

Have most efficient motor drive machine, then run the longest hours 

Group several loads on one motor 
Meter electricity to hold down waste 

Meter machines where function load seems to "creep up" 

Meter departments and charge them with actual consumption 
Check feeders to cut losses 

Equalize loads, test insulation, prevent heating by spotting overloading 
Boost power factor 

Look for motors too large for their loads 

Perhaps install capacitors 
Schedule loads to cut peaks 

Examine necessity for load that constitutes a peak 
Give electrical system adequate maintenance 

Systematically clean, inspect, and repair 
Check your motors, bearings, insulation, mounting, lubrication 

When you shift a machine or relocate it 

Check motor starting characteristics 

Review lubrication and maintenance routine 

This kind of planning removes all guesswork. You know definitely whether 
your building is satisfactory. Some minor compromises will have to be made 
to fit your flow sheet to the available building. Think of this, too : 

Is there sufficient area to take care of parking, an irreducibly small scrap 
pile, a stock of heavy, bulky secondhand steel shapes you have picked 
up for a song but cannot comfortably store inside? 

Is there space in the street or alley for delivery trucks to back in easily? 

How easily can the shop be broken into by thieves or hoodlums? Some of 
the windows may need bars, which you can make and install at little 
expense 

Is there adequate drainage? If the yard is in good condition, some jobs 
can be done outdoors in good weather. If it is not paved, perhaps a 
thick layer of cinders, properly graded, will be sufficient 



HOW TO OPERATE A PLANT PROFITABLY 219 

How does the building look from the outside? Some paint might be a good 
investment and would not displease the property owner either 

How to lay out a plant 

The shop as a whole is a production machine. It must be suitable for the 
work it is to turn out. To make certain of that, a production analysis is 
necessary. 

Consider what will be: the flow of work through the shop; the processes 
through which the material must pass and their order; the number and sizes 
of machines or equipment required; and the volume of business which must 
be handled in order to ensure financial success of the venture. 

Determine what type of organization or grouping of machines is most suit- 
able for you. Two methods are available: 

Straight-line or unit production is advantageous 

If your product can be broken down into units taking substantially the 
same equipment and sequence, and the volume and continuity warrant. 
It gives you a chance to plan a continuous stream of units moving for- 
ward in natural sequence 
When engineering and scheduling can switch a line from one unit to others 

of the same kind 

Where units of different types must come together for subassembly 
Where there is some high-priced or special class of work not used continu- 
ously and several lines may be set up 

But recognize that while straight-line or unit production is usually the most 
efficient, you must check its tendency to incur excessive investment in tools 
and equipment 

Functional arrangement or job production is advantageous 

If you manufacture a variety of products, and quantities are relatively 
small 

If departmental grouping is by kind of machine 

If you seek greater flexibility, maximum machine usefulness, more skilled 
operators, and less supervision and training problems 

But this scheme will usually magnify problems of handling, counting, in- 
spection, production control, and coordination between departments 

If the layout is clumsy and amateurish, your production machine will 
function in an awkward and inefficient manner. A well-planned flow of work 
through the shop will decrease the labor cost, shorten hauls between machines, 
cut down the time of work in process, lessen space requirements, facilitate 
inspection, and encourage such neatness and orderliness as can reasonably be 
expected in a workshop. Use these guides: 

Make an analysis of operations necessary to production 



222 HOW TO RUN A SMALL BUSINESS 

Usually the heating system is designed to combat the average low outdoor 
temperature rather than extreme low temperatures. It is not likely to be 
damaged by being overworked during short spells of unusually cold 
weather 

Temperatures which should be maintained for efficient working conditions 
are approximately as follows: Machine shop, 65 degrees; welding shop, 
50 to 60 degrees; and office, 70 degrees. Extremely cold days seldom 
exceed 5 per cent of the heating season; cold weather averages 20 per 
cent, and mild weather 75 per cent 

Health and comfort demand a proper circulation of air in summer and 
winter. Ventilation cannot safely be left to chance alone, especially 
when there are noxious fumes in the air 

In some places, such as engine and boiler rooms, the air has to be changed 
every few minutes. In the average shop about 1,200 cubic feet of air 
per person per hour is needed to provide proper air sanitation 

Installation of a hood and blower, to eliminate dust and fumes at their 
source, may provide sufficient air turnover for the whole shop. Humid- 
ity is best maintained at 50 per cent but can range safely from 35 per 
cent to 80 per cent in ordinary shops 

If you content yourself with poor ventilation in order to "save money," you 
lose the price of good ventilation many times over in lessened output by your 
employees and an increased amount of spoiled work and scrap. If natural 
ventilation through doors, windows, and skylights is not dependable, it should 
be supplemented with exhaust fans and, if necessary, with ducts which will 
reach the bad spots. Consider these points: 

Where required, air can be circulated over ice 

Spraying water on the factory roof after exposure to a very hot sun some- 
times gives relief at low cost 

If your processes require controlled air conditions which call for special 
handling, study the problem with the manufacturers of equipment. They 
will supply full information about the fully mechanized refrigeration 
systems available 

Consider whether normal air currents aided by such help as you can secure 
from windows, louvers, and ducts will be sufficient 

If suitable, air conditioning can be attained through the use of exhaust 
fans to remove bad air and intake fans to draw in fresh air 

If the air is dry, find out if you get better conditions by restoring humidity 
preferably to a level of about 50 per cent 

Recognize that bringing in air at high velocity, lowering moisture content, 
circulating saturated air at low temperature, are aids to ventilation 

Remember that air cleanliness reduces fatigue and helps prevent occupa- 
tional diseases 



HOW TO OPERATE A PLANT PROFITABLY 223 

How to get employees cooperation in eliminating accidents 

The cost of industrial accidents is little understood and generally underesti- 
mated by most small-plant managers. If they carry insurance, they are likely 
to think of the cost as the cost of premiums only. 

If they pay compensation and medical expenses directly, they think only 
of those costs. As high as premiums on insurance or direct payments for 
compensation and medical expenses are, they are only a small part of the 
total costs of accidents. A rule-of -thumb measure is that for each dollar of 
direct costs for compensation plus medical expenses there are four additional 
dollars for indirect costs. To many this will seem incredibly high, but in- 
direct costs involve many factors. To name some: 

Lost time of injured employees 

Lost time of fellow workers who stop work 
To aid injured worker 
Out of sympathy or curiosity 
For other incidental reasons 

Lost time of foremen and managers 
Assisting injured employee 

Investigating cause of accident and preparing accident report 
Arranging for continuance of injured employee's work 
Selecting and training new employee 
For serious or contested cases, attending legal hearings 

Lost production or damage to product or materials due to upset, shock, or 
diverted interest or workers 

Lost production due to stoppage of machine or process in charge of in- 
jured person 

Damage to machine, equipment, or material 

Lessened effectiveness of injured employee for a period after his return to 
work 

Legal expense, court fees, expense of preparing case, settlements and judg- 
ments in cases contested at law 

Many small-plant managers do not know what these accidents are costing 
them and do not feel they can afford a safety program. Statistics prove that 
the costs of accidents in small plants are high enough to demand a program 
for their reduction. In recent years, many small plants, with the assistance 
of safety organizations, have developed successful safety programs without 
undue expense or additional personnel. Each of these programs is devised 
with the application of certain basic principles. Modern safety engineers 
have discovered that these principles must be adhered to in developing a suc- 
cessful program within any small plant. These principles are 



222 HOW TO RUN A SMALL BUSINESS 

Usually the heating system is designed to combat the average low outdoor 
temperature rather than extreme low temperatures. It is not likely to be 
damaged by being overworked during short spells of unusually cold 
weather 

Temperatures which should be maintained for efficient working conditions 
are approximately as follows: Machine shop, 65 degrees; welding shop, 
50 to 60 degrees; and office, 70 degrees. Extremely cold days seldom 
exceed 5 per cent of the heating season; cold weather averages 20 per 
cent, and mild weather 75 per cent 

Health and comfort demand a proper circulation of air in summer and 
winter. Ventilation cannot safely be left to chance alone, especially 
when there are noxious fumes in the air 

In some places, such as engine and boiler rooms, the air has to be changed 
every few minutes. In the average shop about 1,200 cubic feet of air 
per person per hour is needed to provide proper air sanitation 

Installation of a hood and blower, to eliminate dust and fumes at their 
source, may provide sufficient air turnover for the whole shop. Humid- 
ity is best maintained at 50 per cent but can range safely from 35 per 
cent to 80 per cent in ordinary shops 

If you content yourself with poor ventilation in order to "save money," you 
lose the price of good ventilation many times over in lessened output by your 
employees and an increased amount of spoiled work and scrap. If natural 
ventilation through doors, windows, and skylights is not dependable, it should 
be supplemented with exhaust fans and, if necessary, with ducts which will 
reach the bad spots. Consider these points: 

Where required, air can be circulated over ice 

Spraying water on the factory roof after exposure to a very hot sun some- 
times gives relief at low cost 

If your processes require controlled air conditions which call for special 
handling, study the problem with the manufacturers of equipment. They 
will supply full information about the fully mechanized refrigeration 
systems available 

Consider whether normal air currents aided by such help as you can secure 
from windows, louvers, and ducts will be sufficient 

If suitable, air conditioning can be attained through the use of exhaust 
fans to remove bad air and intake fans to draw in fresh air 

If the air is dry, find out if you get better conditions by restoring humidity 
preferably to a level of about 50 per cent 

Recognize that bringing in air at high velocity, lowering moisture content, 
circulating saturated air at low temperature, are aids to ventilation 

Remember that air cleanliness reduces fatigue and helps prevent occupa- 
tional diseases 



HOW TO OPERATE A PLANT PROFITABLY 223 

How to get employees cooperation in eliminating accidents 

The cost of industrial accidents is little understood and generally underesti- 
mated by most small-plant managers. If they carry insurance, they are likely 
to think of the cost as the cost of premiums only. 

If they pay compensation and medical expenses directly, they think only 
of those costs. As high as premiums on insurance or direct payments for 
compensation and medical expenses are, they are only a small part of the 
total costs of accidents. A rule-of-thumb measure is that for each dollar of 
direct costs for compensation plus medical expenses there are four additional 
dollars for indirect costs. To many this will seem incredibly high, but in- 
direct costs involve many factors. To name some: 

Lost time of injured employees 

Lost time of fellow workers who stop work 
To aid injured worker 
Out of sympathy or curiosity 
For other incidental reasons 

Lost time of foremen and managers 
Assisting injured employee 

Investigating cause of accident and preparing accident report 
Arranging for continuance of injured employee's work 
Selecting and training new employee 
For serious or contested cases, attending legal hearings 

Lost production or damage to product or materials due to upset, shock, or 
diverted interest or workers 

Lost production due to stoppage of machine or process in charge of in- 
jured person 

Damage to machine, equipment, or material 

Lessened effectiveness of injured employee for a period after his return to 
work 

Legal expense, court fees, expense of preparing case, settlements and judg- 
ments in cases contested at law 

Many small-plant managers do not know what these accidents are costing 
them and do not feel they can afford a safety program. Statistics prove that 
the costs of accidents in small plants are high enough to demand a program 
for their reduction. In recent years, many small plants, with the assistance 
of safety organizations, have developed successful safety programs without 
undue expense or additional personnel. Each of these programs is devised 
with the application of certain basic principles. Modern safety engineers 
have discovered that these principles must be adhered to in developing a suc- 
cessful program within any small plant. These principles are 



224 HOW TO RUN A SMALL BUSINESS 

Study the problem until you are fully convinced that it is possible and worth 
while to eliminate accidents. Unless you are sold on a safety program, your 
efforts will be halfhearted and this attitude will be reflected by lack of co- 
operation from your workers. Any attempts to promote safety without 
evident and sincere determination to succeed will be paid lip service only. 
A safety program that has to be abandoned will make it difficult to initiate 
another program at some later date. 

Ask for assistance from the nearest office of your State Department of Labor, 
insurance company, or trade association. They can help you analyze your 
accident problem and assist you in planning a safety program that will 
reduce unnecessary costs. They will generally do it without charge. They 
can provide information and guidance on instruction to your employees, 
on methods of safety inspection, the development of a safety committee, 
and control of mechanical hazards, and can help effect a definite improve- 
ment in your accident records. 

Learn how to recognize hazards of all kinds, how to locate those that are not 
self-evident, and how to remove them or safeguard employees against them. 
Some of the factors which need to be considered in accident prevention 
are 

Machine safeguards 

Plant construction, layout, and arrangement 

Unsafe practices of employees, including those involved in housekeeping 
of plant and machines, maintenance, use of hand tools, lifting, carrying, 
and working on scaffolds, ladders, or other elevated places 

Possibility of fire, explosion, and electrical shock 

Special occupational hazards 

Sell safety to all employees. This is the most important and at the same time 
the most difficult phase of accident prevention. It cannot be done over- 
night. Safety must be encouraged, demonstrated, and insisted upon every 
day until each person is safety-minded and has formed safe working habits, 
Some of the ways of selling safety to employees are 

Recognizing that safety is a responsibility of management and should 
be planned as a part of the plant operation. Directing and giving encour- 
agement to the program 

Organizing, guiding, and encouraging safety committees and delegating 
responsibility through them and through supervisors 

Publicizing the problem, the program, and its results through group 
meetings, talks, posters, and bulletin boards 

Supplying safety information and knowledge through committees, meet- 
ings, talks, posters, written instructions, sound slide films, and sound 
movies 

Keep records of accidents. These records will serve a number of purposes, 
such as 

Providing information for a study of causes and frequencies 

Estimating total cost of accidents for consideration with profit-and-loss 
statement 



HOW TO OPERATE A PLANT PROFITABLY 225 

Identifying workers who have an unusual number of accidents 
Indicating progress and success of safety program 

One of the best ways in which you can gain the worker's interest in safety 
is by eliminating those hazards over which you have direct control. The reali- 
zation that you are doing your part in providing the workers with safe work- 
ing conditions will make them more receptive to a safety program. A basis is 
thus provided for employee cooperation. They will be more willing to do their 
part in maintaining safe working conditions and to support the entire safety 
program. Commence work in the following areas : 

Accompanied by some key workers, make an initial safety inspection of the 
plant. Even though you have not had safety training, you can recognize 
many situations as being dangerous if you will study them closely 

Some hazards that may not be found by such inspections may be dis- 
covered by safety engineers or inspectors who can be brought in from state 
labor departments or insurance companies. These often are asked by 
safety-minded managers to analyze safety conditions in the plant, make 
detailed safety inspections, and recommend corrective action 

Once hazards are recognized, corrective action may be taken to elimi- 
nate them. It is sound business practice to do so, since safety and efficiency 
always go together 

This process of inspection and elimination of hazards is a continuous one, 
since new hazards may be created by a change in operation or old hazards 
may reappear 

Then plan or replan your layout and arrangement intelligently. Proper plan- 
ning of the original plant layout and adequate control of operations the- 
oretically would eliminate all accidents 

Many firms have come very close to that goal. At the time the plant is 
built, safe working conditions can be provided for without additional 
difficulties or expense, since the most efficient operations are usually 
the safest 

Changes in layout or operations of existing plants are indicated for 
reasons of safety and efficiency when materials pile* up at certain points, 
when the paths of materials in process cross each other, when employees 
do not have adequate working space, or when other similar conditions be- 
come apparent. These changes, particularly if they are major rearrange- 
ments in plant layout or operations, cost so much that another change is 
not practical for some time. This emphasizes the importance of planning 
all changes carefully so that other dangerous conditions are not created by 
the change 

Poor lighting of buildings, rooms, and passageways is responsible, directly 
or indirectly, for many accidents. Where conditions do not admit of construc- 
tive improvements, liberal use of white paint or frequent application of the 
whitewash brush will be of much remedial value, Light-reflecting wall sur- 



226 HOW TO RUN A SMALL BUSINESS 

faces do much to help the diffusion of available light, whether natural or 
artificial. And note this: 

Where natural light is not obtainable or sufficient, artificial light should be 
liberally provided. Three systems of artificial lighting are used for indus- 
trial shops. They are: local lighting, general lighting, and general light- 
ing plus. 

With local lighting little attention is given to general illumination of the 
room but an individual light is provided for each worker. This system 
of shop lighting was one of the earliest. However, it is rapidly being 
supplanted by general lighting. Local lighting throws abundant light on 
the work, but leaves the rest of the room dark, thereby causing the pupil 
of the eye to adjust itself every time the worker looks away from his 
work. This constant adjustment results in eyestrain and fatigue. 

General lighting calls for adequate lighting of the entire area, thus elimi- 
nating semidark areas and permitting greater eye comfort. 

General lighting plus is a combination of general lighting and supple- 
mentary lighting. It is used where the type of work requires a higher 
level of illumination than could be economically provided for the entire 
area. 

Plant housekeeping cleanliness and orderliness is a fundamental of good 
management. It prevents accidents by removing their causes. 

In a well-kept plant, there are no loose objects on stairs, floors, and plat- 
forms, no articles that can fall from overhead, no wet or greasy floors, no 
projecting objects in aisles, and no projecting nails or sharp pieces of metal 
to tear the workers' hands. 

Where accident records are good, managers pay very careful attention to 
maintenance of plant, equipment, and machinery this way: 

Floors are kept in good condition, without holes or splinters in them that 

might cause slipping, tripping, falling, or handling injuries 
All portable equipment on which men stand, such as ladders, steps, horses, 

or scaffold planks are maintained in first-class condition 
Chisels, portable grinders, and drills are kept free of defects or replaced. 

Machine guards are properly made, installed, and maintained and the 

workers are instructed in their proper use 
Machines themselves, as well as pressure vessels, electric wiring, and other 

equipment, are kept in first-class condition for both production and 

safety 
Operations and methods are planned to eliminate hazardous situations and 

ensure adequate control at all times 
Mechanical handling is substituted for manual handling. Often it is 

cheaper and faster as well as safer 
Workers are carefully trained and adequately supervised to see that all 

supplies, products, and other materials are moved, carried, piled, or 

stored in a safe manner as well as an efficient one 



HOW TO OPERATE A PLANT PROFITABLY 227 

Workers are protected from electrical hazards 

Protective clothing and equipment, such as safety shoes, goggles, and gloves 

are worn by all workers on jobs where needed. Management usually 

supplies these items and insists on their use 
A simple way to eliminate this hazard is to make sure that all circuits and 

lines are installed and maintained in conformance with safety standards 

Whether a worker wears suitable or unsuitable clothing is a matter largely 
within the control of the employer. Keep watch on this matter. A ragged 
sleeve, a flowing necktie, a loose coat or jumper jacket, can do incalculable 
harm if caught in any part of a moving machine. Women should be required 
to confine their hair or wear adequate head protection when engaged in 
machine operations. For certain jobs special clothing (hand and arm pro- 
tectors, shoulder capes, hats, caps, welders' aprons, coats, overalls, leggings, 
shoes, etc. ) is necessary for both men and women operators. In the selection 
of such special clothing four essentials should be considered: 

The garment should be reasonably comfortable when worn under the con- 
ditions for which it was designed 

It should fit snugly and not interfere unduly with the movements of the 
wearer 

It should offer adequate protection against the hazard for which it was 
designed 

It should be durable, taking into consideration the severity of the conditions 
under which it is used 

Safeguarding of mechanical apparatus is of prime importance. You must 
convince workers that guards should be installed on machines and used at all 
times. Those who have become accustomed to working on machines without 
guards often resent their installation and will remove them whenever pos- 
sible. They must be convinced that the guards are necessary for their protec- 
tion. 

Workers who have been trained on guarded machines prefer them. It has 
been proved that the correct kind of guards invariably increase production 
through enabling machines to be operated more steadily, or faster, or both. 

You should maintain emphatic discipline in the interest of safety, par- 
ticularly with workers who: smoke when it is properly prohibited; drink 
liquor at any time on company premises or report for work under the influ- 
ence of liquor; carelessly tamper with the safety protective devices. You need 
to be tough with those who disregard safety rules particularly operating 
without full use of safety equipment or without authority. And post notices 
conspicuously describing 

How to start, operate, and stop equipment 
What switches and controls must never be touched 
Where fire apparatus is accessible 



228 HOW TO RUN A SMALL BUSINESS 

How aisles are to be kept free for use in fire 
. How waste is to be kept out of corners to avoid gambling with fire 

Every shop should have a system for furnishing first aid to the injured. 
The effects of an accident may be intensified for lack of immediate proper 
care of the injury. Even more, unskilled handling may do further harm, in 
addition to causing unnecessary pain. Where it is not possible to have a thor- 
oughly equipped emergency room, there should at least be first-aid supplies 
and someone trained to render first aid. Make first-aid facilities readily avail- 
able all over the plant see that locations are well known. Only those quali- 
fied should be permitted to administer first aid. Doctors' names and telephone 
numbers should be conspicuously posted; also name, location, and telephones 
of hospital. 

How to reduce workers' fatigue to a minimum 

Recognize that fatigue may be destroying your opportunity to keep work- 
ers in a period when you may want to hold tight to all of them. Seek out all 
cases of: physical exhaustion from excessive labor; accidents caused by down- 
right tiredness; injuries, delays, errors, and omissions caused by factors such 
as poor materials handling, bad light, heat, air, and noise, poor seating or 
standing accommodations, and a lot of others. 

You want to know the least fatiguing way for the operator to work. To 
find that, study surrounding conditions the chair, bench, flooring, materials 
handling, lighting and where accidents occur. Then couple intelligence 
with vigorous action to see what you can do about it, this way: 

Provide the best possible equipment to cut down materials handling 

Make sure of the fresh air supply 

Make sure you have adequate light 

Control your heat and watch humidity 

Cut down noise as much as possible 

Keep a supply of materials flowing to the work in a way to avoid needless 

stooping, bending, and lifting 

Where the need for speed exists, insist upon frequent rest periods 
Cut down noise by proper oiling and adjusting of machines 
Look into noise and dust caused by your materials. Cheap materials are 

often expensive in their effect upon your people 
Prevent accidents by improved training of new employees, especially 

young people 
If you have monotonous jobs, provide frequent short rest periods. They 

will cut down on time spent on incidentals 
Get rid of glare, shadows 
Watch the effect of live steam, gas, poor oils 



HOW TO OPERATE A PLANT PROFITABLY 229 

Provide chairs with good seats that adjust the work to the level of the 

worker 
Furnish devices to curb intake of dust, odors, and dirt and insist upon their 

use 
Put tools in a place where they can be reached without stretching 

Weariness may effect both the quantity and the quality of work. Use the 
following "indicators" with caution, as the personal equation is a variable 
that upsets stereotyped calculations: 

The length of the work week. A greater output may be effected by less 

hours in the work week 

The length of the work day. Find optimum hours for your plant. Note 
that rate of production varies during the day; watch fluctuations in 
hourly output in your plant. Note that the number of "optimum hours 
per day" differs if your object is lower costs or if it is greater production 
Absenteeism. Sick and voluntary absences are increased by fatigue 
Accidents. They are an indirect measure of fatigue in industry 
Labor turnover. It is increased by fatigue; rest periods may decrease labor 

turnover phenomenally 
Spoilage and errors. These increase rapidly with rising fatigue 

How to get the best plant maintenance at lowest cost 

To get the lowest cost possible, you want definite responsibility for main- 
tenance. Delegate that to competent hands. Arrange for periodic reports of 
inspection and good records of maintenance. If you have not enough work 
to employ a full-time man, get regular inspection by a local service man. 

Control of the maintenance costs must be maintained consistently to get 
the greatest economies. You must periodically examine your inspection 
reports and cost records. 

Make sure that they show any excessive maintenance costs. Find the causes 

and adopt corrective measures 
Trace product inspection troubles. You may find that a particular machine 

or kind of machine needs adjusting 
Seek data on what stands up and what doesn't. Seek information that will 

suggest improved equipment and methods 
Make sure your records tell you what items should be replaced 

Preserve your floors by establishing a dependable cleaning procedure 

Keep cement floors wet but free of oil or grease deposits 

Keep wood floors free of slippery soap, oil, or grease 

Clean linoleum floors with mopping and the use of a good soap compound 

Keep cork-tile floors free of harmful water deposits under the surface 

Protect asphalt plastic floors from abuses for which they were not designed 



230 HOW TO RUN A SMALL BUSINESS 

Protect rubber flooring from harmful chemicals 
Keep tile floors dry and protected from heavy trucking 
Clean terrazzo and marble floors with a neutral solvent of penetrating and 
wetting properties and thorough rinsing qualities 

Get the most out of your machines by maintaining them. That means an 
inspection procedure for all machines, to be carried out according to a definite 
schedule. It also means 

Operating machines at most efficient (usually maximum) capacity 

Issuing definite operating instructions to all machine operators, telling them 
just how to start, run, and stop each machine, and what to do in case of 
certain failures 

Knowing your machines and their individual capacities. Beware of over- 
loads and check on idleness 

Checking the accessibility of service and repair units 

Keeping constant check on wear and tear due to faulty bearings and other 
unnecessary friction 

Securing all pertinent maintenance information concerning each machine 
from the supplier or manufacturer 

Keeping all working parts free of harmful waste, shavings, and other ex- 
traneous materials 

Investigating immediately all undue vibrations 

Having machines not in use properly shut down and protected 

Establishing a lubrication routine that automatically prevents rust and un- 
necessary wear 

Checking that power distribution to each machine is adequately controlled. 
Check the condition of all motors regularly 

Checking frequently the accuracy of measuring instruments (temperature 
and oil gauges, scales, ammeters, etc.) 

Inspecting all valves, pumps, joints, fittings, couplings, etc., according to a 
regular schedule 

Having all necessary repairs made promptly 

Checking the insulation and surface of all vital parts 

Inspecting and testing fire and emergency equipment at reasonable inter- 
vals 

Checking the efficiency of all shock-absorbing installations and devices 

Checking to see if machining operations are properly supplied with suit- 
able cutting fluids 

Here are concrete suggestions for saving valuable and critical equipment 

Belts and belt drives 

Keep record of location, specifications, dates of installation and removal, 

when taken up, history of adjustments, and other relevant data 
Frequently check belt tension, service condition, pulley condition 
Protect belts from injury 



HOW TO OPERATE A PLANT PROFITABLY 231 

Buy V belts in sets; never replace part of a set; use old ones with other 

spares 

Teach men not to let belt run over edges of pulleys 
Check alignment of shafts and other equipment for full contact of pulley 

surfaces 
Run endless belts in the way usually marked on them with the brand on 

the outside 
Use a 180-degree turn at the splice on quarter- twist belts; it evens wear 

and stress 

Be particularly careful about belt tension 
Be sure belt ends are squarely cut for splicing and always use proper belt 

fasteners 
Keep tensions low and alignments accurate and check these points by 

regular examination 

See that the bolts are tight if you use fasteners in conveyor belts 
Consider making conveyor belts endless by use of electrically heated vul- 

canizers 
Install grizzly bars to delay lodging of lumps on conveyor belt so that they 

will come after fines 
Use idlers in connection with skirt boards to facilitate yielding to impact of 

material moving over conveyor belts 
Wash dusty or greasy belts with soap and water; remove glazing with a 

cloth dampened lightly with gasoline and hold it against moving belt 
See that belts are never creased, folded, or sharply bent or strained during 

installation 
Furnaces and steam lines 

Look into corrosion- and rust-preventing coatings now being produced 

Mount safety or relief valves as closely as possible to the equipment 

Tighten bolts evenly in the valve flanges 

Arrange discharge piping so that no strain is imposed on the valve 

If connections are screwed, use wrench on valve side of pipe joint 

Do not swage the discharge piping to a smaller size 

Clean valves with air or dry steam when installing, to save trouble from 

particles between seat and disk 

Be sure the pressure gauge with which the valve is set is correct 
Do not set with too little blowdown; about 4 per cent, not less than 3 per 

cent 
Valves 

Repair leaky valves as soon as possible 
See that proper instructions are given for valve regrinding. It is economical 

and easily and quickly done the right way 
Control and recording instruments 
Put all control and recording instruments in charge of one man. Have 

him 

Wind the clocks 

Change the charts and ink the pens and keep them clean 



232 HOW TO RUN A SMALL BUSINESS 

Where possible, remove them from heat, fumes, or vibration 

Cover where exposed to weather 

Fasten any loose tubing out of the way to avoid damage 

When installing gauges, apply wrench only to place on socket 

See that piping leading up to gauges is free from strain 

Use gauges of ample range; twice that of the working pressure 

Protect from rapid pressure fluctuations by throttle screws or needle 

valves 
Motors, motor housings, slip rings, commutators 

Wipe off motor housings, slip rings, commutators 

Occasionally blow dust out of wound sections of motors with low-pressure 
compressed air or hand bellows 

If you use air, see that it is free from grit, metal, or moisture 

See that oil filler caps are closed, dust seals and gaskets in good condi- 
tion 

Use care to confine oil to parts where it is required 

If some escapes and becomes gummed with dirt, remove with a solvent 
(carbon tetrachloride) ; in using solvent, avoid soaking the insulation 

Protect motors from moisture; where water has reached them, dry out in 
an oven or circulate current through windings (use a fan to force air 
through), or cover motor with a tarpaulin and provide heat with elec- 
tric bulbs 

To reduce friction, check lubricating more often in these days of longer 
operating; use enough oil, but not too much 

Check alignment to avoid vibration as far as possible 

Guard against overloading or underloading your motors; overloading will 
induce heat and damage insulation, and underloading will reduce your 
power factor and increase your bill beside putting a greater load on 
the lines 

When a fuse is replaced, find the cause for its blowing first; it may be a 
stiff belt, tight bearings, unclean commutator, motor being brought to 
full speed too quickly, damaged motor, worn bearing, etc. 

