HOW TO FINANCE A BUSINESS 202 METHODS OF RAISING CAPITAL & USING CREDIT TO DEVELOP A BUSINESS GIFT OF Mrs. Berton Einstein HOW TO FINANCE A BUSINESS WHERE AND HOW TO GET FUNDS HOW TO USE THE BANK PARTNER- SHIPS AND STOCK ISSUES SUCCESS FROM SMALL CAPITAL FINANCING IN A CRISIS HANDLING INVESTMENTS MONEY LEAKS AND SAVINGS PLANNING TO MAKE ENDS MEET 202 PROVED METHODS OF RAISING CAPITA!, AND USING CREDIT A. W. SHAW COMPANY CHICAGO NEW YORK A. W. SHAW COMPANY, .Ltd., LONDON 191J Hh How How How How How How How How How How How How How How How How THE MAGAZINE OF BUSINESS OTHER "HOW- BOOKS" TO INCREASE YODR SALES TO INCREASE A BANK'S DEPOSITS TO SYSTEMATIZE THE DAY'S WORK TO GET MORE OUT OF YOUR FACTORY TO INCREASE THE SALES OF A STORK TO SELL REAL ESTATE AT A PROFIT TO SELL MORE LIFE INSURANCE TO SELL MORE FIRE INSURANCE TO WRITE LETTERS THAT WIN TO TALK BUSINESS TO WIN TO WRITE ADVERTISEMENTS THAT SKLL SCIENTIFIC MANAGEMENT is APPLIED TO SELL OFFICE APPLIANCES AND SUPPLIES TO GET MORE POWER FROM COAL TO COLLECT MONEY BY MAIL TO FINANCE A BUSINESS' Others in Preparation BUSINESS MAN'S ENCYCLOPEDIA (Two Volumes) BUSINESS MAN'S LIBRAPvY ^Ten Volumes) BUSINESS LAW LIBRARY (Five Volumes) BUSINESS ADMINISTRATION THE SYSTEM OF BUSINESS (Ten Units Thirty Volumes) In Preparation THE MAGAZINE OF MANAGEMENT COPYRIGHT, 1912, BY A. W. SHAW COMPANY CONTENTS PART I WHERE TO GO FOR MONEY Where and How to Borrow CHAPTER PACK I CHOOSING SOURCES AND APPRAISING CHANCES TO GET FUNDS 7 II WHEN TO APPLY TO THE BANK 16 III How TO NEGOTIATE A BANK LOAN 23 IV GETTING AID WHERE You BUY SO V TAKING IN CAPITAL 37 PART II HOW TO SATISFY THE LENDER What is Credit? VI FINANCING ON REAL AND PERSONAL PROPERTY ... - 47 VII POINTS THAT WIN THE BANKER AND CREDIT MAN ... 54 VIII How TO BUILD A REPUTATION THAT ASSURES CREDIT . . 61 PART HI EMERGENCY METHODS OF FINANCING Resources That Count in Tight Places IX BUILDING A BUSINESS ON THREE FIGURES 69 X HANDLING FINANCES IN A PINCH 76 XI How TO MAKE A FRESH START AFTER FAILURE .... 82 XII DON'TS IN MONEY MATTERS 89 4 CONTENTS PART IV HOW TO MAKE THE MOST OF YOUR CAPITAL Keeping Money at Work CHAPTER PAGE XIII PLANNING TO MEET YOUR BILLS 97 XIV KEEPING EXTRA MONET BUSY 103 XV HANDLING RESERVES AND INVESTMENTS 109 XVI WHERE TO LOOK FOR LEAKS AND SAVINGS . . . . 115 XVII CHECKING UP AND MAKING FINANCIAL FORECASTS , 120 LIST OF FINANCIAL CHARTS CHAJLT PAGE I HOW TO RAISE MONEY 6 II WHEN TO USE THE BANK 17 III BUSINESS FACTORS UNDERLYING SUPPLY HOUSE CREDIT 33 IV FACTORS THAT ESTABLISH FINANCIAL CONFIDENCE ... 46 V PERSONALITY FACTORS UNDERLYING CREDIT 59 VI HOW TO BUILD A CREDIT REPUTATION 65 VII HOW TO FINANCE IN EMERGENCIES 68 VIII KEEPING THE MONEY BALANCE EVEN 97 IX GRAPHIC RECORD OF FACTORY PROFITS 127 Si Part I WHERE TO GO FOR MONEY Where and How to Borrow MONEY or the use of money is bought and sold like flour or cutlery. If you recognize that it is credit which enables you to buy money if you make the lender secure of payment you can purchase whatever funds you need. To do so, however, requires expert purchasing ability. Money service is not always the same either in quality or in price. Money markets vary. Credit which is the assurance of repayment you give means different things in different markets. If you want a loan payable at will rather than on call, the price of your accommodation will be higher. If the available money supply is low, or if your loan involves an unusual chance of loss, you must pay better. If you borrow more than you need that is, if you overbuy money your holdings depreciate day and night at your interest rate. If you underbuy, you may be unable to meet a vital cash demand. Financing a business means expertness in buying, in selling, in using funds. It means establishing credit, stop- ing losses, coming through the pinch by sheer resource- fulness and "making both ends meet" in steady profits. Men who finance store, factory and professional service with success first know their own condition exactly; then check over those who sell funds and apply to such sources as offer precisely what they need. They go to the best money market with carefully prepared purchasing power and buy with expert foresight precisely those funds in amount and in terms which the business needs. ait ' io fflIC these offerings may interest BIB: CHAPTER I Choosing Sources and Appraising Chances to Get Funds HAND to mouth financing recently caused the failure of a large department store in a city of the middle west. The store was well located and the capital should have been sufficient. At the start there was little compe- tition and the business prospered. The prosperity, however, was brief. The owner of the store concentrated his attention on selling and buying. He ignored credit. He paid all small bills upon their' presentation at the cashier's window, larger bills upon receipt of invoice. He took no measures to keep idle funds active; he did not try to establish a reputation among bankers and moneyed men; he adopted no plan to equalize his supply of capital with demand. x At length the business required a new building. The younger members of the firm advised establishing their credit and borrowing the money they needed. A new competitor had entered the field and was making exten- sive improvements. One of the merchant's sons, exas- perated by this move, spoke to his, father. "See here," he said. "We're behind time. Take the railways, the sky-scrapers all the great industrial works for that matter. Could they have been built up 8 . WIJERE TO GO FOR MONEY by following our method? Do they keep their capital idle while waiting for it to grow? Why not borrow this money for the new building? We may be obliged to ask for credit some day to carry on our business. It is better to establish it now while we can." The senior member of the firm, however, was obdurate. He would do nothing until he had accumulated a surplus sufficient to cover the expenses of the improvement, though he admitted that lack of space was a handicap. The first two years the firm managed to build up a considerable surplus. This money was kept in a savings bank, drawing 3% interest. The third year, however, the competition had so grown that no surplus was earned. The fourth year began with a general busi- ness depression. The balance in the bank sank. Still the old policy was continued. What was the result ? The owner of the business had never been well known personally in financial circles. Instead of inspiring confidence, his plan had had the opposite effect. Business houses had concluded that he was obliged to pay cash they came to demand cash on delivery. When the slump came the merchant tried to establish credit, but he had waited too long. He found himself a novice in financing. He did not know how to use to advantage the securities he possessed. He had formed a poor reputation for business acumen and was unable to secure sufficient credit. Although solvent, the firm was compelled to liquidate. The failure of this merchant was due largely to need- less ignorance of financing. He failed (1) to establish credit; (2) to make use of idle funds; (3) to provide for a stringency; (4) to make the most of his tangible and intangible assets, and (5) to arrange to take ad- vantage of business opportunities. SOURCES OF FUNDS 9 The success of your business is closely connected with your methods of financing. The value of capital de- \ pends upon the use you make of it. Your ability to I expand your business, to take advantage of opportuni- ties and meet able competition to save your business in time of financial distress is largely dependent upon how you use your resources. In the building, the maintenance and the expansion of a business finance is a two-edged tool. In skillful hands it becomes, like clever selling, wise buying or the ability to handle employees, a chief factor in the suc- cess of the manufacturer, the wholesaler and the man who measures dry goods or weighs sugar for neighbor- hood trade. Awkwardly used, it undermines the very foundations of a business; and failure may follow fail- ure until the executive learns the lesson of where to look for money to suit various needs ; how to attract the investor and satisfy the lender; how to swing the force of his personal ingenuity into the breach when a crisis develops, and how finally to gain a sure position through records that forecast future receipts and ex- penditures so that his business, like a well-ballasted ship, automatically maintains an equilibrium of cash supply and demand. The first problem in financing a business, is to get the capital. And wherever you may look your chances to secure money depend solely upon the confidence that you can inspire. It is confidence that determines the banker to grant you a loan; confidence that influences the supply house credit man to extend you a line of credit; confidence that attracts the partner and makes possible the stock issue; confidence that secures you loans from private investors. Analyzed, confidence de- pends upon the answer to these questions: 10 WHERE TO GO FOR MONEY From the point of view of the lender : Can you and mil you pay back the loan when due ? From the point of view of the partner or the investor: Can you, as the chief personal element in your proposition, be relied upon absolutely, and does your business judgment war- rant trust ? The factors which determine this essential element of confidence, or, in other words, the factors which de- termine your chances to get capital, are : 1. Your personality. 2. Your assets. 