Ratios for Financial Statement Analysis

Liquidity Analysis Ratios Current Ratio Current Ratio =

Current Assets -----------------------Current Liabilities

Quick Ratio Quick Ratio =

Quick Assets ---------------------Current Liabilities

Quick Assets = Current Assets - Inventories Net Working Ca ital Ratio Net Working Ca ital Ratio =

Net Working Ca ital -------------------------!otal Assets

Net Working Ca ital = Current Assets - Current Liabilities

Profitability Analysis Ratios Return on Assets "R#A$ Return on Assets "R#A$ =

Net Income ---------------------------------Average !otal Assets

Average !otal Assets = "%eginning !otal Assets & 'n(ing !otal Assets$ ) * Return on '+uity "R#'$ Return on '+uity "R#'$ =

Net Income -------------------------------------------Average Stock,ol(ers- '+uity

Average Stock,ol(ers- '+uity = "%eginning Stock,ol(ers- '+uity & 'n(ing Stock,ol(ers- '+uity$ ) * Return on Common '+uity "R#C'$ Return on Common '+uity "R#C'$ =

Net Income -------------------------------------------Average Common Stock,ol(ers- '+uity

Average Common Stock,ol(ers- '+uity = "%eginning Common Stock,ol(ers- '+uity & 'n(ing Common Stock,ol(ers- '+uity$ ) * .rofit /argin .rofit /argin =

Net Income ----------------Sales

'arnings .er S,are "'.S$ 'arnings .er S,are "'.S$ =

Net Income --------------------------------------------Number of Common S,ares #utstan(ing

Activity Analysis Ratios Assets !urnover Ratio

Assets !urnover Ratio =

Sales ---------------------------Average !otal Assets

Average !otal Assets = "%eginning !otal Assets & 'n(ing !otal Assets$ ) * Accounts Receivable !urnover Ratio Accounts Receivable !urnover Ratio =

Sales ----------------------------------Average Accounts Receivable

Average Accounts Receivable = "%eginning Accounts Receivable & 'n(ing Accounts Receivable$ ) * Inventory !urnover Ratio Inventory !urnover Ratio =

Cost of 0oo(s Sol( --------------------------Average Inventories

Average Inventories = "%eginning Inventories & 'n(ing Inventories$ ) *

Capital Structure Analysis Ratios 1ebt to '+uity Ratio 1ebt to '+uity Ratio =

!otal Liabilities ---------------------------------!otal Stock,ol(ers- '+uity

Interest Coverage Ratio Interest Coverage Ratio =

Income %efore Interest an( Income !a2 '2 enses ------------------------------------------------------Interest '2 ense

Income %efore Interest an( Income !a2 '2 enses = Income %efore Income !a2es & Interest '2 ense

Capital Market Analysis Ratios .rice 'arnings ".'$ Ratio .rice 'arnings ".'$ Ratio =

/arket .rice of Common Stock .er S,are -----------------------------------------------------'arnings .er S,are

/arket to %ook Ratio /arket to %ook Ratio =

/arket .rice of Common Stock .er S,are ------------------------------------------------------%ook 3alue of '+uity .er Common S,are

%ook 3alue of '+uity .er Common S,are = %ook 3alue of '+uity for Common Stock ) Number of Common S,ares 1ivi(en( 4iel( 1ivi(en( 4iel( =

Annual 1ivi(en(s .er Common S,are -----------------------------------------------/arket .rice of Common Stock .er S,are

%ook 3alue of '+uity .er Common S,are = %ook 3alue of '+uity for Common Stock ) Number of Common S,ares 1ivi(en( .ayout Ratio 1ivi(en( .ayout Ratio =

Cas, 1ivi(en(s -------------------Net Income

ROA = Profit Margin X Assets urnover Ratio R#A = .rofit /argin 5 Assets !urnover Ratio Net Income R#A = ------------------------ = Average !otal Assets .rofit /argin = Net Income ) Sales Assets !urnover Ratio = Sales ) Averages !otal Assets

Net Income -------------- 5 Sales

Sales -----------------------Average !otal Assets

TO BEAT THE MARKET, BE IN THE RIGHT SECTOR, PART 1

What stock market sector have you been in lately? The sectors that are beating the market or the ones that are trailing behind? Being in the right sectors will make a significant difference in the performance of your portfolio. However, finding the right sector can be a difficult proposition. First let s e!amine a couple of recent studies on sector rotation that help illuminate the opportunities and the problems for investors. "n a follow up article we will then provide some guidelines for investors and traders on how to use sector rotation to achieve better investing results.

Sector Rotation
#ector rotation is an investing concept that believes that investors can produce better returns if they ad$ust the makeup of their portfolios to reflect the stage of the business cycle and the economy. "n theory different sectors of the economy will perform better at different stages of the economic cycle. The %ational bureau of &conomic 'esearch (%B&') and especially #am #tovell chief investment strategist for #tandard * +oor s have been the leaders in helping to define the potential of following the economic cycle and rotate investments among various sectors. The %B&' is the organi,ation that tells us when we have had a recession, usually well after the fact. They perform in depth analysis of many economic factors the help determine the status of the economy. #am #tovell in one of his BusinessWeek columns titled -#ector Watch. stated -The %ational Bureau of &conomic 'esearch sets dates for peaks and troughs in economic activities, based on its assessment of such factors as gross domestic product and employment growth. #ince /012, the 3.#. economy has e!perienced // recessions and /4 e!pansions (it5s now in our //th e!pansion). 6rowth periods have lasted an average of nearly five years (20 months, to be e!act), with the shortest being /7 months from 8uly, /094, to 8uly, /09/, and the longest at /74 months from :arch, /00/, to :arch, 744/.. #tovell has published two books on the sector rotation titled #tandard * +oor5s 6uide to #ector "nvesting /002 and #ector "nvesting, /00;. They provide a general idea of how the economy has influenced investing and especially flow of investors money. While e!pensive these books offer an e!cellent review of the important concepts of sector rotation and how to use them to improve your portfolio s performance.

The table below is derived from #tovell s book and describes the primary stages of the economy along with key characteristics that help define the stage. "t provides some guidelines as to where the economy might be within the business cycle. Stage: Consumer E !ectations: In"ustria# Pro"uction: Interest Rates: $ie#" Cur%e: &u## Recession 'eviving Bottoming <ut Falling %ormal Ear#' Reco%er' 'ising 'ising Bottoming <ut %ormal (#teep) &u## Reco%er' =eclining Flat 'ising 'apidly (Fed) Flattening <ut Ear#' Recession Falling #harply Falling +eaking Flat>"nverted

3sing these stages the graph below, courtesy of #tock?harts.com, shows these relationships and the order the key sectors respond to the economic cycle. The #tock :arket ?ycle precedes the &conomic ?ycle as investors try to anticipate how the market will react to the changes to the economy. Sector Rotation Mo"e#:

(egen": :arket ?ycle &conomic ?ycle

That seems pretty easy. +erform an analysis of the economy using the factors above and then invest in the sectors that will perform the best in the future based on the sector rotation model. #o where are we now, <ctober 744@? ?onsumer e!pectations have been falling recently with the concerns over the credit problems. #o that places us in the Full 'ecovery stage. "ndustrial production overall seems to be rising though there are some areas of problems, especially in the homebuilding and auto sectors. #o that probably puts us in the Full 'ecovery stage, maybe. "nterest rates are falling as the Fed recently lowered the Fed Funds and =iscount rate 4.24A. #o that puts us in the Full 'ecession stage. The yield curve was flat to inverted but is now more normal. #o that puts us in the Full 'ecession stage. Bssuming this analysis is correct (after it is brief and sub$ective) you can get the idea that it is more difficult to identify the stage of the econ0omy we are e!periencing. Bdding to the problem is if the economy is e!periencing $ust a slow down and not a recession, then it makes the analysis even more difficult. Bs you can see the hard part in all this is identifying where the economy is in the business cycle. Bs you might reali,e this is no easy matter and many economists get it wrong. There are many indicators that get published on a regular basis that people use to monitor the economy. This is one of the reasons the %B&' usually pronounces we are in a recession after the fact, and usually after it is over.

From an investment perspective, it is difficult to tell e!actly what stage of the economy you are e!periencing. #econdly, secular factors can overcome the normal cyclical pattern. #ound fiscal and monetary policy aimed at nonCinflationary growth, the final impacts of automation on costs and margins, the restructuring of business for greater efficiency, and the global economy have created a far higher level of gross domestic product growth than we have e!perienced before without incurring substantial increases in inflation, interest rates, and risks of a bear market. These secular phenomena are important to understand if investors want to be able to take advantage of sector rotation to improve the performance of their portfolios.

Recent Stu"ies
Fortunately, there have been a couple of recent studies that might help us to get a better understanding of how to use sector rotation more effectively. <ne is from a paper that builds on the work of #tovell and the %B&'. "n this study that covers nine complete business complete business cycles, they find that sector rotation does work though they apply some caveats that are important to understand. "n another recently completed study, the authors show that Fed rate changes are associated with strong patterns in eDuity returns. The study, which will be published in a forthcoming issue of the Journal of Investing, indicates that a sector rotation strategy guided by Fed rate changes could have substantially improved portfolio performance over the past EE years. " will review each of these studies in ne!t weeks +oint of "nterest.

T)e Bottom (ine

#ector rotation when applied correctly has the potential to improve investors returns. The key to success is being able to identify where the economy is along the business cycle. Bs some studies have shown, when investors can identify where they are along the business cycle they can make better investment decisions and improve their results. However, the difficulty is to recogni,e where the economy is along this cycle. Fortunately there is some more recent research that helps to shed some light on this problem. %e!t week " will review these studies to see how useful they might be to improve investor s ability to improve their investing prowess. Then on the following week " will provide guidelines on how to use sector rotation to improve your investing performance. * +,,- Hans .agner &ditorial Brchive As a long time investor, I was fortunate to retire at 55. I believe you can employ simple investment principles to find and evaluate companies before committing one's ard earned money. !ecently, after my c ildren and t eir friends graduated from college, I found my self elping t em to learn about t e stock market and investing in stocks. As a result I created a website t at provides a growing set of information on many investing topics along wit sample portfolios t at consistently beat t e market. "eel free to visit t e site at ttp#$$www.tradingonlinemarkets.com$

.HAT E/ACT($ IS IN&(ATION0

Before getting started, This piece is my understanding of what inflation is, as taught by all the writers from the various W&B sites. :y issue is with the standard e!planation. That e!planation being, Ftoo much money chasing too few goodsF, left me thinking. Huh?GG &ventually, after reading it from multiple sources, the idea finally sank in. Bnd " hope " got it right, certainly don5t want an enraged :ogambo at my door ready to take my head off, if this is wrong. This is the way " try to e!plain it to family and friends. "n my humble opinion, another way to understand inflation, is from a basic picture conceptual level. Hook at it in terms of a glass of water. The first thing to establish is, what does the glass itself represent?

?onsider thisI The glass represents $ust about anything and everything for sale. :ostly, this will be $ust about anything you can touch, although " took the liberty of lumping services in as well. To me everything is related in an inflationary sense. "t only matters to what degree a price will rise, whether it s something you can touch, like a loaf of bread, car, wrench, toy, or even a service, such as a real estate appraiser. &verything is interrelated in some way. The point is, if you can buy it, regardless of what it is, the glass will represent it. ( Some folks consider currency money, but thats not really true. There is a difference. 1 %ow place some water in the glass, and think of the water as currency. Bs a matter of fact, it $ust so happens that the amount of currency represented by water in the glass, is what is reDuired for the purchase of all products and services at the moment. ( products and services which is represented by the glass1

Bnd where did this currency come from? "t was created by the Federal 'eserve, courtesy of their money creation mechanism. "t should represent a certain store of value. B certain amount of money is necessary for the purchase of goods and services. That would be a good thing. #o the Fed is responsible for the creation of this currency that is used for the purchase of all products and services. ( %es, I'm using money and currency interc angably. & ere really is a difference. )

The level of the water in the glass represents the price of goods and services. That part is real important to see. Bll products and services cost something. Jou can t go into a store and get stuff for free. Bfter costs are established, a price is assigned to whatever stuff you want to purchase. Bll products and services have costs associated with them, and that, helps establish the price to you. #o, the level of the water in the glass represents the price you pay for goods and services. %ow, let us finally consider the role of the Federal 'eserve. The very nature of the Federal 'eserve is to create inflation and manage inflation e!pectations. The Fed presents the illusion they are fighting inflation, but their whole purpose in life is to inflate the money supply. The Federal 'eserve will also try and present the illusion of a healthy economy. B healthy economy looks like growth with steady costs and low unemployment. The Fed accomplishes this slight of hand with deceipt and grossly manipulated statistics and inde!es. ( '(ample# )ews reports t at t e ecomomy is strong and wages are up. *onsumers are confident, and inflation remains contained.) Bll of which is a huge fraud and cover to continually inflate the money supply. #o let us e!amine the effects of the Federal 'eserve adding liDuidity or more currency to the money supply, ergo inflation.

The Fed adds liDuidity. But now look at the level of water in the glassGG The level has risenG The price has risenG The glass still represents all products and services that can be purchased with currency. The products and services did not increase. They re still the same products and services, but more currency has been added into the money supply. #omething changed. What changed is, -the price of products and services.. They are now more e!pensive. But they are only more e!pensive, in terms of the currency you are using. "n this case, it would be the dollar. The product or service is not really more e!pensive. The currency or dollar has been devalued and is worth less. :ore currency is needed to buy the same thing, because every dollar in your wallet is worth $ust a little bit less. This happens every time the Fed creates more currency. The amount of products and services remain the same. "f there is more currency in the economy, eventually, it has to work its way into pricing. Bll prices rise until the whole issue between products, services and total money supply, gets balanced out. Bnd that is inflation from my very basic point of view. #tefan

Free Business Book

Se! or craft your !ay to success"

able of Contents # $nde%

&y C'ristina S'errod for CraftAnd(abricLinks)co* 1oes your 6ob satisfy your soul7 or 6ust your bank account - or er,a s neit,er8 W,et,er your (esire is to se9 or craft or use anot,er talent7 you can be successful: Risky8 It can be7 but7 t,roug, business

kno9le(ge7 you can re(uce t,e risks: Rea( t,is (ocument from start to finis,7 an( you 9ill be 9ell on your 9ay to fulfilling your (reams: .lease rea( our disclai*er an( rea(ing t,is book: Return to our (reebies $nde% (R++ ,e!sletter Stay informe( about our ne9 atterns ; ot,er freebies< er*s before

A&L+ O( CO, +, S C'apter One- Reasons (or Starting .our &usiness C'apter C'apter !o- C'oosing A &usiness Structure 'ree- /overn*ent Agencies C'apter (ive- Professional Assistance C'apter Si%- &usiness Planning ools

C'apter Seven- 1nderstanding .our (inancial $nfor*ation C'apter +ig't- Sa*ple &usiness C'apter ,ine- &usiness Resource Links

C'apter (our- &usiness Start0up

21$C3 $,4+X Accrual Accounting C,a ter = &alance S'eet C,a ter = &usiness Plan C,a ter > &udgets C,a ter > Cas' &asis Accounting C,a ter = Cas' (lo! Pro5ection C,a ter > CPA C,a ter ? Corporation C,a ter * Cost of /oods Sold C,a ter @ Credits C,a ter = 4ebits C,a ter = 4isability $nsurance C,a ter A +*ploy*ent a% C,a ter A (a*ily Support C,a ter B Financial State*ents C,a ter = (1 A "Fe(eral Cnem loyment !a2$ C,a ter A $*age- Professional $*age C,a ter D $nco*e State*ent C,a ter = $nco*e a% C,a ter A $nsurance Require*ents C,a ter ? $nternal Revenue Service 6$RS7 C,a ter A Legal Assistance C,a ter ? License C,a ter A Marketing # Advertising C,a ter ? ,a*e of &usiness C,a ter D Partners'ip C,a ter * Sa*ple &usiness Posting C,a ter A Sole Proprietor C,a ter * Structure- &usiness Structure C,a ter * i*e Manage*ent C,a ter > 1S 8ustice 4epart*ent C,a ter A 9it''olding a% C,a ter A