Don't overfuse; see that the contact on fuse block is good; use the right 
kind of fuse for the circuit 

If a motor or generator has become wet, dry out thoroughly before oper- 
ating 

Do not raise the temperature above 90C. 

Place the stator in an oven and bake 

Enclose the motor with a suitable covering, leaving a hole at top and insert 
heating units or lamps 

Pass current at low voltage through stator windings 

Dry out with portable infrared lamps 

Continue drying until the insulation resistance becomes practically con- 
stant 
Welding equipment and oxyacetylene apparatus 

Keep metal seating surfaces of the blowpipe gastight 



HOW TO OPERATE A PLANT PROFITABLY 233 

Keep these surfaces clean; wipe off carbon deposits left by flashbacks 
Always use a wrench in making connections; never tighten by twisting the 

stem 
Blow out cylinder valves, before connecting a regulator, by opening them 

for an instant to blow out grit and dirt 
Ground the frames of all arc-welding equipment to avoid shock when a 

person touches the frame 
Use adequate low-resistance leads 

In the location of welding equipment, remember that ventilation is im- 
portant; otherwise overheating may result, shortening the life of the 

insulation 
Clean bearings, gaskets, and screws; use clean grease and not too much of 

it, to prevent bearing troubles in arc-welding equipment 
Use correct sized torch tip, correct pressure, and correct diameter hose 

(preferably short length) 

Use all the gas in the cylinders; keep cylinder inventories low 
Close cylinder valves when not in use 
Don't leave torches burning when not in use 
Don't abuse cylinders; return empty cylinders promptly 
Keep the tips clean and free from carbon and slag and handle hose with 

care 
Electrodes 

Protect them from dampness 

Store them in their containers; do not stack directly on the floor 
Leave 4-inch air circulation underneath 
Empty one box before opening another 
See that your operators use electrodes down to last two inches 
Have your engineering department specify right type and size 
Rubber tires 

Inflate them properly 

Avoid bumping into curb; it may leave a bruise 

Have your wheels in balance and aligned and your brakes in adjustment 

Have your tires checked every 1,000 miles for tread cuts 

Switch wheels every 5,000 miles to even wear on tires 

Torn or worn-out sections of tire tubes can now be cut out and patched by 

welding end to end by special vulcanizing process 
Oil-burning equipment 
Watch its efficiency 
If possible, measure by proper instruments the energy output per gallon 

burned and compare with standard data 
Watch for 

Formation of excessive soot or carbon 

Cleanliness of combustion oil used 

Proper proportion of combustion, air, and carbon dioxide produced 

Excessive stack temperatures 

Excessive or insufficient draft 



234 HOW TO RUN A SMALL BUSINESS 

Check on 

Accumulation of soot on boiler surfaces 
Condition of water in the boilers 
Proper insulation 

Scientifically examine your heat-distributing system as to 
Mains and return pipes 
Proper placement of radiators 
Control devices 

Insulation of walls, ceilings, and windows 
Reflectors 

Have an expert go over your oil-burning system in detail 
Wire rope 
Use right lubricant 
Watch out for rust 
To get better results, thin out lubricants by heating before applying to wire 

rope 

Use a vat or special drip-oiling device if possible 
If rope is operated at high temperature, use a thick lubricant, and apply it 

while heated above operating temperature 
Fire hose 

Have as few folds as possible 

Run water through unused hose at least twice a year 
Prevent truck from running over the hose when it is in use 
Protect from chafing at section nearest fire pump. Try to keep from freez- 
ing 

If it freezes, thaw out before bending 

Get the correct size coupling and see that all burrs are removed 
Cut hose end square when attaching socket-type couplings, to prevent fluid 

leaking and wicking through hose 
Put the coupling in a vise and push the hose over the coupling; do not 

drive in with a hammer or mallet 

Mount hose when coupled to hang vertically and relieve strain 
Air-conditioning equipment 
Keep it clean 

Reduce power consumption by cleaning filters; install differential gauge 
Use a small amount of chemical to prevent growth of algae and slime 
Keep insulation repaired 
Have a thorough inspection at the end of the cooling season and arrange 

needed repairs before another season 
Give equipment a complete cleaning in the off season; keep dry and all 

dampers closed; be on guard against neglect at this season 
Tools 

Stretch their life by using them properly, and conserve tool steel 
Tool steel to be forged should be heated slowly and uniformly 
Preheat before bringing up to forging heat 



HOW TO OPERATE A PLANT PROFITABLY 235 

Cool slowly by burying in dry ashes, lime, or silocel protected from 

moisture or drafts 

Anneal intricate shapes after forging to remove stresses 
If previously hardened tools are being salvaged by reforging to make 

smaller tools, anneal before forging 
Use correct angles in setting carbide tools to provide correct rake, back 

rake, and reliefs 
Use the blade suited to the conditions in power hack sawing; check the 

number of teeth, strokes per minute, and feed 
Get the manufacturers' data on setting saws, care of files, and proper 

usage 
Use the right file; do not use too much power on the filing stroke; do not 

drag the file back under pressure 
Keep files in a dry place; do not throw them into toolbox or stack them 

against each other 

Increase useful tap life and decrease tapping costs by reconditioning taps 
Do not put extended leverage on the wrench handle 
Do not subject it to side strains 
Do not use it in place of a hammer 

Do not apply pipe wrenches on hardened steel; it causes wear on the 
teeth 

Keep teeth clean and avoid useless wear by slipping from gripping 

too near the front or back of the pipe 

Get repair parts for adjustable wrenches; reclaim those discarded 
Use the right grinding wheel and make sure the setup is right on speed, 

coolant, traverse, rate of feed, etc 
Never tighten file bands on wheels 

They will cut more accurately without tension 
They will last longer when not stretched 
The file guide holds segments squarest when band is slack 
In welding always cut the saw blade from the back 
Trim the end so that it will be square 
Use a butt welder in making a weld 
Trucks 

Keep records of performance and maintenance 
Teach drivers how to stretch life of truck 

If your truck or car has hydraulic brakes, have master cylinder of the 
brake drum checked at each lubrication period 
Add fluid if less than half full 
Have wheels pulled by an expert at least annually 

Provide your truck drivers with a daily report containing check list of 
points to be watched 
Standardize your inspection procedure to embrace certain definite 

points at 1,000, 5,000, and 15,000 miles 
Keep a report on each inspection 



236 HOW TO RUN A SMALL BUSINESS 

If you have old light trucks, investigate what is being done to rebuild such 
trucks into heavy-duty carriers by installing tandems, rear ends, and 
special transmissions 

Work out pooling arrangements of your trucks with neighboring plants 

Some valuable pointers gathered from hard-bitten production men are : 

Use corrugated tote boxes for small parts instead of metal ones 
Saves metal 

Is lighter for women to handle 
Eliminates injury from sharp edges and splinters 

Improve and speed up production by using degreasing compounds where 
applicable 

Preparing aluminum alloys for resistance spot welding 
Cleaning aluminum or magnesium before anodizing 
Cleaning castings and parts before painting 
Cleaning metals before and after heat-treatment 
Cleaning before pickling, wet grinding, and machining operations 
Store prepared glue at room temperature in winter, in a cool place in 
summer 

In a cool climate anticipate winter quantities wherever possible; use 

old stock first 

Cover the barrel to prevent evaporation 
Keep containers, brushes, equipment clean 

Clean equipment thoroughly when changing from one glue to an- 
other 

Salvage pipe flanges: 
Cut pipe near flange 
Cut a notch in remaining pipe 

Collapse with hammer; it falls out leaving flange threads unharmed 
Clean threads thoroughly 
Repair steam rods from pumps : 
Turn off taper 

Reduce the inside of the stuffing box by a ring of babbitt 
Reinforce with a washer so the packing will not work 

How to buy material and supplies most economically 

Every dollar spent for material has to be earned back by the shop and carry 
a profit along with it. What are the rules for prudent buying? 

You must plan for a rapid turnover. Slow-moving material and supplies 
may rob your business of money needed for fast-moving items the ones that 
support you shop. Your inventory should be closely controlled. Budgeting 
your expenditures carefully will leave your funds free for more useful pur- 
poses. Here are some aids for small plants: 



HOW TO OPERATE A PLANT PROFITABLY 237 

If you have to buy on a hand-to-mouth basis, it is important to patronize 
a firm which makes frequent deliveries and has fairly complete stocks. 
Stick closely to the supplier who can furnish the greater part of your 
requirements. That will entitle you to expect more consideration from 
him and will reduce the number of checks to be made out each month. 
It will also provide better justification for more favorable open-account 
privileges as time goes on. 

To get good service from a supplier your business must be worth having. 
Spread thin among many, it will not be attractive to anyone. Mutual 
confidence between supplier and purchaser is the basis of all successful 
business relations. 

Keep supplies of small items in stock even though these are obtainable 
quickly. Metal screws, wood screws, studs, bolts, and nuts will not tie up 
much money in stock and it is well to have them on hand. Just see that 
they are not thrown around carelessly. A glance at the floor sweepings 
will show whether they are being wasted. 

Small cutting tools, drills, taps, and other such articles might well be kept 
under lock and key and given out only on surrender of the broken pieces 
for which they are being exchanged. That will also show whether tools 
which would otherwise have been thrown away can be repaired. 

What are your sources of supplies? 

Handbooks or data books issued by business papers and selling companies 
are crammed with essential information and should be in the files of any shop. 
Of importance are the mill supply houses. 

They cater to factories and carry a complete line of materials and supplies 
Since they sell in large volume, they buy their own stock at the most 

favorable prices and terms and so can sell to factories at or near ordinary 

wholesale prices 
The catalogues of these houses are valuable to have, especially when you 

must find a source for some item not previously purchased 
The types of stock carried by mill supply houses are determined to a great 

extent by the principal class of customers served and so may differ from 

city to city or even within a single large industrial district 
Conversations with the salesmen who call on you will soon inform you 

which of these houses can be of most service 

Many wholesale houses give special discounts to factory accounts. There 
is a certain zone in which the wholesale hardware house and the mill supply 
house are in competition with each other. Knowing this, the buyer for a shop 
can sometimes get discounts for which he would not otherwise qualify. 

The ordinary retail store may be the logical source for small plants. But 
they need to give the dealer enough business to keep him feeling friendly. 
Usually he will give 30-day terms when the supply houses may still be de- 



238 HOW TO RUN A SMALL BUSINESS 

manding c.o.d. Since his profit margin is larger than that of the wholesalers, 
he can take more chances. He will give a shop owner a discount on almost 
any purchase, as he will expect to average only about 10 per cent profit on 
such business. 

Direct purchasing from manufacturers may necessitate larger unit orders 
because of excessive express expense on small shipments. 

Check the minimum freight charge against the rate per 100 pounds. It 
may take 150 pounds, for instance, to make a minimum shipment if the 
freight rate is 50 cents and the minimum charge is 75 cents 

But be careful not to pad an order beyond probable need merely to take 
advantage of a lower freight rate 

Verify also if the railroad has pickup and store-door delivery arrange- 
ments. Shipping by truck may be cheaper 

The value of maintaining cordial relations with the salesmen who call at a 
small shop cannot be emphasized too strongly. Through them you can keep 
closely in touch with technical developments which will affect your business. 
Here are some aids: 

Usually you will find that the salesmen follow certain schedules and count 
on making their calls at fairly definite and predictable intervals. There- 
fore, if at all possible, set a particular time during which salesmen can be 
sure of finding you in your office; then be there, even if it is not always 
convenient for you. And your allocated time should, by all means, take 
into consideration the travel habits of the majority of salesmen who stop 
regularly at your shop. 

Regardless of your worries or frame of mind, give each salesman an open- 
minded audience, and listen to his story courteously. Tell yourself 
there is no man on the road from whom you can't learn something of 
value. 

Whether or not you intend to give him an order, treat him as respectfully 
as you would a customer. If you are alert and on the job he can be use- 
ful to you. And he will want to be, if he is treated right. 

The most helpful information will probably come from suppliers' sales- 
men. They call on the same factories you do and many more and 
from long experience can advise how to approach any certain one for 
business, what are the pet phobias of others. In fact, they can tell you 
any amount of the personal bits of fact or gossip which it took years to 
collect and which are remembered only as they have some bearing on 
getting business. These salesmen can even be of assistance before you set 
up your shop if they know you are contemplating such a venture. They 
can sometimes recommend favorable locations or possibly tell you about 
an established shop whose owner wants to get out of business and would 
sacrifice some of its value to do so quickly. 



HOW TO OPERATE A PLANT PROFITABLY 239 

How to check fraud* in your purchasing 

Set up a good system of internal control of your purchasing methods unless 
you want to invite fraud and errors. Be sure you get what you think you are 
buying. 

Insist on inspection of incoming goods on arrival. Keep the receiving end 
of your business separated from the buying end if you want to avoid collusion 
between your buyer and the vendor. 

A Continental Casualty Company booklet lists as the more common 
methods of embezzling from an employer 

Paying bills to fictitious firms and cashing checks through a dummy 
Issuing checks for returned goods which were never returned 
Raising invoices and checks after they have been paid 

As a result of many investigations, it urges that control is best had this way : 

Merchandise is money. Because it can easily be disposed of for cash, either 
by direct contact or through a receiver of stolen goods, the need for 
accurate, adequate inventory records is obvious 

Keep a card record of all merchandise, supplies, and equipment, with a 
separate card for each item. The record can serve for regular annual 
inventory or physical inventory of stocks. Physical inventories should 
be made quarterly by a responsible officer other than the custodian, 
receiving clerk, or shipping clerk 

In addition to the regular annual inventory, it is also advisable to make a 
"surprise" inventory at irregular intervals. The ideal arrangement is a 
perpetual inventory of merchandise, supplies, and equipment, with a 
separate record for each place such property is kept 

It is important that the receiving department be subject to check and con- 
trol. The responsibility for checking incoming shipments should be dele- 
gated to one trustworthy person. He should be required to initial all 
invoices or other shipping advices and should be held responsible for the 
accuracy of all incoming shipments 

It is important that the duties of shipping clerk be assigned to one respon- 
sible individual. He should be required to sign some evidence of with- 
drawal of merchandise from warehouse stock and be held personally 
responsible for the accurate filling of shipping orders. He should also 
furnish, to the person responsible for billing, an accurate initialed copy 
of a list of all merchandise included in each shipment 

All warehouse stocks, either on the owner's premises or elsewhere in stor- 
age, should be in charge of some responsible employee designated as 
custodian. He should be responsible for the movement of goods in and 
out of stock. He should be personally accountable for any shortages. In 
addition, he should be required to maintain an inventory control of all 
goods, supplies, and equipment in warehouses or storerooms 



240 HOW TO RUN A SMALL BUSINESS 

No driver or delivery man should be allowed to put goods into storage or 
stock, or to remove goods from storage or stock, without the supervision 
of the receiving clerk, shipping clerk, or custodian 

All drivers should be required to receipt for shipments received for delivery 
by them and to obtain receipts from the parties to whom such shipments 
are first directed, whether it be a railroad, express company, forwarding 
company, or customer 

Drivers should be required to obtain receipts from receiving clerks and 
custodians of his own company to whom he delivers goods. Drivers 
should be held responsible for misdeliveries and should be required to 
return undelivered goods immediately to the shipping clerk and obtain a 
receipt or release 

Valuable merchandise should never be left unattended while on docks or 
platforms of the warehouse, receiving room, or shipping room. It is 
dangerous to allow incoming shipment or outgoing load to stand over- 
night, whether in a garage or not 

In addition to these precautions, you ought to check your purchasing de- 
partment's operations against the following safeguards to eliminate the usual 
collusions in purchasing: 

Consider the possibility of actual bribery of the person purchasing. It hap- 
pens frequently. Your safeguard is a check on prices and a good receiv- 
ing system 
Maintain a continuous record of purchases both to facilitate subsequent 

orders and to permit your CPA to audit 
Periodically have your CPA thoroughly review prices obtained 
Be sure your buyer is familiar with the discounts in the trade 
In order to eliminate questions, see that your orders are complete as to 
specifications, price, delivery date, shipping instructions, and terms of 
payment 

Do this with your incoming invoices to minimize ordinary frauds : 

Date and stamp the invoice 

Provide a rubber stamp to be placed on the invoice so you will get all items 
checked: terms, prices, shipping quantities, quality, and everything else 
you need to be sure you are getting your money's worth 

Be sure the invoice is checked by someone other than the person who 
ordered the material 

And do this: 

See that extensions are verified 

Check on the receiving and the inspection to make sure that they are inde- 
pendent careful jobs and that you get what you expected to buy 

Study the method of checking partial deliveries through comparing requisi- 
tions with invoices, to make sure that they are adequate 



HOW TO OPERATE A PLANT PROFITABLY 241 

Make certain that the procedure is geared to secure all discounts 
Investigate promptly all duplicate invoices 
Investigate thoroughly all delinquent invoices 

Reconcile your creditors' statements with your records and accounts. That 
often discloses trouble 

How to control receipt of your materials to get what you pay for 

You need to specify by item which materials are to be weighed, partly 
counted, or fully counted. Don't expect employees to be mind readers tell 
them what has been purchased and how to check it. If left to their own 
devices, they may incur costs out of proportion on unimportant points. 

Make sure a full report of receipt and inspection reaches you before you 
pay a bill. If some trouble occurs repeatedly, check if it is the fault of your 
supplier or of impractical specifications. 

Be certain that your receiving process meets these simple rules to avoid 
fraud and loss: 

Counts, weighs, and measures all incoming materials 

Provides for independent inspection for quality 

Maintains adequate records of receipts 

Records receipt of all materials upon the copy of a purchase order or a 
receiving report 

Checks freight and transportation charges, and checks whether these are 
to be charged back to suppliers 

Checks all freight bills for classification and rates, and against freight allow- 
ances 

Tabulates results of inspections to inform you of the reliability of suppliers 

Ensures that the receiving clerks do not conduct negotiations with suppliers 
about adjustments, rejections, etc. 

Get your CPA to check your receiving records to see if they are subject to 
alteration by anyone particularly your purchasing people. Study the possi- 
bility of any collusion between purchasing agents and the receiving sources. 

Locate your receiving department properly if you hope to cut costs. Give 
consideration to transportation facilities for deliveries if you can reduce re- 
handling in transferring to stores as much as possible especially of heavy 
materials that are going directly to production departments. 

Make the inspection in your receiving junction a primary responsibility. 
Make someone definitely responsible for checking the quantity and quality of 
material. 

If a laboratory test is required, consider the economy of securing the neces- 
sary equipment 
If extremely technical inspection is required of heavy materials, possibly 



242 HOW TO RUN A SMALL BUSINESS 

arrange for inspection at supplier's plant either just before shipment or 
while in process 

How to plan for good inventory control 

The small businessman always needs good inventory control. Stocks of live 
items do not remain stationary. The bin which is amply full today can be 
dangerously low a few days hence. 

Perpetual inventory control arranges for practically automatic reordering. 
This system determines the maximum stock which should be on hand or on 
order at any one time and the minimum amount below which stocks cannot, 
with safety, be allowed to drop. Between these extremes is a reordering point. 
One easy way to control inventories is 

Set up an inventory card in the office, place it in the supply bin, or tack it 
on the wall nearby 

On it show the maximum and minimum stock figures, the reordering point, 
the amount to reorder each time, and date of each order placed but not 
yet received 

Carry running totals of orders received and of removals from the bin or 
rack so as to show, with reasonable accuracy, the stock on hand 

Two or more times a year, check the card total against the actual count for 
all stock items 

Make occasional spot checks (a few scattered items at a time) in between 
regular inventory periods to make sure that employees are noting re- 
movals on the cards and that smaller items are not disappearing 

Make certain that you buy according to commonly understood specifica- 
tions. Then on arrival of the wares, inspect them to see that you are 
getting just what you ordered 

Check list of instructions for use of your perpetual inventory card 

Describe the material as it should be entered on an order blank. This is for 
use in ordering. It also enables proper replacement of cards. Show here how 
long it takes a shipment to arrive, starting from the day the order leaves the 
shop. And do this: 

Show maximum stock. This is the largest amount of stock estimated to be 
on hand and on order at any time. Change the figure as business in- 
creases or to reflect seasonal variations, when considerable 

Show minimum stock. This is the danger point below which stocks on 
hand cannot be allowed to drop without taking a chance of running out 
completely 

Show a reorder point. Considering time required to obtain, enter here the 



HOW TO OPERATE A PUNT PROFITABLY 243 

amount of stock on hand that is to serve automatically as the point 

(time) to place a minimum replacement order. If properly timed, the 

order will arrive before the stock on hand reaches the minimum figure 

but not so soon that it will increase stocks on hand above the maximum 

desired 
Show minimum ordering quantity. Show in this space the size of order to 

be placed under average conditions 
Put down the date of each entry on the card. Start a new line whenever 

necessary. Have cards printed with plenty of lines fold in half if 

unhandy 

Make record of orders when placed 
Make record of shipments when received 
Remove material from stores to production only in exact quantities. 

Change these quantities as experience dictates 
Show your balance on hand the actual balance on hand. Make no entry 

in this column for materials on order. Keep this balance up to date after 

each receipt or withdrawal of material 
If material has been allocated to a job scheduled for the near future, note 

it here so the reorder point can be stepped up, if advisable 
Get your records set up for good control of the supplies already sent to fac* 

tory. Be sure that that covers the entire method of bringing in supplies, 

taking them out, and periodically checking what you are supposed to 

have left 

Recognize that even good records are easy to circumvent. You must guard 
supplies as you would guard cash to reduce losses, avoid normal, usual 
frauds, and discourage normal, usual employee collusions. Here are some 
aids: 

Set up an independent check of material received in the storeroom 
Actually count, weigh, and measure materials received, and check them ' 

carefully against purchase orders and purchase requisitions 
Before entering them upon the records, be sure the records show existing 

balances at all times 

Maintain a continuous check upon balances by the department 
See that requisitions withdrawing materials from stores are carefully com- 
puted and entered 
Have your CPA review your process to make certain that it is impossible 

for stores people to steal any materials 
Require departments to furnish receipts for materials delivered to them 

by the storerooms 
Study your operations to determine whether alteration of stores requisitions 

(to cover theft) is possible 
Check the extensions upon requisitions occasionally. Sometimes frauds 

and errors are disclosed 



244 HOW TO RUN A SMALL BUSINESS 

Prohibit general entrance to the storerooms 

Make sure that your stores are covered by the proper type of insurance 

Investigate to make sure you have the proper type of equipment, shelves, 

bins, hoppers, etc., to insure protection of supplies from theft 
Prevent losses resulting from faulty arrangement of supplies, dust, dirt, and 

so on 
Arrange for slow-moving stock to be brought to your attention regularly so 

that you can dispose of it with full control of the resulting receipts 

How to take shop inventories for tax purposes 

Tax considerations govern the way you take your inventory. The regula- 
tions require the use of an inventory in every case in which production, pur- 
chase, or sale of merchandise is an income-producing factor. 

Any inventory that can be used under the best accounting practice, in a 
balance sheet showing your financial position, is all right for tax purposes. 

Inventories should include all raw materials and supplies, as well as finished 
or partly finished goods. But they should not include 

Raw materials and supplies which have not been acquired for sale, or 
which will not become a part of merchandise intended for sale 

Materials ordered by you for future delivery, title to which has not yet been 
transferred to you 

Assets of a capital nature, machinery, fixtures, land, buildings, accounts 
receivable, cash, or like assets 

Goods received on consignment 

Goods sold (also containers), title to which has passed to your customers 

In inventorying your normal goods, a reasonably consistent basis of costing 
must be applied. Where you maintain perpetual inventories, inventory ac- 
counts are 

Charged with the actual cost of the goods purchased or produced 
Credited with the value of goods used, transferred, or sold, calculated upon 
the basis of the actual cost of the goods acquired during the year (includ- 
ing the inventory at the beginning of the year) 

The net value as shown by the accounts is accepted to be the cost of the 
goods on hand. But balances shown by perpetual inventories must be checked 
to physical inventories at reasonable intervals. 

The method of inventorying some unusual items not in the foregoing 
is obtained from the following: 

Operating supplies or property not intended to be sold. Not required to be 



HOW TO OPERATE A PLANT PROFITABLY 24S 

inventoried. You may treat it as a deferred charge to be deducted as 
used or consumed 

Merchandise in hands of processor. Inventoried by owner when goods arc 
to be returned in kind; for example, goods to be dyed. But when a new 
product is to be returned (for example, refined copper for ore, or flour 
for wheat), then it is an exchange not inventoried 

Goods under contract of sale but not yet segregated and applied to the 
contract. Include in inventory of seller. Exclude from inventory of 
buyer 

Goods under a noncancellable contract of sale, segregated and applied to 
the contract. Charge to the buyer. He includes these in his inventory 

Merchandise, title to which has passed to the buyer (title passes, usually, 
when the parties intend it to pass; local state law should be consulted). 
Exclude from seller's inventory. Include in buyer's inventory even if 
goods are in transit or buyer does not have physical possession. 

Goods, including shipping charges, sent c.o.d. Include in inventory of 
seller until payment and delivery are made 

Goods shipped on approval. Include in seller's inventory until they are 
accepted 

Merchandise sold and shipped according to contract but refused by the 
buyer because of a price decline. Do not include in seller's inventory 

Goods sold by sample, subject to inspection and rejection within a given 
time. Include in inventory of seller if promptly rejected by buyer, even 
though the goods are not returned before the end of the year 

Goods rejected because of defects. Include in seller's inventory, not in 
buyer's, if rejection is timely 

Goods sold and found unsuitable by buyer, then resold to him in the follow- 
ing year with concessions from the original price. Exclude from seller's 
inventory from the first year when originally sold 

Goods shipped on consignment. Include in seller's inventory until con- 
signee sells them 

How to inventory for tax purposes 

Cost, and cost or market, whichever is lower, are approved as proper 
methods for inventorying. To find cost, you may use the "first-in-first-out" 
or the "last-in-first-out" methods. How each of these work is illustrated by 
the following. 

Assume that the inventory at beginning of year was composed of 1,000 
units which cost $2 each. They had a market value of $2 on that date. Pur- 
chases in the year were 2,000 units at $4. Sales in the year were 1,500 units. 
Inventory at end of year was 1,500 units. The market value was then $5. The 
effect upon cost of sales by the various methods of inventorying is outlined 
in the following table. 



246 



HOW TO RUN A SMALL. BUSINESS 



Method 


Inventory at end of 
year is computed 


Therefore cost of 
goods sold in year is 


Cost: 
First-in first-out 


1 ^nn a* ^4. 


C 1,000 at $2 




1,000 at $2) 


I 500 at $4 
1 *infi o* $A 


Cost or market, whichever is lower . . . 


500 at $4 j 
1,500 at $4 


i,ouu at 9^r 

f 1,000 at $2 
{ 500 at $4 



What does cost mean? In the case of merchandise on hand at the begin- 
ning of the year, it is the inventory price of such goods. In other cases it is as 
follows : 

Merchandise purchased since the beginning of the year invoice price less 
trade or other discounts, except strictly cash discounts. To net invoice 
price, add transportation or other necessary charges incurred in acquir- 
ing possession of the goods 

Merchandise produced since the beginning of the year the sum of: cost of 
raw materials and supplies entering into or consumed in connection 
with the product; direct labor; indirect expenses necessary for the pro- 
duction of the particular article, including probably a reasonable pro- 
portion of management expenses, but not including any cost of selling 

Any industry where usual rules for computation of cost of production are 
inapplicable costs may be based upon an established trade practice of 
the particular industry 

Miners and manufacturers who, by a single process, or uniform series of 
processes, derive a produce of two or more kinds, sizes, or grades you 
allocate costs to each kind, size, or grade of product, which in the aggre- 
gate will absorb the total cost of production. Cost must bear a reasonable 
relation to the respective selling values of the different kinds, sizes, or 
grades of product 

What does market mean? In ordinary circumstances, it is the current bid 
price prevailing at the date of the inventory for the same merchandise in the 
volume in which usually purchased. This rule applies to goods purchased and 
on hand, goods in process of manufacture, and finished goods on hand. It 
does not apply to goods for delivery upon noncancellable sales contracts, at 
fixed prices below the market. These can be inventoried at cost. Or you can 
use these rules: 

If no open market exists or if quotations are nominal because of stagnant 
market conditions, use evidence of a fair market price at the date nearest 



HOW TO OPERATE A PLANT PROFITABLY 247 

the inventory. Or use specific purchases or sales by you or others in rea- 
sonable volume and made in good faith. Or use compensation paid for 
cancellation of contracts for purchase commitments 

Where prices are falling, market may be your sales price, less what it costs 
you to make the sale. Correctness of this method is found by your actual 
sales for a reasonable period before and after the date of the inventory 

The use of "last-in-first-out" is not dependent upon character of a business. 
This method can be used : 

For a class of goods as well as all your goods 

For raw materials only, including the raw materials entering into goods in 

process and into finished goods 
For only that phase in the manufacturing process where a product that is 

recognized generally as a saleable product is produced, as, for example, 

in the textile industry, where one phase of the process is the production 

of yarn 
For any one raw material, when two or more raw materials enter into the 

composition of the finished product, for example, in the case of cotton 

and rayon yarn 

When should you use the LIFO (last-in-first-out) method of inventory 
valuation? Not if prices are likely to decline in the years ahead, as may well 
happen when demand is satiated and production catches up. The LIFO 
method would leave you with high inventory valuations of the items acquired 
at high prices during the period of shortages. 