3. Your proposition. The Money Value of Personality in Securing Capi- tal for Your Business One of the greatest resources is personality personal power to inspire confidence. By that is meant not only appearance and presence, but character and ability. Commercial bankers are almost unanimous in con- sidering personality as the greatest of credit factors. Banks will not deal with anyone whom they cannot trust for honesty, integrity and ability. These qualities the bank considers its most important safeguard. In gathering material for its reports, a well-known credit reporting agency grades credit requisites like this : Ability relatively essential. Integrity absolutely essential. Property not necessarily so. In appraising your chances to get capital, therefore, consider first the credit value of your personality. Have you a good reputation in your community, especially with bankers and moneyed men? If so, you can bor- row on it. Have you a reputation for honesty and abil- ity? A soap manufacturer was offered $5,000,000 for SOURCES OF FUNDS 11 the name only of his product your name has value, too, if it stands for the right qualities. Your chances to get capital depend, in the second place, upon your tangible assets. The confidence which really counts with bankers and money lenders is con- fidence in your ability as well as your honest determina- tion to pay back a loan when due, and this depends to a large extent upon the amount and character of your tangible assets. High-grade real estate is one of the best securities you can always obtain a loan upon it. Government, state, municipal and some public utility bonds are always accepted. You can raise money on life insur- ance, on household furniture. But the value of your assets from a loaning viewpoint depends upon how readily they may be converted into cash. . A patent that has never been proved a success is of little value as col- lateral it could not be sold readily. Special machinery is of little value for the same reason. How the Strength of a Business Proposition Can Be Made the Basis for Securing Capital The third factor which determines your chances to get capital is the nature of your business proposition. Is your enterprise based upon a new invention or an untried scheme, or does it involve no new principle? Is the risk great ? Do the chances for profit warrant the risk? These are some of the points which will deter- mine the amount of capital you can raise on your plan. In new enterprises which are not entirely based upon untried schemes the great difficulty comes from the ex- isting competition. Where the field is covered, unless your proposition includes an exclusive feature which will overcome the advantage of long establishment, your 12 WHERE TO GO FOR MONEY chances for ultimate success are considerably reduced, and the capital is correspondingly hard to secure. The propositions which have the best chance to secure back- ing are those that supply a want widely and generally felt. The old complaint, "It takes money to get money/' and "I never had a chance," make up a refrain that is sung by a large chorus of failures. But money is waiting for investment. The general principle is sound : It can be raised for any business capable of creating profit. The burden of proof, however, is upon you. If you have a proposition of merit, you must show that it has merit. You must plan, study your business and take an active personal part in securing the confidence that alone will insure success. While your chances to obtain capital depend upon the confidence your personality, your tangible assets and your proposition inspire, you must present these factors in the right way and to the right sources. It is here that personal resourcefulness becomes a factor in securing capital. The business of a small foundryman had not pro- gressed far before large competitors brought pressure to bear on his suppliers of raw materials to force him out of the field. Prices were raised and his cost of pro- duction became so high that his business existence was threatened. To put his business on an independent basis he ordered new machinery, depending upon a loan of five hundred dollars to which the banker had agreed. A few days after he had placed his order, however, he was informed that on account of a financial flurry his banker had been forced to refuse the loan. The manufacturer returned to his office discouraged. SOURCES OF FUNDS 13 doa't get the loan," he said, "and the payroll is about due." The office conference lasted for some time. Suddenly the gloom OH the manufacturer's face disappeared. "Here," he said, taking his hat, "we've got our busi- ness at least our being established is an asset. I won't be back until I have raised five hundred dollars." He went to an old manufacturer of farm implements who used his product ; secured a generous contract and requested that his customer advance five hundred dol- lars as a guarantee. He presented his proposition in such a way that the advance seemed a matter of course; the opulent customer signed the check without question. When regular methods of raising capital fail, the real test comes. Resourcefulness is only another word for insight seeing exactly what assets in any form you have and using them to the best possible advantage. How Close Financing together with Good Manage- ment Built up a Successful Business Two printers in an Iowa town who had decided to take over a plant got together one evening to figure out how to raise the necessary money. Every conceiv- able avenue of financing their plant was discussed, item by item ; material resources, loans and investments. Fredericks had a house and lot worth three thousand dollars, mortgaged for one thousand dollars. Barnes had several influential friends he thought might con- sent to a loan, some stock in a doubtful proposition and his life insurance. Together they had six hundred dol- lars in cash. The first suggestion, an issue of stock, involved the probable interference of stockholders, and furthermore 14 WHERE TO GO FOR MONEY they saw that it would be as easy to secure outright lenders as investors. They could get no initial help from supply houses because the plant was already equipped and the owner demanded cash. A moneyed partner offered nearly the same objections as a stock issue. Finally they decided that to borrow on all their available resources would almost finance the enterprise. They did this: Fredericks raised: On house and lot, by second mortgage . . $ 800.00 On household effects 200.00 Cash 400.00 $1,400.00 Barnes raised: From a friend, on personal note $ 500.00 On his life insurance 300.00 On his $1,000 unlisted stock 200.00 Cash 400.00 $1,400.00 Two thousand eight hundred dollars was the total amount they were thus able to raise. They needed three thousand two hundred dollars to buy out the plant, and an additional five hundred dollars for other expenses. They worked together now, and fortunately they had begun to plan far enough ahead so that there was still time to proceed with caution. A partner was the only recourse. First, they canvassed among their friends. Those who had money, however, had already been drawn upon for loans. As a last resort they advertised for another investor. From among those who replied they found one man who consented to put $700 into the business and remain a silent partner. He had been watching the records of the printers and was satisfied that he was making a good investment. SOURCES OF FUNDS 15 This amount raised their capital to three thousand five hundred dollars. They still needed two hundred. This was for a part of the running expense. To cover this amount they solicited work in advance. The owner of the building where the plant was situated gave an order for work which he accepted in payment of the rent, and other minor expenses were met in the same way. The insight of the two printers in financing under dif- ficulties suggests the three vital things in getting money for your business: (1) Appraising without bias and listing in order of preference all those resources, per- sonal and material, upon which you can raise money; (2) finding the one best market for each resource and getting the largest return from it; (3) making every subsequent financial step so business-like and clean-cut as to spell financial progress and improved standing in money markets. First of all must come the personal appraisal of your resources. Have you known ability, a good reputation, a record to stand upon? Have you assets that insure your ability to pay back what is loaned you? Have you a proposition that offers a sure chance for profit, or one in which the chances for profit warrant the riskT In this analysis you will find guidance in securing money. With this start it remains only to study, to train yourself in money matters, to look ahead and to foresee your needs, in order to meet most financial crises successfully. CHAPTER II When to Apply to the Bank WHEN does the bank say 'No'? This question was put to the president of a large bank in Chicago. He reclined in his chair. "Never, when the bank can help it," he replied. The popular idea that you can get money from the bank only when you do not need it and that your chances of getting a loan vary in direct proportion to your ability to get along without it prevails because the nature of banking operations is not generally under- stood. If the banker refuses accommodation, it is be- cause his interests demand it. The bank's acommoda- tion is special accommodation. You would not go to an oculist for an operation for appendicitis tnere are times when to go to the bank is equally absurd. Bankers are no longer private money lenders, risking their personal capital upon loans in which favor plays a part. To use the words of the financier quoted above, a banker is "a merchant, absolutely and precisely a merchant/' The "use of money," or credit, is a mer- chantable commodity. The banker buys credit and sells it at a profit. To be successful, he must keep turning over his stock, just as the shoe dealer must turn his. The man who comes for a loan is a prospective buyer. 