$ntroduction
.+S .O1 CA," 4ou can successfully run your o9n crafting or se9ing business: !o (o so7 ,o9ever7 you must ,ave a goo( un(erstan(ing of t,e business 9orl(: W,y (o businesses succee(8 W,y (o t,ey fail8 !,e contents of t,is book are taken mainly from a (ocument I originally 9rote un(er ES ectrum AccountingE7 a consulting business s ecialiFing in small businesses: I set u t,e accounting system7 olicies an( roce(ures7 an( taug,t t,e business o9ners an( managers ,o9 to successfully e2tract accurate an( timely financial information in or(er to make soun( management (ecisions:

I ,o e to accom lis, several t,ings 9it, t,is book: First7 I ,o e to take t,e mystery out of running a small business an( s,o9 t,at contrary to 9,at you ,ave robably been tol(7 4#C CAN 1# I!< %y using t,is book as a gui(e7 you 9ill be able to set u an efficient business rig,t from t,e start: 1on-t be foole( by larger7 fancy looking businesses: If you follo9 t,is book7 you 9ill be a,ea( of a great number of t,em: From ,ome businesses to fancy salons an( retail stores7 I ,ave seen t,e same errors: No one is above t,e mistakes I 9ill teac, you ,o9 to avoi( in t,is book: %e ositive7 stay focuse(7 succee(< 4$SCLA$M+R !,is book is a %ASIC gui(e only: It 9ill intro(uce you to t,e 9on(erful 9orl( of business: It 9ill e2 lain business terms an( ,el you un(erstan( t,e business conce ts t,at you s,oul( be familiar 9it,: It 9ill enable you to ask more intelligent +uestions 9,en you meet 9it, your C.A7 la9yer or government ersonnel: !,is book is not meant to be a re lacement for rofessional a(vice: ALWA4S seek t,e assistance of a +ualifie( rofessional before rocee(ing: Current ta2 la97 an( local regulations are beyon( t,e sco e of t,is book: Alt,oug, s ecific numbers may ,ave been accurate at t,e time t,is book 9as 9ritten7 la9s may ,ave c,ange(: Again7 t,is is merely a gui(e: 4our C.A an( la9yer 9ill e2 lain current la9s an( re+uirements to you: !o ,ave a co y of t,is book7 eit,er rint t,e (ocument7 or select an( rint t,e areas of your c,oice: !,e !able of Contents an( in(e2 above 9ill take you to s ecific areas of t,e (ocument:

C'apter : Reasons (or Starting .our &usiness

!,ere are several reasons to start your o9n business7 an( you alrea(y kno9 most of t,em or you 9oul( not be rea(ing t,is book: Small businesses are muc, more successful t,an you mig,t t,inkG t,ey are t,e backbone of America-s economy: !,e number of successful small businesses is gro9ing eac, year: 1e en(ing on 9,at ty e of fiel( t,e business is in7 it may actually ,ave an a(vantage over its larger neig,bor: Alt,oug, a large business can buy goo(s an( su lies at a lo9er rate7 (ue to t,e increase( +uantity urc,ase(7 t,e small business is not bur(ene( 9it, layers of management an( inefficiency: !,e small business can react muc, more +uickly to a fast c,anging market lace: It can fill little nic,es of nee( in society t,at 9oul( not be rofitable or 9ort,9,ile for a large business: .lease rea( our disclai*er an( er*s before rea(ing t,is book:

+ntrepreneurial Spirit If you ,ave a truly entre reneurial s irit7 not,ing can s+uelc, it: 4ou 9ill not get it out of your system until you ,ave run a successful business: 4ou are starting your business because you love c,allenge an( you 9ant to create your o9n business from scratc,7 (evelo an( gro9 it an( get satisfaction from t,e fact t,at t,is is your o9n uni+ue creation: !,ere is no better feeling in my o inion t,an utting your lan into motion an( 9atc,ing it gro9 an( succee(: (reedo* 4our o9n business 9ill allo9 you muc, more free(om t,an you 9oul( e2 erience as an em loyee for someone else-s com any7 bot, in creativity an( in time: Running a small art time business from ,ome can be a 9on(erful 9ay to earn a living7 yet maintain t,e free(om of sc,e(uling t,at is necessary for a man or 9oman 9,o also 9ants to be an at-,ome arent: +%tra $nco*e

W,en starte( as a secon( income7 it (oes not ,ave t,e ressure to succee( +uickly in t,e 9ay t,at a rimary income business ,as: /any business o9ners start out t,is 9ay: /any ,obbies ,ave turne( into successful art time or full time businesses: It can also be a 9on(erful 9ay for a erson to earn some e2tra income after retiring: 9'at Are .our Reasons; %e sure7 ,o9ever7 to correctly i(entify your real reasons for (esiring your o9n business: If t,e ans9er is t,at you (o not really 9ant to 9ork7 running your o9n business is not suc, a goo( i(ea: 4ou 9ill 9ork ,ar(er t,an ever before7 an( robably for less ay7 at least in t,e beginning: If you 9ant free(om to make your o9n (ecisions7 are a very ,ar( 9orker an( 9ant t,e benefits of your ,ar( labors for yourself rat,er t,an for someone else7 an( you are atient an( 9illing to 9ait for t,e financial re9ar(s7 t,en running your o9n business is t,e 9ay to go:

Special Considerations %e sure t,at t,e business meets all of your nee(s - financial7 mental)emotional7 ,ysical an( s iritual: 1oes it fit into your lifestyle8 Ho9 9ill your family feel about your business8 Are t,ey su ortive8 !ry to lan time for your family an( yourself outsi(e of your business: Inclu(e your family in your business 9,erever ossible: Listening to t,eir t,oug,ts an( o inions 9ill make t,em feel more a art of your business: Running a successful business at t,e e2clusion of all else in life means t,at t,e success of t,e business 9as obtaine( at a ,orribly ,ig, rice: !ra(ing a success in business for a failure in life is not a goo( tra(e: It is not 9ort, losing your family or yourself along t,e 9ay: !,e best reason for running a business8 It enables you to succee( in your life goals: Wit, goo( lanning an( realistic goals7 you can fit t,e business into your life 9it,out creating a (isaster: A time management course can be of real benefit: A goo( course goes far beyon( sim ly lanning your (ay: It 9ill teac, you ,o9 to kee your business7 family an( s iritual lives toget,er in a 9ay t,at makes all t,ree areas successful: I recommen( t,at you use goo( business lanning7 time management7 an( organiFational tools to ensure you are lanning a successful business an( successful life:

C'apter < &usiness Structure

W,at business structure is best for you8 4ou7 along 9it, your C.A an( attorney7 must (eci(e 9,at legal form you 9ant your business to take: %e sure you un(erstan( t,e a(vantages an( (isa(vantages of eac, (ifferent ty e7 so you can make t,e correct c,oice: Legal7 as 9ell as ta2 conse+uences must be consi(ere(: !,ere are basically t,ree (ifferent legal forms your business can take7 lus some variations of t,e basic t,ree: 4our C.A an( la9yer can go into t,ese in furt,er (etail 9it, you: .lease rea( our disclai*er an( rea(ing t,is book: er*s before

Sole Proprietors'ip !,is means t,at you an( your business are legally one an( t,e same: In ot,er 9or(s7 you are ersonally res onsible for your business: !,is inclu(es (ebts an( liabilities: If t,e business cannot ay a bill7 you must ay it 9it, your o9n fun(s: !,is is er,a s t,e main (isa(vantage of t,is form of business: If you are forming a business 9,ic, ,as otential for liability7 t,is 9oul( not be a goo( c,oice

of business structure: A sole ro rietor can (e(uct a ortion of me(ical insurance costs7 but since ,e or s,e is not an em loyee7 t,e sole ro rietor cannot benefit from all of t,e same em loyee 9rite offs t,at a cor oration can: !,ere are many a(vantages to t,is form of business: 4ou ,ave total control over your business7 an( you are not an em loyee7 so "unless you em loy ot,ers$ you are free from filing em loyee ta2 returns7 lus you are free to make (ra9s "remove fun(s$ from t,e business: !,is is not true for a cor oration: Fun(s (ra9n from a cor oration must taken t,roug, ayroll or a loan7 9,ic, must be ai( baci 9it, interest: !,ere may be a ta2 a(vantage to being a sole ro rietor (e en(ing on your in(ivi(ual ta2 bracket an( ot,er circumstances: 4ou 9ill ay ersonal income ta2 on t,e rofit of t,e business7 9,et,er you ay yourself fun(s or not: For e2am le7 if t,e business ,as a net rofit of IBJ7JJJ7 your income ta2 is ai( base( on t,at IBJ7JJJ - even if you left all t,e earnings in t,e com any bank account an( (i(n-t E ay yourselfE anyt,ing - more on t,is in a later c,a ter: Sc,e(ule C of t,e BJDJ form is use( to re ort your business rofit or loss: N#!'K In t,e e2am le above7 your income ta2 is base( on t,e full IBJ7JJJ t,e business earne(: !,is is your ay7 9,et,er you take it all in (ra9s or not: 4ou may take I?7JJJ or I*J7JJJ in (ra9s t,at year your income ta2 is still base( on t,e IBJ7JJJ net rofit of t,e business: 4our gross ay as far as com uting income ta2 goes is al9ays base( on t,e net rofit of t,e com any: Partners'ip !,is means you s,are t,e business 9it, someone else: In many 9ays you are like t9o sole ro rietors 9,o ,ave 6oine(: !,e artners,i is governe( by t,e .artners,i Agreement: !,is agreement is e2tremely im ortant because it outlines t,e (uties an( res onsibilities of artners7 covers 9,at ,a ens in t,e event of a artner-s (eat,7 etc: 4ou7 as a artner7 are not an em loyee: 4ou can make (ra9s as in a sole ro rietors,i 7 an( you7 as a artner7 ,ave control over t,e management of t,e artners,i "9it,in gui(elines of t,e artners,i agreement$: As 9it, t,e sole ro rietors,i 7 you face liability regar(ing t,e business (ebts "limite( artners an( limite( artners,i s are more rotecte($: Cre(itors may even come after business assets to satisfy ersonal (ebts of a artner: 4ou also are not em loyees7 so (o not +ualify for t,e ta2 benefits regar(ing em loyees liste( above un(er Sole .ro rietors,i s: Also7 t,e artners,i (oes not automatically continue in t,e event of a (eat, of a artner "a artners,i generally is (issolve(7 an( a cor oration 9ill continue$: #t,er forms of artners,i inclu(e Limite( .artners,i "t,e limite( artner is an investor 9,o is not actively involve( in t,e business7 but merely rovi(es fun(s$ an( t,e Limite( Liability .artners,i : If you enter into a artners,i - be sure you 'ave a good partners'ip agree*ent: Corporation A cor oration is legally a se arate entity from t,e o9ner: !,at means t,e liability is limite( "alt,oug, t,is is no longer +uite t,e guarantee it once 9as$: !,e cor oration ays its o9n income ta2: !,e o9ner is ai( t,roug, ayroll or (ivi(en(s an( ays ,is or ,er o9n income ta2es: !,e o9ner cannot take E(ra9sE: Removing money must be in t,e form of ayroll or a loan "9,ic, must be ai( back at a reasonable interest rate$: !,ere may be ta2 a(vantages to incor orating7 (e en(ing on t,e in(ivi(ual-s ta2 bracket: /ost businesses 9it, ,ig, liability ",ome buil(ers7 for e2am le$ 9ill incor orate: #t,er businesses ten( to incor orate 9,en t,ey reac, a certain level of sales: 4our C.A can rovi(e more information on t,is: !a2 la9s c,ange constantly7 so I cannot be more s ecific in t,is (ocument: I am not a la9yer or ta2 s ecialist: !o (eci(e 9,ic, form of business is best for you7 (iscuss your nee(s 9it, your la9yer an( C.A: 0ui(ance from t,ese rofessionals is ,ig,ly recommen(e( in t,e formation of your business: /oney s ent for e2 ertise u front can be a ,uge savings to you later: !,ese rofessionals are best e+ui e( to ans9er your +uestions an( rovi(e recommen(ations:

C'apter = /overn*ent Agencies

!,e government is robably t,e single biggest

obstacle to starting an( running a small business: W,y8 Lack of kno9le(ge on t,e art of t,e business o9ner: !,ese la9 abi(ing citiFens 9is, to E(o t,e rig,t t,ingE7 but t,e numerous rules an( regulations baffle an( frig,ten t,em: !,ey (eci(e to 9ork Eun(er t,e tableE or "9orse$ (eci(e t,at running a business 9oul( be too (ifficult: I 9ill i(entify t,e various agencies7 t,eir ur ose7 an( your res onsiblilities7 so t,at t,e fear an( mystery (isa ear: !,e government can actually be a goo( source of assistance an( information: .lease rea( our disclai*er an( rea(ing t,is book: er*s before

As t,e government gro9s an( a((s more an( more rules an( regulations7 running a business becomes more (ifficult: At t,e same time7 ,o9ever7 t,ere are lentiful resources at your (is osal: I ,ave actually foun( most government em loyees to be +uite ,el ful: !,e trick is to ,ave t,e rig,t attitu(e 9,en a roac,ing t,em: !,ere are rules7 but if you learn t,em an( abi(e by t,em7 you nee( not fear t,em: Having sai( t,is7 I 9ill move on to i(entifying t,e various agencies you must (eal 9it,: !,is may not be a com lete list for your area: For e2am le7 you may also ,ave ,omeo9ner association rules to follo97 as 9ell as ot,er state an( local regulations: (ederal /overn*ent$nternal Revenue Service %usiness an( .ersonal Income !a2es 'm loyment !a2esK LDB ) LDD !a2esK /e(icare !a2es Social Security !a2es Wit,,ol(ing !a2 LDJ !a2esK Fe(eral Cnem loyment !a2 8ustice 4epart*ent Immigration La9s an( Illegal Alien Hiring

State > Local /overn*ent-

State 4epart*ent of Revenue %usiness ; #ccu ation "% ; #$ !a2 "not all states$ Sales !a2es Cse !a2 State Income !a2es State 1ne*ploy*ent State 4isability 4epart*ent of Assess*ent