If you selected the LIFO method of valuing your inventory during prior 
years, you should check your present position. In a market of declining prices 
this method will be to your disadvantage. As soon as the prices drop below 
the level of costs when this method was adopted, you might apply to the 
commissioner for permission to change. It will then be to your advantage to 
change to FIFO (first-in-first-out). 

If you are a manufacturer and have included your entire factory overhead 
in costs, it may be advisable to apply for permission to change your method 
of valuation. 

Many businesses do not include overhead in inventory costs. And a serious 
question has arisen as to whether many costs like salaries, taxes, interest, rent, 
or other expenses provided for as specific deductions on the face of a tax re- 
turn can ever be included in inventory costs. The Treasury holds that Federal 
import. duties are deductible only (as expenses) and may not be considered in 
determining cost of inventories for Federal income-tax purposes. Rent, re- 
pairs, taxes, depreciation, and amortization of emergency facilities are like- 
wise deductible only (as expenses) and may not be considered in determin- 
ing cost of inventories for Federal income-tax purposes. 

Ordinarily, rent, repairs, taxes, depreciation, and other factory overhead 



248 HOW TO RUN A SMALL BUSINESS 

expenses are charged to the cost of production. This conforms to accepted 
principles of cost accounting. If the Treasury ruling is followed literally, 
charging to production is not correct. 

Once you elect an inventory method, it must be applied in all later years 
unless another method is authorized by the commissioner. Here are the rules : 

Application to change must be filed within 90 days after the beginning of 
the year for which the change is to be effective. With your application, 
you must show the classes of items that will be treated differently under 
the two methods and the amounts that will be duplicated or omitted by 
the change 

You will not get permission to change until you agree to terms that will be 
given you. That may involve adjustment of prior years' returns and pay- 
ment of taxes for some prior years. State your case to the Treasury and 
they will advise you fully 

An exception is made with the "last-in-first-out" basis. Your application 
to adopt this method is merely filed with the return for the year in 
which it is first to be used. You must give detailed information of be- 
ginning and closing inventories for that first year and the beginning in- 
ventory of the preceding year. Manufacturers must, in addition, show 
details of their cost computations 

Further, you may be required to make adjustments to inventories of prior 
years. The Treasury can impose these conditions in order that your true 
income will be clearly reflected for all the years involved. Once this 
method is adopted, you must use it in all later years unless the commis- 
sioner requires or authorizes you to use another method. Permission to 
discontinue it may be granted on your application to change under the 
rules described above 



Wow fo use inventory hedges advantageously 

A loss from a futures hedging transaction is an ordinary expense and a full 
tax deduction. But not all futures contracts are hedges. To get the full de- 
duction, the transaction must be a purchase or sale for future delivery, in- 
tended to protect against price fluctuations. 

This is a form of price insurance to avoid the risk of changes in the price 
of a commodity. The basic principle of hedging is the maintenance of an 
even or balanced market position. 

If you buy futures regularly as protection against price fluctuations of the 
identical commodity used in your business and you intend to take deliveries, 
then any loss you suffer is fully deductible on your tax return. This is con- 
sidered to be a true hedge a form of price insurance. 

In other cases, your loss is a capital loss like that from the sale of securi- 
ties. The transaction is regarded as a form of speculation. 



HOW TO OPERATE A PLANT PROFITABLY 249 

You may buy a "futures contract" calling for delivery of merchandise at a 
future date. On the delivery date the price of this merchandise may have 
fallen. It may be wise to accept delivery. The loss suffered upon the sale of 
the merchandise will then be an ordinary loss. If, instead of accepting deliv- 
ery, the "futures contract" is sold at a loss, it may be a capital loss. And that 
may be of no use to you. 

Scientific cost keeping is necessary for your survival 

Your CPA can build you an efficient system perhaps by use of methods 
of costing already tested in your industry. Good business requires you to dis- 
card or revise your present system if it does not give you what is outlined 
here. 

Normally a good system should furnish the accurate cost of jobs, parts, 
articles, and assemblies. Also, it should 

Compare present costs with previous experience or set standards 
Show present costs as compared with those when the price level was set 
Analyze the operating efficiency by: furnishing regular comparative data; 

detecting increases in elements of cost 

Allocate costs to precise units by distributing overhead to production cen- 
ters or jobs in rational manner 

In designing a system, talk to your CPA about the advantages of complete 
standard costing. In that system 

You set cost objectives for materials, man-hours, machine-hours, etc., that 
are reasonably obtainable. You then periodically and promptly report 
exceptions in practice 

You expose departures from standards. This study of variances is worth 
while if you do something; for example 

Get your supervisors to study and get at the causes and prevent ex- 
cesses. Ask them for reports on variances 

Get everybody's hearty cooperation all along the line, by providing 
incentives as rewards for better-than-normal performance 

Design cost reports in the language of the men who use them. Then ana- 
lyze them and periodically go over them with supervisors to get their enthusi- 
astic cooperation to attain or beat the standard. 

Develop a system of standards for reporting every change, good or bad, to 

all supervisors 
Produce automatic reports revealing increased costs caused by 

Plant idleness or higher material prices 

Reduced production, and thus greater unit overhead cost 

Increased labor costs with scale changes 

New transportation costs arising from reroutings to get delivery 



250 . HOW TO RUN A SMALL BUSINESS 

The analysis of labor cost should be a fundamental part of your cost keep- 
ing. Build a system that will: help to cut payroll frauds; be of use in cost 
compilation; be the basis to furnish a daily record of plant efficiency. 

Daily labor cost reports give you a method of production analysis for fore- 
men as well as for executives. Have them give you, for each man, each oper- 
ating center, and each department 

Cost and statistics of production of the operators 
Cost and time lost by operators, plus explanation 

Comparisons of labor time, dollar cost, and production with the standards 
created, plus explanation of variations 

The same record keeping should furnish the data for necessary financial 
and cost records. It can determine the wages due each man as a check against 
the regular payroll records. It can be a full basis for cost records. 

Make sure your plant payroll process guards against payroll errors and 
frauds. Some aids are 

Maintain a historical record of each employee, the date of employment, 
starting salary, department, and date of discharge. In this record, allow 
for salary changes and full approvals. Get your CPA to check this to 
payments 

If you can, pay by check to eliminate risk and to save time in making up 
the payroll 

If you can, pay on a semimonthly basis (to diminish risk) 

Get your CPA to make a periodic physical check of employees on the pay- 
roll get this to periodically supervise the actual distribution of salaries 
or wages. You need to guard against "dummies" receiving wages 

Make it a point to investigate all unclaimed salaries or wages 

Obtain receipts for all payment made in cash 

Get your CPA to check mathematical computations of payrolls. Someone 
other than the paymaster should check his figures 

Study the safeguards that time clocks offer. If you have clocks, audit them 
for possible duplicate cards 

Be sure to check timecards against time charged to jobs on cost assemblies 

An analysis of material costs is also essential to a good system. You should 
gather material costs by jobs, processes, departments, etc., as basis for analysis 
and comparison. Here, seek information about high costs, waste, and spoil- 
age exceeding the standard, resulting from 

Changes in costs owing to an increase Faulty operating conditions 

or decrease in the price of materials Errors in planning or direction 

Errors of individual operators Errors in design 

Faulty material or machines Sabotage or theft 

Make sure your cost records also produce detailed studies of machines and 
departments. Adopt a form that will show clearly all variations from fair 



HOW TO OPERATE A PLANT PROFITABLY 251 

standards. They should show the periodic production accomplished, com- 
parisons with the standards, and the reason for all discrepancies. 

These records should constantly analyze the cost of man and machine idle- 
ness so as to give 

Service problems for which the employee is not responsible 

If lack of work causes idleness, the basis to investigate your planning, rout- 
ing, dispatching, or scheduling 

The losses due to unavailability of materials, tools, or equipment. That 
means wrong planning, poor stores control, or bad scheduling 

The waiting for setup, absence of instructions, damage to job, power off, or 
a machine needing repairs. These call for speedy correction 

A general report on idleness 

Good management finds labor cost reduction in these recorded studies. 
But you need to sell your foremen and key men on their use to improve costs. 

That means you must train them to realize that cost improvements don't 
just happen. They must be worked out. You can assist them if you create a 
regular routine under which they can study costs. 

In setting up your cost system, get your GPA to explain its design and pur- 
pose to those who will gather the cost data. Particularly, get him to explain 
why 

Cost records tie in rigidly to the control over stores and inventories. This 
usually means you must keep perpetual inventory records. And check 
them against physical inventories 

Cost records are unreliable without control of materials. You must insist 
upon a tie-in to control the receipt, storage, and economical use of mate- 
rials and supplies 

Cost records are designed to balance with the payroll records. At the same 
time they furnish data for the cost compilations as well as payroll tax 
data 

Cost records are tied into plant ledger showing the inventory of individual 
equipment cost. This is important to set up a regular system of report- 
ing maintenance costs, inspection costs, adjustment costs, repair costs, 
and other costs to keep the machines in good condition 

Cost records must be interlocked with general ledger and financial controls, 
so as to make sure the cost records are correct 

How best to organize for your plant so/es 

You need to know the market for your product, the channels of distribu- 
tion which you will use, the effects of competition, and the price policies 
which will govern your operation. Then it is possible to outline a sales and 
promotion program to fit your specific needs. 



252 HOW TO RUN A SMALL BUSINESS 

Too much stress cannot be laid upon the wisdom of tailoring your sales, 
promotional, and advertising efforts to your product. 

It is impossible to generalize on this subject. Only a careful examination 
and evaluation of all the important facts will provide the proper answer. But 
what is all-important is that: you have a clear idea of the problems 
involved; every effort be made to make your selling program conform to the 
product. 

How to find your best market for sales 

Your first step in organization for selling is to find your market. You need 
research to do that. 

How do you use qualified individuals to find the reputation of your 
merchandise among wholesalers, jobbers, retailers, and users? This research 
also should give you 

Up-to-date data on competitors' products, sales policies, sales methods, 

trade reputation, volume 
Suggestions for bettering your product, sales program, advertising, service, 

operating methods 
Opportunities to inaugurate services or policies to create new buyers or 

markets, strengthen the loyalty of present customers, improve your local 

or national prestige 
Opportunities to be leaders, rather than followers, in meeting changing 

conditions 

How do you study the most advantageous distribution setup. That is to 
give you the advantages and disadvantages of the following types of distribu- 
tion for which your merchandise may be qualified : 

Factory-owned branches with warehouse, without warehouse 

Manufacturers' agents buying and selling on own account on commis- 
sion 3 without inventory 

Wholesalers, jobbers, brokers exclusive, nonexclusive 

Retail outlets solicited direct exclusive, nonexclusive 

Door-to-door salesmen 

Mail-order promotion without sales force 

Territorial manufacturing-and-sales franchises 

Through mail-order houses 

Through private brand merchandisers wholesalers and jobbers, chains, 
cooperatives, department stores, supermarkets, manufacturers who oper- 
ate retail outlets selling related merchandise, and smaller retailers, in- 
cluding specialty shops 

Through a single, exclusive sales agency 

Through neighborhood agents and community organizations 

To premium and noveltv houses 



HOW TO OPERATE A PLANT PROFITABLY 



253 



Through United States export houses and/or foreign importing firms 
Any other procedures successfully employed for comparable merchandise 

If your products are moving to the consumer, how do you study the retail 
outlets you can best use? That involves considering the possibilities of all 
retail outlets handling a wide variety of merchandise, such as 



Auto-supply stores 

Building-supply stores and yards 

College cooperatives 

Company stores 

Department stores 

Drugstores 

Electrical and radio shops 

Farmers' cooperatives 

Five-and-tens 

Furniture stores and installment 

houses 

Garages and superservice stations 
Gift shops 



Groceries, supermarkets, and delica- 
tessens 

Hardware stores 
Mail-order houses 
Men's furnishings stores 
Mill-supply houses 
Newsstands and tobacconists 
Office-supply and school stores 
Photographic stores 
Ship chandlers 
Sporting-goods stores 
Variety stores 



If you can find these things, you can then plan the type of sales representa- 
tive required; you also can find the number of sales representatives you need, 
where to look for them, what training will be necessary, and where they 
should be located. 

All this takes sales research. 



Do a selling research /ofc if will pay off handsomely 

Although most manufacturers carry on some marketing research, small 
companies lag far behind. They overlook the benefits to be gained. Three out 
of four small manufacturers do no marketing research. Yet only by under- 
taking an intensive study of its sales potentials can the small company build 
its competitive position in a buyers' market. 

Research activities seek these guideposts: 

Sales opportunities, including the figuring of sales potentials, forecasting of 
sales, and setting of sales quotas 

Sales, through analysis of sales statistics and measurement of salesmen's 
performance 

Distribution methods, involving study of standards for distributors and re- 
tailers 

Products, including testing of such factors as product preference, product 
use, and package design 

Advertising, appraised with particular reference to the effectiveness of 
advertising in selling goods 



254 HOW TO RUN A SMALL BUSINESS 

Price, demand, and analysis of business and industry trends 
Consumer preferences, appraised through consumer surveys 

Higher sales, higher dollar profits, and lower distribution costs are some of 
the benefits the small manufacturer may derive from marketing research. 
Only research reveals 

How to make the best use of established outlets and how to satisfy con- 
sumer demand 

Direction that your sales, advertising, and promotion efforts should take. 
By study of sales potentials, the manufacturer may discover how to ar- 
range salesmen's territories, delivery policies, and other realignments. 
He may be led to abandon ideas for routes in sparsely populated low- 
consumption areas 

Price-volume relationships these will in turn help to reduce sales resistance 

Analysis of distribution costs to reveal unprofitable sections or areas, be- 
cause of large freight and delivery costs or high selling and advertising 
costs in ratio to the sales volume for these areas 

Study of the product demand to determine the reasons why products do 
not sell, the sales appeal and features desired by users, and the most im- 
portant sales procedures 

Since marketing research is broad in character and differs greatly by 
products and by companies, there is no single approach suitable for all 
industries. 

For this reason a list of sources covering procedures is desirable. They can 
be obtained free of charge by writing to the Department of Commerce. 
Using these as a base, the manufacturer can formulate his plans to conduct 
some market research work through either a company executive, a market 
research department, or a professional organization. 

Planning a productive promotion and advertising program 

Intelligent planning for promotion and advertising consists of a lot more 
than merely appropriating a sum of money to be spent. There is a simple 
way to set up an advertising and promotion program and to determine how 
much money should be invested in it. You start with a definite objective and 
then assign each part of the "fighting forces" to the task they can do best. 
For example 

One of your first objectives is to get your product in the hands of a suffi- 
cient number of outlets 

You must know how many retailers there are, where they are located, and 
their size 

You must have a pretty good idea of how many retailers you will have to 
sell in order to have adequate retail distribution 



HOW TO OPERATE A PUNT PROFITABLY 255 

You must know, too, the extent of your "ground forces" (your own sales- 
men, and the salesmen of wholesalers and distributors) available to 
make the sales 

If you know these, you can gauge the promotion and advertising support 
that these "ground forces" will need in order to do their job most effectively, 
quickly, and economically. You are then in a position to formulate your 
promotion and advertising campaign to accomplish your objective. You may 
decide that advertising in the trade papers reaching these retailers, sending 
out direct mail, exhibiting at trade shows, and similar activities are called for. 

Having laid out the plan of campaign, the necessary budget almost sets 
itself. Instead of picking an arbitrary promotion and advertising budget out 
of the air, you start at the other end, determining the objective first, then 
detailing the steps involved, and finally estimating the cost. Of course, you 
will probably find that the "ideal" campaign will cost more than you are 
able to spend and that a compromise must be reached. You must then re- 
evaluate each item in your list, cut or trim the least important, and finally 
arrive at a program within your financial means and reasonable from the 
standpoint of possible returns, but still adequate to perform the specific task or 
tasks which you want performed. 

Operating in this manner, with each step in the promotional and advertis- 
ing operation given a definite objective, this phase of the company operation 
becomes as scientific and as amenable to evaluation of results achieved as 
your sales or your production operations. 

It must be borne in mind, however, that initial costs for selling, advertising, 
and promotion will probably be extraordinarily high in introducing a new 
product. For products which have fast turnover and are bought over and 
over again, it is not unusual for promotion expense during the introductory 
period to be as high as, or even higher than, the total sales volume. And even 
in the case of consumer capital goods which have a long life, the cost of in- 
troduction to the consumer market can reasonably be expected to be very 
high. 

How high these costs should be, and how long these extraordinary costs 
are justified, are matters for individual determination in each case, but they 
can be determined, and the potential value of each new user can also be 
determined. On one product selling for $1, it may be well worth while to 
spend $2 or more to gain a single new customer; on another $1 product, 
it may be unprofitable to spend as much as 50 cents to gain acceptance 
in the introductory period. Use this list to help you find what kind of 
promotion you will use: 

Have you an advertising agency connection which will be able to handle 
the new product? 



256 HOW TO RUN A SMALL BUSINESS 

Have you decided on the details of the advertising program? What 
advertising and promotional support, if any, will be given locally to 
distributors? 
What kind of sales force is required? 

What type of salesmen will be needed? 
Will the men require special or technical training? 
Will the entire sales force work out of the home office? 
Are you familiar with the general sales promotion practices followed by 

distributors in reselling in this field? 
Are you familiar with the sales promotion and advertising practices of 

other manufacturers in this field? 

Have you determined what type and how much sales promotional assist- 
ance you will give your own salesman? 

Are you planning an organized publicity campaign (as distinguished 
from advertising) to help make your new product familiar to the 
public? 

Will your promotion and advertising budget be determined on the basis 
of 

The cost of attaining a definite objective? 
A certain percentage of estimated sales? 
An arbitrary sum? 
Some other system? 

Do you know how many salesmen will be needed? 
Have you determined their compensation? 
Have you worked out territory assignment and routing through the 

field? 
Have you given special thought to the "missionary" selling they may 

have to do for introductory purposes? 

Who will bear the costs of this local advertising and promotional sup- 
port, and in what proportion? 
How will you control such assistance so as to make certain that it is used 

most efficiently for the benefit of the product? 
What approach will you use in advertising your product? 

What to study in developing a new product 

Manufacturers intending to introduce a new consumer product need to 
study their production and manufacturing factors carefully. 

They know what materials they will need, where they can be purchased, 
and how much they will cost; they know whether or not an adequate labor 
supply is available; and whether their plant is efficiently equipped to handle 
the product. 

This section is concerned with markets, distribution, merchandising, and 
selling to make the product successful. 

A manufacturer who introduces a new product no matter how good or 



HOW TO OPERATE A PLANT PROFITABLY 257 

how useful it may be without having clearly thought out the course which 
he will follow to move that product from his factory into the hands of the 
ultimate consumer, can find himself in very serious difficulties. 

The following Department of Commerce check list permits analysis of 
an entire marketing procedure. When you get through with it, you have 
charted your course. You know the users, how to get to them, and your 
competition, and you know how much more thought or investigation will 
be required of you before you can be sure that your product will be 
launched into the competitive arena with the best possible chance of being 
successful. When this check has been completed, you will have at your 
finger tips a brief "control sheet" which will show you exactly how well 
you have equipped your product for its competitive battle in the market 
place. And you will know exactly what further thought and study you must 
devote to the problem. 

1. What consumers will use the product? 

What types of consumers are they? Housewives, school children, 
farmers, salesmen, mechanics, animals, or what? 

How many potential customers are there? What factors cut down the 
size of the total market? 

How many live in sections of the country where they will not use the 
product? 

How many are in the wrong age group to use the product? 

How many are likely to be poor prospects because your product is too 
expensive or too cheap for them? (To what income classes will 
your product appeal?) 

How many are likely to be out of the market because they already 
have similar products giving satisfactory service? 

How many live in such a manner that they cannot use the product? 
(For example, if you live in an apartment, you are not a good pros- 
pect for a lawn mower.) 

How many would not be prospects for religious or racial reasons? 

Are there any other market-limiting factors peculiar to your prod- 
uct? 

How many prospects are left for your product? 

2. Where do the potential customers live? 

Are they scattered throughout the country? Are they limited to par- 
ticular sections or states? 

What size community do they live in, and what are their buying 
habits? Do they live in cities and buy at neighborhood stores? Or 
at downtown stores? Or do they live in small towns and on farms 
and buy in town? Or by mail? 

Are there climatic or employment factors in their location that you 
should investigate? (For example, is your product designed only 
for cold climates or only for workers in steel mills?) 



258 HOW TO RUN A SMALL BUSINESS 

3. Will the product meet the requirements of your logical prospects? 

Will its price compare favorably with that of existing products of its 
kind and with that of similar products which may be introduced 
shortly? 

What is the present consumption of products of this type? Is the 
market for this product likely to change in size during the next 2, 
5, or 10 years? 

How often will consumers buy this product? (Is it a durable goods 
item which will last several years or something in everyday use 
which needs replacing every few days or weeks?) 

Will the product sell evenly throughout the year or will the bulk of 
the sales be concentrated at certain seasons? 

What features of the product appeal most to consumers? (Rank in 
the order of importance.) Is it cost of operation, durability, ease 
of repair, price, service and maintenance, style, trade-in value, or 
other features? 

What are consumer prejudices, if any, in regard to: cost of operation? 
Durability? Ease of repair? Price? Service and maintenance? 
Style? Trade-in value? Other factors? 
4. How are products of this kind usually bought by consumers? 

Are they bought for cash? On open account credit? On a time- 
payment plan? On an installed basis? With the expectation of a 
service guarantee? 

If they are bought on an installed basis, will the most of installation 
be included in the price of the product? Or is installation of the 
product (e.g., rewiring for an electric range) additional expense 
for the consumer? 

Does your product have any possibilities for industrial use? Through 
what channel or channels are consumers accustomed to buying 
products of this kind? From retail stores? By mail from cata- 
logues? From house-to-house salesmen or demonstrators? From 
services outlets (e.g., plumbers, auto or radio repair shops) ? From 
other sources (e.g., direct from ads, book clubs, or cooperatives) ? 
5. Put this question to yourself and your friends and associates: "If you 
were going to buy a product like this, from what outlets would you 
prefer to make your purchase ?" 

If the method by which you expect to get the product into consumers' 
hands is not the same as the preferences stated above, what is the 
reason for the difference? Is there difficulty in securing dealers? 
Does the product not follow pattern used for other products in 
the line? Does it require too much time to secure market cover- 
age? Is competition too great? Any other reason? 

Are the reasons important enough to justify your decision to market 
your product in a way that does not coincide with the way con- 
sumers prefer to buy products of this kind? 

Assuming that you will distribute your product through retailers, 



HOW TO OPERATE A PLANT PROFITABLY 25* 

what kind of retail stores will sell it (e.g., grocers, department 
stores, hardware stores, gift shops, or others) ? 

How much do you know about the operations of this type of retailer? 
How many such stores are there? Where are they located? 

What per cent of total sales volume in this field is done by indepen- 
dent stores? By corporate chains? By voluntary chains? By manu- 
facturer-owned stores? By consumer cooperatives? By others? 

On what basis do your competitors usually sell products of this kind 
to retailers? Exclusive franchise? Selected distribution? General 
distribution? 

If on an exclusive basis, do dealers expect to be protected against 
competition from other retail outlets in their town or neighbor- 
hood? 

Can you sell your product through both independent and chain 
stores? 

At what seasons of the year will retailers be most likely to buy your 
product? 

What is the best and easiest method of selling to these retailers? 
Through established wholesalers or jobbers? Through exclusive 
distributors? Through your own factory-controlled sales force? 
Through a combination of the above? By other methods? 

How many wholesalers, jobbers, or other intermediate distributing 
organizations are there which can logically handle your product? 

What is the best and easiest method of selling to them? Through 
salesmen, demonstrators, or technical personnel working out of the 
factory? Through branch offices of the factory? Through brokers, 
sales agents, or others? 

Do you know the wholesale trade practices or discounts, allowances, 
billings, credit, and warehousing which you will have to meet? 

If products like yours are usually installed or have a service guaran- 
tee, will you conform? 

If so, have you arranged for the service and installation through the 

distributive channels? 
6. What competition will your product face? 

What is the reputation of leading competitive firms? Leading com- 
petitive brands? 

Are manufacturers likely to enter the field with products similar to 
yours? If so, what is their reputation? 

Can any competitor bring out a seriously competitive item quickly? 
Will marketing your product cause competitors to give you addi- 
tional or keener competition? 

Can your product compete favorably with similar products already 
on the market as to price? As to quality? As to style? As to 
service? 

To what degree does nonproduct competition exist for your item 
(e.g., commercial laundries for washing machines) ? 



260 HOW TO RUN A SMALL BUSINESS 

Aid$ in marketing your new product 

Businessmen have long been familiar with the aids of the Department of 
Commerce in planning marketing and sales programs for new products. 
Less known perhaps are the Department's listings of available patents for 
new-product development. Write for them. 

There are several other ways in which the Department can be helpful to 
manufacturers concerned with new-product development problems. It often 
can help manufacturers to find ideas, as well as to save dollars, when de- 
signing new products. Other sources of government information are these: 

1. Register of patents available for licensing or sale. Manufacturers or 
individuals who have patents they wish to sell or license may request 
the U. S. Patent Office to place such patents on the register of 
patents available for licensing or sale. (Many corporations have large 
numbers of patents on the register some several thousand.) This 
reservoir is a fertile source of new-product ideas. Some of those listed 
may be used on payment of a royalty to the owners; others may be 
purchased outright. 

2. Government-owned patents. The Federal government carries on vast 
research programs in the field of nearly every industry. As a result, 
the government develops and patents many processes and products, 
which are usually available to manufacturers on nonexclusive royalty- 
free licenses. These government-owned patents may yield usable new- 
product ideas as well as useful information on research and develop- 
ment work already undertaken on products and processes. The Patent 
Office prepares periodic lists of such government-owned patents, 
which arc available free from the Patent Office in Washington, D.G. 

3. Dedicated patents. Many business firms and individuals have dedicated 
patents to the public. When a patent is so dedicated, the donor divests 
himself of all ownership in and control over the invention. Hence, no 
license to make, use, or sell is required; no royalty need be paid; and 
no formality is necessary to make full use of the patent. Information 
on dedicated patents may be obtained by writing to the Patent Office 
in Washington, D.C. 

4. Testing, simplified practice, and commercial standards data. Previous 
research, testing, and standardization activities of the National Bureau 
of Standards also can be helpful to some manufacturers, commercial 
laboratories, and product engineers in connection with the design and 
development of certain new products. For example, it may be advis- 
able for a manufacturer to check and see if any simplified practice 
recommendations or commercial standards are operating in the field 
with which he is concerned. Lists of commercial standards and sim- 
plified practice recommendations are available from the National 
Bureau of Standards in Washington, D.C. 



HOW TO OPERATE A PLANT PROFITABLY 261 

How to set the price for your product tor greatest profits 

The price you establish for your product may be the pivot on which the 
success of your marketing efforts will turn. Every step to a definite and 
concrete price policy should be carefully considered: 

It is obvious that retail prices must be in line with competition for the 

same quality, service, or styling 
Discounts and allowances must be in line with the established practices 

in the field 
A thorough knowledge of trade practices and customs in the field served 

by the product is a first essential in the establishment of a workable 

pricing policy 
In attempting to enter a new field, or to enter an old field with a new 

product, you will find it necessary to set up a schedule of discounts 

and allowances to wholesalers, retailers, and others which will make it 

attractive to them to add your line 
It should also be borne in mind that many a manufacturer has foundered 

on the rocks of a system of distributive discounts which has been so 

large that it has defeated its own purpose 

Unless resale price maintenance is practiced (and this practice, now pos- 
sible under the laws of many states, should be carefully investigated), an 
overgenerous scale of discounts can often lead to price-cutting practices un- 
der which it becomes virtually impossible for anyone to make any money 
on your product. If this occurs, the product becomes a commercial football, 
with results that can be disastrous. The most important items, then, in set- 
ting a price policy may be said to be these: 

Be certain that your scale of prices, discounts, and allowances is, at least, 

in line with long-standing trade practices 
Be certain that discounts and allowances are such that each factor in the 

distributive system, all the way from factory to retailer, not only can, 

but should make a satisfactory profit 
Be certain that a proper relation exists between all of the distributive 

elements who may handle your product, so that no units or groups 

in your distributive setup will have so large a price advantage over 

other units that it is impossible for some wholesalers or retailers to 

compete successfully with others 

Incidentally, it is well to bear in mind, when setting up your price policy, 
that clearly defined Federal laws prohibit the establishment of any price 
policy which discriminates between individual buyers. You can, of course, 
provide larger discounts for larger buyers, give special concessions for mer- 
chandising service, etc. But in each case these special discounts and con- 



262 HOW TO RUN A SMALL BUSINESS 

cessions must be available on an equal basis to all buyers who meet the specifi- 
cations you set up. 