16 WHEN TO USE THE BANK 17 Remember, it is not money that the banker sells, but the use of it. This distinction is important. The banker sells the use of money in precisely the same way that a liveryman sells the use of a horse. The first question either asks is whether or not he is sure of get- ting back what he loans. If you go to a livery stable for a horse to explore an unknown mountain district, full of dangerous precipices, whatever the glory of the adventure, you will be told to go elsewhere to procure your mount. If you go to a banker with a proposition involving equally unknown and hazardous steps the an- swer will be the same. Bank credit properly has a well-defined place in business, hingeing upon quick return secured by quick assets. Correct and incorrect uses of bank credit, together with mis- cellaneous bank services, are here indicated Likewise, neither a liveryman nor a banker would care to sell the use of a commodity for a period that would endanger his business. A liveryman by loaning 18 WHERE TO GO FOB MONEY a large part of his stock for a long time to one person would risk being unable to meet the regular demands of his trade. The final result would be a loss. The situation in a bank is similar, except that the necessity for restrictions of this kind is much greater. The depositors of a commercial bank have the first claims upon it. The individuality of the loans and deposits in a bank is constantly changing. One man's deposit is high this month and he is borrowing nothing; next month his deposit may be low and he be a heavy borrower. The banker must first of all provide for these shifting requirements of his many regular cus- tomers. When you go to the bank, therefore, you must be able to convince the banker that you can pay back your loan, and that it will be outstanding only a short time. Your ability to do this, especially if you are not well known and a regular depositor, hinges, to a large extent, upon your quick assets. Quick assets are those which can be turned into cash in the ordinary course of business. They include, in addition to actual cash, good accounts receivable, good bills receivable, and marketable securities held for in- vestment, which are not a part of the fixed assets. To these items are usually added inventories. Quick assets are those for which there is a continual market those which can be converted into cash without great incon- venience at any time. When you go to the bank for a loan you should have evidence that your quick assets exceed quick liabilities. As a general rule, you should possess two dollars or more of quick assets to one of quick liabilities. The basis of a bank loan is a volume of quick assets sufficient to take up the loan and to leave enough surplus quick WHEN TO USE THE BANK 19 assets to protect your business. The bank insists upon protection for itself and you. A member of a corporation that had just completed its factory organization went to the bank for a loan to organize the sales department. He showed the following assets: Machinery , . . $10,000 Drawings, etc 5,000 Patents 8.000 $23,000 The banker glanced at the statement. "Do you know how much all that is worth from our point of view?" he asked; "just the junk value of the machinery, which is practically nothing." If the applicant for the loan had understood the na^ ture of banking operations, he would have sought his loan from another source or presented other and better claims for it. Presenting a Business Proposition as a Necessary Basis for Bank Accommodations When you go to the bank for a loan, you should have a business proposition. You must be able to show that the money you need will be so used that it will bring quick and profitable returns. Do you want a loan to pay other creditors? to make permanent improvements? to sustain a failing business? Or have you a definite proposition that offers a chance for profit and will con- vince the banker of your ability to pay the loan when due? Put these questions to yourself candidly. Base your answers on the best information, advice and state- ments to be had. If you want the use of a banker's money, you must be able to show that you will get back the money you use, quickly and at a profit. It is his assurance that he will get it back. 20 WHERE TO GO FOR MONEY Keen business men do not expect the banker to fur- nish any part of the fixed capital of an enterprise. That is either paid in by the owners or obtained by long time loans or bond issues from private investors. The owner of a Pennsylvania stone quarry needed more capital for the period necessary to put his busi- ness on a paying- basis. He went to the bank. He had neither a definite short time proposition nor quick assets. The banker could not see that he would be any better able to pay his loan at the end of three months than at first. The banker refused the loan. He ad- vised him to put a bond issue on his property. From the sale of the bonds the owner of the quarry obtained funds which relieved his difficulties. Later the bonds not sold were deposited as bank security for a loan. If the quarry owner had had greater knowledge of banking operations, he would not have applied for the bank's accommodation. He would have arranged for the bond issue on his own initiative. In this way he would not have made evident his financial ignorance. Your bank credit should be held in reserve as a resource for temporary demands and opportunities, to enable you, to be forehanded, able to discount bills and take advantage of markets or meet emergencies. The minimum amount which is always needed in a business should be provided without dependence upon banks; the temporary requirements are the legitimate employment of bank funds. It is wise to go to the bank: 1. When the loan is for temporary uses as con- trasted with uses which involve investment in fixed im- provements. 2. When your quick assets are sufficient to warrant the Joan. WHEN TO USE THE BANK 21 3. When you have a definite business proposition which insures a profit from the money you borrow. If you cannot meet any of these conditions, it is ad visable to seek money from other sources. In small towns, where there is strong competition be- tween the banks, and where interests other than purely banking interests, such as building up the community, can be made factors, the rules are sometimes stretched or ignored. But in the majority of cases, the bank's policy is also your policy. When banks are persuaded to grant loans for other than temporary purposes, a business man risks being forced to make an assignment or to go out of business in order to meet some small but urgent demand. How to Secure the Bank's Help in Furthering Your Business and Financial Interests The most vital of bank services is this of granting loans. But there are other aids that the bank offers, and the shrewd business man will take advantage of them. The banker is at the financial focus of a com- munity. He is in touch with investors. He can help to secure the support of a town for a new industry. He can advise on markets, securities and investments. He can help in selling stocks and bonds. There is hardly a financial question upon which he does not give some help. The banker's interests often coincide with yours. Men skilled in finance make a banker a partner. They consult with him on all matters of financial importance. They show him all the details of their business. This frankness, besides securing his confidence and accommo- dation, gains access to the other services he can offer. An owner of a chain of canning factories was seek- 22 WHERE TO GO FOR MONEY ing a new site in Indiana. The task of securing land from the town on the best terms was proposed to the local banker. The recommendations of the railroad officials were such as to convince him of the value of such an industry to his locality. Through his efforts the commercial club was prevailed upon to secure and donate the necessary ground, and to provide trackage rights. The banker also used his influence in interest- ing the farmers, and the company was enabled through the medium of the bank to operate with certainty of an adequate crop. Thus the bank serves the interests of its patron while serving itself also. What the bank can do for its customers is as diverse as the activities of the businesses it serves. It can help almost everywhere; it can advise, safeguard, protect handle your deposits and by check, your payments and receipts, help raise money, enlarge trade, advise how you may decrease expense and increase profits. In supplying money, however, it has a certain well- defined field of service; to recognize this increases your financial effectiveness and contributes to your business reputation. Guard Your Credit /CREDIT is often more valuable as V^ an asset than capital. The bus- iness world accepts this truth and base it greater activities upon it. CHAPTER III How to Negotiate a Bank Loan FIVE hundred thousand dollars was recently ob- tained offhand on a promissory note by a large de- partment store to discount its bills. When a half million dollars is procured as readily as this, there must be good reasons aside from tangible assets. These are the reasons, as the bank president gave them: "The character of the store proprietor is such as to inspire full confidence that the loan would be paid. "Analyzed, this confidence arose from the following considerations : "The store had kept faith with its customers, building up good will as it built up its sales. "It had put tremendous energy into selling, but never had sold under false pretenses or by exaggerated claims. "It employed good buyers and insisted on a high standard in its salespeople. "Its proprietors were always open and above board with me. They told me every essential thing they did; consulted me at least once a month, and furnished me with detailed, tabulated reports. I never had occasion to suspect them of any misstatements or false optimism. '"A sure and staple market existed and exists for the store's goods." 