0o to Resource Links for links to im ortant government agencies7 as 9ell as ot,er ,el ful business sites: If you ,ave em loyees7 you 9ill nee( to familiariFe yourself 9it, all of t,e above: If you (o not ,ave em loyees7 you 9ill not ,ave em loyment ta2es: !,erefore7 you 9ill not ,ave to kno9 about LDB7 LDJ or state em loyment ta2es: 4ou still must un(erstan( t,e la97 ,o9ever7 because you mig,t ,ave subcontractors or ot,ers 9,om you ay for services: 4ou must be sure t,e erson +ualifies as a subcontractor "(oes s,e ,ave a business license8 Are you making t,e c,eck out to E/ary MonesE or to EA%C 'mbroi(eryE8$7 or t,e government 9ill see t,e erson as your em loyee: If in (oubt7 t,e state usually rules in favor of Eem loyeeE status: !,is makes 4#C res onsible if t,e erson gets in6ure( on t,e 6ob: It can also make you res onsible for em loyment ta2es: I ,ave seen some true nig,tmares regar(ing t,is: !,is can even e2ten( to secon( level - suc, as em loyees of someone you ,ire: !,ere

are several criteria for +ualifying as EsubcontractorE rat,er t,an Eem loyeeE: %e sure you are familiar 9it, t,em: (+4+RAL /O?+R,M+, - $RS %CSIN'SS AN1 .'RS#NAL !A5'S As for fe(eral ta2es7 you 9ill o9e income ta2es base( on t,e rofit your business makes: If you are incor orate(7 your business 9ill o9e it in(e en(ent of your o9n ersonal ta2es: It is as if t,e business is a se arate erson from you: If you are a sole ro rietor7 t,e business rofit is your earnings7 9,et,er you ai( yourself or not: See C,a ter #neK Sole .ro rietor: 4our C.A 9ill figure out for you ,o9 muc, your business s,oul( ay into income ta2 (uring t,e year to ensure you ,ave ai( enoug, by any (ue (ates: If you are incor orate(7 your ta2 ayments for t,e com any-s income ta2 9ill be ai( 9it, an BB*J cou on7 (e osite( at t,e bank7 an( your o9n ersonal ta2es 9ill be ai( t,roug, 9i,,ol(ing from t,e ayc,eck your cor oration ays you: If you are a sole ro rietor7 your com any is not se arate from you7 legally7 so it (oes not ,ave its o9n income ta2es to ay: 4ou 9ill make estimate( ta2 ayments 9it, BJDJ 'S"or ,ave your s ouse take out enoug, e2tra from ,is ayc,eck to cover your ta2es - muc, easier<$: At year en(7 you 9ill file form BJDJ 9it, Sc,e(ule C " rofit)loss$ an( Sc,e(ule S' "Self 'm loyment !a2K since you are em loyer an( em loyee7 you must ay bot, si(es of social security an( me(icare$: If you are a artners,i 7 t,e artners,i itself "com any$ files form BJ>? 9it, a Sc,e(ule N-B for eac, artner "information only for t,e IRS$: 'ac, artner files form BJDJ 'S "for estimate( income ta2es (ue$ an(7 at year en(7 form BJDJ 9it, sc,e(ule ' an( Sc,e(ule S': LDB ) LDD !A5'S W,en you subtract income ta2 an( social security "9,en I say social security7 I am also inclu(ing me(icare$ ta2 from your em loyees7 you must give t,at money to t,e government: If you file +uarterly you 9ill file a LDB form: If you file annually you 9ill file a LDD return: !,e government can tell you 9,ic, one you must file: 4ou must also matc, t,e social security ortion of t,e ta2: !,at means t,at if you 9it,,ol( IL from ay for income ta2 "calle( 9it,,ol(ing$ an( I=:>? for social security ta27 you must turn t,at money in7 along 9it, I=:>? of t,e com any-s money: A total of I*D:AJ must be turne( in: If t,is is all you o9e7 you can turn in t,e amount at t,e en( of t,e +uarter 9,en you fill out t,e LDB return: #nce you o9e If you meet t,e current minimum for mont,ly (e osits "or more fre+uent t,an mont,ly$ you must fill out a LDB cou on "mark t,e bo2 ELDBE$ an( (e osit t,e fun(s at your bank: 4our banker 9ill set t,is u for you: If your ayroll is large7 you may nee( to make (e osits more fre+uently t,an mont,ly: 4our C.A can ans9er suc, +uestions for you: See IRS ublications ?AL an( LA= for furt,er information on em loyment ta2es: LDJ !A5'S !,is covers fe(eral unem loyment: !,is is ai( only on t,e first I=7JJJ "I=7JJJ in *JJB - c,eck current rules$ of ayroll er em loyee an( a cre(it is given for amounts ai( to t,e state for state unem loyment: !,e Fe(eral Cnem loyment !a2 "FC!A$ is ai( by t,e em loyer: !,e business is not allo9e( to (e(uct any ortion from em loyee ay: 1ue to t,e cre(it for amounts ai( to t,e state7 t,e fe(eral rate of unem loyment ta2 varies: 0enerally7 9,en you o9e IBJJ or more you make a (e osit to t,e bank using a cou on as you 9oul( a LDB (e osit: /ark t,e bo2 ELDJE: 4our LDB returns must be fille( out an( maile( in +uarterly: !,e LDJ return is (one annually: If you are an em loyer7 your ta2 ayer I1 number is t,e 'm loyer I(entification Number rovi(e( to you by t,e IRS: If you are not an em loyer7 your ta2 I1 number is your social security number: Al9ays ,ave your ta2 ayer I1 number rea(y 9,en you call t,e IRS: See t,e follo9ing 9ebsite for IRS ublications: !,ey are easily (o9nloa(e( an( rinte(: $RS Publications- !!!)irs)gov (+4+RAL /O?+R,M+, - 81S $C+ 4+PAR M+,

!,e 6ustice (e artment ,an(les immigration la9 an( non-citiFen ,iring: I! IS 4#CR R'S.#NSI%ILI!4 as business o9ner to be sure t,at all em loyees are ,ire( legally: S A + > LOCAL /O?+R,M+, - 4+PAR M+, O( R+?+,1+

'ac, state ,as a (e artment of revenue: N#!'K !,e name is similar7 but t,is is N#! to be confuse( 9it, t,e Internal Revenue Service "IRS$7 9,ic, is t,e t,e fe(eral government: !,e State 1e artment of Revenue collects %usiness an( #ccu ation ta2es for t,e state "if your state ,as suc, a t,ing$ as 9ell as sales an( use ta2es: Sales ta2 is also kno9n as retail ta2: Cse ta2 is relate( to sales ta2 an( I 9ill cover t,at after retail ta2: R'!AIL !A5 Retail ta2 is ma(e u of A arts: .art of t,e ta2 goes to your state7 art goes to your county an( art goes to t,e city 9,ere t,e business 9as (one: In t,e state of Was,ington7 you only ,ave to file a return 9it, t,e state as far as collecting ta2 goes: !,ere is a lace on t,e return for (esignating 9,at city t,e ta2 is (ue to: 4ou still ,ave to ,ave a license to (o t,e business in t,e state AN1 in any city t,at also re+uires one: In AriFona7 some cities collect sales ta2es in(e en(ently from t,e state: !,at means t,at I must be fill out a se arate return for t,e city of .eoria - as 9ell as a state return: In t,is 9ay7 Was,ington state is muc, easier: In Was,ington7 most cities re+uire a license to (o business in t,at city7 an( most cities collect business an( occu ation ta2es: So7 you must kno9 your o9n state7 an( 9,et,er your local location re+uires a license: 4ou must al9ays ,ave a state license if you are selling anyt,ing t,at re+uires sales ta27 as 9ell as ossibly a city license: W,et,er or not you nee( to ,ave a license 6ust to (o business "i:e: you are not in t,e retail business$ (e en(s on your location an( your local re+uirements: 4ou may also ,ave ot,er issues7 suc, as ,omeo9ner-s association rules7 t,at (etermine 9,et,er you can run a ,ome business7 etc: C,eck 9it, your city government as 9ell as your state (e artment of revenue: CS' !A5 If your state collects sales ta2 an( you buy an item out of state "from a state t,at (oes not collect sales ta2$ or over t,e internet 9it,out aying sales ta2 your state 9ants t,e sales ta2: !,e gross amount of t,e item is entere( on t,e return7 an( t,e ta2 is ai( un(er Euse ta2E: %usinesses ten( to get caug,t on t,is one< If you buy somet,ing at a garage sale for your business7 you s,oul( ay Euse ta2E on t,at item: S!A!' INC#/' !A5 %ecome familiar 9it, your o9n state-s rules on t,is: Nno9 9,at forms are use( an( 9,at ayment sc,e(ules are re+uire(: S A + /O?+R,M+, - S A + 1,+MPLO.M+, In Was,ington State7 t,e 'm loyment Securities 1e artment ,an(le( state unem loyment: !,is amount is ai( by t,e em loyer only "i:e: t,e business is not allo9e( to (e(uct it from em loyee-s salary$: !,e amount 9as ai( eac, +uarter7 9,en it 9as sent in 9it, t,e return: Rates (e en(e( on eac, business-s lay-off ,istory: States vary on t,is: FamiliariFe yourself 9it, your state-s olicies7 returns an( ayment re+uirements: S A + /O?+R,M+, - 4$SA&$L$ . States suc, as California ,ave state (isability: Was,ington (i( not ,ave (isability7 but it (i( ,ave insurance 9,ic, 9as rovi(e( t,roug, t,e 1e artment of Labor an( In(ustries: .art of t,e amount coul( be (e(ucte( from em loyee ay an( t,e remain(er 9as ai( by t,e em loyer: !,e rate (e en(e( on t,e rofession: SCC%A (iving 9as very e2 ensive "several (ollars er ,our$ an( clerical 9ork 9as relatively c,ea : Again7 familiariFe yourself 9it, your o9n state-s re+uirements: 4+PAR M+, O( ASS+SSM+,

%usinesses must also ay ro erty ta2es to states an( localities t,at re+uire it: For e2am le7 you may ,ave to ay ro erty ta2 to your city7 county an()or your state: !,is is se arate from any of t,e ta2es

mentione( above: It is ai( accor(ing to your businesses assets: C,eck 9it, your o9n local governments: I can-t be more s ecific 9it, state an( local information7 because states ,ave (ifferent agencies an( (ifferent 9ays of ,an(ling t,ings: Look for any small business seminars t,at are rovi(e( by your local state government: !,ese are free an( rovi(e a 9ealt, of information:

C'apter @ Start .our &usiness

&y C'ristina S'errod for CraftAnd(abricLinks)co* !,ere are several ste s you must consi(er 9,en starting a business: %e sure to meet 9it, a goo( accountant an( attorney early on: !,is 9ill ,el revent roblems (o9n t,e roa(: Refer to C'apter A: 3isit your local book store for books on starting an( running a successful small business:

.lease rea( our disclai*er an( rea(ing t,is book:

er*s before

C'oose A ,a*e (or .our &usiness %efore getting attac,e( to a name7 c,eck to be sure it is not taken: Call your state-s 1e artment of Revenue an( ask about t,e business name an( 9,et,er it is in use in your state: If you 9ill be incor orate(7 you can c,eck 9it, t,e Secretary of State to see if t,e name is in use: If t,ere is a +uestion about t,e name7 seek t,e a(vise of an attorney: 0o toK 1nited States Patent # atents: Obtain Licenses In Was,ington State7 only one (e artment must be contacte(G all licensing is ,an(le( from t,e one (e artment: It is a convenient7 efficient system: If retail selling7 an( you are in a state t,at collects sales ta27 you 9ill nee( to be license( in your state as a retailer7 an( you mig,t also be re+uire( to obtain a license 9it, your city: If you are a service business7 you mig,t still nee( to be license(: La9s vary by state7 so c,eck 9it, your o9n state-s licensing la9s: See C'apter 'ree- /overn*ent Agencies: C'oose 'e Rig't Location rade*ark Office for information on tra(emarks7 co yrig,ts an(

Refer to your business lan "C'apter Si%$: Ho9 muc, (i( you bu(get8 W,ere are your customers8 W,at is t,e visibility of t,is location8 W,at is t,e ,istory of t,is location "success or failure for revious businesses$8 A store t,at sells (olls 9oul( (o better near a sc,ool t,an it 9oul( near a men-s at,letic club: &usiness C'ecking Account If you ,ave an actual business name an( business account7 t,e IRS is more likely to see your enter rise as a Ereal businessE rat,er t,an as a ,obby "if it is a ,obby7 you cannot (e(uct e2 enses$: 4our customers 9ill see you as more legitimate as 9ell: Must as im ortant7 your business financial (ata 9ill be se arate from your ersonal (ata: !,is makes bookkee ing muc, easier: .ersonal e2 enses s,oul( never run t,roug, your business c,ecking account: /i2ing ersonal an( business e2 enses creates a

slo

y7 time consuming system:

Start up Supplies and Costs Refer to t,e %usiness .lan "C'apter Si%$: Remember to kee t,ese costs to a minimum: Having a fancy office mig,t be nice7 but not if it causes a (eficit in cas,7 9,ic, ,as been t,e (oom of many businesses: %e sure su lies7 e+ui ment an( inventory are fully consi(ere(: /ake a list of inventory7 office su lies7 office structures "fabric ,ol(ers7 cutting tables7 su ly racks etc:$7 office e+ui ment "com uter7 soft9are7 (esks etc:$ an( anyt,ing else nee(e( for (aily business activities: Professional Appearance #ne t,ing to kee in min( - al9ays look rofessional an( successful< !,ere are several 9ays to (o t,is: B: %e on time<!,is is t,e most im ortant: Never kee a client or customer 9aiting: Al9ays return calls an( kee your client informe( on t,e status of any on-going ro6ects: Some of my clients 9ere e2cellent craftsmen but t,eir businesses suffere( ,orribly because t,ey (i( not get back to clients in a timely manner7 or (i( not s,o9 u on time "or at all<$: If clients are treate( in suc, a manner7 t,ey 9ill not vie9 t,e business as rofessional an( 9ill take t,eir business else9,ere: *: Install an ans9ering mac,ine if a rece tionist is not available to take calls "an( use one after ,ours if you (o ,ave a recei tionist$: A customer took t,e time to call you once7 an( (oes not 9ant to ,ave to remember to call again: Not ,aving an ans9ering mac,ine is t,e same as saying to t,e customer t,at t,eir time is not im ortant: Remember7 t,is coul( be t,eir first "an( only$ im ression of you an( your business: A: Al9ays leave a business car(: A broc,ure is e2cellent also: A broc,ure is nice because it can be informational in some 9ay7 9,ic, catc,es t,e customer-s attention an( a(vertises for you: Car(s an( broc,ures nee( not be e2 ensive: I ,ave al9ays ma(e mine on my o9n com uter7 9it, t,e use of interesting car( stock an( gra ,ics: D: %e careful 9it, your a earance an( ,ygiene: 1o not smell like cigarettes7 alco,ol or erfume: I kno9 t,is is obvious to most eo le7 but I am still amaFe( by ,o9 many eo le I ,ave come across 9,o 9ante( my business but (i( not get it because I 9as literally allergic to t,e erson< i*e Line Refer to t,e !ime .lanning section in C'apter Si%: /ake a list of (uties nee(e( to be accom lis,e( an( list t,em on a realistic time line: !,e .lanning !ools section e2 lains t,is rocess: .ro6ect out into t,e future: !,is e2ercise 9ill ,el you organiFe yourself an( ensure t,at all im ortant tasks are com lete( in a timely manner: If a client ays 9it, a c,eck 9ritten out to your business name7 a business c,ecking account s,oul( alrea(y be in lace:

C'apter A Professional Assistance

&y C'ristina S'errod for CraftAnd(abricLinks)co* Small businesses cannot affor( to take on an army of e2 erts: !,ey (o not ,ave t,e nee( for full time to +uality em loyees in t,e areas of business management7 marketing7 ,uman resources7 etc: !,ere may not even be enoug, 9ork for ongoing art time ,el : !,e business o9ner must un(erstan( t,ese tasks7 or i(entify a goo( rofessional to outsource t,e tasks to: A goo( un(erstan(ing of t,ese functions is necessary in or(er to ro erly i(entify a goo( em loyee or outsi(e consultant: Fortunately7 t,ere are numerous rofessionals 9,o

are eager to ,el you as you start or gro9 your business: In t,is c,a ter I 9ill (iscuss t,ose 9,om I t,ink you s,oul( consi(er seeing as soon as ossible: !,ese inclu(e a C.A or ot,er ta2 a(visor7 Accountant ) %usiness Consultant7 /arketing S ecialist7 Attorney7 an( Insurance Agent: An investment counselor mig,t also be of benefit: .lease rea( our disclai*er an( rea(ing t,is book: er*s before