You should also remember that a price policy embraces more than prices, 
discounts and allowances. It embraces everything that goes into the estab- 
lishment of a true price, including especially such items as credit and col- 
lection policies; whether goods are sold f.o.b. factory or on a delivered basis; 
consignment policies; policy on returned goods, cancellation of orders; and 
credit for damaged or unsatisfactory goods. Use this check list to find where 
you stand: 

Do you know, in general, what your price policy will be on this product? 
Have you determined what classes of customers will be entitled to dis- 
counts and allowances? 
Have you determined the schedule of discounts and allowances to: 

Exclusive distributors? 

Wholesalers? 

Retailers? 

Other distributors? 

After considering trade custom in the field for your product, have you 
determined policy with respect to 

Pricing point (e.g., f.o.b. factory; local warehouse; delivered)? 

Credit? 

Credit facilities? 

Collections? 

Returned goods? 

Consignment? 

Order cancellation? 

Damaged or unsatisfactory goods? 

Use of minimum retail prices through price maintenance agreements? 
Have you considered insurance and transportation costs, as well as costs 
of manufacture and selling, in determining your price? 

Know the laws you face in selling your product 

There are a number of very important questions for which you need a 
lawyer's help before going ahead with selling a product. They deal pri- 
marily with patents and trade-marks, legislation affecting marketing, taxes, 
etc. 

You are probably reasonably familiar with patent and trade-mark legisla- 
tion. You must make certain that you do not infringe on any other manu- 
facturer's rights in this field. But perhaps the most important legal difficulties 
to avoid are those which have to do with marketing. These are likely to be 
less familiar to you, because in so many instances they differ greatly from 
state to state and even from locality to locality. Consider these: 



HOW TO OPERATE A PLANT PROFITABLY 263 

In the national field, the principal statutes and regulations by which the 
marketer in interstate commerce must abide are antitrust laws, includ- 
ing the Robinson-Patman and Miller-Tydings Acts, the Federal Food, 
Drug, and Cosmetic Act, and the Federal Trade Commission Act. It 
will pay you well to have your legal counsel examine your product, 
your labeling and advertising, your sales agreements, price policies, etc., 
in the light of these statutes, and state fair-trade and pure-food laws. 

In the state and local field, laws, ordinances, and regulations which cir- 
cumscribe the field of operation are too numerous to detail, but mention 
of a few of them will give you an idea of the possible difficulties which 
may be encountered unless great care is taken. 

Premiums and certain types of contests in connection with the sale of 
merchandise, while legal in most states, are prohibited in some, and 
material dealing with such premiums or contests must be kept out of the 
prohibited states, or must contain a specific disclaimer, saying that the 
premium or contest offer is not good in such states. 

In the case of alcoholic beverages and a number of other products, state 
laws vary widely on what may be said and shown in advertising and 
display material; and in many states, certain types of products, such as 
drug products, may be sold only in certain types of retail outlets. 

A substantial number of cities throughout the country have adopted ordi- 
nances circumscribing the activities of house-to-house canvassers and 
frequently requiring a license. In other states, restrictive laws have 
been passed which may tend to cut down or eliminate sales of out-of- 
state products competing with dominant local industries. 

We are all familiar with the fact that health laws, building codes, and 
sanitary codes are in operation in most, if not all, cities. In many 
instances, these laws prohibit the use of certain types of products in 
construction or in homes. 

Perhaps you should visit your lawyer and go over this kind of check 
ist with him: 

Is your product patentable? 

Is its trade-mark protected? 

Are all claims to royalties or other indemnities settled? 

Do royalties limit the market for the product? 

Is there anything in the product, its labeling or advertising which may 
cause you to become involved in a possible violation of a Federal, state, 
or local statute or ordinance? 

Is the nature of the product such that regulations, trade agreements, etc , 
may restrict or prohibit its sales in certain areas? 

Is there anything in pricing policies, trade practices, or selling setup which 
might involve a violation of Federal, state, or local statutes or ordi- 
nances? 

Have local licensing and tax problems been considered? 



264 HOW TO RUN A SMALL BUSINESS 

What are the relative merits of the various freight carriers available for 
moving the product to the market? 

Will it be desirable to insure the product while in transit to the market? 

Are there any labor or union regulations which might affect the manu- 
facture or distribution of the product? 

Are there other problems, peculiar to your product, that should be con- 
sidered? 

You mutt avoid terms of so/e that are discriminating 

Most sellers know the law forbids price discrimination if it will injure 
competition. Special sales terms that amount to price reductions, or price 
increases, should be quoted to all purchasers on an equitable and consistent 
basis. Special terms may be granted in good faith, where necessary to meet 
competition, but shaded prices or discounts should normally be applied uni- 
formly to all competing customers who purchase the same product in the 
same period of time. 

Services, or allowances for services, should also be made available to all 
purchasers on proportionally equal terms. 

If you quote terms of this type, ask your lawyer if you can protect yourself 
by: informing all buyers of your terms; holding special offers open for a 
reasonable period of time. 

What about rebates in case of market decline? A seller is free to give 
a buyer a guarantee against a price decline. That is he may promise a cus- 
tomer a rebate equivalent to whatever price reduction is made between the 
date on which the buyer places an order and any specified future date 
frequently the delivery date. 

He will meet requirements, if he gives the same terms to all customers 
who place orders on a single date and have rebates computed as of a single 
future date. Any shift in the initial date, or the rebate date, justifies a change 
in terms provided changes in the seller's costs or in market conditions 
have occurred. 

Example L On Nov. 1, X takes identical orders from A and from B for 
delivery on Mar. 1 of the following year. He should not give A a guarantee 
against a price decline and then refuse to give the same guarantee to B, if 
there is any possibility of injury to competition. 

Example 2. On Nov. 1, X takes an order from A for delivery on Mar. 1 
of the following year. He gives him a guarantee against a price decline. 
On Dec. 1, he takes an identical order from B for delivery on Mar. 1. If 
conditions have changed, and he is no longer giving guarantees to any of 
his customers, he may refuse to give B a guarantee similar to X's, even 
though both customers will take delivery on the same date. 



HOW TO OPERATE A PIANT PROFITABLY 265 

What about future delivery contracts? A price quoted for future delivery 
need not be the same as a price quoted for immediate delivery. This is so 
because the law does not prevent changes in price based on changes in 
market conditions. 

A seller may, for example, take an order from a customer for delivery 
one or two months ahead, at either more or less than the price prevailing 
on the day when the order is placed. On the other hand, if he quotes dif- 
ferent prices to different purchasers who place orders for the same amount 
of the same product for delivery on the same advance date, he runs the risk 
of violating the law. 

Example. On Nov. 1, X charges A $1 for an item for delivery on Dec. 15; 
he charges B 75 cents for the same item for delivery on Mar. 1. There is 
nothing in the law to forbid this. He would, however, risk violation of the 
law if, on Nov. 1, he charged A $1 for delivery on Mar. 1 and B 75 cents 
for delivery on the same date. Safety hinges on offering, on the same day, 
the same prices for deliveries on the same future date. 

What about options for future purchase? A seller may give a buyer an 
option to purchase a given amount of an item at any time up to a given 
future date, at the price prevailing on an earlier date. 

It is, of course, true that a buyer who does not have such an option may 
be paying a different price, when purchasing on the same date as the buyer 
who has the option. This fact will, however, not result in violation of the 
law if all similar buyers have had the same rights and opportunities to enter 
into a like option. 

Example. The market price for an item is $12 per dozen. A obtains an 
option to purchase 100 dozen at that price, for delivery during the following 
6 months. Exercise of this option will not involve danger of violating the 
law, even if the market price rises above $12 per dozen during the period, 
if similar buyers have had a fair opportunity to acquire an option on the 
same terms as A. 

What about return privileges? A seller is, in general, free to permit buyers 
to return merchandise under any conditions he may care to establish: 

He may permit return of damaged or imperfect items 

He may permit returns if the buyer receives the goods after a specified 

delivery date 
He may even permit the buyer to keep a product for several months and 

then send it back, if the product cannot be disposed of at a normal 

markup 

Unless return privileges are made available to all buyers on identical 
terms, violation of the law may occur. 



266 HOW TO RUN A SMALL BUSINESS 

Example. If X permits A to return merchandise that he cannot sell at 
his normal 25 per cent markup and withholds this privilege from B, B may 
well feel that X is discriminating against him. B may, for example, hold 
that he is, in effect, paying a higher price than A for the units he does sell, 
since in figuring his profit on merchandise he buys from X, he must add the 
cost of unsold items to the cost of items actually sold. 

What about special discounts for large orders? Quantity discounts for 
large purchases are not directly prohibited or permitted. 

Such discounts are legal if they do not injure competition, or if they are 
based on specific cost, market, or competitive conditions. Quantity dis- 
counts are permissible if a seller's costs actually do vary with the size of the 
order the customer places. 

Difficulties, may, however, be encountered if a seller's exaggerated dis- 
counts for large orders bear no reasonable relationship to discounts on his 
smaller orders. 

What about credit terms? In a period of rising prices your dealers may 
find that an increasingly large proportion of their capital is tied up in 
inventory. They may, therefore, request easier payment terms than before. 
If you revise your cash discounts or other credit arrangements that affect 
price, you should make new terms available to all customers without dis- 
crimination. 

What about special delivery services? You may wish to rush merchandise 
to buyers in your own trucks or by fast delivery service. If you do, you 
should make a charge for the additional service or else make "special de- 
liveries" available to all customers on proportionally equal terms. 

CAtci //sf for effftcf iVft packaging of your product 

What do you consider in studying your package design and construction? 

1. Is there adequate protection against rough handling in transit and de- 
livery to user? That includes checking for strength under both load 
and impact and for resistance to exposure and dampness. It also 
covers 

Ability to withstand climate and temperature changes 

Sealing against tampering 

Prevention of rattling 

Interior reinforcement and cushioning 

Minimum weight for proper protection 

2. Do you think of getting the greatest possible shipping economy? Occa- 
sional breakage and replacement may be more economical than 
penalizing every shipment by the cost and weight of damageproof con- 



HOW TO OPERATE A PLANT PROFITABLY 267 

tainers. The natural tendency of shipping departments, in their own 
protection, is to overdo protection with 

Too many crates 

Too many nails 

Too much padding 

Too much wrapping 

Too much gummed tape or twine 

Too much bulk 

Too much weight 

You may need to establish standard practices which eliminate extrava- 
gances. At the same time, relieve the shipping department of criticism. 
3. Is the container suitable for the final purchaser's needs and prefer- 
ences? Has it value to the recipient (a) as a permanent container; 
(b) because of salvage possibilities; (c) for utility in some other type 
of service; (d) to go into the production line as its own tote box; (e) 
for display? If so, use prominent space on the exterior of the package 
to explain it, so that its value will not be destroyed by careless opening. 

When designing for retail display, make sure the package has distinction 
and visibility on shelf, counter, and show window. It must compete for atten- 
tion not only with competitive articles but with all other merchandise near it. 

It should "look its price" that is, give the impression of being worth 
what is asked for it. If one item in a line, it should probably bear a "family 
resemblance" to the other packages. If the appearance of the contents is a 
sales asset, consider transparent wrappings, "windows," and glass, or a 
bulk display of packages with one sample exposed to view. Other important 
points are 

Avoid frills and elaboration suggesting that the purchaser is paying too 
big a part of the price for the package 

Avoid bulk 

If the merchandise is meant for feminine customers, avoid a package that 
is hard to open, requires tools, or calls for an expenditure of manual 
strength 

Give the package good labeling. Include all the information required by 
law 

Make it helpful to salespeople by providing easy identification and fur- 
nishing selling data 

Give the complete information for the buyer, to minimize returns and 
complaints. Use accurate, easily legible statements of contents, con- 
densed "how-to-use" instructions 

Tie it up with product's advertising through trade-mark, brand name, 
company name, color scheme, and slogan 

Consider additional use of bulk container for delivering store display ma 
terial, selling instructions, and consumer leaflets 



26$ HOW TO RUN A SMALL BUSINESS 

Consider whether the package delivered to the ultimate user should con- 
tain "how-to-use" instruction sheet, folder or slip featuring other articles 
in line, guarantee certificate, return card for registering buyer's name 
at home office 

Find out whether a single "standard package" will fit buying habits of 
all types of outlets or whether, with different sizes, more markets can 
be cultivated 

Find out whether the consumer market can be enlarged by offering your 
product in wider range of quantities 

Avoid needless weight in your package design. Remember, too, that ma- 
terials or colors can easily become shopworn. Do not use three- or 
four-color labels if, by better designing, two colors can produce an 
equally effective display 

Avoid "over packaging" It definitely antagonizes intelligent, thoughtful 
customers. Keep informed as to the many new money-saving ideas being 
developed. Be watchful for methods to conserve shipping space and to use 
easily obtainable materials, less material, or lighter material. Study recent 
developments, such as 

Transparent packages. (Can the amount of cellophane or other trans- 
parent material be reduced by substitution of a small "window" for a 
larger area of the transparent wrapping?) 

Shipping packages which start their service as assembly trays on the pro- 
duction line 

Nonadhesive films for protection of metal goods in transit and storage 
More efficient and economical use of freight-car space 
Envelope type "two-dimensional" packages 
"Bag-in-box" containers, avoiding use of metal or glass 
Fiber cans, produced on same machine used to manufacture metal cans 
Waterproof glues and other new cements 

Plastic-lined, spirally wound paper cans for liquids formerly shipped in tin 
Climate- and temperature-resistant interlinings which permit less expen- 
sive outer containers 
Cotton bags for mail and express shipments and for inclusion of small 

parts in larger shipments, to replace heavier and bulkier containers 
Better use of packages returned to you 

U*e proved methods of advertising to the trade 

Don't generalize in your advertising; get down to cases. Tell all to a 
reader. Do this: 

Be specific. Advertise product by product. Readers don't buy your "line" 
If you want inquiries, offer something that's really useful to the reader 
and tell him why it's useful 



HOW TO OPERATE A PLANT PROFITABLY 2*9 

Don't be afraid of long copy but make it informative 

If you want direct action, suggest it in your copy, and tell the reader 

why he'll get something out of acting quickly 
Don't get "fed up" with your own sales story. Change the pace, use new 

approaches, produce fresh evidence that your story is true, but never 

stop telling it 

Trade and business papers are an essential medium for reaching other busi- 
ness or dealers. The Haire Publications list the advantages this way : 

Trade advertising delivers solid help to your sales force by 

Doing a missionary job 

Selling the standing of your house 

Introducing men in their territories 

Creating leads 

Selling above heads without offense 

Making the calls between personal calls 

Calling on more prospects 

Getting a special message over to all buyers 

Covering all buying powers regularly 

Building morale of your salesmen 

Paving the way for successful interviews 

Selling with "reason-why" appeal 

Keeping dealers sold 

Reaching the new man on the job 

Reaching buyers who are hard to contact 

Ensuring business momentum 

Consolidating all sales gains 

Maintaining contact between peak business seasons 
Trade advertising plays a vital role in marketing operations by- 
Selling the primary channel of distribution the dealer 

Winning and holding dealer loyalty 

Speaking the dealers' language 

Introducing new products, new styles 

Giving the dealers down-to-earth, nonglamour information they need and want 

Announcing prices 

Talking profits and turnover 

Discussing new developments 

Developing distributors 

Moving goods that have been sold to distributors 

Promoting dealer aids and their use 

Training dealers how to display products 

Inducing them to tie in with national drives 

Aiding in sales training 

Getting cooperation of dealer sales staffs 

Tying in with trade shows 

Merchandising consumer advertising campaigns 

Developing repeat business 

Trade advertising ensures the stability, development, and good public relations of 
business by 

Maintaining momentum of business with dealers 

Protecting against price competition of nonadvertiscd brands 

Offsetting ill will of neglected customers 



270 HOW TO RUN A SMALL BUSINESS 

Discouraging substitution 

Forestalling competition of new companies 

Keeping the trade-mark in the forefront 

Reselling lost customers 

Explaining delays in deliveries or service 

Pi eventing industry from thinking that business is slipping 

Building confidence in the company's financial structure 

Testing salability of new items 

Building up additional items in the line 

Opening new markets 

Cultivating future buyers 

Publicizing additional services 

Interpreting the policies of the house 

Counteracting illegitimate practices in the industry 

Doing a good public-relations job with all outlets 

Planning an efficient sales organization 

First, do a good job in selecting and training your sales force. Make the 
selection by a plan seeking to avoid misfits. Part of that is your method 
for a thorough checking of applicants' aptitudes, courage, and honesty. Be 
on watch against 

Applicants with poor credit reports against them 

"Floaters" who have had too many jobs 

Men too thoroughly imbued with competitors' products and methods (it 

may be hard to teach them new ways) 
Men with "trouble" at home 

Men whose attitude suggests that the job is only a "stopgap" 
Men whose references prove noncommittal 

Carefully design your sales training program. Even the "born salesman" 
is up against the stiff competition of carefully trained and coached men, 
stimulated by constant inspirational means. Your training procedure should 
be planned to 

Convince your representatives completely of the value of what they are 
selling and what it will do for their customers 

Inspire them with respect for the company which they will represent 

Imbue them with its basic philosophy and aims 

Give them as detailed an understanding of the manufacturing process as 
will be useful to them in the field and guard them against misstate- 
ments 

Give them a thorough grasp of all factors which differentiate your type 
of product and the markets you cultivate from what they have known 
in other sales work 

Sell them on the importance of all reports you expect of them; the sound- 
ness of any unusual sales policies; the value to them of the close super- 
vision you will give them 



HOW TO OPERATE A PLANT PROFITABLY 271 

Provide a method by which they can check up on their own performance 
in order to take maximum advantage of their opportunities 

Show them how you will keep them informed as to trends and develop- 
ments in salesmanship 

Give a clear picture of the means you will employ to increase the effective- 
ness of their personal effort and furnish additional opportunities for 
income 

Keep in mind that any ably handled training course is one of the quickest 
means of "selling" a company to its new representatives and sending them 
out into the field under full steam. Lay them out in group sales meetings in 
complete detail and stick to the schedule. Don't handle them informally 
and thus belittle their importance. Don't cover too much territory in any 
one session. Use these techniques 

Employ showmanship in emphasizing and dramatizing main points (set 

them an effective example of how to do this) 
Encourage questions and general discussion, but watch out lest the sessions 

drag and grow tiresome 
Make a clean-cut statement before each session on what will be covered, 

and summarize the day's topics at the close 
Omit any topics of interest to only a part of the group; cover these in 

separate talks with the individuals interested 

Show salesmen how to meet customers' complaints effectively. Make cer- 
tain that your salesmen know exactly how to explain shortages, delayed 
deliveries, changes in packaging, discontinued items, etc., so that they can 
effectively handle criticisms and complaints. 

Use the meetings to educate new salespeople on detailed "how-to-use," 
"how-to-sell," and "how-to-display" bulletins which your salesmen can give 
out freely to make sure that new customers, novice factory labor and fore- 
men, and inexperienced clerks will quickly learn to do justice to your 
products and their reputation. 

Helping your salespeople get more sales 

That needs study of the way you handle your men. 

For one thing, conserve sales time. The job of a salesman is to sell. Don't 
load him with duties which will cut into his selling time. Don't require him 
to make out lengthy, detailed call reports, unless the home office puts the 
information to real use. Other points to be studied include 

Consider whether your compensation plan needs overhauling to meet 

changed conditions 
Be sure your contact with salesmen is sufficiently frequent to keep them 

in good spirits and give them a sympathetic understanding of your 

company policies 



272 HOW TO RUN A SMALL BUSINESS 

Put additional emphasis on placing all pertinent information in their hands 

in definite, easily understood form 
See that you are giving them the best possible support in the form of 

letters and mailings to prospects before and after their calls 
See that their complaints or questions are answered promptly and under- 

standingly 
Don't let the stress of office activities get you out of touch with the men 

in the field 
Keep them interested in the future by telling them of your research 

activities 
Coach them carefully on how to present these activities to jobbers and 

dealers and how to make use of them in talking to users 
Take the steps necessary to replace salesmen, and have them ready to 

carry on efficiently 

Make full use of work stimulators. Here are a few standard procedures, 
some of which should be applicable to your operations: 

Weekly bulletins showing comparative standings, commending notable 
accomplishments, giving case studies of successful sales stratagems 

Prize contests with merchandise, cash, or savings bonds offered to suc- 
cessful salesmen (or their wives) 

"Topnotchers' " clubs of the year's leading producers, with membership 
pins or buttons 

Special drives: new accounts; getting back old customers; pushing a 
selected item; best window trim or store display; "president's month" 

Special rewards for making quota, reducing ratio of expenses to volume, 
submitting worthy ideas, interviewing many new prospects, maintaining 
good call reports 

Calls at organized intervals from home-office executives 

Personal letters to acknowledge notable sales, winning over rough pros- 
pects, improvement in volume, economical operation, etc. 

Get full use of salesmen's capabilities. Salesmen can help by educating 
customers in the operation of your business and theirs. And they can help 
in 

Keeping customers informed on how others are meeting the new competi- 
tive status 

Interpreting current difficulties, delays in shipments, errors, and can- 
cellations to keep them from being dissatisfied 

Going over their problems with them to give them the benefit of other 
people's experience 

Telling you how to bring your own selling and promotion in line with 
what they find to be current conditions in the field 

Bringing back to you all the data they can secure on the difficulties cus- 



HOW TO OPERATE A PLANT PROFITABLY 273 

tomers are encountering to help make your own production and market- 
ing effort more profitable 

Be ready to make territorial realignments. Place your men where they 
and you can best take advantage of changes required by these principles: 

Keeping travel costs at a minimum 

Letting salesmen concentrate their time in the most productive markets 

Taking into account the mass shifts in population; also the increased 
buying power of industrial labor 

In areas where telephone facilities are not overloaded, substituting tele- 
phone calls at a prearranged time each day to take routine, everyday 
orders from regular customers 

Change the tune of your sales meetings. Be prepared with authoritative 
staging, equipment, and showmanship. Give them proper chairmanship and 
adequate timing. Also follow these pointers: 

Keep the discussions relevant to subjects that make for easier selling today 

Hold down the topics; give an intensive educational or inspirational han- 
dling of all subjects discussed 

Don't run overlong sessions; have adequate ventilation, good seating and 
writing accommodations, good acoustics 

Make sure of sufficient audience participation on a systematic basis 

How your so/esmon con use his time most productively 

Recognize that time spent in contact with prospects is the productive part 
of a salesman's day. Do all that you can to build up the ratio between pro- 
ductive and nonproductive time. Here are some aids : 

Show salesmen the value of keeping a personal "score card," giving a 
day-by-day record of 

Productive hours in contact with customers and prospects 
Hours in travel 

Hours spent on routine records and correspondence 
Number of calls made and number of interviews 
Expenses 

Number of orders and total dollar volume 
Teach them how to study it to discover 

Ways and means of increasing the ratio of contact time to total time 
Accounts (or prospects) using up more time than their business 

justified 
Evidence of poorly planned routing (too much mileage or travel cost 

per interview) 
How their sales effort is divided between A, B, and C prospects 



274 HOW TO RUN A SMALL BUSINESS 

Study and discuss with salesmen: the high cost of hours diverted to per- 
sonal affairs during the working day; the waste involved in asking for and 
interviewing the wrong man; the rewards for getting started promptly in 
the morning and staying on the job as long as possible; the lost effort in calls 
made without proper preparation and material. Here are real aids in your 
planning: 

Give clear instructions as to which prospects should get the bulk of their 
attention, and which can be neglected or used only as "fillers" in other- 
wise wasted time 

Plan routing carefully 

Plan just how often you want them to call back on each customer or 
prospect 

Warn them to avoid the salesman's easy error of dropping in too often 
where they are sure of a friendly welcome and staying away from those 
places where the ice still needs to be broken 

Use a system which discloses when a salesman is spending too much time 
on an unprofitable account or an unpromising prospect 

Assign them territories which can be efficiently and economically covered 

Encourage the flow of daily reports from men. They will give you an 
opportunity to review their production and permit your criticism and 
encouragement 

Keep your sales record adequate. It should permit you to move quickly. 
Have salesmen give you enough information to 

Check their call reports against your prospect files to control their move- 
ments 

Check their expense reports to prove their coordination with call reports 
Check the quality of their calls 
Check the results from each type of promotion 
Find the actual production of each man 
Get the actual cost of each man 

Make sure salesmen have records of customers' activities to keep them 
abreast of what is occurring with their own people. Possibly send cus- 
tomers' complaint reports to men to keep them advised in their own efforts 
to save customers. 

Study call reports to be sure that worth-while prospects are not being 
consistently neglected through no fault of the salesman. That may mean a 
reduction in territory, assignment of a junior salesman to cover "B" pros- 
pects, or finding out whether a salesman thinks, or knows, that he is "in 
wrong" with the prospects he neglects. And do this: 

Make sure that the sales kit and the verbal presentation of their com- 
modity are both planned to save salesmen's and prospects' time by get- 
ting straight to the point and sticking to it 



HOW TO OPERATE A PLANT PROFITABLY 278 

Check up frequently to make sure that they haven't forgotten what they 

were told 
Make sure that your training program is kept alive by personal example 

or stimulating bulletins 

Point out to salesmen the waste caused by common mistakes and bad 
habits, such as 

Using working-day time for planning trips, writing reports, etc. 

Attempting to handle too big a territory for best results 

Assuming that successful interviews can't be made the first thing in the 

morning, late afternoon, or on Saturday morning 
Trying to win or hold the prospect's attention by spreading gossip and 

rumors 
Putting in too much time on "long shot" and "fringe" business 

How to control your salesmen's expenses 

You need to set up a fixed policy on your expense arrangements. Make 
it a completely detailed, mutually understood statement about allowable 
expenses which will be paid by the company. Set a definite rule stating 
exactly how they must be reported and substantiated by the salesman in a 
permanent reference form. 

Before establishing the system, consider providing for these expenses in 
the salary or commission paid each salesman. That frees you from further 
responsibility. Or you might set a per diem or other flat-rate system. 

The expense manual or instruction sheet should cover your policy con- 
cerning all expenses incurred away from home on the company's business, 
including 

Hotel rooms in cities of various sizes (consider the use of due bills) 

Meals, also according to size of cities 

Extra-charge accommodations on trains 

Use of airplanes 

Tips 

Taxis 

Valet, laundry, and shoeshines 

Telephone and telegraph 

Sunday expenses when away from home 

Entertainment 

Expenses when in a home town (lunch, etc.) 

Completely detailed understanding as to automobile costs mileage rate, 
insurance, depreciation or upkeep, tires, daytime parking, overnight 
storage, home- town use, distance limitations (no long trips), allowance 
when used in place of cheaper transportation, etc. Look into the 
advantages and disadvantages of per diem rate 

Provision for combination business and vacation trips 



276 HOW TO RUN A SMALL BUSINESS 

How and when expenses shall be reported and when they shall be payable 

What receipted bills or other supporting evidence shall accompany ex- 
pense reports 

Association and club initiation fees and dues 

Any matters peculiar to your line of business that might occasion mis- 
understanding and disputes 

Now set up your reporting and auditing system by giving the salesman a 
simple and convenient report form. Provide for inspection before approval 
by the salesman's direct superior and an accounting-department official. 
Be sure, too, your system does this : 

Provides a means by which costs can be checked against railroad and 

pullman rates, bus fares, and other provable items 
Furnishes a quick comparison with salesman's previous costs and those of 

fellow salesmen operating in similar territories 
Shows ratio of expenses to sales volume 
Discloses information permitting economical salesmen to be commended or 

rewarded for their thrift 
Provides for prompt payment to salesmen 

This is the beginning of the check to avoid salesmen frauds. This scrutiny 
of expense accounts should spot items out of line. But your check should 
also include 

Actual check of salesmen's reports with receipted bills or your definite 

knowledge of costs for various traveling and expense activities 
Insistence, wherever practical, on receipts for all items in expense accounts 
Check to rate books for railroad, pullman, bus, and any other charges 

that can be proved 
Curtailment of excess costs by effective bulletins to traveling people on 

Failure to take advantage of round-trip rates 

Unnecessary pullman accommodations 

Excessive charges for meals 

Unreasonable entertainment expenses 

Unnecessary telephone and telegraph costs 

Unreasonable use of taxicabs 

Audit of all traveling expense accounts is essential if experience means 
anything. Too often excess mileage between various points is found in them. 
In a great many cases they are incorrectly added or extended. 