24 WHERE TO GO FOR MONEY The same principles apply equally well to a loan of one hundred dollars. The most important point in your financial effort is, therefore, to know and adapt your- self to this basis on which the banker can safely afford you accommodation. It is by knowing the basis' for bank loans, by framing your request on this basis, by approximating the banker's conditions, that you will be able to secure loans and fortify your credit standing. In country banks or small city banks the cashier and the president have charge of loans. In the large city banks the great volume of business makes specialization necessary. Here you should make your application to the official, generally a vice-president, who has charge of loans in your particular line. , The first necessity in applying for a loan is to secure an introduction to the officials of the bank. City banks, as well as country banks, desire to know their customers intimately. The local real estate man, the factory owner, the contractor, merchant and lawyer, find it to their interest to bring the bank new customers of the right kind from week to week. Where your reputa- tion is high, seek a bank introduction through a friend of financial prominence. The confidence of the bank in the customer who introduces you will accrue to your advantage. A Michigan man went into the paint business with one great asset his ability. He kept a checking ac- count at the bank, but the balance was usually down to the vanishing point, and, instead of asking for cash, he felt that he should apologize every time he approached the teller's window. One day he saw a chance to make a good profit by buying paint and varnish on a rising market. He went to the banker. NEGOTIATING A LOAN 25 "How can I borrow some money ?" he asked and then he felt like running away. "On what security ?" inquired the financier. "A carload of paint." The banker elevated his eyebrows. "Paint isn't ex- actly the kind of security a bank wants, ' ' he said. ' ' Sup- pose you couldn't sell it? We might have to close it out at a heavy discount." I The paint man admitted this was true. But he found courage to explain his plans fully. The banker had been watching this young man for several months, not because his bank account was small, but because he had been exhibiting unusual ability as a salesman. It is seldom that these things escape a local banker. He considered the man's selling ability really better security than the stock of paint, and he granted the accommodation. Your best guarantee of success in getting a loan at the bank is an earlier success in other directions; not necessarily a conspicuous financial achievement, but success in attainment of those personal attributes that make character. Individual habits, honesty, contempt for deceit and a faculty of looking at things in a true light these are the elements that build confidence. A look at the personal records in the credit department files of a large bank would convince anyone of the credit value of personality and character. How Business Records and Personal History Nay Be Made Factors in Securing Bank Loans After character, and closely associated with it, come your business record and history. The banker places emphasis upon your history and he is entitled to know it fully. Have you always paid your debts, and done 26 WHERE TO GO FOR MONEY so in a prompt and business-like way? Are your ex- pectations based upon knowledge and intelligent calcu- lation, or are they mere guesses? If you are new in the community, can you show a good record where you have lived? If you are new in business, have you a clean personal record in someone's employ? The more promptly and fully you show up these details the greater chance you have of obtaining a loan. Two concerns applied to the bank for a loan. One of these had a loan item disproportionate to its finan- cial responsibility. It was not accustomed to " clean up" and carried practically the same amount of loans continually. This constant position of borrower indi- cated a cramping for capital, a fact that put the con- cern at a disadvantage. The history of the firm was so good, however, that the bank accorded it an extended line of credit. Another firm which had gone into bankruptcy pre- sented a statement far superior. It was refused a loan for a reason the opposite of that for which the honest although struggling management, was granted accom- modation. The personal records of its officials did not warrant a loan. What the Statement and the Analysis of Business Mean to the Bank When ordinary evidence fails to secure a loan, there is one argument by which you can compel the bank's attention. It is the analysis that goes deep into your resources a detailed defense of your assets. You should go to the banker certain of the condition of your busi- ness; ready to analyze your assets and needs to the last detail. An analytical statement is the best and most business-like proof that the loan is justified. NEGOTIATING A LOAN 27 The statement you make should show conspicuously the assets that really count in making a loan the quick assets, such as accounts receivable, cash and merchan- dise. Against these you should set off your accounts and bills payable. Thus you can furnish, in bird's-eye perspective, your situation from a loaning standpoint. If you expect your banker to grant you a loan, you should also be open and candid with him. If you do not care to trust your banker with the details of your business, go to another whom you can trust. The in- terests he guards give him a right to know all the facts that affect your solvency, and he will not be satisfied with generalities. The attempt to keep the banker in the dark about some factors of a business is made even by honest bor- rowers. They tell the banker what they wish were true, or what they hope is going to be true, or they hold back some fact which, they falsely persuade themselves, may be irrelevant. A man went into the office of a New York banker with a statement which was perfectly true as far as the business itself went. But he suppressed the fact that he, personally, had borrowed to the limit on his life insurance. As it happened, that was important, and it happened also that the check had gone through this bank and the fact had been noted. The loan was re- fused. A banker gets to be an expert in detecting these res^- ervations. If some discrepancy does not betray this kind of a borrower, his manner will. And deception in even a minor detail undermines confidence. A banker deciding whether or not to make a loan is like a con- tractor digging for hardpan upon which to rest the foundation of a building. Until he has found it, he 28 WHERE TO GO FOR MONEY doesn't know how much farther down it is. The fact a customer conceals may be trivial, but if there is sus- picion of concealment, the banker cannot be sore that his loan is safe, and he will not lend unless he is sure. On the other hand, confidence inspires confidence. The man who makes the banker a consulting partner in his business finds him a willing helper at need. Next to frankness in presenting the details of your business comes the exactness of your knowledge of it. A man is generally considered to know about his own business, but it is often far from the case. Lack of trade knowledge may deceive him on such matters as depre- ciation, and other technical points ; or he may be blinded by inherent optimism. Bankers are skeptical on this point, but evidence of thorough knowledge will do much to overcome this skepticism and secure confidence. Moreover, the indorsement of the concern's paper by prominent men will often augment its credit A firm of partners was accorded a loan and at the same time a manufacturing corporation that presented a better statement was refused. The partners had large personal estates that were brought to the bank's atten- tion as subject to the debts of the firm. Thus there was really greater financial backing than the company's state- ment itself showed. In the other case, the directors did not indorse the company's paper, and the only security was that actually shown in the statement. Had the directors been willing to indorse the corporation's paper it would not have been challenged. Meeting the Banker's Requirements What to Con- sider in Applying for a Loan To negotiate a loan at the bank, understand the bank's requirements, and then meet them as far as possible. NEGOTIATING A LOAN 29 Remember that perfect credit conditions are rare, but that the borrower who most fully evidences what he has, who keeps his record as clear as possible and offers profitable business to the lender, has the best chance to secure the bank's service. In applying for a loan you should : 1. Get an introduction by a favorably known cus- tomer. 2. Guard against all compromising appearances. See that your private and business life are such that they will create a favorable impression. If you have a repu- tation for honesty, integrity and ability, demand your loan on that asset do not try to "fix up" your statement. 3. Submit a statement of your business, complete in every detail. Make sure of your quick assets. 4. Be frank in your dealings with the bank. Do not withhold facts. Analyze your situation, showing what is to be done with the loan. 5. See that you know the facts of your' business. Be careful of your statements. Do not exaggerate. 6. Consider the credit value of your business record. If favorable, it is an asset it can be used to secure a loan. 7. Get private indorsement of your company's paper as a last resort, where money must be had even though the security implies financial weakness and need for backing. BANKS base credit on the assur- ance that borrowers can pay out of their quick assets. Geo. M. Reynolds CHAPTER IV Getting Aid Where You Buy AS personality is the prime factor in securing a loan from a commercial bank and tangible assets in borrowing from a bank doing a general loan business, so the condition of your business is the chief factor in obtaining a line of credit from a supply house. When you go to a supply house for credit you are not only a customer for credit, but you are also a cus- tomer for goods. The credit man must regard sales as well as credit risk. The supply house is desirous of selling as much goods as possible. To follow a policy of extreme conservatism would mean the loss of trade. If you carry on your business in a progressive manner and combine with good management the degree of in- tegrity necessary to warrant safety, the supply house will consider this sufficient guarantee that it will be paid for the goods it sells you. The problem of obtaining credit from a supply house is closely associated with the problems of business or- ganization and management. It is necessary to consider them together. The experience of a merchant in a small town illustrates how a retail store may be put on a basis to assure credit. John Black, a dry goods salesman, decided to put 30 CREDIT FEOM SUPPLY HOUSES 31 ten thousand dollars into the dry goods business. After he had selected his location, the first problem was the purchase of fixtures. Next he was obliged to place a limit upon the credit he would extend to customers. This was a vital problem, and one that would affect the credit standing of his store. Deducting the amount tied up indefinitely in fixtures and in customers' credits, he had left a working capital of six thousand dollars. On this capital he should be able to secure four thousand dollars credit from his supply house. This would enable him to carry ten thousand dollars stock. As he could turn it three times a year, he was in a position to do an annual business of thirty thousand dollars. His expenses were not to be more than twenty per cent of the total sales six thousand dollars per an- num, or one thousand dollars every sixty days. His bills fell due in sixty days. On the basis outlined his business was conducted thus: Original cash capital . . . $10,000 Stock carried $10,000 Fixtures 2,000 Sales for year 30,000 Sales every sixty days . . 