CPA 6Certified Public Accountant7 A C.A is a goo( source of information an( gui(ance on ta2 lanning7 setting u your bookkee ing system7 an( c,oosing t,e ro er business structure for your business: !,ere are 9i(e +uality (ifferences bet9een C.A-s7 I ,ave foun(: I 9as once sent into a com any to (o a Es ot c,eckE on in,ouse accounting roce(ures an( foun( t,at t,ey ,a( not ai( em loyment ta2es for several years: !,is com any ,a( t,eir income ta2es re are( every year by a C.A com any: !,eir financial statements coul( not ossibly ,ave balance(: No one from t,e accounting office ,a( ever revie9e( t,e accounting recor(s of t,is business: !,ey merely use( t,e figures t,e client ,a( turne( in: Wit,in an ,our I foun( several serious roblems: In a fe9 ot,er cases I +uickly (iscovere( embeFFlement: In eac, case t,e C.A ,a( set u a E+uick an( (irtyE cas, basis accounting system: W,atever cas, came in 9as counte( as income: In a goo( +uality accrual system7 earnings are tracke( 9,et,er t,ey ,ave been ai( or not: !,is (ouble entry system is muc, more accurate: Cn(erstan( t,at a C.A firm offers many (ifferent services: Nno9 9,at to ask for: If you go merely to ,ave your ta2es (one7 t,at is all you 9ill get: !,e C.A 9ill use your numbers to re are t,e return: 4ou ,ave not aske( for7 nor ai( for7 a revie9: A C.A s,oul( be able to refer you to a goo( bookkee er or business consultant 9,o can teac, you roce(ures7 set u of accounts7 etc: La!yer A la9yer 9ill ,el you (eci(e 9,at legal form your business s,oul( take "cor oration7 artners,i etc:$: Seek legal a(vice regar(ing any contracts you nee( for your business7 an( before you sign any contracts: Cn(erstan( your liabilities an( ,o9 best to rotect yourself: Cn(erstan( co yrig,t an( tra(emark la9s so t,at your creative 9ork an( intellectual ro erty are rotecte(: &usiness Consultant %usiness consultants are usually not C.A-s: !,ey are eo le 9,o ,ave e2 erience running businesses7 or e2tensive kno9le(ge in economics an( finance: !,ey s,oul( be able to e2 lain ricing7 cost control7 cas, management7 etc: /any business o9ners 9,o ,a( C.A-s com laine( to me t,at t,ey (i( not ,ave t,e INF#R/A!I#N t,ey nee(e(: I looke( at t,eir financial statements an( foun( t,at t,ey 9ere cas, basis statements7 9,ic, are useless as far as a business lanning tool: I c,ange( t,e com any over to accrual an( t,e o9ner no9 ,a( timely7 meaningful information: As state( above7 cas, basis means t,at e2 enses are counte( 9,en ai( an( income is counte( 9,en receive(: !,is creates a roblem 9it, timing: /y cas, basis client 9ante( to cut ,er a(vertising because s,e felt it 9as not benefiting ,er business: I s9itc,e( ,er to accrual accounting an( 9as able to s,o9 ,er t,at as ,er a(vertising costs increase( "t,ey counte( 9,en incurre(7 not 9,en ai($7 ,er revenue increase( "it 9as counte( 9,en t,e sale 9as ma(e7 not 9,en s,e receive( ayment$: Wit,out accurate statements7 s,e 9oul( ,ave ma(e an incorrect business (ecision: $nsurance Agent Liability insurance7 ro erty insurance an( ot,er ty es of insurance nee( to be consi(ere(: Marketing Specialist /arketing is (ifferent from a(vertisingG it takes lace before a(vertising7 an( is on-going: /arketing tells you 9,et,er you s,oul( (evelo t,e business or ro(uct in t,e first lace: W,o is your market8 W,o no9 controls t,is market8 Can you a((ress t,e current market better t,an com etitors8 Will you be creating a ne9 market8

A(vertising is (one once you ,ave your ro(uct or business in lace: /arketing an( a(vertising nee( not be e2 ensive: I once ai( for a boot, in a tra(e s,o9 6ust to see 9,at ty e of res onse I got for my ro(uct: I +uickly foun( out t,at alt,oug, everyone love( t,e ro(uct7 t,ey 9ere not 9illing to ay t,e rice I nee(e( to get: !,ousan(s of eo le came t,roug, t,e tra(e s,o97 an( I receive( all t,at fee(back for only t,e rice of t,e tra(e s,o9: I kne9 a man 9,o starte( an auto (etailing com any: He left flyers on t,e 9in(s,iel(s of e2 ensive looking cars in me(ical facilities "targeting (octors$: His business gre9 +uickly:

C'apter B &usiness Planning

&y C'ristina S'errod for CraftAnd(abricLinks)co* Page :- &usiness Plan Page <- &udget # Cas' (lo! Page =- i*e Manage*ent %efore rocee(ing7 careful lanning is nee(e( to ensure business success: S ecial Ebusiness toolsE re(uce risk an( increase c,ance of success if use( ro erly: 'ac, tool covere( in t,is c,a ter lays a big art in t,e success of your business7 so (on-t leave any of t,em out: !,ese tools inclu(e Cas, Flo9 Analysis7 a %usiness .lan7 %u(gets7 %usiness 3olume .ro6ection an( !ime /anagement "calen(ars7 time lines7 etc:$: .lease rea( our disclai*er an( rea(ing t,is book: &1S$,+SS PLA, er*s before

ools

!,e business lan is t,e overall outline of t,e business: It forces a business o9ner to t,ink about all areas of t,e business an( make some im ortant (ecisions regar(ing t,e business: If any of t,e lan is incom lete7 it means t,ere is a ,ole in t,at area of business management: !,e business lan can be an informal set of i(eas ke t in one-s ,ea(7 or a carefully 9ritten out (ocument: I refer a 9ritten lan7 alt,oug, t,ere are lenty of very successful businesses t,at 9ork from a loose set of i(eas t,at are no9,ere but in t,e o9ner-s ,ea(: %anks (on-t ask for a business lan as often as t,ey ,ave in t,e ast7 but a business o9ner nee(s to kno9 t,e ans9ers to t,e +uestions t,at a business lan a((resses: !,e follo9ing is an e2am le of a business lan format: !,ere are several (ifferent ty es of business lansG t,e follo9ing lan is sim le7 but a((resses areas t,at I t,ink s,oul( be covere(: If you are able to com lete all sections7 you ,ave covere( a lot of key areas of business management7 an( you greatly en,ance your c,ance of success: :)C 'e Co*pany

B:B Historical 1evelo ment Write a fe9 aragra ,s about t,e ,istory of t,e business: .ur ose8 %ackgroun(8 Nee(8 W,o starte( t,e business8 Ho9 (i( t,e business come about8 B:* Current Status Write a fe9 aragra ,s about t,e current status of your com any: W,o is involve( no98 Current focus8 Location8 Qualifications of o9ners8 W,o (oes t,e business 9ork 9it,in t,e community8 Com etitive

e(ge8 B:A .lan For !,e Future Write a fe9 aragra ,s about lans for e2 ansion into ne9 areas "ne9 ro(uct or locations$: Also a((ress any increase( services ertaining to current services or ro(ucts: !,e above is rat,er general: 4ou (o not nee( to be e2tremely s ecific7 but it s,o9s t,at you kno9 9,ere your business ,as been an( 9,ere it is going: Later arts are muc, more s ecific: <)C Products > Services *:B 1escri tion ) A lication

!,is section may be several ages: Write very s ecific aragra ,s about your ro(ucts an( services:

EXAMPLE: Spectrum Accounting specializes in meeting the basic accounting and business management needs of small businesses and professionals. The purpose is to provide high quality, affordable support services to this market. Such services include: Accounting / usiness !anagement "onsultation usiness #mage "onsulation Accounting Soft$are Training %roductivity Tool &evelopment 'Spreadsheets to compute productivity( )inancial Statements etc.: list of all servicesE From ,ere7 you 9oul( go into (etail on eac, of t,e above services: For e2am le7 for t,e first one7 I mig,t start out as EAccounting services are su lie( to businesses eit,er on an as-nee(e( consulting basis7 or as a mont,ly service: A reasonable mont,ly fee covers accounting re orts7 as 9ell as one-onone consultation at t,e time t,e re orts are resente(:::E 'ac, to ic 9oul( ,ave its o9n aragra ,s "or section of aragra ,s$: *:* %enefits Ho9 (o your customers or clients benefit from your ro(ucts or services8 If t,ere is no benefit for t,em7 t,ey 9ill not urc,ase it< 4ou must be able to (emonstrate a clear benefit - a Enee(E t,at you are a((ressing: EXAMPLE: * y understanding their current financial status, and $here they are going, clients of Spectrum Accounting can avoid many of the problems $hich lead to failure in so many small businesses. y providing alternatives to other high+priced services, Spectrum Accounting allo$s for effective financial management of the small business, $hich other$ise $ould have been forced to omit these critical areas of business management...* =)C Market Analysis A:B Customer .rofile Write a brief (escri tion of your ty ical customer or set of customers: A:* #verall /arket !,is is a toug, one because it re+uires R'S'ARCH on your art: 4ou nee( to kno9 ,o9 many of your ty e of consumer t,ere are7 ,o9 many com etitors you ,ave etc: 4ou must un(erstan( your market in or(er to kno9 ,o9 you 9ill get clients or customers to come to you7 rat,er t,an to a com etitor: Nno9 your customer as 9ell as your com etitor< C,arts an( gra ,s can 9ork 9ell ,ere: Refer to gra ,s s,o9ing t,e gro9t, rate of your area7 es ecially if it easily correlates to an increase in nee( for your

ro(uct: 4ou can learn a lot of key information by com leting t,is area of t,e business lan: A:A /arket Segment 4ou nee( goo(7 s ecific (ata ,ere: W,at ercentage of t,e market are you lanning to overtake in eac, area of service or ro(uct8 For e2am le I mig,t state t,at I lan to take on 2O of ne9 businesses forming in my community an( t,ere are 2 number of ne9 businesses forming eac, yearG t,erefore I lan to increase t,e accounting ortion of my business by 2 clients er year: !,is art of t,e lan takes time an( re+uires 9ork on your art: No Eimagine(E numbers ,ere - you nee( real facts an( figures: Also be sure to a((ress t,e com etition - 9,at (o t,ey rovi(e an( ,o9 9ill you be (ifferent8 W,y7 s ecifically7 9oul( someone come to you rat,er t,an to your com etitors8 Location8 Service8 Access to clients8 @)C Marketing Strategy and Sales Plan D:B !,e .ros ective Customer W,o is your customer8 Are t,ey (ivi(e( into s ecific grou s "9omen7 c,il(ren7 seniors7 etc:$8 4ou nee( to i(entify your s ecific customer ty es so you can lan your marketing strategy: Remember t,e car (etailer in C,a ter ?8 He kne9 t,at rofessional business eo le 9ere likely can(i(ates for ,is serviceG t,erefore ,e oste( fliers on e2 ensive cars in t,e arking lots of me(ical an( legal offices: It 9orke( very 9ell: 1ivi(e your customers into grou s an( attac, t,em to t,e various services you rovi(e: In t,e e2am le I 6ust gave7 ,e ,a( one grou of rofessional clients 9,om ,e a(vertise( ,is total (etailing service to: If ,e also rovi(e( basic cleaning7 ,e coul( ,ave a(vertise( t,is service to anot,er market: D:* Sales .lan A(vertising .ieces W,at 9ill you use as a(vertising ieces8 %usiness car(s8 %roc,ures8 4ello9 .ages a(8 A 9ebsite8 'bay8 List t,em in t,is section: 4ou mig,t also inclu(e sam les of 9,at you lan to create: 4ou mig,t ,ave (ifferent business car(s7 broc,ures etc: t,at target your (ifferent customer ty es: #t,er A(vertising List ot,er ty es of a(vertising t,at 9oul( be useful: 4ou mig,t 6oin a crafter-s grou 7 your local c,amber of commerce7 etc: %e s ecific7 because you nee( to ,ave a 9ell t,oug,t out lan: D:A /arketing Costs vs: Sales .ro6ections !,is is a (ifficult area: .eo le often make u all kin(s of nice numbers ,ere t,at look goo( on a er but cannot be backe( u by any real statistical analysis: W,at you are looking for in t,is section is an i(ea of ,o9 your marketing 9ill ay off: Ho9 muc, in sales are you e2 ecting to get by 6oining a crafter-s guil(8 Sometimes7 t,ere are no ,ar( facts ,ere: For e2am le7 you may not make (irect sales from t,e guil(7 but your members,i mig,t o en ot,er avenues for you: A)C Operations- Service 4elivery Ho9 (o you lan to (eliver your services an( ro(ucts to your customers8 Ho9 9ill you initially reac, t,em8 !,is is t,e section t,at covers your lans for t,e actual o eration of t,ese activities: 1o you lan to meet otential customers t,roug, ,one calls8 Craft fairs8 Craft Circles8 Internet8 W,ere 9ill your ro(ucts be ,ysically locate(8 Ho9 9ill t,ey be (elivere( to your customers8 /ail8 Customer icku 8 %reak (o9n your business again into (ifferent ro(ucts an( services) ro(ucts an( customer ty es an( (eci(e ,o9 you 9ill get your ro(ucts out to t,ese eo le: Will you rovi(e Efree sam lesE8 Ho9 9ill t,ese be (elivere(8 If you ,ave E,ome crafting artiesE ,o9 9ill your ro(ucts be (elivere(8 All of t,ese (etails are 9orke( out in t,is section: ?:* /aterials an( Inventory If you must maintain inventory7 9,ere 9ill it be store(8 Ho9 9ill you kee track of it8 Ho9 9ill you ensure t,e inventory is ke t at an a(e+uate level8 Ho9 9ill it be safeguar(e( "t,is is es ecially im ortant if you ,ave em loyees$8

?:A '+ui ment W,at e+ui ment is re+uire( for your business8 Se9ing mac,ines8 Storage containers8 Com uters8 S,i ing containers an( materials8 List all necessary e+ui ment: !,is is im ortant because you mig,t fin( in making t,is list t,at im ortant ieces are missing: It 9oul( be a s,ame to gro9 +uickly an( get a large amount of sales only to fin( out t,at you are not re are( to s,i t,e ro(ucts in an efficient an( timely manner to your customers: ?:D .ersonnel Will you ,ave em loyees8 W,at 9ill t,eir s ecific functions be8 Ho9 9ill you re are for com any gro9t,8 Will you ,ave a sales staff8 W,at is t,e com ensation lan8 !,is book (oesn-t cover t,e full sco e of com any res onsibilities regar(ing em loyees: 4ou nee( to call your local7 state7 an( fe(eral governments for more information: Refer to C,a ter A: ?:? Quality Control Ho9 9ill you maintain +uality control8 W,o in your business is res onsible for ensuring t,at all ro(ucts meet your stan(ar(s8 Can you maintain +uality control as your business gro9s8 Manage*ent Plan >:B # erational Areas)/anagement Res onsibilities I(entify your areas of service or ro(uct ty es ,ere: W,o 9ill manage t,e (ifferent areas8 1o you ,ave a artner8 .er,a s one of you is res onsible for rocuring materials7 as 9ell as marketing an( sales7 an( one is res onsible for making t,e items t,at 9ill be sol(7 or overseeing t,e making of t,e items: .er,a s you 9ill run your o9n craft business7 but your s ouse 9ill take care of t,e books or com uter 9ork: >:* Skill Re+uirements 1o you ,ave t,e skills necessary to get t,e 6ob (one8 If your s ouse is going to (o t,e bookkee ing7 (oes ,e or s,e kno9 ,o9 to (o t,is8 W,at skills are necessary for your business to be successful8 Ho9 (o you lan to obtain any missing skills8 (inancial Plan- Resources ,eeded =:B Nee(s7 Sources an( Costs '+ui ment an( Facilities Again7 make a list of e+ui ment nee(e(: !,is time7 ,o9ever7 a(( t,e cost of eac, iece of e+ui ment: W,at about facilities8 1o you nee( to rent s ace8 Remember storage s ace< List every iece of e+ui ment you 9ill nee( inclu(ing an office c,air for t,e com uter7 ens7 a er7 E%ookkee ing For 1ummiesE book etc: !,is area can a(( u +uickly an( you nee( an accurate list of costs: If renting s ace7 (o you nee( a coffee mac,ine8 Cart for your coffee mac,ine8 4ou 9oul( be sur rise( at ,o9 muc, it can all cost by t,e time you finis, t,e list "t,is is 9,ere you mig,t (eci(e you (on-t really Enee(E some t,ings<$: Start C Costs !,is area inclu(es ot,er costs of starting a business: W,at 9ill a C.A cost8 La9yer8 License fees8 .ermit fees8 #ver,ea( /ake u a list of mont,ly over,ea( costs: !,e list must be (etaile(: 4ou mig,t t,ink t,ere is no over,ea( because you 9ork out of your ,ome7 but you 9ill incur e2tra costs 9it, your business: If you se97 you mig,t use more laun(ry soa (ue to re-9as,ing fabric: 4our electric or utility bills may be effecte( as 9ell:

!y ical costs of over,ea( inclu(eK a(vertising soft9are com uter su lies meals ; entertainment office su lies tele ,one an( utilities (ues an( subscri tions rent ostage an( freig,t insurance 'm loyees may be art of over,ea( if t,ey are ai( a set fee as office ,el : Working Ca ital !,is is 9,ere most businesses run into trouble: 1o you ,ave enoug, fun(s to maintain your business8 If your mont,ly costs of over,ea( come to IB7*JJ er mont,7 (o you ,ave fun(s to cover t,is8 4ou must be able to accurately say t,at your rofit margin on your ro(ucts 9ill be at least t,is muc,: !,is (oesn-t inclu(e an amount to be ai( to you "unless you inclu(e( a fee for yourself as art of your Eover,ea(E$: W,at 9ill be your minimum amount ke t in c,ecking8 It s,oul( be an amount to a(e+uately cover your basic "over,ea($ costs: #ver,ea( costs are costs t,at are not tie( to sales: !,ey are incurre( 9,et,er or not you ,ave sales7 suc, as rent "if you are 9orking at ,ome7 ,ig,er utilities 9oul( robably only occur 9,ile you are manufacturing your ro(uct7 so utilities 9oul( not be over,ea( in t,at case - if you ,a( no sales7 you 9oul( not ,ave ,ig,er utility bills$: In t,e 9orl( of economics7 over,ea( is calle( a fi2e( cost: It is Efi2e(E at a certain amount because you 9ill ,ave t,at same cost no matter 9,at your sales are "remember t,at fi2e( costs are only fi2e( until a certain oint - if your sales really boom7 you may nee( to rent a larger s ace$: W,en (o you lan to ay yourself8 Remember t,at all ayables must be consi(ere( first "i:e: remember 9,at bills nee( to be ai( before aying yourself$: =:* !iming an( Source of Investment '+ui ment 4ou nee( a carefully lai( out lan t,at uses a time line for costs e2 ecte(: Ho9 9ill t,e over,ea( be covere(8 W,at is t,e source of fun(s8 W,en 9ill various ieces of e+ui ment be urc,ase( an( ,o9 9ill t,ey be tie( to fun(s8 I al9ays gave my clients a Ecas, flo9E file I create( on '2cel: !,ey use( it on an on-going basis: %efore making any (ecisions effecting costs t,ey 9ere to lug t,e numbers into t,is s rea(s,eet an( see ,o9 it laye( out over time: W,en a client calle( an( aske( 9,et,er ,e s,oul( ,ire someone to ,el 9it, filing7 my first +uestion 9as7 EHo9 (oes it look on t,e s rea(s,eetE8 It may look fine for a 9,ile7 but ? mont,s out "maybe insurance is (ue t,en$7 ,e sees t,at ,e su((enly runs negative: !,e s,ortage may be ? mont,s a9ay an( cas, flo9 s rea(s,eets are less accurate t,e furt,er out t,ey go7 but t,is gives a goo( 9arning: Facilities Ho9 long can you stay in your current facility8 If you 9ork at ,ome7 ,o9 long can you (o t,at8 Will you nee( a larger s ace8 If so7 9,en8 Will increase( fun(s become available by t,at time8 In t,is section7 remember t,at you are not 6ust i(entifying costs: !,e key to t,is section is i(entifying t,e timing of t,e costs to ensure t,at fun(ing 9ill be available: (inancial Plan- Activity Pro5ections !,is is t,e section t,at contains your c,arts an( gra ,s an( financial statements7 9,ic, are base( on all of t,e rece(ing information: Remember to kee t,e follo9ing rules in min( 9,en (evelo ing your lan:

B: A((ress all sections of t,e business lan: !,is 9ill oint out to you t,e areas in 9,ic, you really (on-t ,ave a clear enoug, i(ea on ,o9 to rocee(: *: %e com lete7 but not overly s ecificG (on-t create a nee( to constantly u (ate your lan: A: Nee your lan confi(ential: !,is is your Ebusiness bibleE an( contains many of your most im ortant business secrets: D: 4our business lan may be ,el ful in obtaining financing: ?: Refer to your lan often: It 9ill ,el kee you on your lanne( at, "alt,oug, you may ,ave goo( reason for c,anging from your lan - in t,at case you mig,t nee( to u (ate your lan$:

C'apter B &usiness Planning

&y C'ristina S'errod for CraftAnd(abricLinks)co* Page <- &udget # Cas' (lo! Page :- &usiness Plan Page =- i*e Manage*ent %efore rocee(ing7 careful lanning is nee(e( to ensure business success: S ecial Ebusiness toolsE re(uce risk an( increase c,ance of success if use( ro erly: 'ac, tool covere( in t,is c,a ter lays a big art in t,e success of your business7 so (on-t leave any of t,em out: !,ese tools inclu(e Cas, Flo9 Analysis7 a %usiness .lan7 %u(gets7 %usiness 3olume .ro6ection an( !ime /anagement "calen(ars7 time lines7 etc:$: .lease rea( our disclai*er an( rea(ing t,is book: er*s before

ools

SPR+A4SD++ S- &14/+ E CASD (LO9E 9DA

$(

!,ere are t,ree ty es of s rea(s,eets t,at are a business o9ner-s best frien(s: !,ey ,el in lanning t,e future of a business: .ro er lanning can sto a (isaster before it occurs: !,e t,ree ty es of s rea(s,eets are cas, flo97 bu(get an( E9,at ifE: !,ey can be (one manually on large B* column accounting tablets or on a com uter: '2cel is an e2cellent rogram for t,is ur ose: Cse t,ese s rea(s,eets for lanning t,e startu of t,e business7 an( continue to use t,em (uring t,e life of t,e business to (etermine t,e results of your business (ecisions: All t,ree are base( on various criteria t,at are establis,e( at t,e time t,e s rea(s,eet is create(: Cas' (lo! Cse t,is s rea(s,eet to (etermine cas, flo9 for t,e lanne( scenario: A cas, flo9 s rea(s,eet e2ten(s over several mont,s - eit,er on one s,eet or 9it, mont,s on se arate s,eets: !,e beginning balance of any mont, is automatically set to e+ual t,e en(ing balance of t,e rece(ing mont,: %alances t,roug,out t,e mont, are automatically calculate( as cas, is a((e( or subtracte(: If t,is is Manuary7 you can go to /arc, an( a(( e2 enses of ,ig,er rent an( 9atc, t,e balances c,ange for t,e rest of t,e year: Will you ,ave enoug, cas, for t,e remain(er of t,e year to ,an(le t,e ,ig,er rent8 Is t,ere a mont, 9,ere you mig,t run into trouble8 Let-s say you are lanning your usual business o erations for t,e ne2t t,ree mont,s an( 9ant to see if

t,ere 9ill be any sort of cas, flo9 roblem: #n any given (ate on t,e s rea(s,eet7 t,e time erio( u to t,at (ate is EactualE7 meaning it is a co y of 9,at is actually recor(e( in your c,eckbook: I u (ate( cas, flo9 9orks,eets for my clients 9eekly an( t,e balance on t,e (ate of t,e last u (ate is e+ual to t,e balance actually recor(e( in t,e c,ecking account: All information after t,at (ate 9as base( on my estimates: I in ut all e2 ecte( cas, intake an( e2 en(itures: I usually ro6ecte( out several mont,s7 alt,oug, you must kee in min( t,at t,e furt,er out you go7 t,e less accurate your ro6ection becomes: !,is 9orks,eet is very ,el ful in lanning ur oses because you can in ut your e2 ecte( cas, e2 en(itures an( see if t,ey make sense: If you see a negative c,ecking balance (evelo ing any9,ere7 you kno9 you 9ill nee( a loan or you 9ill nee( to make a(6ustments7 eit,er in e2 en(itures or in t,e (ate of t,e e2 en(itures: %elo9 is an e2am le of a cas, flo9 s rea(s,eet: Incoming cas, is liste( on t,e leftG e2 en(itures are on t,e rig,t:

In t,e above e2am le7 I am re(icting t,e cas, intake for t,e mont, to be IBJ7JJJ: !,at number is base( on ast sales "9,ic, ,el s me estimate cas, sales t,is mont,$7 ot,er money I e2 ect to collect t,is mont,7 etc: 4ou 9ill get more accurate 9it, t,is art over time: N#!'K !,is is not the amount of sales for the month7 but t,e amount you e2 ect to collect in t,e mont,: !,is is 9,y t,is s rea(s,eet is so im ortant: It (oes not tell you 9,et,er your com any is making a rofitG instea( it tells you if you 9ill ,ave a(e+uate fun(s: A com any can be making a rofit7 but still run out of money - a very ,ar( lesson to learn< &udget Com uter s rea(s,eet rograms are also e2cellent for creating bu(gets: A bu(get is an im ortant lanning tool mostly because it makes you t,ink ,ar( about your future: 4ou must t,ink about t,e (irection of t,e business an( you can learn a lot sim ly by (oing t,is e2cercise: 4ou (o not ,ave to be froFen to t,e bu(get: A bu(get is usually ma(e u for an entire year at a time7 but if art9ay t,roug, t,e year t,ere is a big c,ange in t,e business ",o efully a ositive one<$7 you can create an amen(e( bu(get: It is merely a tool for you to use to see if you are Eon trackE base( on your initial lans for t,e year: !,ere are several tricks to creating a goo( bu(get: 4our first year-s bu(get 9ill be a real guess base( on ro6ecte( sales an( e2 enses: After t,e initial year7 ,o9ever7 a more accurate bu(get can be (evelo e(: It is best to start 9it, a sales forecast: !,is s,oul( be base( on actual facts on t,e business: Ho9 (i( t,e business erform last year8 W,at 9as t,e ercentage of gro9t, t,e first year in business8 W,at is t,e e2 ecte( rate of gro9t, in t,e ne9 bu(get year8 W,y8

#nce you ,ave t,e ne9 sales figures7 you can re(ict (irect costs: !,ese are costs (irectly assiciate( 9it, sales: 1irect costs gro9 in a (irect ro ortion to sales: If it costs I?:JJ to make one tree ornament an( you sell it for IB*:JJ7 t,e I?:JJ cost er ornament is a (irect cost: 1oubling your sales 9ill (ouble your (irect costs: 4ou can assume t,at IB7*JJ in sales "BJJ ornaments$ 9ill ,ave a cost of I?JJ: W,at if you make BJJ ornaments but only sell ?J8 !,e ?J you (o not sell are actually in your inventory7 so t,eir cost is not yet recor(e(: !,ink about it: 4ou ,ave ?J ornaments in your garage rea(y for sale: !,ey are an asset "t,at-s a goo( t,ing$: !,ey are 9ort, somet,ing to you: 4our rofit statement 9oul( s,o9 sales of I>JJ "?J ornaments at IB*:JJ eac,$ an( your e2 ense 9oul( be I*?J "?J ornaments at I?:JJ eac,$: 4our balance s,eet "lists your com any-s (ebts an( assets$ 9oul( s,o9 inventory 9ort, I*?J "?J ornaments in your garage at a cost of I?:JJ eac,$: /ore on t,is in C,a ter =: Ne2t you must re(ict fi2e( costs: !,ese generally (o not gro9 as a ro ortion of sales in t,e s,ort run: !,ese are t,ings like rent: It (oes not matter ,o9 many ornaments you make7 your rent remains t,e same: #f course7 no cost is a fi2e( cost in t,e real long run: For e2am le7 rent actually becomes semifi2e( in t,e longer run because after a certain amount of gro9t,7 your over,ea( costs like rent 9ill increase "if your (eman( for ornaments 6um s from BJJ er mont, to BJ7JJJ er mont, you 9ill nee( a larger lace$: #nce you ,ave your bu(get com lete(7 com are t,e figures to last year: W,at 9as t,e cost er (ollar of revenue for eac, e2 ense last year8 Is it t,e same t,is year8 W,y not8 Is eac, e2 ense t,e same ercentage of total e2 ense as it 9as last year8 W,y not8 4ou nee( to in oint (etails of costs of (oing business: Is it getting more e2 ensive to (o business8 In 9,at areas an( 9,y8

9'at $f State*ent !,is can be an income statement "or bu(get$ or cas, flo9 statement: .lug in various figures re resenting various business scenarios: Su ose you are a seamstress an( you are consi(ering a((ing a ne9 embroi(ery service: 4ou nee( to kno9 9,et,er it 9oul( be rofitable7 an( you nee( to kno9 9,at t,e cas, flo9 c,ange 9oul( be: 4ou 9oul( nee( to make a ne9 estimate( income statement "bu(get$ an( a ne9 estimate( cas, flo9 statement: 1on-t re lace your regular bu(get an( cas, flo9 ro6ectionG t,is is 6ust somet,ing to vie9 as a tool: 4ou can make any number of c,anges an( 9atc, t,e results: Start 9it, your original s rea(s,eets7 an( Esave asE a ne9 name "so you (on-t over9rite your real statement$: For e2am le7 you mig,t call it E'mbroi(ery Cas, flo9E:

C'apter B &usiness Planning

&y C'ristina S'errod for CraftAnd(abricLinks)co*

ools

Page :- &usiness Plan Page <- &udget # Cas' (lo! Page =- i*e Manage*ent A time line is a terrific stress buster7 because it gets im ortant events onto a er 9,ic, allo9s business o9ner to sto carrying it all aroun( Ein ,is ,ea(E: It also forces organiFational t,inking7 an( ensures t,at im ortant (etails are not forgotten: .lease rea( our disclai*er an( rea(ing t,is book: i*e Planner I ,ave 9orke( on ,uge7 very (etaile( ro6ects t,at ran over a erio( of several years "I ,a( a osition coor(inating activities re+uire( for getting %oeing =D= galleys installe( on t,e air lanes on time$: Wit,out a goo( lan7 I 9oul( never ,ave com lete( tasks on time: Long7 (etaile( ro6ects must be broken (o9n into s,orter erio(s of time an( smaller goals: EHave all t,e galleys rea(y t9o years from no9E is far too big of a task an( too long of a erio(: Ho9 9oul( you kno9 on any given (ay 9,et,er you are on sc,e(ule8 Lay out t,e ro6ect over a time line by starting 9it, ma6or milestones: Ne2t7 break (o9n t,e ma6or milestones into smaller areas: %reak (o9n t,e small areas into in(ivi(ual tasks: #nce you ,ave a 9orkable lan7 you can forget about it to a large e2tent: 4ou sim ly focus on 9,ere you nee( to be no9 an( (on-t (9ell on future (ates: 1on-t try to kee everyt,ing in your ,ea(: %y getting it (o9n on a er7 you can Elet goE of it: !,is is a terrific stress re(ucer: I even use( t,is met,o( of time organiFation to lan my college assignments an( my 9e((ing< !,ere are e2cellent soft9are tools you can use7 or you can use a er an( encil: Not,ing fancy is nee(e(: W,en I 9orke( for t,e %oeing =D= (ivision7 com uters 9eren-t aroun( yet an( I manage( fine 9it, a er an( encil: Remember7 com uter s rea(s,eets are truly 9on(erful for t,e above: 4ou can be as fancy as you 9ant to be: !ry to become kno9le(geable in t,e use of s rea(s,eet rogramsG gra ,s an( c,arts are visually more a ealing t,an sets of numbers: I am a visual erson7 so I refer suc, E icturesE: If you (o not ,ave access to a com uter7 ,o9ever7 a large columner a( 9orks very 9ell also: %usinesses 9ere run very successfully for years 9it,out t,e use of com uters7 so (on-t feel you must ,ave e2 ensive soft9are rig,t a9ay to succee(: &usiness Planning and i*e Manage*ent Supplies er*s before

Having t,e ro er su lies 9ill ,el you manage your time7 create a ,ig, +uality business lan7 an( organiFe your life: %esi(es time line7 I recommen( a ersonal calen(ar: .ost all business meetings an( ma6or milestones in your ersonal calen(ar: !,is ensures t,at your business goals (o not conflict 9it, your ersonal res onsibilities an( goals: In t,e sam le belo97 re( lines re resent ma6or milestones: If to(ay-s (ate is Se tember B?t, an( you ,ave not yet urc,ase( inventory or signe( a lease7 you kno9 t,at you are be,in( sc,e(ule: 4ou 9oul( nee( to take some (rastic action to catc, u 7 or you 9oul( nee( to lot a ne9 time line t,at accurately reflects 9,ere you are no9:

C'apter F 1nderstanding (inancial State*ents

&y C'ristina S'errod for CraftAnd(abricLinks)co* !,is c,a ter covers t,at sub6ect you ,ave been (rea(ingK bookkee ing: 4es7 a goo( un(erstan(ing of bookkee ing is necessary to run a successful business: As I ,ave been stating t,roug,out t,is book7 you s,oul( be able to (o basic bookkee ing yourself: #nce you ,ave a goo( un(erstan(ing of t,e rocess7 an( your business ,as gro9n to t,e oint 9,ere your time 9oul( be better s ent on ot,er areas of your business7 you mig,t 9ant to ,ire t,is 9ork out to someone else: 4ou 9ill be in a better osition t,en to kno9 ,o9 to c,oose a +ualifie( erson7 lus you can still kee an eye on t,ings: In t,e beginning7 you can save a lot of money by (oing your o9n bookkee ing7 lus you 9ill learn a lot about your business in t,e rocess: .lease rea( our disclai*er an( rea(ing t,is book: er*s before

No matter 9,at siFe your business is7 you nee( an efficient accounting system: 4our system (oesn-t ,ave to be E,ig, tec,E: .encils an( columner a(s 9ork fine: W,at is im ortant is t,at t,e information be accurate: It must give you re orts t,at are meaningful for your business7 an( you must be able to un(erstan( t,ese re orts: 4ou7 as a business o9ner or manager7 must ,ave timely7 reliable information in or(er to make correct an( timely business (ecisions: !,ere is really no mystery or magic 9it, accounting an( general business set u : It can be accom lis,e( at a reasonable cost7 an( you can remain in control of t,e situation: I cannot teac, you everyt,ing you nee( to kno9 about accounting 9it, t,is one (ocument: I am merely intro(ucing you to t,e conce ts of accounting: Fin( a goo( accountant or bookkee er 9,o can set u your books an( teac, you ,o9 to kee your o9n books: As your business gro9s7 be sure you 9ork 9it, a goo( accountant 9,o can give you a(vice base( on your financial statements7 as 9ell as consultation on ot,er areas7 suc, as ta2es7 ,iring an( licensing an( general7 soun( business ractices: As your business gro9s7 your nee(s 9ill c,ange: Sim le bookkee ing 9ill no longer suffice: 4ou 9ill nee( goo( information about t,e various areas of your business7 an( t,at can only be accom lis,e( 9it, a goo( accounting system: W,ere are you losing money8 W,ere are you rofitable8 A careful analysis of t,e nee(s of a larger7 more com le2 com any is necessary to ensure t,at t,e information being receive( from t,e system is meaningful: 4ou 9ill also nee( to kno9 t,at your ot,er business ractices are soun(7 an( t,at you ,ave ro er olicies an( roce(ures in lace: If you ,ave an in-,ouse bookkee er7 9,at ste s ,ave been taken to rotect your business from embeFFlement8 Refer to C'apter (iveProfessional Assistance: 4ouble +ntry Accounting- 4ebits and Credits

W,at in t,e 9orl( are (ebits an( cre(its8 I kno9 you are t,inking7 E1o I really nee( to kno9 t,is stuff8E Wit, to(ay-s soft9are7 suc, as Quick%ooks7 you (on-t really ,ave to fully un(erstan( (ebits an( cre(its: !,e soft9are takes care of t,ose nasty little (etails for you: Ho9ever7 I am going to cover t,em ,ere because I believe it is beneficial for you to ,ave a more t,oroug, un(erstan(ing of t,e rocess: #t,er9ise7 even 9it, a system like Quick%ooks7 you can make some very common errors "I ,ave seen some very strange t,ings$: 1ouble entry bookkee ing is a very clever system: It is +uite sim le7 yet creates balance( financial statements: 1ebits must al9ays e+ual cre(its: !,ere are t9o se arate statements you can ost toK %alance S,eet an( Income Statement: !,ey 9ill be covere( in t,e ne2t section: Must remember7 if you ,ave a total of IBDJ in (ebits7 you must ,ave a total of IBDJ in cre(its: !HIS IS ALWA4S !RC' - no e2ce tions: 4our (ebits can ,it t,e rofit statement "also kno9n as t,e income statement$ an( your cre(its can ,it t,e balance s,eet7 or your (ebits an( cre(its can ,it t,e balance s,eet7 or your (ebits an( cre(its can ,it t,e income statement: It (oesn-t matter 9,ic, statement t,e (ebits an( cre(its ,it7 but t,ey must be balance(: Refer to t,e section belo9 on ELet-s 1o Some Actual %ookkee ingE: &alance S'eet !,e balance s,eet tells you 9,ere your business is A! A 0I3'N .#IN! IN !I/' "for e2am le Eas of /arc, ABstE$: It tells you 9,at t,e business is 9ort, "it mig,t also be referre( to as t,e net 9ort, statement$ on /arc, ABst: Is is merely a list of your assets an( liabilities7 an( t,e (ifference bet9een t,ese "calle( your e+uity$: !,e follo9ing ty es of t,ings are liste( on t,e balance s,eetK balance in c,ecking account value of office furniture an( su lies value of inventory balance in accounts receivable "t,e amount customers an( ot,ers o9e you$ !,e above are all ASS'!S: !,ese are goo( t,ings: It-s goo( to ,ave money in your c,ecking account: !,e follo9ing are also t,ings t,at 9oul( be on a balance s,eet: Loan (ue "suc, as t,e amount your o9e t,e bank on a loan$ Rent (ue "you o9e t,e rent an( it is not yet ai($ !a2es (ue !,ese are LIA%ILI!I'S: !,ese are not goo( t,ings: !,e (ifference bet9een t,e ASS'!S an( LIA%ILI!I'S is calle( 'QCI!4: Ho efully your assets 9ill al9ays be muc, more t,an your liabilities: Assets an( liabilities are furt,er broken (o9n into current an( long term: !,is is to ,el 9it, financial analysis: Current generally refers to very li+ui( assets "suc, as cas,$ or loans (ue 9it,in t,e current year: !,ere are all sorts of ratios t,at accountants use as tools to analyFe t,e ,ealt, of a business: Current ratio is one suc, tool: Are your current assets enoug, to cover current liabilities8 If not7 you mig,t be in (anger of running out of fun(s: $nco*e State*ent 6or Profit>Loss State*ent7 !,is is t,e statement t,at tells you ,o9 muc, money you ,ave ma(e in a certain time erio(: It lists t,e total income an( total e2 ense F#R A .'RI#1 #F !I/' "for e2am le EFrom Manuary B t,roug, /arc, ABstE$: Ho9 muc, money (i( you make (uring t,at time8 !,e follo9ing are t,ings t,at 9oul( be on an income statement: sales revenue interest income "from bank account$ !,ese are INC#/' items: #nly income is liste(: If you recieve( money from a loan7 it is not liste( ,ere:

!,e follo9ing are also t,ings t,at 9oul( be on an income statement: rent e2 ense cost of goo(s sol( "if a ro(uce 9as reviously liste( in inventory an( you no9 sol( it$ office su lies e2 ense !,ese are '5.'NS' items: !,ey are t,ings you ,ave urc,ase( for t,e business "you cannot inclu(e ersonal e2 enses$: Accrual vs) Cas' &asis Accounting "ash asis Accounting /any C.A-s start out small businesses on cas, basis accounting: !,at means t,at income is oste( 9,en t,e money is recieve( an( t,e e2 enses are oste( 9,en t,ey are ai(: For a very sim le business7 t,is is fine: In ot,er 9or(s7 if you collect t,e money 9,en t,e sale is ma(e7 an( you ay your bills in a timely manner7 t,is s,oul( be sufficient for your business: It is easy an( you (on-t ,ave to track t,ings like accounts receivable an( money you o9e: Ho9ever7 as your business gro9s7 t,is 9ill N#! be sufficient: At t,at time you 9ill nee( accrual accounting: Accrual Accounting Accrual accounting osts t,e e2 ense as soon as it is incurre(7 9,et,er it ,as been ai( for or not: It osts t,e sales revenues as soon as t,e sale ,as been ma(e7 9,et,er t,e money ,as been collecte( or not: W,y is t,is so im ortant8 %ecause you can track your actual e2 enses vs: sales to look for tren(s: 4ou also track amounts (ue to you an( amounts you o9e: It is im ortant to be able to revie9 business tren(s: 1i( sales go u 9,en you took out t,at ne9 a(vertisement in t,e a er8 !,ink about t,is e2am le: Let-s say you took out an a( in t,e ne9s a er for your ne9 store: 1ue to a s ecial romotion7 t,e ne9s a er allo9s you to ost one ayment for t,e a(vertisement for > mont,s: 4our a( runs in 1ecember an( your cas, sales (ouble in 1ecember: Remember t,at you (o not ay for your a( until Mune: Cn(er cas, basis accounting7 your 1ecember sales 9oul( be ,ig, an( a(vertisement e2 ense 9oul( be Fero "not recor(e( until Mune$: It 9oul( look as if a(vertising isn-t 9orking: Wit, accrual accounting7 t,e a(vertising e2 ense 9oul( ,ave been recor(e( in 1ecember7 even t,oug, it 9as not yet ai(: A(vertising an( sales 9oul( bot, be ,ig, in 1ecember: Furt,ermore7 9it, cas, accounting7 t,e (ebt o9e( is not recor(e(: Remember t,at an e2 ense is not recor(e( until it is ai(: 4our balance s,eet 9oul( not reflect t,e amount you o9e si2 mont,s from no9 for t,e a(vertisement - not a very accurate statement< C.A-s love to start out small businesses on cas, basis7 as I state(: It is a +uick an( easy system: %'WAR'< It is N#! a goo( system: Wit, t,e soft9are available to(ay7 ro er accrual bookkee ing is +uite easy: 0o to C'apter +ig't for an actual e2am le of bookkee ing: I 9ill take you t,roug, several mont,s of bookkee ing for a small sam le business: 4ou 9ill see actual osting an( ,o9 it effects t,e financial statements:

C'apter G &ookkeeping Lesson

&y C'ristina S'errod for CraftAnd(abricLinks)co* Rea( C'apter F- (inancial State*ents before continuing 9it, t,is c,a ter: A teac,er once tol( my class t,at t,e only t,ing interesting about bookkee ing is t,at it containe( A consecutive (ouble letters: Funny statement7 but not entirely true: %ookkee ing is muc, more interesting t,an t,at "I-m not ki((ing$: It is a very clever system t,at allo9s a balance( met,o( of tracking t,e ,ealt, of a business: Wit,out financial statements7 a business o9ner 9oul( +uickly lose

track of im ortant information7 making it im ossible to make accurate management (ecisions: .lease rea( our disclai*er an( rea(ing t,is book: er*s before

L'!-S 1# S#/' AC!CAL %##NN''.IN0 !ore ,n &ebits and "redits I am going to take you t,roug, some actual mont,s: I 9ill list t,e event "sol( some ro(ucts7 ai( a bill etc:$7 s,o9 you t,e actual osting "9,at is (ebite( an( 9,at is cre(ite($ an( s,o9 you t,e c,ange in t,e financial statements: I am using accrual accounting: First I nee( to e2 lain more about (ebits an( cre(its: Cnfortunately7 t,is ten(s to be t,e confusing art: If you carefully t,ink about it t,oug,7 it makes sense: Remember t,at for every ost t,ere must be an o osite ost "for every (ebit t,ere is an e+ual cre(it$: 4ou ,ave t,e follo9ing to ost toK asset7 liability7 income7 e2 ense: !,e first t9o ,it t,e balance s,eetG t,e last t9o ,it t,e income statement: Re*e*ber t'e follo!ing(or t'e balance s'eetE debit is good and credit is bad) (or t'e inco*e state*ent debit is bad and credit is good) Write t,at on a Ec,eat s,eetE an( kee it 9it, you: /emoriFe it: #n t,e balance s,eet a (ebit 9illK raise your asset or lo9er your liability: W,y8 %ecause assets are (ebits an( liabilities are cre(its: #n t,e income statement a (ebit 9illK raise your e2 enses an( lo9er or income: W,y8 %ecause revenue "income$ is a cre(it an( e2 enses are (ebits: .er,a s t,is (iagram 9ill ,el :

!,oroug,ly confuse(8 !,is is t,e one area t,at you must revie9 an( memoriFe on your o9n: !,e income statement is a list of revenue "cre(it balances$ an( e2 enses "(ebit balances$: If you (ebit an e2 ense your e2 ense 9ill go u : If you (ebit a revenue account7 your revenue goes (o9n "suc, as a sales return$: If you cre(it an e2 ense7 your e2 ense goes (o9n "a refun( on rent$7 an( if you cre(it your sales revenue7 revenue goes u : So7 for t,e income statement7 cre(its are goo( an( (ebits are ba(: For t,e balance s,eet7 assets are (ebit balances an( liabilities are cre(it balances: If you (ebit an asset7 it goes u : Assets are goo(7 so t,is is a goo( t,ing: If you (ebit a liability account7 t,e liability balance goes (o9n - again a goo( t,ing: If you cre(it an asset7 your asset is re(uce( "suc, as c,ecking balance falls$: If you cre(it a liability account7 it goes u "you o9e more on a loan$: !,erefore7 on t,e balance s,eet7 (ebits are goo( an( cre(its are ba(: ,$ner-s .quity: ,$ner &ra$s, %aid #n "apital and /etained .arnings I-m afrai( I must a(( one more confusing item: Small business o9ners are usually sole ro rietors: !,ey often ask me 9,at ,a ens if t,ey take money out of t,e business " ay t,emselves$ or ut t,eir o9n ersonal fun(s into t,e business: Sole ro rietors (o not take actual ayc,ecks from t,e business "c,eck 9it, your C.A to see if you s,oul( ,ave an actual ayc,eck or 6ust take (ra9s$: If you are a very small business an( (o not take ayc,ecks7 ,o9 (o you ay yourself8 Remember from c'apter < t,at as far as t,e IRS is concerne(7 t,e rofit your business makes is your ay: !,ey (on-t care if you leave it in t,e business c,ecking account or not - you still ay income ta2 base( on your ersonal ta2 bracket an( 9,at t,e business rofit is: If you (eci(e to take money out of t,e business for yourself7 it is recor(e( as a E(ra9E: !,e balance s,eet is ma(e u of t,ree areasK assets7 liabilities an( o9ner-s e+uity: Assets minus Liabilities e+uals o9ner-s e+uity: In ot,er 9or(s7 if t,e assets 9ere use( to ay off all liabilities7 t,e remain(er left is t,e e+uity t,e o9ner ,as in t,e com any - unless it ,as been taken

out as a (ra9: So7 if you take out a (ra97 you 9ill (ebit t,e e+uity account: If you ut cas, into your business7 you 9ill cre(it t,e e+uity account "raise it$: In or(er for t,ings to balance7 t,e e+uity account is like a liability account in t,at t,e balances are cre(its: Liabilities lus o9ner-s e+uity e+uals assets on t,e balance s,eet: !,at is 9,y cre(iting o9ner-s e+uity raises t,e account an( (ebiting lo9ers t,e account: 1ra9s are re(uctions in e+uity7 so t,at is t,e only account 9it, a negative balance: EWaitE7 you say: W,y is o9ners e+uity a liability8 Isn-t it a goo( t,ing8 It is a goo( t,ing for t,e o9ner7 but it is o9e( to t,e o9ner by t,e business so is liste( as a liability: For t,ose of you 9,o love t,is stuff7 t,e Eretaine( earningsE is ma(e u of net income lus or minus amounts ut into or taken out of t,e business by t,e o9ner: Some accounting soft9are systems break out t,e current year-s net income an( list t,at on a se arate lineG t,e total of all ast years- income is on it-s o9n line7 calle( Eretaine( earningsE: In t,e above e2am le7 t,is is t,e com any-s first year of business: !otal o9ner-s e+uity is ma(e u of ai( in ca ital "9,at t,e o9ner ut into t,e business minus (ra9s taken out of t,e business$7 an( net income "retaine( earnings$: See ,o9 it all balances an( 9orks toget,er8 .retty cool: Sample ookkeeping

Mont' :) 4ou 6ust starte( your business: 4ou take out a business loan from t,e bank for I?JJJ7 an( you ut your o9n ersonal fun(s into t,e business in t,e amount of I?7JJJ: 4ou o en a business c,ecking account in t,e amount7 t,en7 of IBJ7JJJ: 1ebit c,eckingK IBJ7JJJ Cre(it %ank LoanK I?7JJJ Cre(it .ai( In Ca italK I?7JJJ 1o total (ebits e+ual total cre(its8 4es< 'ffect on financial statementsK