Often the salesman's call reports and traveling expenses will vary, sug- 
gesting that one is in error. Too often, sleeping accommodations for both 
pullman and a hotel are found on expense accounts for same period. 

Similarly there are repeated items for taxis or bus fares when automobile 
expense is already charged for. Expenses for porters or tips are often charged 
when the quantity of luggage may be very small. 



HOW TO OPERATE A PLANT PROFITABLY 277 

Ho* iesf to sell by direct mail 

Letters can be long except when addressed to business executives. You 
must always make specific appeal for definite action. Use some offer or 
inducement whenever possible. Make "you" the central figure in your 
letter, rather than "I" or "we." Be newsy; be personal; localize appeal 
where possible; tell your whole story. Other techniques recommended by 
experts are these: 

Employ "subheads" in the body of the letter to give your message quickly 

and to stimulate a desire for ownership 
Make use of margins for sideheadings 
Arrange the sequence of your letter to give main points quickly. Restate 

them at least once more (except in letters to business houses) before 

signing off 

Use postscripts for emphasizing a special appeal or summing up an offer 
Two-fifths down the page is the "visual center" place an important 

part of the letter at that spot 
Get attention with illustrations, cartoons, display boxes, display circulars, 

underlining in black crayon or colored pencil. Key paragraphs in color 

also help 

Format suggestions by experts urge that elaborate or expensive setup is 
not essential for the great bulk of commodities and service advertised by 
direct mail. A two-color letterhead usually proves a better investment than 
a one-color one for form letters. Other comments urge 

A printed letter with an arresting headline is cheaper than one personally 

filled in and is equally productive for some lines 
Hand-addressed, type-addressed, and stencil-addressed envelopes show 

almost similar results for most uses 
In a series of mailings, variety should be employed to avoid recognition 

before opening; color, size, and style of envelopes and letterheads may 

be varied 
A letter-size sheet without company heading, but with a striking headline 

or illustration, is effective 
If letter extends beyond one page, it is better to use two sheets rather 

than reverse side of first 
The color of your envelope has little or no effect on returns 

The most widely employed types of mailing are the letter without en- 
closure; the letter with enclosure, which may be a circular, reply card, or 
order blank; a circular alone enclosed in an envelope; sometimes a circular 
or broadside is self -mailing without an envelope. 

For most commodities and services the letter is the most nearly indis- 
pensable element. Experts suggest that the attachments be handled this way: 



278 HOW TO RUN A SMALL BUSINESS 

On a single-page letter mailing, the order form may be put at bottom of 
letter 

If letter and circular are used, the order form may be put on separate 
card or may be a part of the enclosed circular (back cover) 

The cost of a two-color reply card is not usually justified 

A blank reply card will ordinarily produce as well as one which has been 
filled in 

It is well to be wary of using reply card inviting or suggesting that a sales- 
man will call 

Air-mail reply cards are not justified, but the "No stamp required we'll 
pay return postage" type of card should be tested 

How to cut costs in direct-mail sales 

Notice these results of tests: 

The common use of metered mail on business correspondence has made 
it equally or more productive than stamped mail in direct-mail work 

The expense of first-class mail is not warranted until, by test, you have 
proved that it pays out; third-class mail usually pulls as well 

Avoid mailing for Monday delivery 

The development of a mailing program of maximum productiveness is a 
matter of constant testing. The extra expense of using split lists, or other 
testing devices, is rarely a waste if you study the comparative results and 
apply your findings to future mailings. 

Once you have established some standard of results by which to measure 
all mailings, you will be in a position to take the additional precaution of 
testing out a proposed letter on a small sample of your list. That avoids 
undertaking the whole investment without any gauge of the returns you 
can expect. 

Experts urge you to keep testing the individual details of mailings by 
using different materials on alternate names on lists; for example 

Letter A vs. letter B Style of addressing 

First-class vs. third-class postage Offer of premium vs. no premium 

Circular or no circular Mailing dates 

Order blank on letter or separate Cheap stationery vs. more expen- 

order blank sive 

Blank vs. filled-in reply card Letter processes 

Return postage paid by prospect Self-mailing pieces vs. pieces en- 

vs. return postage paid by you closed in envelopes 

Filled-in heading vs. generalized Blind envelopes vs. envelopes 

heading showing source 

And experts also urge you to keep a record of your tests of direct mail 
this way: 



HOW TO OPERATE A PLANT PROFITABLY 279 

Keep a detailed cost sheet for each mailing, covering all items of expense, 

number mailed and identification of list used 
When returns are in, tabulate the number of replies, volume of orders 

received, cost per reply, and cost per dollar of sales 
Use these as the basis of all test comparisons: pulling power of copy 

appeals; style and contents of mailings; productiveness of lists 

How to build productive direct-mail lists 

The first step in organizing for direct-mail selling is the building of a mail- 
ing list through card files maintained in the home office, or through the 
service of a mailing house. 

What are the best sources, or best combination of sources, of names for 
your list? They probably are 

Your customer ledgers, current and past 

Your salesmen's call reports 

Trade directories 

Lists purchased from mailing-list houses 

Names or lists furnished by sales outlets 

Telephone books and classified directories 

Club and association membership lists 

Names in competitor's lists of users 

Names secured from news columns of publications 

Names furnished by clipping services 

Prospects suggested by satisfied customers 

Offered voluntarily 

Brought in by letter requesting suggestions 

Brought in by offer of a gift 

Brought in by offer of financial or other reward if sale results within 
specified time 

You ought to use a prospect card file to assemble your list if it is possible. 
If you do, it should cover the name and address in complete form, plus this 
sort of data: 

Source of name (to help in evaluating sources) 
Date when put on list (as a check on unproductiveness) 
In case of a business concern name and title of individual, if known 
In a large organization additional cards for all individuals influencing 
purchases 

How do you check the accuracy of your list? Many methods are available: 

By return card asking whether mailings should be continued 

By local postmasters, for a fee 

By your own salesmen, for their territories 



280 HOW TO RUN A SMALL BUSINESS 

By key distributors, for their areas 
By submitting to mailing-list houses 
By your own executives 

Guaranteeing return postage on mailings will help maintain quality of 
your lists. So will these steps: 

Comparison with salesmen's call reports 
Insisting that salesmen promptly report all changes 
Withdrawal of unproductive cards after a fixed interval 
Constant check of the names against established list sources 

Your wholesalers may be able to help you operate efficiently 

One aid is in providing storage space for the manufacturer. Wholesalers 
can buy and store goods at the time they are produced and hold them until 
they are needed by local retailers or industrial consumers. This greatly re- 
duces the amount of warehouse space needed by large manufacturers. It 
eliminates the need for storage space by many small producers. 

The wholesaler can often make better use of storage space than can most 
manufacturers. The production of many processors is seasonal. Were it not 
for the wholesaler, they would have to provide storage space for their maxi- 
mum seasonal output. Therefore, as the goods were moved out, space would 
be vacated which would remain idle until the opening of the next season. 
The wholesaler, on the other hand, carries goods for every season. As goods 
for one season are moved out, those for the next season are moved in. Con- 
sequently, space is more fully utilized. Other aids can be 

The wholesaler lessens substantially the amount of capital needed by the 
manufacturer by buying goods as they are produced and paying promptly 
for them. Capital requirements are less than if the manufacturer had to 
hold the goods until they were needed and paid for by retailers 

By distributing through wholesalers, some manufacturers are able to ship 
their products, at good prices and for cash, as fast as the goods are ready. 
This gives them money with which to continue operations until the season 
is ended. It also eliminates the necessity to have a storage warehouse, to 
maintain a year-round staff for shipping small orders as they come in 
from the various retailers, and to keep a selling staff of sufficient size to 
cover a large enough portion of the market to dispose of the entire stock 

Manufacturers can sometimes arrange sale of their entire output to a 
limited number of large direct buyers whose offering price might 
normally approach the break-even point 

A manufacturer can get national distribution more quickly and more 
thoroughly through wholesalers than by any other means. If he at- 
tempts to sell direct to retailers he has to train and send into the field a 



HOW TO OPERATE A PLANT PROFITABLY 281 

large staff of salesmen, who commonly enter upon their duties as stran- 
gers to their prospective retail customers. On the other hand, the whole- 
saler's salesmen usually are old friends of the retailers on whom they 
call 

Wholesalers speed sales of new lines of merchandise. Retailers buy more 
readily from the wholesaler because, through past dealings, they know 
he is reliable and would not burden them with goods that he knows are 
not suited to their trade. They also realize that he is nearer at hand than 
the manufacturer and that adjustments on unsalable merchandise can 
be had from him without a great deal of correspondence and bother 

Wholesalers can give protection of market. If there were no wholesalers, 
small and medium-sized independent retailers would be only a minor factor in 
our marketing scheme. No manufacturer would enjoy sufficient coverage 
without selling through chains. They furnish many other aids: 

The wholesaler can keep the manufacturer advised on market conditions, 
the nature of the goods which can most readily be sold in the market, the 
type of package which consumers seem to prefer, and the size of unit 
which makes the greatest appeal. Thus, where the manufacturer 
employs wholesalers in many areas, he receives a constant flow of mar- 
keting information which guides him in making decisions 

They give a selection of retail agencies. The wholesalers and their sales- 
men, through long business association, know intimately the operations 
and character of the individual retailers. Therefore, the processor who 
uses wholesalers and who desires to establish retail agencies for a line 
need only inform his wholesalers of his intentions and give them detailed 
instructions 

The wholesaler cuts advertising expense. He is the agency through which 
manufacturers may distribute their advertising to retailers. The material 
is sent to the wholesaler. He makes it up into kits, which are given to 
his salesmen to deliver to each of their retail customers. The only cost 
to the manufacturer is shipping the bulk material to the wholesaler. The 
cost of this procedure contrasts with the cost which would be entailed if 
the manufacturer had to make up the kits and mail them to thousands 
of individual retailers 

The wholesaler lowers substantially the handling cost of the processor. 
When distributing through the wholesaler, the manufacturer often 
merely has to load full cars and ship them on. If he sold to retailers 
direct, it would be necessary for him to employ a much larger warehouse 
force to fill the small orders which would come in from retailers. Many 
would be shipped by express or parcel post rather than in carlots by 
freight. This would necessitate special packing and weighing of many 
orders, with a consequent increase in expenses 

By ordering goods in carlots the wholesaler not only lowers the distribution 
costs of the manufacturer, he contributes to lower costs to retailers 



282 HOW TO RUN A SMALL BUSINESS 

The wholesaler greatly simplifies the credit problem. If the manufacturer 
were selling direct to retailers, he would have to keep a check on thou- 
sands of accounts in widely scattered localities. When the wholesaler 
checks the credit of a retailer he does so for all lines he carries 



How you can promote sales through retail outlets 

Retail stores often like sales instruction and cooperation. That might be a 
regular mailing program to keep information up to date. Or it might be by 
bulletins or a dealer magazine; supplying educational material (sales man- 
uals) to all salespeople handling your line. 

Your job is to give them all possible selling helps. The needs of retail out- 
lets vary according to type of outlet and size of organization. The following 
is a list of the major helps offered by manufacturers: 

Product exhibits 

Store demonstrations with factory representatives on the job 

Group meetings of salespeople to hear announcements of new items, new 
advertising campaigns, etc. 

Dealer contests for window display, store display, newspaper advertising 

Prize contests for clerks, or premiums for sales made 

Window displays and trims 

Counter cards and wall hangers 

Display racks 

Ready-to-use advertising electros and mats 

Advertising suggestions in proof form 

Portfolios showing available advertising material, with order blanks pro- 
vided 

Outdoor signs, metal, cloth, waterproof paper, etc. 

Store signs (exterior use) in wide variety 

Decalcomania door and window signs 

Sales literature for store distribution 

Envelope enclosures 

Letter campaigns or suggestions for letters on retailers' stationery 

Special window displays and exhibits remaining the manufacturer's prop- 
erty and routed from store to store 

Advertising allowances 

Cooperative advertising, shared by store and factory 

Cooperative advertising by groups of outlets 

Personal activity by salesmen in setting up window and store floor displays 

Payments for use of show windows 

Help in preparing mailing lists and the material to be sent out 

Salesmen or special experts who offer sound advice on management prob- 
lems, suggesting new sources of income, or show how to handle criticisms 
occasioned by changes in product, packaging, and policies 



HOW TO OPERATE A PLANT PROFITABLY 283 



How you con promote so/es through jobber outlets 

Jobbers like a market analysis. It should furnish a list of prospects in the 
area each one covers for each item you manufacture. Start it by checking the 
jobbers' mailing lists for inclusion of all desirable names. Furnish, too, specific 
instructions about the use of your product in all out-of-the-ordinary markets. 

What ammunition can jobbers' salesmen use effectively? That varies 
widely. All the following demand consideration: 

Catalogue pages and inserts Sales literature to be furnished deal- 

Full-line catalogues of your line ers 

Product bulletins Window displays; wall hangers 

Sales manuals Showroom displays and demonstra- 

Portfolios of advertising material tion material 

Visual presentations Displays for exhibit booths 

Sample kits Materials suitable for their house 

Direct-mail literature for own use, es- organs and other mailings 

pecially envelope enclosures Help in planning the above promo- 
Store and window signs : tions 

"Selling Agents for . . .," "Exclu- Order blanks for their use in arrang- 
sive Representatives for . . ,," etc. ing shipments of advertising to 

retailers 

Jobbers often will permit you to show their sales forces, by groups or indi- 
viduals, how to present each item in personal sales work or to make actual 
calls in company with jobbers' representatives. You may be able to help them 
with the following other cooperation : 

Arranging to give expert demonstrations to selected prospects 

Presenting new items, new advertising campaigns, new sales portfolios to 
group meetings of sales forces 

Maintaining a list of jobbers' salesmen and addressing to them personally 
all bulletins, pep letters, etc. 

Suggesting prize contests for salesmen 

Organizing special sales drives on an item or full line 

Assisting at conventions and exhibits 
Through help in planning display 
Through personal attendance of factory representative 
Through demonstration equipment 

Being on call for "trouble shooting" in case of difficulties with their out- 
lets 

Checking up on stock on hand and seeing to it that a properly balanced in- 
ventory is maintained 

Attending, when invited, jobbers' house picnics, dinners, etc. 



284 HOW TO RUN A SMALL BUSINESS 

Be sure you know the cost of plant selling 

This will permit you to select commodities, methods of distribution, and 
quantities in which sales or delivery can be made so as to secure the largest 
possible profit. 

Cost studies permit you to formulate intelligent plans for the future. They 
guide you in checking your present operations against the standards and 
budgets you have created. 

Federal and state legislation prohibit discriminations in price. They make 
it essential that you be aware of the possible dangers in selling commodities 
to various classes of purchasers at different prices. The various antidiscrimi- 
nation acts generally permit actions against you if your prices might be 
charged to be unlawfully discriminatory. But different prices can be justified 
by proving cost differentials. 

Be sure you know how to find the cost of plant selling. As in production, 
there are opportunities for reducing costs in marketing through the improve- 
ment of efficiency. 

Progress lies in this direction. An improvement in efficiency and a reduc- 
tion of marketing costs offers opportunity for lowering prices, increasing net 
profits, and improving a competitive position. 

No company makes all its sales at equal profit. In every business there are 
sales which are much more profitable than the company average and a siz- 
able proportion of other sales which are much less profitable. 

These are basic facts of business life which marketing executives encounter 
every day. Yet these commonplace truths hold "secrets" which so far have 
been acted upon by only a few companies. 

In most businesses, a large proportion of the number of customers, orders, 
and commodities, bring in only a minor proportion of the sales, Such a dis- 
tribution of sales would not necessarily result in unprofitable business, except 
that marketing efforts are costly. Hence, marketing costs all too frequently 
follow the number of customers, orders, commodities, and so forth, rather 
than the actual or potential dollar sales. In other words, a large part of the 
marketing expenditures are "responsible" for securing only a very small part 
of the total sales and gross profit results. 

Intelligent small businessmen are thus faced with a need for marketing cost 
policies, such as 

How many and what kinds of customers to sell 

Which channels of distribution to use 

Which territories to cover 

Which products to sell and at what price 

Where and how to apportion their marketing efforts in closest relation to 



HOW TO OPERATE A PLANT PROFITABLY 285 

potential sales results (estimates of market potentials by territories, prod- 
ucts, and customer classes) 

Where the relatively unprofitable sales are, and the reasons for the sources 
of loss; ways and means to make these sales profitable 

The whole cost of distribution should be included in your studies. That 
includes 

Promotion, advertising and anything else that serves to create the demand 

for sales 

Selling facilities of all kinds 
The entire delivery process, together with any storage, warehousing or 

handling costs incident to the sale 
The functions of credit approval and collection 

You need to analyze all costs in terms of the type of selling you do. You 
should seek at least the costs and profit incident to each type of sales. And 
seek these other facts: 

The pricing policy that will come from such analysis (possibly different 
territories require different scales; various classes of consumers need dif- 
ferent prices) 

Cost of sales by territorial divisions, branches, or field locations; type of 
customer served; method of selling employed, dealers or jobbers vs. direct 
sales to consumers 

Costs of sales for specific products 

Unprofitable customers (seek a better price for such distribution, or make 
continuance of such sales a house policy comparable to advertising or 
goodwill promotion) 

The assembly of costs by type of selling should be fair to all classes. That 
is simple if distribution costs can be directly charged to individual sales clas- 
sifications. But where that is not readily possible, a fair system of apportion- 
ment must be found. That can be based upon detailed analysis of all costs in 
behalf of all services or functions. 

A great many studies have been made of methods of allocating costs for all 
types of distribution costs. If you want details on the subject, get particularly, 
from the Federal Trade Commission at Washington, "Case Studies in Dis- 
tribution Cost Accounting for Manufacturing and Wholesaling." Study with 
your CPA its detailed experiences in the allocation of 

Sales supervision and sales office expenses 
Compensation of sales representatives 
Advertising costs 
Warehousing costs 
Stock handling costs 
Local delivery expense* 



286 HOW TO RUN A SMALL BUSINESS 

Use of costs in handling ordinary 
Credit and collections expenses 
General and administrative expenses 

Be sure you seek full analysis of salesmen's costs. They should be recorded 
in detail so as to determine justification of the expense through 

Elimination of backtracking and useless traveling 

Comparison with calls budgeted 

Relation of sales to calls 

Careful scrutiny of the reasonableness of the expense item 

Comparison with budget 

Comparison of cost to income produced 



What to look for in your cost studies 



Elimination of unprofitable sales is not the only method or the most desir- 
able method for dealing with unprofitable business. Here are some of the 
policies (all available by good distribution cost analysis, readily installed for 
you by your CPA) for converting relatively unprofitable commodities into 
sources of profit: 

Simplify the line. Reduce the number of sizes, styles, qualities, and price 
lines. Simplification may result not only in reducing distribution costs, but 
also in increasing sales, by permitting concentration of advertising, selling, 
styling, and design on a smaller number of items. One knitting mill, for 
example, sharply reduced its storage costs and inventory losses by restricting 
the variety of articles offered for sale and attributed a rapid increase in 
sales to that policy. 

Repackage the product. A change in the package may reduce the direct costs 
of packing, and the new container may make possible reductions in trans- 
portation, storage, and handling costs. A new package may also influence 
the volume of sales. 

Increase or decrease the amount of advertising and promotion work. 
Whether it would be profitable to increase or decrease advertising depends 
on such factors as the effect of advertising on volume of sales and the effect 
of the volume of sales on unit production and distribution costs. 

Decrease the price. Sometimes, it may actually pay to reduce the price of 
unprofitable commodities. When consumer demand is so elastic that a 
small reduction in price leads to a substantial increase in sales, the result 
may be a greater excess of dollar gross margin over distribution costs than 
the net contribution of the commodity at the old price. This may come 
about as the result of both an increase in the unit of order with a reduction 
in costs and an increase in total sales sufficient to at least counterbalance 
the loss of gross margin per unit of sale that follows the price reduction. 

Increase the price. Where an increase in price may lead to only a small reduc- 
tion in sales, it may be possible to raise the price in order to recover the loss 



HOW TO OPERATE A PLANT PROFITABLY 287 

on unprofitable products. This would be true if the increase in dollar gross 
margin would exceed the increase in per unit cost of production and dis- 
tribution that might result from the lower volume or the smaller unit orders. 

Many possibilities also exist for minimizing the losses resulting from orders 
that are relatively unprofitable because of their small size. Some of these 
are 

Devise special routine for handling small orders. One electrical manufac- 
turer, for example, uses only about 25 per cent of the usual clerical rou- 
tine in handling small orders 

Reduce services offered on small orders, such as special storage, free ac- 
ceptance of returns, and repair services 

Minimize broken-package sales by reducing the original package unit, by 
employing package units of several different sizes, or by developing 
special-assortment packages for filling small orders 

Make a special handling charge for all orders below a minimum size 

Employ quantity discounts or increase present quantity discounts with the 
size of the order. Quantity discounts must, of course, be in line with 
cost differentials 

Establish a minimum size order that will be handled 

Offer bonus to salesmen for orders above a certain size, or penalize sales- 
ment for orders below a certain size 

Turn small orders over to jobbers, brokers, or agents 

Turn unprofitable customers into profitable ones by directing salesmen to 
call on them less frequently, or to solicit by telephone 

Substitute mail-order solicitation for personal calls on a number of custom- 
ers of certain classes 

Minimize the losses resulting from small orders, such as the development 
of special-assortment packages, which do away with broken-package sales 

How you can exploit undeveloped profit possibilities 

Salesmen usually send in a continuous flow of criticisms of present prod- 
ucts, suggestions or demands for improvements, and requests for new prod- 
ucts. Maintain two files of all such material one labeled "Improvements,** 
the other "New Products." Then consult both at regular intervals par- 
ticularly when considering changes in your product. 

Encourage your foremen and factory workers to submit ideas and sugges- 
tions for new products and production economies. Reward those who make 
suggestions that are adopted. 

Give someone in your organization specific responsibility for keeping watch 
for suitable additions to your line and reporting his findings or suggestions at 
regular intervals. 

Study a mailing list catalogue for classifications to which you should be 



288 HOW TO RUN A SMALL BUSINESS 

able to sell your product but have not been cultivating. Buy or prepare lists 
of such customers for each of your salesmen. Furnish special sales literature 
for each market if your standard catalogues or bulletins do not meet the needs 
of the new markets. 

When an order is received from an unusual source, find out why your 
product was purchased. The information may disclose a market for your 
product or an application of it that had not occurred to you. 

If your competitors publish lists of users of their products, study them 
closely for suggestions of classes of prospects or uses for your product which 
you have been overlooking in your sales work. 

Someone in your organization should carefully read the publications of 
your trade or industry for news items concerning 

New businesses in any of your markets to add to your prospect list 
Personnel changes in firms already on your prospect list 
News concerning competitors product announcements, advertising plans, 
merchandising plans, new salesmen, distributor appointments, organiza- 
tion changes, new facilities 

Keep up an analysis of the parts or processes connected with your product 
to disclose any which, though needlessly expensive, you are using because 
"that's the way we have always done it." Be sure you are always investigating 
money-saving possibilities of "substitute" materials which recent research has 
developed. Effective developments include such economies as 

"Metalizing" to salvage metal parts damaged in production or handling 
Use of substitute materials, plastics, moldable plywoods, vitreous enameled 
plywoods, Fiberglas, silver, low-tin babbitt metals, hard-coated softer 
steels 

Simplified, "streamlined" packaging, minimizing the use of metal and mak- 
ing use of the new climate-resistant wrappings, adhesives, and seals 

Product study also includes checking for elimination of "gadgets" which 
add to the manufacturing cost of the product but contribute little to its actual 
value; for example 

Finish, exterior or interior, more expensive than necessary 

A tendency to grow needlessly elaborate in packaging. Restudy to see if it 

can be simplified and made less expensive without loss of protection 
"Gingerbread" that can be eliminated 
"Accessories" that are of value as selling points and are actually rarely or 

never used by purchasers 



12. HOW TO MAKE PROFITS IN WHOLESALING 

How can wholesalers make money today? 

What steps should they take to improve the competitive status of their retail 
outlets? What steps can reduce the expenses of handling a larger volume of 
goods? 

How can they protect their gross-margin rates? A most important aid is 
in a Department of Commerce booklet listed in Chap. 14. Much of the mate- 
rial contained here is from Department studies. 

One step toward profits is in the closer relation that wholesalers have estab- 
lished with their retail dealers. They have done this to assure themselves they 
can push their goods through to the ultimate consumer. To do this 

Wholesalers merchandise their controlled brands more aggressively. They 
have an active program of dealer aids, cooperative advertising, and com- 
petitive retail pricing policies. The progressive merchandising of con- 
trolled-label goods represents an attack on the problem of declining gross 
margins. It tends to improve the competitive position of the wholesaler- 
retailer combination. 

They get better pricing policies. They help retailers to compete with the 
chains as regards prices. At the same time they assure themselves an 
adequate average gross margin. This means following the leader-mer- 
chandising principle, with greatly varying gross-margin rates in different 
lines, and still ensuring an adequate dollar gross margin on the entire 
volume of business. 

Why cost control /$ so necessary in wholesaling 

In order to operate successfully, it has been necessary for the wholesaler to 
introduce a highly effective system of cost control. Customer and product 
control ranks high. 

All-important, because of narrowing gross margins, increasing expense 
levels, the prevalence of leader merchandising, and the increased merchandis- 
ing of controlled brands, is the control over salesmen. The methods used 
are 

Check of sales and margin analysis. Some wholesalers check up weekly on 
the gross-margin rates by departments that is, sales volume secured by 
each salesman in the various departments and by classes or brands. 

289 



290 HOW TO RUN A SMALL BUSINESS 

Some check the dollar gross margin of each salesman, minus direct ex- 
penses for which he is responsible, as a means of finding his effective- 
ness. 

Records of the total or departmental sales to each customer. These also 
help in evaluating the salesmen's efforts. 

Closer control over the credit-granting powers and the collection activities 
of salesmen. Wholesalers have sought to overcome the weaknesses of 
salesmen in credit and collection work. They use records which disclose 
current conditions in the outstanding accounts of the salesmen's cus- 
tomers. These policies and more stringent credit have reduced accounts 
receivable and bad-debt losses. 

Methods of compensating salesmen. These are closely related to cost con- 
trol. More and more wholesalers are finding a commission based 
on dollar gross margin to be more satisfactory. Even the gross-margin 
basis may not provide a sufficient incentive to salesmen. Adjustments 
have to be made, such as extra rewards for expense reductions 
and increased volume, or deductions for overdue accounts and price 
shadings. 

Boldness in customer selection not based on the matter of sales volume 
alone. Net profits are a function of two variables dollar gross margins 
and dollar operating expenses. They may be changed by a shift in either 
or both of the variables. An increase in net profits can be effected by 
eliminating unprofitable customers, even though such a move reduces the 
total sales volume. Net profit position is often improved. Wholesalers 
can save in dollar operating expense an amount greater than the dollar 
gross margin they give up. 

Turning unprofitable customers into profitable ones by the method and 
adoption of the policy of offering inducements to the retailer who in- 
creases his order size. This is important; it cuts credit delivery, and sell- 
ing expenses. 

Appraisal of the relative profitability of brands based on two factors the 
expense of handling the given brand, and the dollar gross margin con- 
tributed by it. Wholesalers are prone to judge the profitability of brand 
groups on gross-margin rates. They may neglect the contribution 
the brand group makes to the net profits of the business. A brand 
may carry a high gross-margin rate. But, because of small sales 
volume, it contributes little to the dollar gross margin of the business. 
On the other hand, a brand may have a low gross-margin rate. But, 
because of large sales volume, it contributes a satisfactory amount of 
dollar gross margin. It is necessary to look beyond the dollar gross 
margin to determine the relative profitability of handling different 
brand groups. 

A system of inventory control to weed out the slow-moving items, prevent 
"out of stocks," establish optimum purchase quantities, and achieve a 
high rate of turnover. 



HOW TO MAKE PROFITS IN WHOLESALING 291 

Constant analysis of sales proportions, gross-margin rates, dollar gross 
margins, and expenses, by departments. 