5,000 $ 8,000 Deduct expenses and personal Customers' accounts . . . 2,000 withdrawals for 60 days 1,000 Cash including profits, to $ 6,000 apply to accts. payable 4,000 Credit from jobbers . . . 4,000 ( which last entr ^ P roves U P with the item, "Credit from jobbers.") 'John Black was able to establish a successful busi- ness. He planned not only to put his business on a sound basis, but he considered also his credit standing. He limited his outlay for fixtures; he limited the amount of his accounts receivable ; he planned his business and took collection precautions so that he could meet his notes when due; he accepted an amount of credit well proportioned to his working capital. 32 WHERE TO GO FOB MONEY As in the case of John Black, your credit standing with the supply house, as well as the success of your store, depends upon the following factors: 1. Selecting the right location. 2. Money paid for store fixtures. 3. Limit placed on customers' accounts, 4. Amount of credit accepted from jobbers. 5. Annual turnover. 6. Cost of doing business. The extent to which you may use your suppliers' credit depends upon the nature of your business. In some cases the supplier makes the retailer his agent and demands remittances only as the goods are sold and as the final purchaser settles. Other houses require remittances on the first of every month or thirty days after the date of delivery. Some supply houses, especially new and small con- cerns, furnish actual capital in money, and in order to secure trade will offer long time credit terms. If you need additional capital to start or to carry on your business, supply house credit offers great advantages and few disadvantages. It is more easily secured than most other kinds of credit. In the case of a stock of goods, the payment of the amount is provided for by the sales. Unlike the method of taking in capital by an issue of stock or by taking in a moneyed partner, this method entails no sacrifice of part management in the enterprise. With ample credit, the advisability of accepting ac- commodation from your supply house depends upon the amount of the discount for cash and the value of the money to you in some other investment. For in- stance, if the discount is small and the money market CREDIT FROM SUPPLY HOUSES 33 high, the money you would have to pay IIF cash might earn more in sixty or ninety days than the amount of the discount. While there are advantages in obtaining credit from the supply house, it often entails over-buying. Pay- ments look small at a distance. When credit is extended and no sacrifice is demanded for a long time, a retailer is often persuaded to lay in stock that he will be unable to sell, a stock that will "grow whiskers/ 7 to use the credit man's phrase. In the liquidation of a store in [ Trade Reached 1 Competition 1 Operating Advantages 1 Fixtures and Equipment ' 1 Stock 1 Reserves 1 Financial Methods 1 Efficiency of Control Business Factors, 1 Accepted Supply House CrecHt 1 Number of Creditors 1 Standing with Credit Agencies 1 Buying Methods 1 Production Methods [ Executive Policies | [ Handling of Employees 1 Dealings with Customers 1 1 Relations with Public | [_ Turnover | 1 1 Cost of Operation I 1 Selling Costs | 1 Overhead Expenses | Securing permanent credit support from the manufacturers and wholesalers who supply the mill and stor^, depends- upon your demonstration that every important factor in your business, as here suggested, favors a prospect of consistent profits northern Illinois, in 1910, a stock of caps was found which was made expressly for the Grant-Colfax presi- dential campaign in 1872. There is a close analogy between jobbers' credit and 34 WHERE TO GO FOR MONEY bank credit. The same general factors of personality, assets and business possibilities apply. As in the case of a bank loan, you should first understand the nature of supply house credit and then meet the requirements. What the credit man wants to know about you is sug- gested by the chart in this chapter. Remember that knowledge is back of confidence. Moreover, frankness, willingness to submit difficulties as they are, is one of the greatest factors in securing credit from whatever source. A southern merchant had seen the credit man of his supply house only a few times. He considered himself an almost entire stranger. In the course of his conver- sation he misstated some facts. He had not gone far, however, before the credit man checked him with an abrupt gesture. "Do you mean to say that your stock is worth fifty thousand dollars?" the credit man asked. [The supply house official then entered into a com- plete account of his prospective customer's history, told him when he came to this country, where he got his capital, how many children he had, where he lived, the location and business of his relatives, the condition and extent of his stock. The merchant fell back in his chair. He had learned the lesson of misrepresentation before a credit man, too late. Likewise, as in bank credit, the smallest factors of personality and habits are considered by the credit de- partment of the factory and jobbing house. A dry goods store in a little town in Nebraska has been running for several years. At first the proprietor met his bills regularly. Recently, however, he asked for a considerable extension of credit. It was granted CREDIT FROM SUPPLY HOUSES 35 after some hesitation. This merchant is now on the "keep-track list," and at the bottom of the card, un- derneath the statement, is one matter-of-fact word which explains the whole case "Drinking." How to Use the Credit Man's Service in Financing Your Business The credit man is an expert in his line and that means that in most cases he is an expert in your line also. His value to his house depends largely upon the extent of his knowledge of the trade he serves. He has watched hundreds of business successes and failures. He knows the why. One credit man said that he could tell in fifteen minutes what was the matter with almost any store and it was not vain boasting either. The credit man is willing to help you, not only to finance your business, but to make it grow and pay. He requires in return absolute frankness in your deal- ings with him, and your confidence. A country merchant violated the two great rules the credit department recommended, that is, he stretched his own credit and extended too much to his customers. One day this man, Blackwell, rushed into the office of the wholesale house in whose debt he stood. ' ' The sheriff is in possession of my store ! " he said. The credit man knew that Blackweirs trouble was due chiefly to inexperience, but he had confidence in his ability. Taking a draft for five thousand dollars, the credit man returned with Blackwell to his town; the claim was satisfied and the sheriff left the premises. Blackwell was then installed as manager, acting for the jobbers who had accommodated him. Eventually, by following the rules rigidly, Blackwell turned the stock, paid the creditors in full, and came 36 WHERE TO GO FOR MONEY once more into control of the reorganized store with a small working capital to proceed on. Small Factors Which Have a Big Influence in Obtain- ing Credit from a Supply House The merchant who needs credit and who values his credit standing should, in the first place, do business with one house as much as possible, and as a precaution against foreclosure, he should avoid having a large number of small creditors, that is, " spreading his credit too thin." A man who went to a supply house for credit, doing a business on a capital of twenty thousand dollars, had sixty-four creditors. The credit man was obliged to refuse. A number of small creditors are dangerous. They have little real interest in the debtor, and are likely to force him to liquidate on the first sign of financial embarrassment. The tendency at present is to deal as much as possible directly with the manufac- turer. To buy at random for the sake of little savings in price often results in complete loss of credit. Remember that the surest basis for accommodation is in the management of your business. Plan your financing in advance; consider how much credit you may reasonably demand and the amount you should extend to customers. Watch, also, such matters as ap- pearances, insurance, the condition of your stock, courtesy in dealing with employees and customers. Es- tablish a reputation for integrity. Cooperate with credit agencies. Show willingness to consider the interest of house extending you accommodation. It is good policy to establish a personal relation with the credit man, and to consult him on all matters of financial importance. CHAPTER V Taking in Capital TAKING in capital means sharing the profits and sharing the risk. There are two ways to take in capital: (1) by admitting a moneyed partner; (2) by issuing stock. An inventor advertised for capital to float an enter- prise. He received five answers: four from chattel mortgage sharks, and one from a man who had a little money and desired employment for himself as well as for it. The inventor accepted the last offer. His partner appeared at first to have some ability. The inventor's good opinion of him, however, did not last. Every night when the inventor came in tired but loaded down with orders, his partner would be waiting for him with a typewritten list of matters upon which he wanted to consult. The inventor would skim through the list and tell him what to do. "What he was told he would always write down, for fear of forgetting. He had waited for orders until he could not overcome the habit. In a few months, capital ran short. The part- nership was dissolved, although the interest in the pat- ent was still divided. Later the inventor sold the patent for ten thousand dollars and was obliged to give five thousand of it to his former incapable partner. 