N#!'K #' stan(s for o9ner-s e+uity !,e income statement is not effecte( "you (i( not (ebit or cre(it any income or e2 ense accounts$: !,e balance s,eet is in balance because Assets = Liabilities an( #9ner-s '+uity:

Mont' <) 4ou urc,ase office su lies for IBJJ: 4ou lace an a(vertisement in t,e a er for a cost of I*?J "it 9ill be ai( ne2t mont,$: 4ou urc,ase floral su lies to make 9reat,s7 in t,e amount of I>JJ7 an( you ay cas, for t,e su lies: !,is is enoug, to make >J 9reat,s: We-ll go a,ea( an( e2 ense t,e floral su lies at t,is oint7 because 9e e2 ect to sell t,e 9reat,s soon: Cost of Goods Sold !o be more accurate7 you 9oul( ost "(ebit$ t,is cost to an asset calle( E9reat, su liesE "an inventory account$: As you sell 9reat,s7 you 9oul( move IBJ er 9reat, from t,e asset E9reat, su liesE to t,e e2 ense ECost of 0oo(s Sol(E: !o kee t,ese e2am les sim le7 9e 9ill make an a(6ustment later "refer to t,e last mont,7 9,en 9e ost remaining su lies to an inventory account$: At t,e en( of t,e mont, you sell D 9reat,s for I>J eac,: .urc,ase of office su liesK 1ebit office su lies "e2 ense$K IBJJ Cre(it cas,K IBJJ .urc,ase of A(vertisingK 1ebit A(vertising "e2 ense$K I*?J Cre(it A). Moe-s A( Com any "liability$K I*?J P A). means Eaccounts) ayableE: In ot,er 9or(s7 you o9e someone money: .urc,ase of floral su liesK 1ebit floral su lies "e2 ense$K I>JJ Cre(it cas,K I>JJ Sales floral su liesK 1ebit cas, "asset$K I*DJ Cre(it sales revenue "income$K I*DJ 1o total (ebits e+ual total cre(its8 4es< 'ffect on financial statementsK

!,e income statement is affecte( t,is mont, "you ,ave bot, income an( e2 enses$: !,e balance s,eet is in balance because Assets = Liabilities an( #9ner-s '+uity: It reflects t,e net income of t,e mont,7 as 9ell as t,e current balance in your asset an( liablility accounts: 4our loss for t,e mont, is I=BJ: Mont' =) 4ou sell B? more 9reat,s for I>J eac, "total sales of ILJJ$: 4ou ay off t,e a(vertisement bill in t,e amount of I*?J 4ou start making ayments on your bank loan in t,e amount of I*JJ: Sales Revenue 1ebit cas, "asset$K ILJJ Cre(it revenue "income$K ILJJ .ay off A(vertising billK I*?J 1ebit A). Moe-s A( Com any "liability$K I*?J Cre(it cas, "asset$K I*?J /ake ayment on bank loanK 1ebit bank loan (ue "liability$K I*JJ Cre(it cas,K I*JJ 'ffect on financial statementsK

!,e income statement is affecte( t,is mont, "you ,ave income but no e2 enses$: A(vertising is N#! an e2 ense: It 9as recor(e( last mont, as an e2 ense: It is merely a (ebt being ai( t,is mont,G it effects t,e balance s,eet7 but not t,e income statement: !,e balance s,eet is in balance because Assets = Liabilities an( #9ner-s '+uity: It reflects t,e year to (ate net income7 as 9ell as t,e current balance in your asset an( liablility accounts: Mont' @) "Final mont, of t,e year$: 4ou sell *? 9reat,s for I>J eac, "total sales of IB?JJ$: 4ou make anot,er ayment on your bank loan in t,e amount of I*JJ: 4ou (eci(e to E ay yourselfE I*7JJJ lus ay yourself back t,e I?7JJJ you originally ut into t,e businessG an( take out a (ra9 for I*7JJJ7 lus

you take out t,e I?7JJJ: 4ou urc,ase( enoug, floral su lies to make >J 9reat,s: 4ou e2 ense( all of t,e cost of t,e su lies at t,e time of t,e urc,ase: 4ou ,ave sol( DD 9reat,s7 meaning you ,ave su lies on ,an( still for B> 9reat,s: 4ou ,a( ai( I>JJ for t,e su lies to make >J 9reat,s7 so t,e cost er 9reat, is IBJ: 4ou must no9 make an a(6ustment for su lies still in inventory: !,e IRS (oesn-t 9orry about small amounts of su lies in inventory7 but if it a((s u 7 you must count it as inventory: !,is means you (on-t count it as an e2 ense: 4our C.A can give you a(vice on t,is: I am moving t,e remaining su lies from e2 ense to inventory to illustrate ,o9 it is (one: 4ou ,ave enoug, su lies to make B> 9reat,s7 so you ,ave IB>J in inventory "IBJ 2 B>$: At t,is oint7 you coul( move t,e cost of your su lies use( from Efloral su liesE to ECost of 0oo(s Sol(E: Sales Revenue 1ebit cas, "asset$K IB?JJ Cre(it revenue "income$K IB?JJ A(6ust for inventory "formerly e2 ense($K I*?J 1ebit inventory "asset$K IB>J Cre(it floral su lies "e2 ense$K IB>J /ake ayment on bank loanK 1ebit bank loan (ue "liability$K I*JJ Cre(it cas,K I*JJ .ost 1ra9 1ebit (ra9 "e+uity$K I*JJJ 1ebit ai( in ca ital "e+uity$K I?JJJ Cre(it cas,K I=JJJ 'ffect on financial statementsK

!,e income statement is affecte( t,is mont, "you ,ave income an( an a(6ustment to e2 enses$: 4our balance s,eet is effecte( "cas,7 t,e bank loan an( your (ra9 an( removal of ai( in ca ital$: !,e balance s,eet is in balance because Assets = Liabilities an( #9ner-s '+uity: It reflects t,e year to (ate net income7 as 9ell as t,e current balance in your asset an( liablility accounts:

Do! can $ be s'o!ing a profit if $ 'ave no *oney;

WAI!< !,is s,o9s you ma(e a net income of IB7@?J for t,e year: 4et7 you (o not even ,ave enoug, in t,e bank to ay off t,e bank loan: Ho9 can t,is be8 S,oul(n-t you ,ave cas, in t,e bank to cover t,e loan7 lus 9,at you ma(e in rofit8 W,ere (i( t,e money go8 Is t,ere a mistake some9,ere8 No t,ere is no error: 4es7 t,e business (i( make a rofit of IB7@?J: W,ere is it8 4ou took out a (ra9 for I*7JJJ7 remember8 .lus7 you ,ave some of it 9ra e( u in inventory: It is ossible to s,o9 a rofit on t,e books7 yet ,ave no money in t,e bank: %e sure you un(erstan( t,is: Remember7 also7 t,at in t,is e2am le "sole ro rietor$7 t,e business o9ner-s income ta2 is base( on t,e business rofit of IB7@?J7 not t,e I*7JJJ taken out as a (ra9: %e sure you un(erstan( t,at conce t as 9ell:

OI(, IN&(ATION, AN2 GO(2

February BD7 *JJ= Jou see headlines like this all the time in the mainstream financial media C F'ising <il +rices =rive =emand for 6old as "nflation HedgeF. But what does that really mean? Higher oil prices cause concern over FinflationF which drives demand for gold? =oes that make sense? Bnother freDuently seen headline is similar to the one for this report from Bloomberg earlier today, F6old ?limbs as =ollar5s =ecline :ay #pur =emand From "nvestorsF. This one seems to make sense the first time you read it C if you5re holding 3.#. dollars and they5re declining in value against other paper money, then these 3.#. dollars are probably declining even faster against the world5s oldest money in the form of precious metals. The first paragraph of the report says as much. F6old prices advanced in Hondon as declines in the 3.#. dollar spurred demand for the precious metal as an alternative asset.F That all seems to make sense, but what about the relationship between oil and gold and the slightly nebulous concept of an Finflation hedgeF that connects them? =efining F"nflationF "t seems that in order to solve this pu,,le you first have to define FinflationF to know what it is that you are FhedgingF against. The idea of a FhedgeF is pretty simple C :erriamCWebster says it is Fa means of protection or defenseF.

#o there5s action being taken to FprotectF or FdefendF against FinflationF. :erriamCWebster defines FinflationF as Fa continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and servicesF. They seem to be infected with the same sort of thinking that dominates most of contemporary economics C where the definition of inflation is actually the symptom of something else. Bt least they5re honest about it. Bs usual, Wikipedia has a much more thorough discussion of the sub$ect (after all, it is an encyclopedia and not a dictionary). But, encyclopedia sub$ects normally start with a definition, and here is where you first see a few wheels turning C a few Dualifiers right at the outset. Bt Wikipedia, FinflationF is defined as followsI F"n mainstream economics, inflation is a rise in the general level of prices, as measured against some baseline of purchasing power.F B distinction is made between FmainstreamF economics and other economic theory and other Dualifiers e!ist in the FgeneralF level of prices measured against a Fbaseline of purchasing powerF. Bs evidenced by the rest of the material on this page, the topic is much more comple! than :erriamCWebster lets on. The discussion includes eight different commonly used measures of inflation, a discussion of hedonic ad$ustments, and what appear to be thousands more words including Fother theoriesF. The first topic in the <ther Theories section is Bustrian &conomics where it is found that, FBustrian economics views inflation as an increase in the money supply itself, and views moves in the general price level as being subsidiary to changes in money supply.F That must be why the oilCgold Duestion is being asked here today. For any observer concerned about causes rather than symptoms, inflation is much better defined as the increase in money and credit, and it is there that the oil price>inflation hedge>gold price logic breaks down. <il +rices and 6old +rices The mainstream thinking on the sub$ect of oil, inflation, and gold is evident in this Bloomberg story from a week or two agoI F6old prices rose in %ew Jork on speculation higher energy costs will boost the appeal of the precious metal as an inflation hedge. 6old sometimes moves in the same direction as the price of oil, which has almost tripled in the past five years. 6old reached a 7;Cyear high of K@E7 an ounce in :ay, and oil climbed to a record in 8uly.F Jes, rising oil prices will drive up the consumer price inde! (the mainstream view of inflation) and people will feel that perhaps they should trade in some of their dollars for gold because gold will also rise in price. But that still doesn5t really make sense.

What if 24 percent of oil production were knocked offline and oil prices shoot through K/44 and the consumer price inde! in the 3.#. rises to /4 percent? Would people then feel a need for FprotectionF as the price of oil rises? #imilarly, what if some low cost manufacturer from the other side of the world drives down the cost of imported goods and keeps consumer prices far below where they would otherwise be? Would people then feel that they need less FprotectionF or no FprotectionF? B much more sensible approach to the Duestion of what causes the gold price to move is to simply look at money and credit and assess whether there is $ust too much of the stuff being created. The price of oil and its impact on consumer prices $ust confuses the issue. Here5s a chart of reconstructed :E from the %ow and Futures website to help out on the money creation part (the Federal 'eserve stopped publishing this data a year ago C they said it costs too much to maintain and provided too little helpful information. The black line, :Eb, is the reconstructed portion).

%o one really knows how much credit has been created since the stock market bubble burst almost seven years ago. 6old is probably going to go higher

INTEREST RATES MO3E STOCKS

by Dans 9agner Trading,nline!arkets.com Mune **7 *JJ= "nvestors seeking to beat the market should be aware of the trends in interest rates. "n the last couple of weeks we have seen longer term interest rates with the /4 year 3.#. Treasury %ote breaking through the 2A level. "n response to the most recent rise in interest rates, stock price volatility increased causing investors to become more cautious about the stocks in their portfolios. The Duestion is does this increase in interest rates signal a decline in the stock markets and in the price of stocks? Before answering that Duestion, consider some background on interest rates.

.)o is in t)e 2ri%er4s Seat, Interest Rates or Stoc5 Prices

What affect does interest rates and bond prices have on stock markets and the prices of stocks? Basically, bond investors are more closely aligned with the economy as interest rates are a key determinant of economic performance. #tock investors must be aware of the economy but they focus on companies and their individual performance. "nterest rates and especially changes in interest rates are a ma$or driver of the economy and the stock market. Bs investors we are very interested in the direction interest rates will go over the ne!t ; months and year. 3nfortunately forecasting the direction interest rates will move is fraught with failure. Typically, for every forecast of increasing rates by economists there is another forecast of decreasing rates. #o what are investors to do? Well, it turns out that interest rates are much more volatile that most investors reali,e. &d &asterling of ?restmont 'esearch found out that in the past E2 years (with a 7Cmonth e!ception), there has not been a ;Cmonth period during which interest rates somewhere along the yield curve did not change at least 24 basis points. :ore than half of the time, interest rates change by more than /.2A (and over 72A in percentage terms) over all ;Cmonth periods. %ow that is something we can use, so let s e!amine the current state of interest rates in a little more detail.

State o6 Interest Rates

Bill 6ross of +imco Bonds, the world s largest bond management firm, stated in his most recent investment outlook that -With the possibility of creeping inflationary tendencies, especially in weak currency countries including the 3.#., combined with the potential reduction of financial flow subsidies which to this point have favored fi!ed income vs. eDuity and real commodity investments, we come to the following range forecasts for the secular timeframe from 744@ to 74//..

Source: +imco Bonds "nvestment <utlook :ay>8une 744@ While not the only cause of the rise in the /4 year 3.#. Treasury rate, Bill s comments are closely followed. 'ising rates are further evidence that the Federal 'eserve will not be lowering rates in the ne!t si! months. The chart below shows the 71 year bull market in E4 year 3# treasury Bonds. This is the chart of bond prices not interest rates. 'emember bond prices move in opposite direction to interest rates. Bs indicated, it looks like this could be coming to an end. "f this happens then Bill 6ross s comments would be confirmed and we are much more likely entering a period of higher rates.

The chart below is of the /4 Jear 3# Treasury Jield. "t shows that rates are rising and testing resistance levels. <n the chart the 2.72 and the 2.11 areas are important near term resistance. "n addition the high of the last ten years is Duite close to the target mentioned by Bill 6ross. Lind of interesting.

.)at Stoc5 In%estors S)ou#" "o No7

#o what does this mean for stock investors today? First we need to assume that interest rates are more likely to move up than down for now. That means that companies that are more sensitive to rising interest rates should be avoided, such as '&"T and utilities. "n theory, rising interest rates should be good for stocks. "f the economy is growing too rapidly then corporate earnings should also be growing rapidly and so should stock prices. "n reality, rising rates are often bad for stocks, for several reasonsI When rates go up, investors who had been buying stocks opt for bonds because their yields are rising.

The market looks ahead. #tocks rise when investors think the economy and corporate earnings will grow. When the Federal 'eserve increases rates, it is seeking to restrain the economy. ?ompanies that borrow money pay more when interest rates go up. This reduces their earnings. ?onsumers also pay more to borrow money, which discourages them from buying cars, houses and everything that goes with them. This hurts companies dependent on the consumer.

Bs a result stock investors need to become slightly more cautious keeping an eye on changes in interest rates. "t does not mean that we should avoid stocks. "t $ust means we need to recogni,e the impact higher rates will have on the 3.#. and global economy and corporate growth. ?ompanies that can fund growth with less debt should benefit.