Planning physical operations that reduce handling costs 

: Examining physical operations that reduce handling costs has growing sig- 
nificance. That ensures 

Working arrangements with the retailer to increase average order size, 
reduce selling efforts, and establish regular schedules for sales calls and 
deliveries 

All necessary moves to reduce the expense of the physical handling 

Much of attention to reduce the clerical and office expense and facilitate 
operations throughout the business, especially in the warehouse. These 
are designed to ensure a smooth flow of work and an elimination of dup- 
licated steps. They are integrated with the selling, warehousing, delivery, 
and other operations of the business 

Control by adoption of the "selected line" principle to the assembly of 
orders in the warehouse. This involves a separation of the function of 
order handling from that of storage and the establishment of a route 
which warehousemen follow in assembling the goods 

Far-reaching changes in internal physical operations, to avoid assembling 
goods from all over the warehouse. This allows the order-assembly, re- 
ceiving, and shipping operations to proceed in a less haphazard manner. 
Wholesalers now try to keep separate the functions of storage and order 
assembly. They have systematized the operation of the assembly func- 
tion by setting up an assembly line. Many wholesalers who do not have 
the proper facilities have been able to accomplish expense savings by 
setting up semiassembly lines 

Control of delivery expenses to find: what are the most suitable kinds, 
sizes, and types of equipment? Is contract trucking or owned trucking 
the more economical? Does the coordination of sales and delivery routes 
permit speedy deliveries to customers? 

Planning for the loading of trucks and routing the stops in a logical man- 
ner. This arranges for a regular schedule of deliveries, rolling fully 
loaded trucks over as much of the route as possible 

Studies to find buildings designed to meet the needs of wholesalers. They 
have made it possible to reduce expenses all along the line receiving 
expenses, order-assembly expenses, and shipping expenses. The move to 
a new building may even result in the reduction of some of the occu- 
pancy expenses 

Sometimes wholesalers who cover extensive trading areas set up branch 
houses, because of the economy of locating the bulk-breaking point as near 
as possible to the retail store (carload-lot freight rates are lower than less- 



292 HOW TO RUN A SMALL BUSINESS 

than-carload rates). This gives lower travel expense, closer contact with 
customers, and speedier deliveries. 

Branches are set up so that total operating expenses are at a minimum. 
The spacing of branches affects the operating expenses. With branches 
located close to each other, delivery and travel expenses are decreased, 
while the expenses of maintaining branches are increased. Conversely, with 
fewer branches located at greater distances from each other, delivery and 
travel expenses are increased, while the branch maintenance expenses are 
decreased. What is the optimum number of branches and spacing that will 
result in the lowest total expense? Note these points: 

Better trucks and modern highways make it economical to deliver to greater 
distances than before 

With more economical delivery, the minimum total expense can now be 
achieved by spacing branches at greater distances from each other. The 
optimum spacing is, of course, an individual problem for each wholesaler 

The increasing importance of moving merchandise and the declining im- 
portance of storing merchandise have affected the number of branch 
houses and their location as well as on the design of warehouses 

The lengthening of economical delivery distances has led to an effort to 
find the point at which the net advantage now lies between increased 
expenses due to the investment in a number of branches and the diffi- 
culties in supervising them; and decreased delivery and selling expenses, 
due to location of branches closer to customers 

The savings in expense and advantages of centralization resulting from the 
elimination of branches may more than offset the additional expenses"' 
due to greater delivery distances 

Know the territories in which you can operate profitably 

It is important that the wholesaler know what territory he can serve profit- 
ably. He uses these guideposts: 

If he extends his territory too widely he will probably increase his operating | 
cost out of proportion to the volume he can hope to obtain. That dissi- 
pates profits realized on the business enjoyed in territory which he can 
more legitimately serve 

If he does not extend enough, he may forfeit desirable trade 

A wholesaler's legitimate market embraces all territory in which he can 
hope to do business on a profitable basis. The boundaries may be closely , 
approximated by comparing the cost of serving each questionable district : 
with the gross profit to be secured from it < 

If he chooses to serve other than his legitimate market, he might do it by 
different sales methods 



HOW TO MAKE PROFITS IN WHOLESALING 293 

It usually costs as much to prepare orders and keep records for customers 
in one territory as it does for customers in another. How does the wholesaler 
go about the study to find which customers are profitable? 

All costs, other than selling and delivery, can be charged to outgoing mer- 
chandise on an equal basis, regardless of destination. This burdens all 
merchandise assembled for shipment with what may be styled a constant 
cost 

To determine whether a given area in his market is profitable, the whole- 
saler need only add selling and delivery costs for the area to his constant 
cost. He then compares the result with the gross profit which the area 
yields 

The wholesaler should continually strive to make each section of his market 
yield the maximum desirable trade, at a cost which makes operations therein 
profitable. Cost should be so controlled and activities so adjusted as to make 
as large as possible the territory that can be served without loss. Some ques- 
tionable territories may require special treatment. 

Before opening a new territory, a wholesaler should first 

Have the territory surveyed to ascertain the prices at which his type of 
merchandise is selling in that territory 

Find out what his direct competition would be, where it is located, and 
what its possibilities are for rendering a better service 

Find out whether competitors operate a voluntary group or whether they 
have built up a big following on their own brands, whether there is 
a retailer-owned wholesale house in the territory, and all such informa- 
tion 

Arrive at a determination as to the potential volume of business he feels 
he can secure from the territory 

Knowing his constant costs and his selling costs, add to these two items his 
delivery cost in order to arrive at what he can consider will be his cost 
of operating in this new territory 

Wow mail-order so/es con increase profit* 

The market can often be appreciably extended by employing specialized 
methods of merchandising. They reach certain areas which cannot be served 
in the regular way without loss. An example of this type of operation is 
found in mail-order wholesaling. These suggestions may he helpful to whole- 
salers entering the mail-order business. 

In no case should a customer who is contacted by a salesman' be solicited 

by mail 
In no case should a mail-order customer be directly competitive with a good 

customer who is served through a salesman 



294 HOW TO RUN A SMALL BUSINESS 

The mail-order customer should pay the cost of delivery 

If feasible, terms should be net, cash in advance 

The price sheet is the wholesaler's only contact with the mail-order cus- 
tomer. It should therefore contain all terms, allowances, and discounts 
in unmistakable, clear language. It should also list all items offered to 
mail-order customers 

Price sheets should be marked "confidential" and any customer using them 
in a manner injurious to the wholesaler should be removed from the 
mailing list 

Every price on the sheet should remain in effect until either an amendment 
or a new sheet is mailed out 

A prospective customer should be sent price sheets for a reasonable period. 
At the end of 3 months he should be sent a friendly letter inquiring the reason 
for not receiving any business, and be informed that he will be continued on 
the mailing list for a further limited period. Perhaps he has just failed to give 
any attention to the price sheets that have been sent him, and he is requested 
to look them over in hopes that he will now find after considering them care- 
fully that he is in a position to favor the wholesaler with a portion of his 
business. Then, after a further period, he should be sent a final notice that 
in view of the fact that he does not appear to find it profitable to buy from 
the wholesaler, his name will be taken off the mailing list at the end of 30 
days. If at the end of that time he has not purchased, his name should be 
struck from the list. 

Cash-and-carry outlets can expand sales volume 

Many wholesalers have found the cash-and-carry branch a convenient 
medium. The branch may enlarge their market, expand their volume, and 
increase their profits. Guideposts to operation are 

Great care should be exercised in the selection of locations for cash-and- 
carry branches 

If possible, branches should be placed at points where they will draw the 
maximum trade away from competitors and as little as possible from the 
parent house. This can best be achieved by placing them in localities 
outside the area covered by the wholesaler's own salesmen 

In order to determine the profitableness of a cash-and-carry branch, the 
wholesaler should make a proper charge for every service rendered the 
branch 

The cash-and-carry branch is most effective when it is geared to handle 
only fast-moving items which can be stocked in a smajl area and readily 
assembled for customers 

It should not attempt to stock every item carried by the parent house. In 
no case where the branch is located in the area covered by salesman 



HOW TO MAKE PROFITS IN WHOLESALING 295 

should it carry the long-margin items for which the wholesaler has the 
exclusive agency and on which he relies for much of his profit 

In every case possible, merchandise should be drop-shipped from the 
manufacturer to the branch. This eliminates several handlings and 
greatly reduces cost 

The prices quoted by a cash-and-carry branch should be high enough to 
cover all cost plus a fair profit. Any branch which constantly shows a 
loss should be closed at once 

When a new branch is opened in a locality not covered by salesmen, a cir- 
cular should be sent to every prospective customer in the region. It 
should remind them of the opportunity offered to secure staple merchan- 
dise at low prices. Subsequently, a second circular should be sent to the 
retailers in the vicinity who are not patronizing the branch 

How you can help retailers sell your products 

What can the wholesaler do to help the retailer? 

First, he can aid in anticipating demand. Since he covers many outlets in 
the market, he knows which items consumers are buying and which they are 
not. He therefore is in a position to advise his retailers as to products for 
which demand is growing. 

On the other hand, by reviewing the orders he receives he can sense when 
the demand for individual items is decreasing and can advise the retailers to 
close out their stocks of such items before the goods must be sold at a loss. 

Other aids are 

He can advise the retailer if the supply of a commodity is dwindling or 
increasing 

He knows when prices on given items are likely to advance or decline. He 
can indicate to the retailer when it is wise to increase or decrease pur- 
chases of the items 

He can advise and help his customers with their merchandising and oper- 
ating problems. His salesmen visit many stores and observe the good 
practices of the efficient merchants. The salesmen can then pass on these 
practices to other retailers in a position to adopt them 

He can help customers to remodel their stores, put in good accounting 
systems, establish good credit systems, etc. 

He often can obtain for his retailers accounting forms, store fixtures, adver- 
tising programs, and other benefits at far less cost than they could be 
obtained for by the retailers 

Sometimes he can maintain showrooms where retailers can bring their 
customers to examine goods and installations. Electrical appliance re- 
tailers can take their customers to their wholesaler's establishment to' 
examine items which the retailers do not have in stock 

He can interest retailers in improving their merchandising methods. In 



296 HOW TO RUN A SMALL BUSINESS 

the process, store fronts are often painted, old counters replaced by open 
displays, interiors decorated, and advertising campaigns inaugurated 

He can give retailers price concessions on certain items to meet competi- 
tion on specials 

He can extend credit to his customers in proportion to their capitalization 
and managerial ability. Without this financial assistance many retailers 
could not have entered business. Many others could not have remained 
in business after they were established 

He can work out plans by which insolvent retailers can regain a solvent 
status 

When floods, earthquakes, fires, or other disasters destroy retail establish- 
ments, he can often advance whatever aid is necessary to reinstate his 
good customers in business 

If the wholesaler is efficient, he has the right merchandise at the right time 
and at the right price. His warehouse is a stock room from which the retailer 
can draw goods at the time needed and in the quantities required. This is 
of extreme importance to retailers in some trades. It helps this way: 

In most lines, if the retailers bought directly from the manufacturers, they 
would have to buy in large quantities. That would necessitate the main- 
tenance of stock rooms larger than their retail stores 

Then, too, the nature of the merchandise would add to the cost and diffi- 
culty of storing. Some products are heavy; some are light and bulky; 
some deteriorate rapidly; some are odoriferous; some absorb moisture; 
some are spoiled by the proximity of others. These commodity character- 
istics can make specialized storage expensive. 

Without this aid, even very small retail merchants would need greatly ex- 
panded capital to conduct their businesses. This would prevent the entry 
into business of many persons of modest means 

This system usually offers prompt delivery on small quantities. Then the 
retailer is not so likely to find himself with substantial quantities of un- 
known goods which will not sell. He may order unknown goods in 
"sample" quantities until the demand for them has been established. 
This enables him to keep his stock fresh and clean, and hold losses from 
spoilage to a minimum 

Trading with the wholesaler instead of directly with the manufacturers 
reduces to a small chore the retailer's task of buying. It enables him to devote 
most of his energy to selling. It eliminates: 

Need to review, file, and keep posted on catalogues, price lists, price-change 
sheets, and sales literature issued by the hundreds of manufacturers with 
whom practically every retailer deals 

Direct buying which makes it imperative that the retailer receive, interview, 
and place orders with scores of manufacturers 1 salesmen 

Direct buying which would materially increase the retailer's accounting 



HOW TO MAKE PROFITS IN WHOLESALING 297 

cost. Instead of maintaining accounts with a few sources of supply, he 
would have to maintain them with many times the number of individual 
manufacturers 

Trouble with adjustments for shortages and errors in invoicing. They are 
often made on the return call of the wholesaler's salesman. No cor- 
respondence is involved. Where goods are procured directly from the 
manufacturer, adjustments usually have to be made by correspondence, 

increasing clerical cost and loss of time 



One way /$ fo help the retailer fix a pricing policy 

One area in which the independent retailer needs help is in his pricing. 
The wholesaler often has the job of teaching the retailers to do this: 

Permit leader merchandising and varying markups on individual items to 

meet competition 
Get varying markups to result in a general average over-all profit rate that 

will enable the retailer to earn a satisfacftry return 
Get comparisons to emphasize the fact that high-margin products may, 

and often do, provide but a small part of the gross profit of the business. 

Items carrying a small margin may provide a large part of the gross 

profit because of their large volume of sales 
Show how varying margins for various items, some low and some high, will 

average out so as to realize a satisfactory return. Thus, the retailer's 

pricing problem will be greatly simplified 

All these also point toward a lowering of the wholesaler's operating ex- 
penses. He can be assured of a predictable volume for his goods. It can 
lower his warehouse and delivery expenses. He can know the nature, quan- 
tity, and frequency of retailer's orders and can plan operations. It reduces 
selling expenses because the retailer gives regular, predictable orders. This 
reduces selling time and cost. It also reduces office expense, billing, record- 
ing, and shipping because of larger orders, less frequently given. 

Many independent wholesalers have set up a procedure for assisting re- 
tailers in pricing their merchandise. Most successful plans urge retailers to ] 
gather this cost data: 

Gross margin as a percentage of sales by departments. The gross-margin 
percentage for any item or group of items indicates their relative profit- 
ability without reference to the volume of sales 

Departmental or item sales as a percentage of total sales. This provides 
information on the importance of the department or item in the total 
sales of the company. It is often found that items showing high gross 
margins are a small proportion of total sales 

Dollar gross margins for each line or department as a percentage of total 



298 HOW TO RUN A SMALL BUSINESS 

dollar gross margin. This shows what percentage of total gross margin 
dollars is provided by various items. This is the figure of greatest im- 
portance 

Good accounting and inventory method* are indispensable 
in wholesaler control 

All wholesalers are constantly concerned with the dollar margin that will 
be added or eliminated as a result of a lot of the procedure so far discussed; 
for example 

Would the business be more profitable with or without a certain group of 

customers? 
Would the business be more profitable with or without a certain group of 

brands or commodity departments? 
Would it be profitable to build a new warehouse building? 
Would the business be more profitable with or without certain additional 

(or presently covered) territories? 
Would it be more profitable to purchase with the objective of achieving 

rapid turnover or would there be a net advantage in larger purchase 

quantities? 

Annual statements of the results of operations and of financial position are 
of historical interest. But they are not useful in controlling current operations. 

Current control demands that far greater detail be available in time as a 
guide to management. Currently required, for example, are sales and gross- 
margin analyses for use in 

Setting gross-margin rates (prices) on individual items to obtain a satisfac- 
tory average gross margin for the business as a whole 

Determining the most "profitable" commodities, customers, and brands, 
from the standpoint of dollar gross margin 

Disclosing and eliminating slow-moving and duplicate items and brands 

Controlling salesmen by revealing their sales and gross margin attainments 
(by commodity departments, customers, and brands) 

In all methods of making either sales or gross-margin analyses there are 
certain essential steps. These are 

"Costing" of each invoice to determine cost of goods and gross margins by 
items or by invoice totals 

Transcription and classification of these invoice data by departments, sales- 
men, or customers 

Accumulation of totals and summarization of results , 

A simple way to get these data is the columnar-analysis method of making 
sales and margin analyses, which yields sales, cost of goods sold, and gross 



HOW TO MAKE PROMTS IN WHOLESALING 299 

margins of individual commodities or departments. The initial step is to "cost" 
the invoices. The current cost of each item is entered on the office copy of 
the invoice and extended to obtain the cost of goods. Then it is subtracted 
from the extended selling price to obtain the gross margin for the item. 

Some wholesalers enter only the cost extensions on the invoices. The total 
cost of goods, and the gross margin (for the invoice) are usually obtained by 
adding the figures for individual items. 

Some wholesalers "cost" each item, but accumulate the cost of goods for 
the entire invoice. They compute the gross margin only for the invoice as a 
whole. They do not make sales and gross-margin analyses for each commod- 
ity department, but do make them for salesmen and for the entire business. 

Where the wholesaler's only interest is in total sales and gross margins for 
the house and for each salesman, the invoices are first sorted according to 
salesmen. 

If sales and margins by individual commodity departments are desired 
(either by individual salesmen or in total for the house), a re-sorting of in- 
voice lines by commodity departments is necessary. 

One common method is to use a columnar analysis sheet with a column 
for each department, and to post the amounts of the invoice lines, one at a 
time, into appropriate columns. The amounts in these columns are totaled 
daily, semiweekly, or weekly, and transferred to summary sheets. If a de- 
partmental analysis by salesmen, is desired, the first step is to sort the invoices 
according to salesmen, and then to use a separate columnar sheet for each 
salesman. The sheets for the salesmen are totaled to secure house totals. 

Just as important as the gross-margin analysis is the real finding of the 
profit and loss by customers, commodities, brands, departments, and terri- 
tories. This takes an allocation of all the expenses of operations. 

Because of the opportunity for increasing profits by comparisons of the 
costs and revenues associated with small segments of the wholesaler's sales 
volume, methods have been developed by the U. S. Department of Commerce 
for allocating unit costs to individual customers and to commodity depart- 
ments or lines. 

Your CPA can readily install these for you with the aid of the booklets 
issued by the Department. 

How fo gef good inventory control 

The low-gross-margin, high-turnover merchandising principle makes it 
necessary for the wholesaler to have more and better current information 
about the status of his inventory, for these reasons: 

He must determine how much dollar sales and how much dollar gross 
margin he is obtaining from his various commodity departments, items, 



300 HOW TO RUN A SMALL BUSINESS 

and brands. He needs that before he can successfully merchandise goods 
through the retail outlets and obtain a satisfactory dollar gross margin 
for both the retailer and himself 

The ability of the wholesaler to operate on a low-cost-per-unit basis re- 
quires methods of analyzing and controlling current expenses, as well as 
adjustments in the methods of physical operation 

The innumerable policy decisions involve a choice of alternatives. A wise 
choice depends upon a comparison of alternative costs and revenues 

The inventory is always a large proportion of capital. Its condition affects 
the efficiency with which operations can be performed. Therefore, every 
wholesaler uses some kind of inventory control. 

How does inventory control help the wholesaler to maintain his merchan- 
dise in a condition of maximum usefulness? How does this condition of maxi- 
mum usefulness affect the efficiency with which operations can be performed? 
A system of inventory control makes it easier 

To maintain an adequate supply of every item. Data provided by the in- 
ventory control are used by the buyer to determine how much to buy and 
when to buy. The system calls attention to the need for buying when 
each item reaches the minimum level of stock that has been set 

To avoid an oversupply of any item, whether staple or seasonal. The pur- 
pose is to increase the rate of turnover. Inventory control discloses slow- 
moving items and permits reductions of purchase quantities; thus mini- 
mum stocks can be set at lower levels 

To avoid carrying a stock of items for which there is no active demand. 
The inventory control, by showing the rate of movement, discloses those 
items for which there is no active demand, or for which the demand has 
changed 

To detect stock losses by furnishing a "book" inventory figure. The inven- 
tory control indicates how much stock should be on hand. By checking 
these figures with a physical count the exact amount of stock losses is 
disclosed and data on which to base investigation are provided 

Each wholesaler must decide with his CPA what system of inventory con- 
trol will be most satisfactory for his business. 

While there are many variations of detail, the inventory-control systems 
fall in three classes: (1) observation methods, (2) periodic stock-count 
methods, and (3) perpetual inventory control. 

The ideal inventory-control system furnishes a measure of the actual 
amount of stock on hand of each item, and its value, at any time. It also 
shows the rate of movement, or sales, of each item. 

In using any type of system the problem of the wholesaler is to obtain 
accurate information currently. With some of the simpler systems, it is 
scarcely possible to do so. 



HOW TO MAKE PROFITS IN WHOLESALING 301 

The advantages of the three inventory methods can be detailed this way: 

1. The observation method is the simplest and least expensive. As a gen- 
eral rule, it is the least satisfactory. Heavy reliance is placed on judgment 
and memory. There is no record of the rate of movement or of the 
quantity on hand of any given item. Stock standards, such as minimum- 
and maximum-stock points, ordering points, and economical purchase 
quantities cannot be set. In using the observation method there are no 
data on which to base such standards. It is not really an inventory 
control. 

2. The stock-count method is an improvement over the observation 
method. It furnishes some indication of the rate of movement, as well 
as the quantity on hand. It also furnishes a written record of the whole- 
saler's experience with any item. It is relatively simple, inexpensive, 
and flexible in its application. The opportunity for error, the lack of 
data between counts, and concealed errors in the calculated rate of 
movement are the principal disadvantages. 

3. The perpetual-inventory-control method furnishes the most complete 
information. It does cost something to operate. But the cost is moderate 
in view of the controls it gives. 

With the perpetual methods of inventory control a detailed record is kept 
(in units) of every item of merchandise handled. Values may also be deter- 
mined at any time by multiplying the number of units on hand by the aver- 
age cost or other cost per unit. 

The data for each item in stock supply a continuous record of purchases, 
receipts, sales, and returns. They also give a continuous balance of the quan- 
tity on hand, and also values, if desired. Thus, a perpetual inventory control 
provides current data of stock on hand, without the necessity of making a 
physical count, and current data on the rate of movement, for each item. 

The rate of commodity movement is obtained by posting daily sales, in 
units, from customer invoices. A continuous record of the stock on hand of 
each item is obtained by means of the following formula: The previous in- 
ventory (units), plus receipts (units), minus sales (units), equals the quan- 
tity on hand (units). This "book" inventory figure represents the quantity 
which should be on hand. These data are checked periodically by a physical 
inventory. Differences are investigated. 

A perpetual-inventory-control system makes it possible to establish certain 
standards for each item in stock useful in controlling inventory and purchas- 
ing activities. These standards are 

Order points, which indicate when to buy 

Maximum- and minimum-stock standards, which are safeguards against 

"out-of -stocks" and "overstocks" 
Standard-order quantities, which indicate how much to buy 



302 HOW TO RUN A SMALL BUSINESS . 

The order point will be based on the average time lapse that occurs be- 
tween purchase and receipt of the merchandise and on the maximum rate 
of sales during that interval. 

Sufficient stock must be in the warehouse at the time of ordering to avoid 
the occurrence of out-of-stocks before the new goods are received. The mini- 
mum stock, which represents a margin of safety against out-of-stocks, can be 
computed by subtracting the average sales during the period of time required 
to fill an order; from the quantity established as the ordering point. The 
maximum quantity of stock, of course, is the maximum old stock expected 
to be on hand when a new shipment is received, plus the standard-order 
quantity. 

Wholesalers use perpetual inventory to reduce the amount of inventory 
carried. That results in opportunity for expense reduction. Purchasing fast- 
moving merchandise in smaller and smaller quantities in order to achieve a 
higher turnover rate may merely result in increased buying, receiving, and 
other expenses. It may give higher cost of goods, and increased risk of out- 
of-stocks, without compensating advantages. To reduce expenses and to in- 
crease profits, as a result of higher rates of merchandise turnover, this specific 
action is required : 

A reduction in the amount of space used for storing inventory or a reduc- 
tion in the financial charges on the investment in inventory (interest, 
insurance, taxes, etc.) Since space and financial charges are semifixed 
costs, they can be reduced, if at all, only as a result of significant reduc- 
tions in inventory 

An elimination of slow-moving items in stock and replacement with other 
goods having a higher turnover rate. Since the dollar costs of financing 
and storing the total inventory will be little affected by such a course, 
the increase in dollar gross margin should leave larger net profits 

An increase in sales volume without proportionate increase in inventory. 
That will result in obtaining a larger dollar gross margin without in- 
creasing the finance and storage expenses associated with inventory 

The operation of an inventory-control system often discloses many slow- 
moving and duplicated items which can profitably be eliminated. An ex- 
pense reduction, however, does not always follow automatically. The ex- 
penses of financing and storing merchandise in stock are semifixed in char- 
acter. A reduction in the amount of stock may furnish an opportunity for 
reducing expenses. But management must act to take advantage of the 
opportunity. 



13. HOW TO OPERATE A BUSINESS OFFICE 
MOST EFFICIENTLY 

Be sure your building is the best you can get for your needs and your 
pocketbook. Locate where it will do you the most good. This means that 
you should 

Be accessible to transportation systems for employees and customers 
Be near to customers and clients served, your bank, post office, warehouse, 
and factory, and sources of labor and material supply 

And then check 

Restaurants in the immediate vicinity? 

Neighborhood free from excessive dirt and noise? 

Similar business firms in same locality who may be desirable? 

Neighborhood such that employees have no fear passing through it? 

Check to see that your activities are not affected by local zoning restrictions 
and building code. You ought to know the comparative cost per net square 
foot of usable space, giving due weight to various service costs, against what 
other buildings can offer you. Compare the facilities of the building with 
what others have to offer, particularly 

Services provided by the building elevator, heat, sanitation, janitor serv- 
ice, light, toilets, window shades, fire protection 

Floor available, considering elevator usage 

Exposure available, especially if east or north light is needed for your work 

Space available for possible expansion. Consider securing options on more 
space or leasing more space than you require at present. You can sublet 
part of your space on short-term basis until the need for additional space 
arises 

Shape of office space available rectangular shape will require much less 
walking than a long, narrow space. Check on height of ceilings 

Number of electric outlets available 

How to lay out an office 

First, consider the space requirements of all equipment. Then find the re- 
quirements for your people and services. Some standards have been evolved 
in practice. They are 

303 



304 HOW TO RUN A SMALL BUSINESS 

Aisles: important ones up to 7 feet; others 3 to 5 feet 

Offices: minimum 9 by 14 feet, with averages of 12 by 15 for one person 
and 12 by 18 for two 

Space required for each individual: an average of 100 square feet per per- 
son, including space for executives and foyers 

Get proper facilities for reception room, conference room, storage, and 
vaults. The reception room should be 10 square feet per person, for the maxi- 
mum number of people who may come at one time, and a minimum size of 50 
square feet. 

Study the need for rest rooms, coatrooms, and any other provisions for 
personal comfort. Be sure the building provides adequate toilet facilities 
one toilet seat for every 15 persons; one washbowl for every 20 persons; 
liquid or powdered soap, individual pull towels or paper towels, and mirrors, 
especially in the women's room. Try to make it provide for adequate drink- 
ing-fountain facilities. 

Seek to allot your natural light, noiseproof rooms, and best ventilation for 
greatest efficiency. Give others artificial light. 

In employing partitions, consider the height and type to be used, based on 
requirements for soundproofing, light requirements, air circulation, movabil- 
ity with office rearrangement, and possible use of walls for business purposes. 

Study the ventilation. Consider the need for equipment to maintain con- 
stant temperature, avoid drafts, and circulate plenty of fresh air. 

Now you can make a layout plan with cardboard templates : 

Place desks and equipment so that the light from windows will be at the 

left of the individual 

Strive for straight-line production for smooth flow of work 
Place those that must meet the public in an accessible spot 
Separate people handling funds, to get maximum control 
Place desks of people doing related work as near to each other as possible 
Bring people frequently communicating with each other close together 
Place executives near the departments they supervise 

Consider the disadvantages of private offices: They complicate the prob- 
lems of ventilation, lighting, and heating; decrease amount of light and air 
for other employees; waste space; are costly to build and equip with furni- 
ture; require additional telephones and buzzers. Use them only when the 
dignity of the position requires it; when they are essential for greater concen- 
tration, or to avoid distraction to other employees by frequent callers. 

Be sure you have adequate lighting in the office. Poor lighting means eye- 
strain and tired and grumbling employees. Fatigue can be reduced by better 
lighting. Compare your existing light with accepted standards by use of a 
light meter. The electric company in your vicinity will aid you willingly in 



HOW TO OPERATE A BUSINESS OFFICE MOST EFFICIENTLY 305 

your study. You ought to know the accepted standards for the light meter 
for office work. They are: ordinary desk work needs 20 foot-candles; close 
work 30 to 50 foot-candles. The quality of artificial lighting is important in 
order to avoid glare and shadows and to increase diffusion. Study available 
equipment to secure fixtures that will properly direct the light. Glass-top or 
highly polished desks cause glare. Blotters and desk pads will absorb light 
and tone down glare. Avoid too great contrast of light in different parts of 
the same room. Consider use of indirect lighting and translucent bowls to 
increase diffusion of light. 

Efficiency of lighting may depend largely on getting maximum reflection 
from ceiling and walls. Flat white is the most satisfactory color for the ceil- 
ing, while flat white paint on the walls may reflect up to 90 per cent. Buff, 
light blue, or green will reflect about 60 per cent. Blue and green paint are 
frequently used for side walls to soften glare and because they make the room 
appear larger. 