37 38 WHERE TO GO FOR MONEY This incident illustrates the greatest danger of admit- ting a moneyed partner that of not knowing before- hand whether he will be a help or a handicap of ap- praising the mere money assistance above the positive or negative influence of the new half owner. The choice of a partner is similar to the employment of a high executive, except that in the one case the em- ployee can be discharged, and in the other a lack of the qualities necessary to the position can be remedied only at the cost of one-half of the entire business. When Taking in a Moneyed Partner Offers the Best Means of Obtaining Capital An odd-looking westerner entered the office of a small real estate dealer in the outskirts of New York. He had had successful real estate experience, but he was tired of little deals and wanted to engage in business on a bigger scale. After he had presented his project, the New York real estate man told him that there was a real estate office on every corner and that all the real estate men in that section were on the verge of starva- tion. But the new-comer was not easily discouraged. r Just as he started to leave, disparaging New York meth- ods, the New York man called him back. "Hold on, Jenkins," he said. "You are a good bluffer at any rate. Here is a list of properties see what you can do." The next morning when the real estate dealer reached his office, Jenkins was there with a weazened little old woman whom he introduced as his landlady. In a week he had sold her a ten-apartment building. After that, the partnership was clinched. Jenkins added what capital he had. Business prospered. The only phase of the work in which Jenkins proved weak was in the TAKING IN CAPITAL 39 office and legal end, and that became the main part of the New York man's work. The experience of the New York real estate dealer illustrates the best occasion for taking in a moneyed partner. In his case he secured, not only additional capital to attempt a larger business, but he got new blood into his enterprise. Furthermore, the partner was strong where he was weak. Neither could have done so well alone. There is seldom a case where money is needed more than brains and energy. Most successful partnerships are formed in view of both of these requisites. Some lines of business call for diverse knowledge and abilities that no one can combine. For instance, in a manu- facturing plant the owner may have expert knowledge of factory management, but he may be weak in knowl- edge of sales organization. Or, one branch of an enter- prise may depend upon another. A grocery store is often handicapped because of the distance to the next butcher shop. A further advantage of this method lies in the fact that in the case of new schemes or enter- prises based on new inventions there is often difficulty in securing funds in any other way. Banks will seldom give aid. A stock issue or borrowing from private in- vestors is seldom possible because of the difficulty of convincing a large number of people of the profit chances of your scheme. The money secured through partnership belongs entirely to your enterprise. There is no interest to pay on it, and you are in no danger, as where loans are sought, of being forced to go out of business to pay back the money. There are two ways to secure a moneyed partner: (1) by presenting your proposition among friends and acquaintances; that is, broadly speaking, private 40 WHERE TO GO FOE, MONEY means, and (2) by advertising in the "business oppor- tunities" columns of the newspapers and periodicals, or public means. When you are considering a partner, do not be in too great a hurry give yourself time to test him. "Choosing a partner is like choosing a wife" in either case there is need for second thought and sure knowl- edge. A Michigan man was looking for a partner to take charge of the sales department of his concern. Instead of choosing a man in the usual haphazard way, on a chance acquaintanceship, and after a quick judgment, he made a complete investigation of several prospects, involving his spare time for more than three months. He visited the places where they had lived. He found out about their habits, and their standing among neigh- bors, friends and critics. He interviewed their previous employers. He found out what they had done, their ability and their trustworthiness. The investigation cost considerable time and money, but it was cheap in- surance. A newspaper man who was locking for a partner had received an offer of a block of shares in a gas company conditioned on his support of a questionable franchise grant to them. "We've got five thousand dollars to start with," he said to his prospective associate. "But it's a bribe," was the quick reply. It was the answer the newspaper man had wanted. In another case a manufacturer of gasoline motors tested the business acumen of prospective partners by noticing how they accepted a glowing word picture of visionary profits to be made immediately by manufac- turing motors for aeroplanes. TAKING IN CAPITAL 41 Before admitting a partner you should know : 1. About his ability, his past record, his standing in the community, his technical knowledge, his education, his personal habits, his financial expertness. 2. Whether his knowledge, experience and ability complete yours, and you could work with him to ad- vantage. 3. Whether he has a disposition that inclines him to restlessness. 4. Whether he is ambitious ; whether he will put his best efforts into building up your concern. 5. Whether he is honest whether his character warrants complete trust. Two merchants who had implicit confidence in each other formed a partnership upon an unusually wise base. They anticipated no difficulties from misunder- standing or from personal differences, but they provided for them nevertheless. In the articles they drew up they arranged for joint appraisal or an arbitration com- mittee to settle differences between their estimates of the value of their business at any time. They agreed also that no matter which presented the proposition for dissolution the other would have the right either to buy or to sell. They provided also for even responsibility in the addition of new capital. These safeguards often appear at first to be needless, but the experience of a large number of partnerships confirms their value. In preparing the agreement for a partnership, you should provide specifically for a clear division of the duties, for the amount of profits to be taken out and the amount to be put back into the business, for a fair interest on all investments and withdrawals, for reserves, for the salary basis in case the profits are not divided evenly, for the routine of appraisal and continuation or liquida- 42 WHERE TO GO FOR MONEY tion of the business in case of the death or withdrawal of one of the partners. The Second Method of Taking in Capital Issuing Stock for an Enterprise There is a close connection as to advantages and dis- advantages between the issue of stock and the first method of taking in capital the partnership. In both cases the risk and also the profits are divided. In most small businesses a stock issue is impracticable. These enterprises depend almost entirely upon the abil- ity of the management and an issue of stock entails a sacrifice of management to the stockholders. One stock- holder will advise one thing; another something else. It is generally a case of too many cooks. Occasionally inactive stockholders are looking only for a chance to invest their money profitably. In most small enter- prises, however, it is as easy to secure loans from these investors as to sell stock. The advisability of a stock issue under these conditions depends upon your eager- ness to divide the risk. With larger corporations railways and great indus- trial works in which a large amount of capital is needed stock and bond issues offer the only solution possible. Whether or not it would be advisable for you to adopt this method of raising capital depends, in the first place, upon whether interested stockholders would be a help to your enterprise. With the interurban trolley, the gas, electric light and water companies of the small city, nothing will aid so much in the work of construc- tion, in securing patronage and retaining it, as having shares scattered among the farmers, workmen, merchants and professonal men of the community. This is also true of many wholesale ventures. f TAKING IN CAPITAL 43 A plumber decided to raise capital to start an enter- prise based upon a device he had perfected. He had some capital of his own and could have raised the nec- essary money by borrowing on his collateral and on personal notes. He reasoned, however, that if he should form a corporation and sell the stock to the plumbers in the district where he expected to do busi- ness, the success of his venture would be assured. The plan succeeded. The users of the company's product were directly interested in its welfare. Their support alone secured enough business to establish the enterprise. In the actual placing of shares of stock, principles similar to those of securing a moneyed partner apply. The method may be either public or private. As a gen- eral rule, only private presentation is practicable except in the case of large corporations. The strongest pros- pectus not only develops the project but indicates the successful interests back of it. Signatures are best se- cured on a single sheet, headed with the names of the most influential stock buyers. When the money is needed for the expansion of the business, the basis of the selling campaign should be the complete report of some certified public accountant, showing exactly what has been done in the past. This statement will get consideration when nothing else will. It is always expected that the promoter of an enter- prise will be enthusiastic, but facts and figures are not subject to mental discount. A close analogy exists between the issue of bondsi and the issue of stock. A bond, however, is a direct lien upon the property of the corporation. A stock issue divides the risk; a bond issue, on the other hand, is a form of mortgage ; the risk and profit are wholly upon the business. 