IN&(ATION, IN&(ATION, IN&(ATION

by 4avid ,) ?aug'n 0ol( Letter7 Inc: Mune =7 *JJ= Bre you feeling sorry for gold lately? 5Fraid it doesn t need your sorrow with its present price action. Bs " have said before and will say again gold will do what gold wishes to do. Here s a sub$ect that brings humor to the table. "nflation. The humor is the fact that inflation is the huge elephant in the living room that everyone wants to ignore and pretend its not there. Well, not e!actly. The middle class, lower class, the upper class and every class in between knows that prices are rising across the board. 8G2P u! at ,9:; annua# rate, 7orst since <,+9= T)e >9S9 econom' gre7 at t)e s#o7est !ace in more t)an 6our 'ears?= 8On t)e in6#ation 6ront, t)e Commerce 2e!artment sa's t)e &e"era# Reser%e<s !re6erre" !rice gauge, 7)ic) measures consumer !rices e c#u"ing 6oo" an" energ', 7as u! +9+; in t)e 6irst @uarter, %s9 19A; at t)e en" o6 +,,: an" aBo%e 7)at se%era# &e" o66icia#s, inc#u"ing C)airman Ben Bernan5e, )a%e ca##e" t)eir in6#ation com6ort Cone9= C#ic5 The humor is how our government attempts to hide it by playing with subtle numbers and hoping that the mere thought of inflation will disappear from the minds of the voters. Bnd " guess this is true pretty much. The reason the general public accepts inflation without a big fuss is that for /4 years the public has seen inflations effects primarily in the value of their home going up. Bnd the big $oke is that

the classes have been convinced that their home is an investment and that there fore a rising home price means rising personal net worth. +lus, the loan market added to the bubble by making cheap loans to all. Why not use cheap money to acDuire an asset that is -guaranteed. to go up in value. How can you lose? <f course you lose when the asset Duits appreciating and actually begins to go down in value. What? =oes anything actually ever go down in the throes of an inflationary environment? Jes, some or many things will go up while a few things go down. Best to be most informed of those assets that have a better longer term reputation for keeping pace with inflation and even surpassing inflationary forces. Bnd of course " will not test your intelligence here to remind you of the principal asset that not only keeps pace with inflation but leaps in bounds ahead of it. 6old au contraire? ?lick Bnd you think monetary inflation is bad. &ver heard of -cosmic inflation?. 8?cosmic in6#ation is t)e i"ea t)at t)e nascent uni%erse !asse" t)roug) a !)ase o6 e !onentia# e !ansion t)at 7as "ri%en B' a negati%eD!ressure %acuum energ' "ensit'9= 8In6#ation ans7ers t)e c#assic conun"rums o6 t)e Big Bang cosmo#og': 7)' "oes t)e uni%erse a!!ear?= 8In6#ation a#so e !#ains t)e origin o6 t)e #argeDsca#e structure o6 t)e cosmos9= 8In6#ation is t)us no7 consi"ere" !art o6 t)e stan"ar" )ot Big Bang cosmo#og'9= 8In6#ation suggests t)at t)ere 7as a !erio" o6 e !onentia# e !ansion in t)e %er' ear#' uni%erse9= 8In6#ation is o6ten ca##e" a !erio" o6 acce#erate" e !ansion Because?= C#ic5 Het s get back to the sub$ect of monetary inflation. " believe we need #tephen Hawking to understand better -?osmic "nflation.. But there do appear similarities between monetary and cosmic inflation. 8&e"era# Reser%e sa7 in6#ation as Biggest t)reat9= 8Concerns aBout in6#ation trum!e" 7orries aBout t)e s#um!ing )ousing mar5et #ast mont) in t)e min"s o6 &e"era# Reser%e o66icia#s 7)o %ote" to )o#" interest rates stea"'9= 8.)i#e >9S9 &e" o66icia#s sai" t)e "o7nturn in )ousing 7as turning out to Be more se%ere t)an e !ecte", 7orries aBout in6#ation continue" to "ominate t)e Ma' E "iscussions among &e" C)airman Ben Bernan5e an" )is co##eagues?= FNear#' a## !artici!ants %ie7e" core in6#ation as remaining uncom6ortaB#' )ig)?= 8&e" o66icia#s sai" t)e' )a" not c)ange" t)eir %ie7 t)at in6#ation remaine" t)e Biggest ris5 to t)e econom'9= C#ic5 Below is an interesting and informative email. 82ear 2a%i", Ha%ing rea" t)e artic#e B' Ma#co#m Buc)o#tC aBout Pegmatite Minera#iCation an" >ncon6ormit' Minera#iCation, it Begs t)e @uestion F.)ic) t'!e o6 minera#iCation "oes Pa#a"in 6ace in Ma#a7i an" Austra#ia0F He seeme" to Be on#' concerne" aBout Cigar (a5e9 B'e no7,= (a7rence 29 WowG Het s learn something new today. +egmatite :inerali,ation and 3nconformity :inerali,ation. " know you have stayed up late at night pondering the relevance and significance of these terms. Well, your dreams of curiosity have been answered. Ma#co#m Buc)o#tC G 8?an' !resentation 7)ere t)e to!ic o6 !resentation 7as >ranium D t)ere 7as stan"ing room on#' an" 'ou cou#" )a%e )ear" a !in "ro! in t)e room9= 8?gra"e is o6 secon"ar' im!ortance 7)en e !#oring 6or >ranium9= 8O6 !rimar' im!ortance to in%estors is t)e >ranium geo#ogica# setting9= 8$ou see, in Nort) America, >ranium minera#iCation occurs in + Basic 6ormats D Pegmatite st'#e minera#iCation an" >ncon6ormit' st'#e minera#iCation9= C#ic5

%e!t name coming up below is analyst =oug ?asey. B bright light should appear automatically in your mind and click to -pay attention. mode when =oug ?asey s name is referenced. 8Ne7s#etter 7riter 2oug Case' is 7e## a7are o6 geo#ogica# setting issues9 He recent#' ma"e a comment in t)e Bu## an" Bear ne7s!a!er to t)e e66ect t)at in%estors no7 s)ou#" Be starting to 6ocus on t)ose com!anies t)at are e !#oring in areas a7a' 6rom t)ese Basins9 An" I trust 'ou can see 7)' )e 7ou#" sa' t)is9 T)e cost o6 "ri##ing t)roug) t)e t)ic5 #a'er o6 san"stone is 6ar 6rom c)ea!9= 8T)is 7ee5 I intro"uce t7o >ranium e !#oration com!anies9 T7o are acti%e in t)e .'oming area an" 7i## use inDsitu #eac)ing9 T)ree are acti%e in areas o6 Cana"a 7it) !egmatite st'#e minera#iCation?= C#ic5 Below is a good email from a reader. 8Hi 2a%i", 8T)ose 7)o in%est in t)e stoc5 mar5et s)ou#" Be 7orr'ing9 A6ter a##, t)e' are t)e ones c#imBing t)e 7a## Ho6 7orr'1, not us9 .e are mere#' seeing a re6#ection o6 )o7 go#" is mo%ing re#ati%e to t)e "o##ar an" ot)er 7or#" mar5ets9 T)an5 'ou 6or !u##ing us t)roug) #ast summer4s correction 7it) 'our centere"ness on t)is issue an" 'our artic#es aBout c)eese9 Ho7 aBout a nice Bott#e o6 7ine un"er I+,0 T)is is m' o7n !ersona# @uest9 .)en t)e go#" mar5et gets t)e Jitters an" tries to s)a5e me out, I Just ignore t)e noise an" 6ocus on somet)ing e#se 6or a7)i#e?= Best .is)es, Ton' P9 S9 Bnd how goes the growth related to the nuclear power industry? Bre those $uicy uranium stocks still the place to be? 8Euro!e 7arms to nuc#ear energ'= 8Euro!e is !oise" to Begin a ne7 nuc#ear age, re%ersing t7o "eca"es o6 !o#icies aime" at aBan"oning nuc#ear !o7er as an energ' source?= FT)ere is a strong mo%e,F sa's Ian HoreD(ac' o6 t)e .or#" Nuc#ear Association, a (on"onDBase" g#oBa# nuc#ear in"ustr' grou!9 FPeo!#e are starting to sa', <(et<s )a%e anot)er #oo5 at t)is9F FI6 7e 7ant to )a%e secure energ' su!!#ies an" re"uce CO HcarBon "io i"e1 emissions, 7e )a%e got to !ut t)e issue o6 nuc#ear !o7er on t)e agen"a,F B#air sai" #ast 7ee59= 8Euro!e<s mo%e to7ar" nuc#ear !o7er comes ami" nearDrecor" g#oBa# !rices 6or cru"e oi# an" natura# gas9 T)ere is a#so intense "eBate aBout en%ironmenta# "amage cause" B' green)ouse gases emitte" t)roug) use o6 oi#, gas an" coa#9 Euro!e<s resurgent interest can<t matc) C)ina<s amBitions: C)ina !#ans more ne7 nuc#ear reactors K +L K t)an an' ot)er countr', t)e .or#" Nuc#ear Association sa's9= C#ic5 Before we close let s tie together the importance of inflation and gold including the natural resource markets. 8In6#ation is one o6 t)e most im!ortant consi"erations 6or #ongDterm in%estors9 I6 interest rates are M9N; an" in6#ation M9-; t)en 'ou are #osing mone'9 So is t)ere a 7a' to Beat in6#ation0 I1,,,,,, to"a' cou#" Be 7ort) a #ot #ess in rea# terms tomorro79= 8?7)ere on eart) s)ou#" in%estors stas) t)eir cas) to a%oi" t)e ra%ages o6 in6#ation0= 8T)e c#assic )e"ge against in6#ation is go#" an" si#%er, an" ot)er !recious meta#s9= 8?in6#ation can Be t)e 6rien" o6 t)e sa%%' in%estor9

IN3ESTMENT &(ASH: IN3ESTMENT IN STOCKS P>RE SPEC>(ATION

by Paul 8) La*ont /ay *7 *JJ= #tocks are still following the elliptical curve upwards mentioned in our last "nvestment Bnalysis 'eport. "n 74 of the last 7E days, the =8"B has closed higher (which has never occurred in the history of the =8"B). Bccording to Bob +rechter -the most similar string of days ended in 8uly /070.. "n his Bpril 744@ &lliot Wave Theorist, +rechter also discusses more recent historyI -"n /000, the public was heavily invested in mutual funds, and mutual funds had 0;A of their clients money invested in stocks.. (&d. %oteI We all know what followed from 7444C7447.) He continuesI -Today much of the public has switched to so called hedge funds (a misnomer). Bridgewater estimates that the average hedge fund in 8anuary had 724A of its deposits invested. This month the Wall #treet 8ournal reports funds with ratios as high as /E times.. "t s easy to see how, as the &conomist reports, -margin debt is now at its highest level since the /074 s.. Bnd it s not $ust in stocks. Total credit market debt is over E44A according to the chart below from the 6abelli :athers Fund.

"t s a speculative credit bubble right from the history books. Bs real estate investors have recently found out when credit disappears so do price gains. Hedge funds will also find that leverage works $ust as well in reverse. :uch like investors who bought stocks at speculative tops in /070, /0;;, and 7444M inflationCad$usted value will not be recovered for at least 74 years.

IN&(ATION O H>MAN NAT>RE

+...,crabbling in t e eart for a fres source of cas , t e gold - silver miners of ./t century 'urope proved t at t e money supply never simply increases as if by magic...+ $O> MIGHT THINK Ben Bernanke5s way with words mere cant, $ust so much sophistry learnt from the :aestro. But words matter when we5re talking about inflation N or denying it. ?hoosing the mot 0uste can prove as crucial as selecting (or denying) the right data. Bt the turn of the 74th century, for e!ample, a 6erman scholar, Wilhelm Bbel, noticed how medieval chroniclers writing nearly seven centuries earlier had made a curious shift in their choice of words to describe rising grain prices. <ver the three decades between B.=. /7E4 and /7;4, wheat prices rose by about one Duarter in "taly, oneCthird in France, and nearly as much in &ngland. Writing about these increases yearCbyC year, Bbel found, the chroniclers slowly switched from blaming fames N or shortages and famines N to blaming caristia, a word derived from carus, meaning costly or dear. The middle of the /Eth century, in other words, saw a switch in how people described what was happening to grain prices. The cost of living N as measured by the cost of having enough to eat N was no longer related to good or bad harvests, not according to the chroniclers5 choice of words. "nstead, the cost of living had become dearer. That changed the way people thought about prices. "t also changed the way they responded to rising prices, too. 6eneral price levels kept growing more costly for the ne!t century, in fact, in a phenomena identified by =avid Hackett Fischer as the :edieval +rice 'evolution. F+eople responded to the discovery of caristia OcostlinessP by deliberately e!panding the Duantity of money,F writes Hackett Fischer in his tome, & e 1reat Wave (<3+, /00;). F=uring the thirteenth century, a ma$or effort was made to e!pand the supply of silver in &urope. <ld mines opened again in Hungary...%ew mines were brought into operation. <utput was increased by new technology.F #crabbling in the earth to uncover fresh supplies of money proved that e!tra cash didn5t simply appear out of thin air, as if by magic. "t Fwas not a deus e( mac ina,F writes Hackett Fischer, Fthat descended ine!orably upon the economy. "t was an artifact of human will and purpose.F +ut another way, Fthe most important thing to remember,F as Hudwig von :ises reminds us, Fis that inflation is not an act of 6od, that inflation is not a catastrophe of the elements or a disease that comes like the plague. "nflation is a policy.F Who5s making policy today? Het5s agree that semantics do matterM let5s also imagine for a moment that the word FinflationF only describes an increase in the money supply. Then let5s bend an ear to the latest choice of words. F"nflationary pressures have been a feature of the ma$or industrial economies in recent times,F said 6ordon Brown, the 3L finance minister this week.

F"nflation has risen not $ust in this country but in most of the ma$or countries,F said his political partner and rival, Tony Blair N the 3L prime minister N earlier this year. F"nflation rates have been pushed upwards across oilCimporting countries,F noted 8osQ :anuel 6on,Rle,C+Rramo, an e!ecutive of the &uropean ?entral Bank (&?B) at a seminar in Helsinki last month. FHow should central banks react?F asked the &?B man. Bnd what about the rest of us? The same pattern that Hackett Fischer found in the :edieval +rice 'evolution of the /Eth century N a pattern of higher price levels preceding a determined attempt to increase the money supply N was also identified in the +rice 'evolutions of the /;th and then /9th centuries. #teadily rising prices for basic foodstuffs are recorded long before new sources of gold and silver were first tapped. The +rice 'evolution of the /;th century, says Hackett Fischer5s research, actually began as early as /194 N Fmany years before Bmerican silver and gold arrived in &urope. "n &ngland and 6ermany, prices nearly doubled during the half century before Bmerican silver could have had a significant effect on their economies.F Whatever the initial cause of rising prices N and Hackett Fischer cites population growth in all four of the +rice 'evolutions he identified between the /Eth and 74th centuries N observing the ageC old response of human nature to higher prices reveals the true problem of modern central banking. For both the policy wonks themselves and for anyone trying to invest profitably under their fiat money dominion, the natural response to rising prices is actually a search for fresh supplies of cash. <lder, more studied and apparently wiser today, mankind of course knows to meet higher prices with higher interest rates instead. 2ace this week5s miniC?hina shock to the #hen,en and global stock markets, tighter reserve ratios are also e!pected in the commercial banking sector. That should decrease the multiplier effect, or so theory says, thus reducing the availability and growth of credit. When rising prices become clear in the data, rising interest rates are sure to follow. The supply of money must be restricted, not increased. But that5s not Duite what happens. "n the compact and compressed little +rice 'evolution we5ve e!perienced so far in the 7/st century, global interest rates slowly began turning higher in late 744E. The Bank of &ngland moved first, followed a year later by the Fed...then the &?B in Frankfurt...and finally the #wiss %ational Bank and the ,eroCrate cra,y Bank of 8apan. Jet the global money supply has by no measure decreased. The broad supply of #terling has risen at a doubleCdigit rate annually for the past two yearsM :E in the 3nited #tates is now estimated by 8ohn Williams5 #hadow#tats to be growing at nearly /7A year on yearM &uro,one money supply is growing at /4A per year, the fastest rate since /004. Het5s give the Fed, &?B and Bank of &ngland their heads, and imagine that they actually want rising rates to counter rising prices by restricting moneyCsupply growth. "t simply hasn5t worked over the last /7 months and more.

?ould it be N shhhhhh N that modern central banking is impotent in the face of a genuine and sustained rise in living costs? Bre the wonks undone by the rest of us N and most especially the commercial banks N scrabbling in the dirt for fresh supplies of money to overcome the loss of purchasing power that higher prices produce? <r will it take a surprise and shocking increase in interest rates, a hike up to doubleCdigits throughout the industriali,ed world, to cut money supply growth and so cut the rate of inflation in prices? F"n cultural terms,F writes Hackett Fischer of the /Eth century gold and silver seekers, Ftheir actions helped individuals and institutions to cope with high prices, but had the collective effect of driving prices higher.F High prices demanded more moneyM more money led to increased prices. "f you ever thought today5s rising cost of living would somehow slow down by itself, you failed to account for human nature.