Control of lighting fixtures is essential for economy. Use a pull cord or 
other arrangement to permit elimination of light when not needed. Also, 
place notices at strategic places, reminding employees to extinguish lights. 
You will also get economy if 

You keep ceiling and walls clean. (Walls with smooth finish are easier to 
clean than those with a rough finish, but an enamel finish tends to cause 
glare) 

Replace or repair defective reflectors 

Use the proper size of lamp 

Dust lighting equipment regularly 

Clean reflectors and glassware periodically with solution of ammonium 
carbonate and then rinse with warm water 

Think about office noises when you make your layout. Will they seriously 
interfere with the concentration any employee can give to his work? You 
should study ways to reduce noise from office machinery, conversations, and 
outside sources. Isolation of noise-producing equipment in soundproofed 
rooms is advisable. Other ways to reduce noises are 

Silent-type machinery is advisable if it can be obtained 

Partitions and ceilings may be treated with sound-absorbing materials 

Carpet over Ozite cuts foot-traffic noises 

Acoustically treated rooms give lowered noise from voices 

Linoleum and cork floors, linoleum table tops, and muffled telephone bells 

will help eliminate noise 
Oil on doors, drawers, cabinets, swivel chairs, and other equipment will 

lessen noise 

Direct education of persons who talk or dictate too loudly may help con- 
siderably 



306 HOW TO RUN A SMALL BUSINESS 

The best room temperature is 68 to 70 degrees. In considering ventilation, 
partitions that greatly restrict air circulation should be removed, and smoking 
should be confined to private offices and rest rooms. Installation of air condi- 
tioning might be desirable. 



What equipment should you have for your particular office? 

What considerations should lead you to buy equipment or office machinery? 
You should buy new, or even secondhand, equipment only if your studies 
show that it will 

Speed up work 

Simplify record-keeping operations that are enormously complicated 

Economize on office space necessary to handle records or work 

Make your records more durable 

Afford protection in handling of your cash, securities, mail, and other office 
details 

Save the time of executives and office workers 

Make records easier to find 

Make the office more livable particularly in proper ventilation, heating, 
and lighting 

Avoid loss of records through proper filing, stapling, registering, and simi- 
lar procedures 

Make it possible to get your records and statements more quickly through 
accounting, calculating, and similar machines 

Cut down problems in office work by speeding the preparation of complete 
statements 

Sometimes cut down employee costs by use of automatic equipment 

Avoid clogging of your files, as by use of transfer cases 

Permit economical use of supplies by current substitutes for timeworn 
methods 

Cut down bulk in books and in storage space 

Secure permanency of records through photographing and similar repro- 
duction methods 

Effect neatness in record keeping through typewritten rather than hand- 
written records 

Cut down writing space by using machines that space the writing 

Avoid disintegration in records and files by special treatments 

Promote greater accuracy through machine calculation 

Know the job you want to do when you buy equipment. Or else, get an 
expert to show you the economies possible. The advice of office-appliance 
and equipment dealers handling the type of product you want to install is 
often invaluable. Ask them to give you detailed studies of the appliances, 
showing how their installation will affect your operations. 



HOW TO OPERATE A BUSINESS OFFICE MOST EFFICIENTLY 307 

Avoid the normal mistakes made in acquiring office appliances: 

Failure to recognize that specialized help like that of your CPA is some- 
times necessary 

Acquiring equipment that is not of the same standard as other equipment 
in the office lack of uniformity 

Purchasing equipment the use of which, though advantageous, is confined 
to short periods. Machinery is often acquired in the hope that it can be 
used more extensively 

Failure to consider the space available for installation of the equipment 

Failure to consider noise and other working conditions that will result from 
some installations 

Failure to consider personnel problems that may arise as a result of instal- 
lation of automatic equipment 

Failure to use equipment for the purpose for which it was purchased. Too 
often it is bought for one use and then converted to another 

Know what office equipment you have and what it costs to maintain. 

A good idea is to keep a record of each piece of equipment, showing the 
manufacturer, serial number, model, cost, date of purchase, type of work per- 
formed, location, etc. Then provide for recording the maintenance costs, 
perhaps on reverse side of the record card. Show the dates of repairs. 

How fo maintain office equipment at the lowest cosf 

Make sure you do everything to keep office equipment in good condition. 
Here are some normal practices that cut costs : 

Care for seasonal equipment (fans, screens, heaters) . Store them in a dry 

place after thorough cleaning and repairing 
Oil the casters under all chairs at least once a month 
Give varnished surfaces a good cleaning and oiling once a month. Ink will 

generally come out of furniture with linseed oil and wax after moderate 

sandpapering 
Clean linoleum tops weekly with oil, wax, or even sandpaper. Linoleum 

floors should be treated regularly with a thorough scrubbing with soap 

and water and then a rubbing with wax 
Clean your lighting fixtures regularly. Dust them daily 
Ask employees to report defects in desks or equipment quickly so that 

repairs can be made before it is too late 
Investigate the service job offered by all reputable equipment people. They 

will make annual contracts on a reasonable basis even though you did not 

buy the machines from them 

Ask your equipment suppliers for a list of things to do to help keep your 
office machines in good service. They are anxious to have you keep using the 
machines. Make sure employees using machines thoroughly understand how 



308 HOW TO RUN A SMALL BUSINESS 

to operate and care for them. Machines must be serviced by trained mechan- 
ics. They ought to be kept covered when not in use. Give operators these 
points, too: 

Remove all visible dirt, taking care not to unlock springs 

Remove lint from multigraphs, multiliths, addressographs, and other dupli- 
cating machines 

Oil fast-moving machines regularly and carefully; use good grade of 
medium-weight oil, not a light oil 

Change cloth ink pads at least once a month 

Wash ink off rollers when machine is not in use 

Wash impression rollers with soap and water before the ink dries 

Don't try to force too much speed out of machine 

Never force or bang the machine 

Never use cleaning fluid on rubber parts of machines 

Don't allow the motor to idle ; remove plug from wall when machine is not 
in use 

Be sure you understand the operation and care of machines; keep instruc- 
tion book handy 

To get maximum use of your typewriters, make a survey of the extent to 
which the machines are used. A simple time study may be of great value. 
Perhaps you want to make necessary rearrangements to get maximum use 
by- 

Staggering of lunch hours 

Staggering of dictation and typing time 

Sharing of machine by secretaries 

See that typists take good care of their machines. They ought not to pound 
the keys harder than necessary; a smooth rhythmic action is faster and less 
wearing on machine and operator. And other suggested rules to give these 
are 

Do not slam the carriage back 

Never force a movement if something jams 

Pull carriage to one side when erasing to prevent particles from falling 

into machine 

Use at least two sheets in the machine at all times to safeguard the platen 
Keep a felt pad under the machine to absorb vibration and prolong life. 

The supporting desk or table must be firm; fasten machine to support 

if possible 

Keep machines covered at all times when not in use 
Have oiling done by a mechanic (once a week is enough) ; he should oil 

only the carriage rails, using a light-grade oil 
Lift machine at bottom, not by carriage 
Never use force in changing ribbons 
Clean machine thoroughly at the beginning of each day 



HOW TO OPERATE A BUSINESS OFFICE MOST EFFICIENTLY 309 

Keep the typewriter type faces clean at all times. To do that 
Cover the platen and ribbon to avoid damage 
Then place a drop of good solvent on type faces and allow a minute 

or so for it to penetrate 

Now brush carefully, using a brush with soft, firmly fastened bristles 
Avoid brushing particles into other parts of the machine 
Remove any caked particles with a sharp-pointed piece of wood or tooth- 
pick. Never use metal, which will scratch type faces 
Wipe slugs individually with clean, fresh rag 

How to cut your costs for printing, paper, and engraving 

Greatest economy in dealing with printers comes from being familiar with 
the range of work most economically handled by them. Invite bids only from 
printers who are properly equipped. They will ordinarily be able to turn out 
the work at the best price. 

Seek the advice of the printer, before planning a job in detail, as to size, 
style, paper, folding, and mailing. And watch these money -saving ideas: 

To avoid trimming, with resulting waste, know the various standard-size 
papers carried in stock by a printer 

Work out a schedule of low-volume periods at the printer's and print your 
stock forms during this period if you can get a saving 

Work out a schedule to permit you to run several of your jobs as groups on 
larger presses. That may cut costs 

Check the printer for improvements in copy preparation that would help 
him to interpret your desires, permit him to secure better production, and 
eliminate costly corrections 

Weigh the advantages accruing to the job against the cost, whenever you 
consider the use of extra color, tricky layouts, bleed or oversize pages, ex- 
cessive corrections, holding presses, or running into overtime 

Make sure you are receiving the benefit of lower prices that can come with 
increased press runs, simplification of layout of text matter, change in 
size of type, etc. 

Don't pay for rush work that can be avoided by planning in advance 

Cooperate with the printer by releasing forms on schedule if you want your 
work out on time. Don't put the entire responsibility on him without realizing 
the need for cooperation. Allow him enough time to do a satisfactory printing 
job. You can do this if you understand all the elements that go into produc- 
tion. Find out if you can curtail costs by reducing the number of galley, 
page, or press proofs furnished at your request by the printer. 

In the control of your composition costs, give the printer clean typewritten 
copy. Review it (edit) to avoid later corrections and thus keep down costs. 
And maintain this routine: 



310 HOW TO RUN A SMALL BUSINESS 

Don't send copy to the printer to be set long in advance of publication date. 
You might find that a change in events did not permit you to use it 

Develop a method of measuring space requirements for given copy in 
advance, or use a copy-fitting system to avoid overset matter or revisions 
to a smaller type size in order to fit space available 

Cut tabular costs by having the line cuts made after typewriting or van- 
typing 

Find out if you can save by changing to fewer columns per page, or select- 
ing a face that can be set by a slug-casting machine 

Consider the selection of a type face that may be larger on the same point 
body, to give the equivalent readability at smaller composition cost 

Be familiar with all the type faces available at your printers. Utilize them 
in place of costly hand lettering and engraving 

In control of your presswork and binding, be sure you ask the printer for 
imposition charts. They permit economical layout of various size forms on 
the printer's equipment. Give the printer larger forms if it will save money 
on his equipment. And use these ideas: 

Run large color forms, and slit or cut them into smaller units for binding 
into different parts of copy to spread as required by special positions 

Lay out your color pages to permit printing of several colors in the same 
form by use of split rollers 

On color pages, be careful to send to your printer, in advance, a specific 
sample of color on your own stock if possible, so that he can arrange for 
that color, before he is ready to run. Some colors require considerable 
time for proper matching 

Consider the use of gloss ink for covers, in place of varnishing, thus saving 
press impressions 

If you use covers for house organs or catalogues requiring tint blocks of a 
specific color, see if you can cut costs by running them in larger forms, 
several up, for a number of issues at one time 

If you imprint from electrotypes, check the feasibility of running from type 
and saving foundry charges 

Do you pay for unauthorized overruns? Why? 

Make someone in your organization responsible for incurring charges for 
holding up presses or overtime 

When planning your press layouts, provide for machine gathering of in- 
serts between signatures when possible, rather than have them inserted 
by hand owing to their position. If gathering is impossible, try to insert 
in the middle of the signatures, since other inside positions usually require 
slitting of the sheets and extra expense 

Check the possibility of binding 32-page signatures instead of 16's, or 16's 

instead of 8's 

Consider saddle stitching in place of side stitching if your book runs less 
than three signatures 



HOW TO OPERATE A BUSINESS OFFICE MOST EFFICIENTLY III 

Bind your job with fewer staples; for example, two instead of three. This 
helps your printer conserve essential supplies 

Give a printer your print order early enough for him to cut stock and ar- 
range other preliminaries to avoid last-minute delays 

In control of paper you use, do not buy paper from the printer (and pay 
him an extra service charge) if you can help it. 

Consider the use of cheaper papers for example, machine-coated instead 
of regular-coated stock in view of the lower price; or the use of lighter weight 
stock to save money on paper and postage. Do this, too : 

Have the printer report damaged stock to you 

Maintain detailed perpetual inventory records to know what stock is really 

used 
Check paper consumption and waste allowance independent of the printer's 

reports 

Make him credit you with oflcut that can be used for other purposes 
Before using a new kind of paper, consult your printer as to its suitability. 
Determine whether your presswork cost or your schedule requirements 
may be affected by the change. Test it also for qualities you need, such 
as fineness, smudging, opacity, erasability, pencil surface, and endurance 
Request your printer to trim to exact specifications 
Limit the sheet size of your paper stock to a minimum of trim waste 
If you are piinting bleed pages, consider varying sizes of paper stock for the 
bleed and nonbleed forms. You can save some money on the nonblced 
by a smaller sheet. Don't run all forms on the larger sheet required by the 
bleed forms 

In your control of engravings, study the economy possible in grouping of 
several pieces on one copy for reproduction for the engravers. Check these 
points, too: 

Some photographs and some retouchers' paints are likely to contain traces 
of blue or brown or a yellowish cast. It may result in poor engravings, 
the blue coming light and the brown or yellow going dark. The need 
for pure blacks, grays, and whites is frequently overlooked and is likely 
to result in expensive makeovers 

When you have colored copy from which a monochrome engraving is to 
be made, consider the possibility of having a commercial photographer 
make a color-corrected copy negative and print rather than pay the 
engraver's "emulsion negative" charge 

Find out who is cheaper on mortices, notches, etc. your engraver or your 
printer. Often the engraver's work of this nature has to be done again 
by the printer. The engraver may not know just how you are going to 
use the plates. Find out if you can save by having the engraver trim 
one or more edges of a block flush, rather than pay the printer for this 
work, when it is necessary to accommodate a caption 



312 HOW TO RUN A SMALL BUSINESS 

When expensive plates are to be run for a long period, electrotype them to 
avoid the need for remaking originals later. Originals are likely to crack 
at the edges and in other places with repeated runs 

Some printers require unmounted engravings. Check with your printer. 
Determine if you can furnish him with unmounted plates and save the 
cost of mounting 

Are too many of your plates ordered for rush delivery? Remember that, if 
the engraver or other supplier is given more time, this might help to 
reduce your price. Or at least it gets less confusion, makes for greater 
efficiency, and enables suppliers to plan their work better 

Maintain records of all printing to secure information for reduction of 
costs. That planning helps you to reduce costly corrections, eliminate frills, 
and intelligently estimate future costs. Factors to watch in your record study 
to decrease costs are 

Decreasing the quantity of killed matter 

Comparing costs with those of others 

Reducing the number of copies printed 

Decreasing the use of bleed and other tricky forms 

Improving scheduling to eliminate overtime 

Avoiding delivery of late copy 

Making larger purchases, resulting from precise knowledge of requirements 

Reducing the allowance for waste on part of printer 

Changing texture or finish of paper 

Decreasing the sheet size for trim requirements 

How to get the best design for the forms you need in your business 

When you design the forms you need in your business, be sure each form : 
clearly indicates its purpose; commands immediate attention; and provides 
a place for the date. And be sure each form 

Records items in the same order, if the form is to take information from or 
pass information to another form 

Has its information in the relative position in which it will be used or posted 
by the person receiving it 

Has all recurring items printed so that only variables need be filled in 

Carries its most important items in a prominent place where they will be 
seen quickly 

Contains space for numbering or coding, to facilitate filing and re- 
ordering 

Will fit typewriting or handwriting operations 

Where possible, uses exact spacing for required information to eliminate 
use of unnecessary words 

Has a margin on the form so that it will not have to be rearranged later 

Will fit window or other envelopes you may use 

Makes use of tabulator stops on the typewriter to save typing time. Have 



HOW TO OPERATE A BUSINESS OFFICE MOST EFFICIENTLY 313 

the printed material aligned on the right-hand side rather than the left 
Differentiates revised forms so that they are distinguishable from the 

originals 

Makes full use of combination forms and carbon copies where possible 
Makes use of different colors to aid in identification and reference and to 

ease eyestrain 

Is the correct size for filing or binding 
Is printed on the size and weight of paper that is most economical 

Buy your paper to fit the specific needs you have for it. That means 
buying 

13-pound where five or more copies are to be prepared (13-pound paper 
means that 500 sheets of standard mill size, 17 by 22 inches, weigh 13 
pounds) 

16-pound where one to four copies are to be made 

20-pound for letterhead and forms sent to customers 

24-pound for ledgers 

28-pound for special ledgers, legal documents 

Tissue grade when many copies are to be prepared 

Bond paper when a single form is prepared with pen or pencil or typewrit- 
ten on one or both sides 

Ledger paper for permanent ledgers prepared by pen 

Bristol board for card records used frequently 

Consider the length of time the form is to be used and get the paper for 
your particular purpose. For example 

Tears to be kept Typ* of paper needed 

Ito3 100% sulfite 

3 to 6 75% sulfite, 25% rag 

6 to 10 50% sulfite, 50% rag 

More than 10 100% rag 

Set up a routine for checking forms periodically. Make sure the person 
initiating changes knows printing, paper, and mailing economies. Have him 
review forms to find 

What is essential? 

What can be cut out? 

What is duplicating other effort? 

What use is made of the copies prepared are they unnecessary frills? 

What combination of forms can be made? 

Can more copies be made at one time, if copies are necessary? 

What writing on it can be eliminated by checking or crossing boxes? 

Help his studying to find out if some forms can be eliminated or consoli- 
dated with others. Have him determine if any form is wasting more time to 
keep than the record is worth. 

Be sure to check the rough sketch of any new form with the actual users, 



314 HOW TO RUN A SMALL BUSINESS 

for possible changes, additions, or eliminations. This helps in purchasing; 
facilitates regular review. 

Before giving the job to a printer, consider whether it would be more 
economical to reproduce the form yourself, using mimeograph, multigraph, 
ditto, or other duplicating devices or can you use a rubber stamp for intra- 
office forms? 



Wow fo Aeep stenographic and correspondence costs at a minimum 

Find out if you should cut full-size letterheads in half, or reduce the size 
of letterheads to 5}/2 by SJ/a inches and type across the short dimension. Con- 
sider cutting carbons to the same dimensions and reducing the size of tissue 
copy. 

Can you use unskilled boys or girls to prepare batches of letterheads with 
carbons and second sheets, to save time of typists? They can also separate 
them after typing. 

Should you prepare envelopes in advance to companies and persons to 
whom you write frequently? You can address them by a duplicator and set 
them in racks to be used as required. Other points to watch are 

Can you use window envelopes to save writing? 

Can you make your copies on the back of incoming letters instead of using 

carbons or second sheets? 

Is it advisable to use government postal cards to acknowledge letters? 
Can onionskin or thin letterheads be used? 
Are you reusing interoffice envelopes as much as possible? 

Check to see if those who dictate letters are wasting their own and the 
stenographer's time. 

Be sure they prepare dictation in advance by reviewing previous corre- 
spondence, planning each letter, perhaps in outline form, consulting others 
in advance when necessary, and having all necessary data at hand. Arrange a 
definite dictating schedule, preferably at the same time each day. 

Consider the stenographer and her work. Help her do her job more effi- 
ciently. To do that, tell those who dictate to 

Enunciate clearly; don't swallow words or phrases 

Spell out all technical terms and proper names 

Speak at a steady speed in a natural, conversational tone; avoid spurts, 
silences, and monotones 

Keep all distractions (mannerisms, smoking, telephoning, etc.) to a mini- 
mum while dictating 

Consider the economies of manuals and form books. In them, you write 
up the system for the guidance of all concerned. You also do this: 



HOW TO OPERATE A BUSINESS OFFICE MOST EFFICIENTLY 315 

Standardize methods and forms of correspondence as much as possible, 
without sacrificing efficiency and the personal touch needed in customer 
relations 

Incorporate in your manual of procedure definite instructions for abbrevia- 
tions, salutations, closings, indentation, spacing, punctuation, etc. 
In many cases, prepare form letters or form paragraphs selected from pre- 
vious correspondence, which represent matured judgment and are much 
better than haphazard dictation 

Speed in the production of letters is aided by form paragraphs 
The monotony of answering a great quantity of similar correspond- 
ence is avoided by using form paragraphs or letters 
If used, the forms must be carefully prepared 

Your stenographer can cut mailing costs by eliminating unnecessary waste 
in sending out stamped, self-addressed envelopes with collection letters or 
statements. 

Don't dispatch special-delivery or air-mail letters too late. If they are held 
until late in the day, the extra postage is frequently wasted. See that all the 
office mail going to one person is placed in one envelope. 

Accurately weigh all outgoing mail to avoid too much or too little postage, 
and watch these postage cost-cutting hints later in this chapter. 

Be sure your typists are familiar with all the timesaving "tricks of the 
trade." One is in addressing envelopes. Experts eliminate waste motion by 
turning carriage down and inserting new envelope beneath flap of the old, 
continuing to reverse the ordinary turn of the carriage. In centering a cap- 
tion, they find center and then backspace once for each two letters. 

In typing columnar figures, they insert sheet with its left edge at zero on the 
scale. Then they divide the scale figure at the right edge by one more than 
the number of columns you want, and place the tabulator keys at multiples of 
the answer. Thus, if five columns are needed, and the scale reads 90 at the 
right edge, divide by 6, then place tabulator stops at 15, 30, 45, 60, and 75. 
This gives even spacing. 

Other ideas are 

To draw a vertical or a horizontal line without removing the sheet from 
the machine and using a ruler, place pencil or pen point at typing line, 
wedge firmly, and move carriage across for horizontal line or turn cylin- 
der for vertical line 

When rush work must be done immediately and a letter is hajf done in 
the machine, pull carriage down to letterhead, insert new material, block 
carbons, and type new material. This avoids taking the half-finished 
sheet out of the machine, then reinserting it later, with realignment diffi- 
culties 

When mail is sent to branch offices daily, have operators address a supply 
of envelopes or stickers during slack periods in the department 



316 HOW TO RUN A SMALL BUSINESS 

If this is done, keep the addressed envelopes in alphabetical order so that 
they are immediately available 

When you buy furniture for a stenographer, pay a lot of attention to cost 
cutting and turnover. 

Get desks and chairs that give maximum desk comfort at a natural working 
height (about 29 inches) and allow greater desk usability for the person 
sitting. They should have adequate drawer space and compartments, card 
racks, stationery racks, accessory racks, letter trays, and letter work file and 
partitions for the particular job to be done. 

They ought to permit sitting in scientifically correct posture to eliminate 
"afternoon tiredness." 

How to control office filing costs 

Cut your costs by making sure that your filing system locates documents 
instantly. 

To do this, you must be sure you have the most economical basis for 
indexing, sorting, releasing, finding, following up, and transferring. 

Study, first, your whole folder arrangement. 

Allot to each folder a specific, inflexible place in the files. Seek to make 
material easily found by grouping folders naturally, by means of proper labels 
and guides. Keep individual folders for active names, but give inactive files 
special treatment 

Treat all matters on individual names or individual subjects in one folder. 
Put the newest addition to the files on the top. Divide the folders when they 
become heavy. Give specific directions to the content of folders, particularly 
as to the number of papers to be inserted in each. Control folders out of file 
through cards listing those removed. 

You should study the system available to you. Select the one, or combina- 
tion of several, most suited to your needs. 

Alphabetical filing has these advantages: 

Most appropriate where the volume of correspondence and other filing is 

small 

Simplest and least expensive 

Unnecessary to create special folder for each correspondent 
Personnel require no special training 
Papers misfiled will not be too far from correct place 

But it also has these disadvantages: 

Variations in spelling make chance of error very great 
Inexperienced clerks often fail to follow dictionary arrangement 
Room for expansion in each drawer must be provided, making additional 
equipment necessary 



HOW TO OPERATE A BUSINESS OFFICE MOST EFFICIENTLY 317 

If you do use an alphabetical filing system, give it a chance to operate 
properly: 

Use card files that break the file up alphabetically, so that the clerk quickly 

finds the folder 

Have separate folders for most active names 
Use given, or first-name, separation folders when this is necessary 
Separate recurring names by appropriate territories 
Have appropriate guides to signal recurring names 
Divide bulky folders chronologically (one folder for the first 6 months, 

another for the last 6 months, etc.) 
Divide some name folders according to subjects dealt with, where it is 

necessary 

A subject filing system can be used when the arrangement by subjects is 
important for example, for matter pertaining to one case or contract. This 
method can lead to great confusion unless the subject arrangement is worked 
out long in advance. Overlapping of subjects must be avoided. Only one 
person can select the titles, and cross references must be maintained. 

In a numerical filing system, your papers invoices, contracts, orders, etc. 
can easily be numbered and cross-indexed. The code can be used for other 
purposes; for example, to furnish a complete list of customers. You have 
secrecy as to contents of files; only a number appears. If you have a difficult 
transfer-filing problem, transfer files are always best handled on numerical 
systems. That prevents rehandling of boxes with each transfer. If you adopt 
this system 

Use card index, cross-indexing by name or subject matter 
Make sure every paper bears your filing number 
Use a separate consecutive folder for each number 

Use a folder and guide arrangement to give perfect visibility for quick 
handling 

A geographical filing system ought to be used when there is a large volume 
of correspondence that should logically be kept together on the basis of locali- 
ties for example, sales work where the community is the chief factor. Give 
the system the best possible equipment. Go at it this way: 

Find the geographical divisions of importance to you (states, counties, 

towns, streets, etc.) 
Then create card and signpost guides that will quickly get you to the 

correct folder 
Break up folders (as in the alphabetical filing) into 

The important names, recurring subjects, etc. 

Chronological folders for any bulky names 

Subject matter within important names 



318 HOW TO RUN A SMALL BUSINESS 

A chronological filing system can best be used for filing creditors' bills by 
discount dates or for filing of letters according to date of receipt or date when 
some action will be taken. It is most practical for use: in collecting bills; 
in follow-ups; and in other matters where the date is the controlling factor. 

Consider the use of more modern equipment and supplies for filing. Get 
burglar-, fire-, water-, and bombproof equipment if you can. Don't buy any 
size of cabinet. You can get special sizes of files and guides to fit your checks, 
cards, invoices, ledger sheets, folder documents, blueprints, etc. And do this: 

When space is important, consider using five-drawer letter files instead of 
the customary four-drawer ones 

Know the advantages of a preliminary sorting of papers before filing, 
through sorter trays and tickler systems of various kinds 

Study the economy of various forms of cross-reference cards sold by most 
equipment houses, with a view toward avoiding making many copies 
for various parts of your files 

Study the types of charge cards that are used again and again to record 
material taken out of files 

Consider using special carrier folders when material is taken from the files 
to help ensure an early return 

Study your current supplies (guides, folders, and accessories) . Your equip- 
ment dealer has many economies in these to offer. Get those which give 
the greatest durability and permit the greatest finding speed 

Your method of transferring material from files should be the cheapest 
from your point of view. Consider these three methods now being used for 
transfer work: 

Regularly transfer the entire contents from current files to transfer boxes 
Regularly transfer out of current files only the material over a given age 

(say 1 year old) to transfer boxes 

Maintain two sets of filing cabinets; use the upper row of drawers for cur- 
rent files and the lower for transferred documents. This expedites refer- 
ence to recent files and material not recently transferred. At fixed 
periods transfer the old files to storage 

Make sure your transfer file is numerically arranged. Any other method 
results in confusion. But always maintain a cross index of materials in trans- 
fer files. Make sure your transferring is at fixed periods. 

File promptly so that work does not pile up so that papers are found 
where they should be. Make sure filing is done daily so that material does 
not accumulate. And do this: 

Make sure that papers are placed with the head reading from left to right 

so that it can be easily read in the files 
Insist that file folders be taken out before the paper is inserted, in order to 

preserve the files 



HOW TO OPERATE A BUSINESS OFFICE MOST EFFICIENTLY 319 

When folders are full, use expansion folders or divide folders; this will 
conserve supplies 

Insist that folders taken from the files be returned as soon as possible 

If you are having difficulties, consider making it a rule that all outstand- 
ing records be returned to the files at the close of each working day; 
then every morning have such records as may be required redistrib- 
uted to the proper desks without unnecessary calls on the filing depart- 
ment 

When the records are outstanding for more than the usual length of time, 
keep track of them through the use of a tickler system 

Examine the contents of file drawers occasionally to see if all papers are 
worth saving. Preserve material with a limited life of usefulness for a 
limited time (say 3 months) 

Don't fill file drawers so full that papers cannot be removed easily or with- 
out pulling out unwanted material 

Study the method by which papers are fastened in your files. Inquire 
whether pins, clips, or other fasteners are essential. Consider the use of 
perforators that fasten papers together by hand machines; pasting related 
papers together. 