44 WHERE TO GO FOR MONEY in presenting stock for sale among local investors, let your prospectus touch their interests, not only on the basis of possible direct profit, but also on the basis of indirect benefits to be derived. The ease with which you sell your stock depends upon your ability to talk your proposition. Find out what interests appeal most strongly to your particular prospect, and emphasize them. In selling the stock of a preserving factory in an Idaho town, the promoters showed the advantage to the farmers in markets ; the advantage to the banker in increased accounts ; and the advantage to the merchants in increased sales of supplies to the plant and to the employees. The stock of a sanitarium was sold by showing the local investors how the town would become more desirable for residences, how property values would appreciate, how the practice of physicians would be built up, and how the merchants could increase their business. In placing stock, these are some of the inter- ests to play upon. Show how your particular prospect will be benefited indirectly and how profits may reason- ably be expected from the business itself. In this way you will secure cooperation and support, as well as capital. Keep Control TF outside capital must be secured, A let it come from those who have implicit confidence in the organizers and who will consider the advance only as a profitable investment. Henry Clews Part II HOW TO SATISFY THE LENDER What is Credit? AT the movement of a finger a bargain of six figures is made in the wheat pit. A word and a nod buy and sell carloads in the wholesale house. Confidence the confidence of the sales agent in the buyer underlies and expedites credit business. In precisely the same way confidence underlies the in- vestment and the lending of money the financing of your business. The man who furnishes funds buys and sells the use of money on credit. To secure a supply of money from him you must show him that it is good business for him to lend; you must make him confident of receiving his principal and his profit. You may secure your creditor by tangible assets legally bound and beyond your control; or you may secure him by your personal promise to pay. A personal promise depends on your willingness and your ability to keep it. Men of honor are often uaable to pay men of property are often dishonest. To estab- lish both your ability and your willingness to pay requires a statement of the property you own; all possible evidences of your business ability in handling your property and enterprises; thorough demonstration of your character. The more flawless the business record you consciously develop and the more thoroughly you present this evi- dence with business-like acumen, the more easily can you secure money. Consistent credit can be had only by proving that you are unflaggingly honest and capable that you will make every effort to repay; and that back of effort lies financial knowledge linked with business power. in: net FACTORS THAT ESTABLISH FINANCIAL CONFIDENCE Location Investment for Fixtures Permanent Improvements ' Credit Granted Credit Accepted Annual Turnover Cost of Operation Personality Character Habits Reputation' Ability Private Expenditure Courtesy in Your Business Expectations Introduction Organization and Capital Details of Growth, Frankness Ownership, DivU Thorough dends. Surplus Knowledge of Assets Bills Payable Your Bu,.neM Liabilities and Certified Creditors Statement Condition of Stock _ . v Business Judgment Demonstrated Security Offered Friendship Established Persuasive Appeal Business Favors Sales .; Income Expenses Ratio of Stock to Sales Profits ' Turnovers Credit Granted Business Prospects Stock Inventory Bills Receivable Returned Goods Holdings and Their Appraisal Insurance to Lender Arousing Competition of Lenders for Your Account Your Record Your Presentation Your Business Statement Your Security Ability to raise funds depends on the business and oersonal factors the borrower introduces, as shown by this chart. Money merchants quickly recognize a clean record, a strong appeal, a complete statement and bus- iness-like security CHAPTER VI Financing on Real and Personal Property $50,000 was needed by a southwestern chamber of commerce for the erection of a new building. To raise funds the directors joined hands with a local life insurance company which was seeking to gain the mo- mentum of high-grade local patronage. The insurance officials offered the chamber of commerce a liberal share of the commission on every policy written at the instance of its membership within a given time. Upon this basis, the chamber of commerce financed its build- ing completely in less than sixty days. The secretary of a Pennsylvania concern was buying the sales rights of a subsidiary product. He financed the purchase by selling five town lots on time ; by secur- ing $750 from an aunt who agreed to become a silent partner, and by borrowing $500 from his former em- ployer on his personal note. Finance has but one rule for securing funds give an equivalent. Getting money may always be consid- ered as a straight transaction of purchase and sale. The chamber of commerce sold to the life insurance com- pany its services as a policy- writing agent, backed by the efforts of its powerful business membership and its 47 48 HOW TO USE CREDIT parallel appeal for the endowment of a public institu- tion. The Pennsylvania secretary actually disposed of his real estate and sold to a money broker the notes re- ceivable thereon; to his partner he sold a fraction of the possibilities of his enterprise ; and to his former em- ployer he sold an investment for a definite period, giv- ing as a final consideration a share of his future income amounting to the full -money value plus a guaranteed profit of six per cent. He first used actual possessions which he could transfer to another holder, and then filled out his fund by resort to his credit standing and in- tangible chances of future profit, in which the money lender was willing to purchase an investment. When money is needed for a business the one question is: "What have I to sell?" And the obvious answer the easiest and most certain source of funds lies in those material properties which can be transferred to or legally bound by the concern that in return furnishes you with money. How to List Your Properties and Choose Those That Will Help You Most in the Money Market Finances are often secured by sale or pledge of prac- tically every item that shows upon an inventory sheet; real estate and buildings, leases, water frontage, freight connections, water power rights, machinery and fixtures, products at any stage of manufacture where they are easily convertible, franchises and contracts, copyrights and patents, life insurance policies, prospect and sales lists. Negotiable paper and securities, such as the real estate mortgage,, the bond and the warehouse receipt for grain, are based upon definite material property and have a recognized sale or loan value when taken to proper markets. Other securities, such as stock certifi- FINANCING ON PROPERTY 49 eates, notes receivable and accounts receivable, have no tangible backing except the general credit and profit chance of the debtors. Such securities are usually de- posited by a borrower merely to strengthen the credit standing which is actually the basis of the loan. Nine hundred thousand dollars was recently advanced upon deposit with an agreed trustee of $1,250,000 in notes receivable. The creditors were cleverly protected, how- ever, through the borrower's agreement to deposit cash monthly with the trustee assuring repayment at the rate of $100,000 annually. Moreover, quarter^ statements were rendered to the trustee and his advice invited as an extra assurance of continued credit and prosperity for the borrower. Tangible properties represent, not merely (1) some- thing which can be sold outright, but (2) something which can be mortgaged to lenders, or (3) something the use of which can either be sold or rented for the period of financial need. In this analysis lies the secret of suc- cess in securing funds on property as a basis. A Dakota merchant sublet the basement of his store at a figure which enabled him to finance an advance in the price of his own lease and prevent a competitor from crowding him out. A merchant, seeking a bank loan, clinched his case by drawing from his pocket a contract designating him as the official supplier for a chain of railway construction camps. A Southern manufacturer raised funds by renting warehouse facilities to a furni- ture dealer who happened to be crowded for storage room. Whatever your holdings, reservations or invest- ments, it is almost certain that if they are tangible they have a definite value somewhere. Whether you are subletting floor space, disposing of an idle machine or negotiating a loan on merchandise 50 HOW TO USE CEEDIT inventory, the financial problem of making the most of your transferable holdings is essentially a sales problem. The executive who uses them with best results (1) takes a salesmen's advantage of the time element, (2) finds the best market in which to offer his commodity or security, (3) cleverly arouses the possible competition in that market for that commodity, (4) excites a de- sire