Establish and adhere to a time schedule for the retention of records in 
the files. Clean out the files regularly. Organize the transfer system care- 
fully. Appoint someone to work out the procedures and be responsible 
for the follow-up. Work this way: 

Classify what is to be destroyed and what is to be transferred. Decide 

how long various types of papers and records are to be kept 
Recognize that filing affects a good many departments and people with 

differing views and requirements 
Survey what is being filed. Make arrangements to eliminate putting into 

permanent files unnecessary duplicates that may come back to the 

filing department from several departments. Decide which copy to 

keep preferably one of distinctive color 
Set up a routine for automatically disposing of purely current carbons 

after some established interval has passed 
Mark on the copy, at the time written, the date for its disposal. Have 

the filing department work through the folders as they file and take 

out material from the back 

Consider transferring your records to microfilm. Records on film result 
in enormous saving of filing and storage space. A roomful of records can 
be condensed to small rolls of film occupying a small fraction of the space. 
Other aids are 

The rolls can be safely stored in bank vaults or another place of safety 
Records can be fireproofed and dustproofed easily 
Film binds the records in a definite, unchangeable order 



320 HOW TO RUN A SMALL BUSINESS 

Loss of a record in a group is impossible; a page cannot slip out acci- 
dentally 

Fraudulent alteration of records is avoided 
Postage savings in mailing records can be substantial 
Transportation and transfer of records is easier and more economical 
Old paper records can be shredded after filming and sold as scrap 

Be sure of the conservation of the filing materials. Reuse file folders and 
guides. The reverse side is often adequate. Use the backs of 3- by 5-inch 
cards. Salvage the material weeded out of files. See if there are filing ma- 
terials in the dead file that can be put to use in the live files. 

How to cut your postage cosfs 

Get someone at the post office to tell you all the postal rates for each 
class of mail. They do it gladly. And you will get great economy if you 
know the many services available and how to apply them for your benefit. 
Most small businessmen do not know all the post office will do for them. 

Investigate mechanical helps to see if they will save you money and time 
in handling. They include 

Hand stamp affixers, which pick Postage scales 

up, moisten, sever, attach, and Parcel-post machines 

. count stamps Scaling machines 

Envelope openers Combined sealing and stamping 

Sorting racks and tables to facili- machines 

tate sorting and dispatching mail Metering permit machines 

to various departments Nonmetering permit machines 

Folding and inserting machines Tying and bundling machines 

Addressing machines 

Review carefully the chance in your place for the mail frauds that occur 
so often in small business offices. Then consider using a process of metered 
mail, or precanceled stamped envelopes, or stamped envelopes of any other 
nature. See Chap. 3 for the story on this. 

Check your office routines on normal wastes in any office. Go at it this 
way: 

See if your people are mailing two or more letters to the same person in 

one day when they might be sent in one envelope 
Avoid use of dips or other weighty material in your mail, to cut the 

cost 
Don't store envelopes in a warm, dry room. The gummed flaps may curl 

and make sealing difficult. A shallow pan of water placed above each 

tier of envelopes provides sufficient moisture to prevent drying out 



HOW TO OPERATE A BUSINESS OFFICE MOST EFFICIENTLY 321 

Make sure you weigh your mail it's cheaper than counting it 
Be sure outgoing mail is collected early enough so that it can be properly 
weighed and stamped a last-minute rush by the office boy may mean 
careless and excessive stamping 

Put a distinctive marking in the upper left corner of your envelope- 
invoice, statement, order, etc. This speeds sorting in the receiving office 
and delivery to the proper office division 

Don't use air mail to points served as quickly by first-class mail 
Charge stamps to the department sending out the mail a report at stated 
periods on the postage ordered causes them to be more careful 

You need to watch many details to cut your costs in your mailing. Check 
these points: 

If you want an envelope to hold not more than 1 ounce, you need not 
necessarily confine the contents to one sheet. With some lightweight 
paper, especially useful for air mail, 9 sheets weigh only 5/2 ounce 

Large first-class envelopes should be clearly marked or stamped "first 
class"; otherwise, they may be mistaken for second-class mail and 
delayed in transit 

Instead of enclosing stamped, self-addressed envelopes for reply, business 
reply cards and reply envelopes permit you to pay only on those actually 
returned. Business reply cards via air mail cost only 1 cent more than 
the usual air-mail fee. That may give you results of tests very quickly 

Demurrage charges on c.o.d. mail can be avoided by using address labels 
recommended by the post office, giving specific instructions if unde- 
livered 

Letters, cards, and order forms can be mailed very cheaply. Check with 
the post office if you are mailing books or catalogues 

Your covering invoice, if it applies strictly to the package contents can 
be enclosed in the package. That saves postage and the time of prep- 
aration that would be required if the invoice were mailed first class 
later 

Each letter should carry the correct amount of postage. Buy stamps in 
various denominations, according to your mailing needs, to facilitate 
correct and quicker stamping 

Self-mailers should be folded so that the entire inner surfaces of the piece 
may be inspected without breaking the seal. Use a metal staple or a 
stitch as preferred it can be taken apart and put back 

If you can use it, bulk mail is a great economy 

The post office will check your mailing list and get new addresses they 
do this cheaply 

Special delivery should not be confused with special handling special 
handling gets extra speed in handling only to the post office addressed; 
special delivery gets this, plus a special messenger for delivery at its 
destination. Don't use both 



322 HOW TO RUN A SMALL BUSINESS 

Are you getting the greatest return on your office employee budget? 

Should you be running your own service departments? Check carefully 
present costs of your multigraphing, mimeographing, and mailing-machine 
operations, and other service units, against the cost of buying the work from 
an outside job shop. 

When you do, be realistic* Too often your people will fight a change and 
be slipshod in their comparative data. 

Every once in a while, analyze the jobs in your office. Find out if every 
one is essential to your profits. See if each job is being performed in the 
one best way. Here is a guide to check waste motions and duplicated efforts: 

Is there a specific and understood purpose for each step or operation? 
Does work move in a direct manner from one person to another without 

unnecessary repetition, duplication, or delays? 

Is each step or operation performed in the same manner by all workers? 
Do certain details or certain records require more time than the results 

are worth? 
Are workers supplied with the necessary materials to perform the step 

or operation without unnecessary delays to get material? 
How do your people work? Can you eliminate unnecessary interruptions; 

arguments and gossiping; absences from desks; delays in answering 

questions; procrastination; unnecessary questions? 

Have an understudy for every job in an office. You waste a considerable 
amount of time in selecting and training outsiders for an exact operation 
that someone in your office can be watching and learning. New people always 
cause wear and tear and repairs. Inexperienced help always produces imper- 
fect work and greater costs. Your own people will approve being made un- 
derstudies for the more important vacancies. It gives them confidence in you. 

Help your people do their work. Avoid the need for their wandering to 
deliver messages. Keep a three-tiered basket on each desk, for incoming, 
outgoing, and file papers. Insist upon written messages to avoid misunder- 
standings. Concise interoffice memos save time, minimize misunderstand- 
ings, and serve as reminders. A spoken message is often forgotten or mis- 
understood and usually requires much moving around the office, wasting 
time, and distracting others. 

Watch your costs for supplies they can be a source of great savings 

In the use of carbon paper, cut off good marginal area of worn-out carbon 
paper for use with smaller forms. And adopt these cost-saving points: 

Use an extra sheet of backing in your typewriter when carbon sheet 
grows dim 



HOW TO OPERATE A BUSINESS OFFICE MOST EFFICIENTLY 323 

Reuse one-time carbon paper where suitable 

Handle carbon paper carefully to avoid wrinkling and tearing 

Limit the amount issued from the stock room 

Make sure carbon paper is turned frequently to utilize entire surface 

Place used carbon for first copy and new carbon for successive copies 

where multiple copies are required 
Have all carbon turned in to a central place for examination before it is 

thrown away 
Consider using 8J/ 2 - by 8 J^ -inch carbon paper instead of the usual size. 

It is often adequate 
Use other duplicating methods to save carbon paper 

Watch the use of typewriter ribbons. Here are some pointers: 

Buy red-black ribbons only when you actually use the red 

Invert your all-black ribbon when the lower side is worn dim 

Reink typewriter ribbons for longer use 

Wind ribbon onto one spool each night before leaving 

Be sure ribbon feed is properly adjusted to ensure even wear 

Watch the use of paper. Use both sides of file or index cards. Cross out 
the "dead" side. Cut old circular letters, reports, etc., and make them into 
pads. Do the same with old letters. And consider these aids: 

Be sure stenographers use every line of their notebooks 
Select the most economical grade and size of paper for each purpose 
Use paper of lighter weight 
Use smaller sized stationery for short letters 
Economize on stationery by single spacing and reducing margins 
Do not use envelopes for interoffice mail. Confidential letters may be 

sealed with a strip of paper 
Make full use of the chain envelopes one envelope that is arranged to 

be used a great many times by a printed form on its face 
Where possible, use postal cards instead of letters 
Retain obsolete forms and spoiled paper for scratch paper 
Use both sides of the paper rolls in your adding machines 
Single space on adding-machine tape, and use narrowest width possible 
Discontinue writing unnecessary letters of transmittal and acknowledg- 
ment 

Consider using the back of incoming letters for the first copy of your reply 
If letters or reports will probably be corrected, make a rough draft, on 

cheaper paper, first 

Use soiled or damaged company envelopes, when envelopes are neces- 
sary, for interoffice correspondence 
Use longer sheets for mimeographed work instead of two. This also saves 

staples and decreases the cost of cutting, packaging, etc. 
Use both sides of mimeograph paper 



324 HOW TO RUN A SMALL BUSINESS 

Use photostat to save time in typing, and eliminate possibility of error; 
it is sometimes cheap 

See that only the needed number of mimeographed copies are ordered 

Cut out unnecessary reports. They waste paper. Perhaps you can: pre- 
pare other reports less frequently; cut down the number of file copies 

Make the best use of your wastepaper. Collect and sort it systematically. 
Then bale it and sell or shred it. But save all cardboard to use for pack- 
ing or backing 

Watch the use of other supplies. Save clips, pins, etc., on material to be 
thrown away. Don't use two clips or staples where one will do the job. 
Fasten papers together with sewing machine or use paper fasteners to save 
paper clips. 

In using normal safeguards to avoid waste of supplies, go over all your 
forms to see what can be eliminated to cut down costs. Check every pos- 
sible way of eliminating losses of supplies. Clean out all desks at definite 
intervals and return unneeded materials to stock room. Consider this: 

Teach your people to use office supplies as sparingly as if they personally 

were paying for them 

Check to see if you are discarding any material that can be reused 
Recognize that waste in supplies can be due to mere lack of control; 

your system of delivering necessities to office people must be kept under 

control 
Remember that waste often comes in spoilage of supplies. Find out 

whether work is intelligently or incompetently planned; instructions are 

definite not ambiguous 
Avoid serious waste in deterioration or obsolescence of supplies. Check 

your whole system of ordering and usage with this in mind 
Issue supplies in limited quantities to each desk to reduce spoilage and 

waste 

Check list for economical use of utilities 

Your electricity bills should be watched. Instruct your employees on ways 
of conserving light and electricity. Place reminding notices at strategic 
places. Check and see that the conservation policy is followed this way: 

Check the lighting system with light meters to be sure that there is no 

excessive disbursement for electricity 
See that your people turn off lights and electrically driven machines when 

leaving desks at noon, at rest periods, at closing time 
Disconnect water coolers at night 
Cut light costs by having ceilings and walls painted a light color and kept 

clean so that there is the maximum of reflection 
Rearrangement of the office may secure more advantageous use of light 

and cut costs 



HOW TO OPERATE A BUSINESS OFFICE MOST EFFICIENTLY 325 

Watch your telephone and telegraph costs. Be sure your staff understands 
telegraph rates. Have them use day letters and overnight letters where that 
is possible. Check occasionally to see whether air mail will not do just as 
well as telegrams. Study these points: 

Consider instructions that will give exact instructions as to use of tele- 
grams 

Review telegrams occasionally so as to be able to discuss wastage with 
employees 

Possibly approve telegrams before they are sent in order to find out if 
they are necessary 

Find out if the people in your office are making too many personal tele- 
phone calls. If they are, make a charge for them 

Make sure your office understands the cost of personal long-distance 
calls; possibly give them the cost at the end of their calls 

Possibly install pay telephones so as to cut down on personal calls 

Be sure to reconcile your telephone bills monthly with your operator's 
records 

If you do much telegraphing across country, see that a schedule of dif- 
ferences in time is provided. The office you are trying to wire to by 
fast message (most expensive) may be closed 

For frequent and lengthy communications that are unavoidable, consider 
timed wire messages or teletypewriter service, private or exchange 



INDEX 



Acceptances (trade), and notes, 89-90, 

95-96 

Accident prevention, 223-228 
Accountants, certified public, 15 
Accounting, accrual basis, 53, 55 

cash basis, 53, 55 

importance of, 3-4 

plan of operations for, 18 

proper, 15-31 

and records, 15-31 
Accounting controls, 11 
Accounting year, 54 
Accounts, assignments of, 97-98 

bank, checking of, 35 , 

future, assignments of, 97-98 

overdue, collection of, 93-99 
Advertising, 28, 200-203 

methods of, 201-202 
Agencies, mercantile, 85 
Analysis, ratio, 22-28 
Assets, fixed, 100 

and liabilities, ratio of, 22-23 
Assignments of accounts, 97-98 
Associated Credit Bureaus of America, 81 
Associations, unincorporated, 97 
Auditing, 31 
Automobiles, owning or renting, 53 

use for business, and tax deduction, 64 

B 

Balance sheet, 107 

monthly, 21-22 
Bank, choosing a, 108-109 

industrial, 112 

relations with, 109-110 

requirements of, for loans, 105-106 
Bankers, investment, 101-102 
Bankruptcy law (Chandler Act), 99 
Bankruptcy proceedings, 99 
Bonding of employees, 34, 41, 135 
Bookkeeping and records, 17-18 
Borrowing (see Capital) 
Budgeting, 29-30 

for buying, 183-184 



Buildings and locations, 6, 10 
Bureau of Standards, National, 260 
Business, changing form of, tax pitfalls in, 
74-75 

cooperative, 8 

advantages in taxation, 73 

established, buying of, 133-141 

evaluation of, for credit purposes, 86-93 

investigation of a, 134-135 
Business life insurance, 127-129 
Buying budget, 183-184 
Buying offices, 179-181 
Buying program for store, 175-181 



Capital, 100-120 

drawing account, 12 

need for, reducing of, 103-104 
temporary, 104 

working, 4, 7, 100,102-104 
Capital loans (see Loans) 
Carry-back and carry-over, computation 

for tax refund, 14 
Cash, accounting of, 27-28 

and credit, 7-8 

handling of, safeguards, 40-41 
Cash-and-carry outlets in wholesaling, 294 
Cash frauds, 35-38 
Certified public accountant, 15 
Chandler Act, 99 
Changing form of business, tax pitfalls in, 

74-75 

Charge accounts, safeguarding of, 41 
Checks, safeguarding, 38 
Children, salaries for, and tax deduction, 

53 

Claims, guaranty of, 98 
Collection, attachment proceedings for, 99 

laws affecting, 95-99 

of overdue accounts, 93-99 

precautions in using the mails for, 98 
Collection letters, 95 
Commerce, Department of, 260 
Commercial credit companies, 114-115 
Community industrial development loans, 
120 



327 



328 INDEX 

Competition, unfair and ruinous, 6 
Confidence men, 46 
Consumer finance companies, 113 
Controls, accounting, 11 

financial, 9 

operation, 30 

stock, 181-184 
Cooperative business, 8 
Coordination of production 
and sales, 8 

Corporation stock, amount to issue, 101, 

102 

frauds in, 47-48 
transfer of, 151 

Corporations, advantages and disadvan- 
tages of, 144 
dealing with, 97 
directors of, duties, 151-152 
dividends from, 153 

tax on, 155 
operation of, 151-152 
securities issued by, kinds of, 152-153 
taxation of, 154-164 
two or more, advantages of, 58 
Corporations, proprietorships, and part- 
nerships (see Partnerships, compared 
with proprietorships and corpora- 
tions) 
Correspondence cost, economy in, 314- 

316 

Cost keeping, scientific, 249-251 
Costs, business and personal, 64-68 
capital, and tax deduction, 62 
control of, 3 
delivery, 206-207 
distribution, 8 
and income, 56 
operating, 27 
of plant selling, 284 

(Set also Expenses) 
Credit, amount of, to extend, 87-88 
of businessman, checking of, 85-88 
and cash, 7-8 

of customers, checking of, 81 
information regarding exchange with 

other suppliers, 85 
and installment sales, 76-99 
protection of, 104-105 
sales on, 25 
trade, 117 

Credit interviews, 79-81, 86 
Credit policies, flexible, 86-87 
Credit principles, 77-78 
Credit reporting, 85-86 
Credit statement, financial, by customer, 
86-93 



Credit terms, 4 

Customer relations, 8, 207-209 

frauds in, 38 
Customers, service to, 8 
Cycles, business, 6 
Cyclone insurance, 123 



Death of partner, effect of, 72, 143, 148, 

151 

Debt financing, 24 
Debts (see Liabilities) 
Delivery costs, 206-207 
Delivery methods, 8 
Department of Commerce, 260 
Depreciation, 28 

computation of, for taxation, 66-67 
Depression, business, 6 
Design of product, 9 
Development, industrial, loans for, 120 
Direct-mail advertising, 201-202 
Directors (see Corporations) 
Discounts, cash, 117 

cash and trade, 55 
Display window, 199-200 
Distribution, sales, 8 
Distribution costs, 8 



Economy in office operation, 313-325 
Embezzlements (see Fraud) 
Employee budget, economy in, 322 
Employee fatigue, reduction of, 228-229 
Employees, bonding of, 34, 41, 125 
checking of, by associates, 34-35 
pension and profit-sharing plans for, 

129-132 

and personnel difficulties, 6 
salaries of, and tax deductions, 53 
salesmen, outside, 203-206 
salespeople, training of, 195-199 
selection of, 11 
thefts by, 32-41 
wages of, high and low, 27 
working hours and days of, 229 
Engraving, economy in use, 309, 311-312 
Equipment, and fixtures, 10-11 

manufacturers of, loans by, 116 
Established business, buying of, 133-141 
Expanse, and gross margin percentage, 26 
Expenses, miscellaneous, 28 
and sales, ratio of, 177-178 



Factories (see Plants) 

Factoring companies, loans by, 113-114 



INDEX 



329 



Failure, avoidance of, 4-5 

causes of, 3, 9-13 

causes and percentages, 52, 75 

early, 15 

weakness as cause of, 9-13 
False-statement laws, and mail statutes, 96 
Families, services of, and tax deduction, 

63 

Family business, and taxation, 59-60 
Fatigue, reduction of, 228-229 
Federal Housing Administration, loans by, 

118-119 

Federal reserve banks, loans by, 118 
Filing, economy in, 316-320 
Finance companies, miscellaneous, 116 
Financial arrangements, 12 
Financial controls, 9 
Financing (see Capital) 
Fire insurance, 123-124 
Fixtures and equipment, 10-11 
Forms, printed, economy in supply and 

use, 310-312 
Frauds, 32-49 



"GI" loans, 118-120 
Goods, durable, 6 
Group pressures, 6 
Guaranty of claims, 98 

H 

Help (see Employees) 
Home, use of, for business, 63 



Incentive plans for labor, 9 
Income, and costs, 56 

cutting of, for tax purposes, 55 
"Income splitting,*' for tax deduction, 68- 

69 

Incorporation, 51-52 
Industrial development, community 

groups for, 120 
Installment sales, 75-79, 82-85 

carrying charges from, 83 

changing of terms, 84 

down payments on, 83 

of "hard" and "soft" goods, 82, 83 

overdue payments on, 84 

repossession of goods, 82-84 

taxation deductions for, 55-56 
Insurance, 5, 121-132 

business life, 127-129 

checking of, 121 

cyclone, 123 

fire, 123-124 



Insurance, kinds needed, 124-127 

lightning, 123 

tornado, 123 

windstorm, 123 

Insurance companies, loans by, 116 
Insurance rates, 104, 105, 121 
Inventory, correct, ascertaining of, 182- 
183 

and current assets, 23 

"last-in-first-out method," 185 

physical, 182 

planning of, 11 

pricing of, for profitable sales, 185-186 
for tax purposes, 184-185 

reduction of, for tax deduction, 13-14 

replenishing of, 6 

store, control of, 181-184 
Inventory control, 242-244 
Inventory-turnover ratio, 24-25 
Investment bankers, 101-102 
Investment Bankers Association, 102 



J 



Jobber outlets, 283 
Joint ventures, 58 



Labeling, 9 

Labor (see Employees) 

LIFO ("last-in-first-out") inventory, 185 

Laws, on collections, 95-99 

Federal, on bankruptcy, 99 
Leasing (see Renting) 
Legislation (see Laws) 
Letter, collection, 95 

dunning, use of postcard illegal, 98 

(See also Correspondence) 
Liabilities, and assets, ratio of, 22-23 

and net worth, 23-24 
Life insurance (business life), 127-129 
Lighting, 215, 217-218 
Lightning insurance, 123 
Loans, bank requirements for, 105-106 

for community industrial development, 
120 

from corporations, 117 

by factoring companies, 113-114 

by Federal Housing Administration, 
118-119 

by Federal reserve banks, 118 

financing business with, 53 

installment, 112-113 

kinds of, 110-112 

obtaining, 100, 105-107 

from small-loan companies, 113 

sources of, 100-101 



330 



INDEX 



Loans, to veterans, 118 

Location of building, 6, 10 

Losses, computation for tax deduction, 14 

M 

Machinery and tools, care of, 230-236, 

308 
Mail, advertising by, 201-202 

precautions in use of, for collections, 98 

safeguarding of, 36 
Mail costs, economy in, 320-321 
Mail statutes, 96 

Mail-order sales in wholesaling, 293-294 
Manufacture (see Plants) 
Margin, gross, percentage of, and ex* 

pense percentage, 26 
Marketing and sales policies, 8-9 
Markets, development of, 8 
Markups, and markdowns, 25, 186-189 

too high, 26 
Mercantile agencies, 85 
Money (see Capital) 
Mortgages, on real property, 52 
"Mutualization," 8 

N 

National Association of Securities Dealers, 

102 

National Bureau of Standards, 260 
Newspapers, advertising in, 201-203 
Notes, promissory, 96 

and trade acceptances, 89-90 

O 

Office equipment, 306-309 

Office layout, 303-306 

Offices, economy in operation of, 303- 

325 

Operating statements, 20-21 
Outlets, jobber, 283 

retail, 282 

Overcapitalization, 101 
Ownership, proportion of, 24 
Owning vs. renting, 52 



Packaging, 8-9 

Paper, economy in use of, 309-3 1 1 

sizes and weights of, 313 
Partnerships, advantages and disadvan- 
tages of, 143 

compared with proprietorships and 
corporations, 51-53, 58-62, 142- 
164 

death of partner, effect of, 72, 143, 
148, 151 



Partnerships, dissolution of, 145-146, 
149 

liabilities of, 97 

limited, 97, 143, 146 

operation of, 144-151 

sale of interest in, 150-151 

taxation of (see Taxation) 

withdrawals from, 146 
Payrolls, 250 
Pension plans, 129-132 
Personal finance companies, 113 
Personnel (see Employees) 
Petty cash, thefts from, 37 
Plant costs, studies of, 286 
Plant layout, 219-222 
Plant location, 210-212 
Plants, accident prevention in, 223-228 

building, buying, or leasing of, 212- 
214 

building, selection of, and conditions, 
214-217 

control of, 9 

cost keeping in, scientific, 249-251 

maintenance of, at lowest cost, 229- 
236 

operation of, 210-288 

power for, 218 

production factors, 9 
Policies, store, 11-12 
Postcards, use in dunning prohibited, 98 
Pressures, group, 6 

Pricing, of inventories for tax purposes, 
and for profitable sales, 184-186 

of particular items, 186-190 
"Prince or pauper" industries, 6 
Printing, economy in use, 309-316 
Product, advertising to the trade, 268- 
270 

direct-mail selling of, 277-280 

introducing and marketing, 254-264 

laws concerning selling of, 262-266 

markets for, finding of, 252-253 

packaging of, 266 

profit possibilities for, undeveloped, 
287 

promotion and advertising program 
for, 254-256 

promotion and sales program for, 251- 

260 

Product design, 9 

Production and sales, coordination of, 8 
Profit, net, and net sales, ratio of, 26 
Profit-and-loss statements, 20-21 
Profit-sharing plans, 129-132 
Profits, increasing of, 2-14 
Promissory notes, 96 



INDEX 



331 



Promotion mediums, 8 

Proportion of ownership, 24 

Proprietorships, advantages and disad- 
vantages of, 142-143 
compared with partnerships and cor- 
porations (see Partnerships, com- 
pared with proprietorships and 
corporations) 

Protection against robberies, 32-46 

Purchasing (see Buying) 

R 

Radio, advertising by, 201-202 
Ratio analysis, 22-28 
Ratios, acid test, 23 

comparison of, 26 

current, 22-23 

expenses and sales, 177-178 

financial and operating, 22-28 

standard, obtaining, 28 
Receivables and net sales, 25 
Reconstruction Finance Corporation, 

117-118 
Records, and accounting, 15-31 

for credit sales, 79 

effect of, on taxes, 53 

more than bookkeeping, 17-18 

for natural business year, 30 

preservation of, 30 

proper, 15-31 

Relations, customer, 207-209 
Rental terms, 10 
Renting vs. owning, 52 
Reorganization, 14 

Residences, use for business, and tax de- 
duction, 63 

Retail credit interviews, 79-81 
Retail outlets, 282 
Retail stores (see Stores) 
Retailers and wholesalers, 289, 295-297 
Risks, 3-4 
Robberies (see Frauds) 



Salaries, for children, 63 

Salary, for oneself, 12 

Sales, on credit, 25 

and expenses, ratio of, 177-178 
installment (see Installment sales) 
and marketing policies, 8-9 
and production, coordination of, 8 
and profits, estimate of, 13 

Sales costs, and principles, 82-85, 284 

Sales distribution, 8 

Sales expenses, control of, 275-277 

Sales finance companies, 115 



Sales promotion program, 251-260 
Sales research, 253-254 
Sales terms, what to avoid, 264-266 
Sales thefts, over-the-counter, 39-40 
Salesmen, cash-collecting, checks on, 39 

outside, 203-206 
Salespeople, help for, 271-275 

training of, 195-199 
Satellite business, 5 
Securities and Exchange Commission, 

102 

Self-service stores, 172-173 
Shoplifting, 42-43 
Shops (see Plants) 
Slow-moving goods, 25 
Small-loan companies, 113 
Space, economy in use of, 303 
"Splitting" of incomes, for tax deduction, 

68-69 

Standards, National Bureau of, 260 
Statements, false, law against, 96 
financial, 96 

analysis of, 88-93 
operating, 20-21 
Statutes (see Laws) 
Stealing (see Frauds) 
Stenography costs, economy in, 314-316 
Stock (see Inventory) 
Stocks (see Corporation stock) 
Storage space, 280 
Stores, avoidance of accidents in, 173- 

174 

buying programs of, 175-181 
good, characteristics of, 165-166 
layouts of, 171-172 
locations of, 166-167, 169-170 
need for, 166-167 
opening of, 9-13, 166-167 
operation of, 165-209 
precautions in, 173-174 
selection of right towns for, 167-169 
self-service, 172-173 
Styles, variations in, 5 
Suppliers, 117 

loans by, 116-117 

Supplies, controlling receipt of, 241 
frauds in buying, checking of, 231 
office, economy in use, 309-316, 322- 

324 
Supply, diminished, 7 

source of, 11 
Swindlers (see Frauds) 



Tax control, from joint ventures, 58 
Tax deductions, 52 



332 



INDEX 



Tax deductions, for costs, 57, 64-66 
business and personal, 67-68 

economy in reporting, 56-58 

for expenses, 57 

personal, not deductible, 62 

legitimate, from income, 54, 55 

maximum, obtaining, 62-66 

of salaries, 53 

standard, 67 

for trade-ins, 56-57 
Tax laws, use of, 13-14 
Tax management, 50-75 
Tax overpayments, of partnership, 146- 
151 

peril in, 75 

Tax records, business, effect of, 53 
Tax reporting, year for, 54 
Taxation, 50-75 

computation of depreciation for, 66- 
67 

of corporation, 154-164 

of family business, 59-60 

"income splitting" for, 68-69 

of partnerships, 146-151 

plant inventory for, 244-249 

pricing of, 184-185 
Thefts (see Frauds) 
Time-recording devices, 34 
Tools and machinery, care of, 230-236 
Tornado insurance, 123 
Town, selection of, for store, 167-169 
Trade acceptances, 95-96 

and notes, 89-90 



Trade-ins, for taxation, 56-57 
Turnover-inventory ratio, 24 
Typewriters, care of, 308 
Typewriting, economy in, 312-313 

U 

Utilities, economy in use of, 324-325 



Veterans, loans for, 118-120 

W 

Wages (see Employees) 

Warehouse certificates, 111 

Weakness in retail merchandising, 9-10 

Wear and tear (see Depreciation) 

Weather factor, 5 

'Wholesalers, help from, 280 

loans by, 116-117 

and retailers, 289, 295-297 
Wholesaling, 289-302 

accounting and inventory methods in, 
289-302 

branches used in, 292 

cash-and-carry outlets in, 294 

cost control in, 289 

deliveries in, 292 

handling costs in, 292 

mail-order sales in, 293-294 

territories in, profitable, 292-293 
Window displays, 199-200 
Windstorm insurance, 123 
Worth, net, and liabilities, 23-24