not only for what he has to offer today, but for his financial patronage month after month. The shrewd manager of finance, like the successful salesman, looks ahead, studies the money market, offers his securities or holdings when times are favorable and even buys his reserve stocks and bonds under a plan which makes them available at the times when other re- sources fail. There is an art, too, in checking over all the different individuals, money brokers and sources of funds to de- termine which one places the highest value on the prop- erty you offer. A young grocer in a Columbia River town was in need of $6,000 for a grocery which he had established in a neighboring city; yet there seemed no way to raise the money except to sell at a sacrifice his home store in the sluggish village. As he checked over all the possible buyers for the unattractive small town business, however, he hit upon one man of modest ambi- tions and capital, who, being bound to the town by all the ties of habit and family, might snap up the pur- chase. As it proved, the finding of the one live market for his offering enabled the young grocer to close an advantageous sale. The choice of lenders, or "buyers" for the invest- ments you offer, must be considered in view of the se- curities you propose just as the grocer narrowed down his selling campaign to the one best buyer for his store. FINANCING ON PROPERTY 51 Commercial banks demand ready money and quick as- sets; national banks are prohibited from loaning upon real estate. The man who comes into the market for a mortgage loan or with slow assets as security, must apply to the individual, to the money broker, to the state bank or trust company. With every class of prop- erty and paper, like facts are significant. The man who expects to finance cleverly, studies the money market before he enters it. How Salesmanship in the Presentation of Your Re- quest and Security Operates to Get Loans A seasoned business man was indignant because he failed to secure a bank loan of $25,000 for the summer, upon a security of ten times that amount. He could not explain the refusal he had met. "But do you understand/' inquired a friendly finan- cier, "that money is tight just now and that banks are busy taking care of their regular customers? Ap- plications for bank loans are listed and come before the directors or some official for decision. All or a few loans may be granted, depending upon the attractive- ness of the investments and upon whether or not the bank has a large balance to put out at interest. First favors go to regular and substantial depositors, then to smaller depositors and finally to outsiders in the order of the security they offer, the interest they bid for the purchase of ready money and the future patronage they can award the bank. What you have failed to do is to understand that money lenders vie with one another to select the most attractive holdings. You have not studied the market for your borrowings, nor put sales- manship into your proposition." Negotiable paper is usually sold through brokers, but 52 HOW TO USE CREDIT depends for salability upon similar considerations. The clever borrower seeks funds when the lender's balance for investment is large; his application is attractive in proportion as it bears signatures of known standing, as it offers good interest, as its securities, in the way of warehouse receipts, merchandise stocks, and eo on, are high grade. The purchase of a mortgage involves ex- pert investigation of the property ; proof that it includes an occupied and income-producing structure ; a decision, in the case of a city bank, by a loan committee of capi- talists, real estate investors and other experts, touching the value of the property, improvements, condition of buildings, materials used and whether fireproof, insur- ance conditions, guarantee of title, and finally, whether the loan total is sufficiently under the appraised value of the security. With the country merchant or the head of a little factory, the negotiation of a loan may seem informal, but will follow these same fundamental lines. At no point do set rules govern. The transaction of getting money on security is a genuine sale. The money lender buys what offers him the greatest advantage. Securi- ties bring their maximum only when offered at the right time to the best market and with the most at- tractive setting. Salesmanship in financing upoa material properties has come to demand that you take the money lender's motives, precautions and wishes frankly into account; that you make the facts of your presentation full and flawless ; that you demonstrate insurance protection, title guarantee and every factor that makes for security or carries persuasion with the money lender; that you em : phasize the "you" interests which have led you to bring your security to this particular market ; that you appea' FINANCING ON PROPERTY 53 to the underlying desires, with argument, proof, guar- antee and inducement, just as a clever salesman gains for his goods the highest regard and the readiness to pay a price which spells profits. A steel company faced an important demand for cash. The president came before his executives and said: "Any staple, such as cotton, wheat, corn, coal, rep- resents value of as genuine a sort as commerce offers. We have a half-dozen piles of iron ore on the river front. We cannot show warehouse receipts, but I am going down to the bank and invite my friends there to send out a watchman with authority to guard ore piles Numbers 4 and 6 as the basis of a loan to meet our needs. He will have authority to check weights as the ore is used, in order to see that we pay back the money more rapidly than we use up the security.'' The manufacturer went to his banker, presented his case frankly, hinted at the value of his account to the bank, offered an extra half per cent interest and sug- gested the ore piles as security. The loan was made. In every business, there are such possibilities of find- ing a basis in fixed assets, in materials or in other securities for cash sales or money loans. With a sales- man's cleverness in knowing market rules and condi- tions, in appreciating values, choosing times and locat- ing prospects, there is no simpler rule of finance than to offer, as a final value or as security, the tangible properties which best assure the buyer or lender a full equivalent for his money. CHAPTER VII Points That Win the Banker and Credit Man FACTS are the basis of every business transaction. "Give me the facts," says the executive to whom you are presenting a proposition, whether you are seek- ing a loan, applying for a position, selling goods or mak- ing a complaint. Nowhere are facts more important, more requisite, more self-sufficing than in securing credit. Present all ' the facts of your case. The position of the banker, like that of a lawyer, is a position of trust. If the banker is engaged in a com- peting line of business or is connected with competing firms, it is impossible to submit details with complete frankness. But you should avoid the difficulty by your choice of banking connections. It is not only necessary in most cases to state the essential facts of your business, but it is good policy to give them on your own initiative. Suspicion, deception, even an appearance of concealment are antagonistic to credit. In large banks methods of obtaining informa- tion about borrowers have been reduced to a complete and efficient system. Mercantile reports, individual "Aatements, cooperative trade clearing house reports 54 CEEDIT POINTS 55 these mediums of obtaining information about you are used by all credit men. The efficiency of the investi- gations is a reason in itself for the exercise of both frankness and veracity in your credit applications. A manufacturer in a small Illinois city went to a large bank in Chicago to secure a loan. In the past he had simply gone to his local banker and said : * ' John, I want $5,000 for sixty days." The only ceremony attached to borrowing was the signing of a promissory note. The banker had the facts without asking. At the city bank the first sheet of the statement he was required to fill out offended the manufacturer. "Why should he reveal to the bank all the secrets of his profits, sales and expenses? Why should he be required to go into ancient history and tell how he started, how he got his capital and how much money he had drawn out of the business every year ? Some of the questions were even embarrassing. There were items of contingent lia- bilities, notes he had endorsed for friends, that he con- sidered his personal affair and not connected at all with this proposed loan. Some of the questions he could not answer conveniently. He left the spaces blank. Next day a diplomatic and business-like man called and introduced himself as Mr. Brown of the Credit In- formation Bureau. With the first question he grew personal. 4 'You are married, I believe?" he asked. " Fifteen years," retorted the manufacturer. "More than once?" The credit man was polite and smiling. "Yes, twice." "And how much of a family?" Other questions followed along the same lines, even concerning the amount of his household expenses. The 56 HOW TO USE CREDIT credit man then went to outside sources for facts he could not get in the interview. : He found out the busi- ness hours the manufacturer kept, his amusements, his habits. There was nothing startling about the report. The bank would have considered him a good risk had not its credit department been afraid of his secretive- ness. The loan was refused. If you try to hide the facts of your business or to misrepresent them the weakness that- is concealed will almost inevitably come to light. The best plan is to make a clean breast of it. You have a chance then of securing a loan because of your frankness and integ- rity. What Information Counts Most with the Banker and Supply House Credit Man The first information the banker or credit man wants is about your character. Have you always paid your debts and done so in a prompt and business-like way? Do you keep your promises? What is your experience and what success have you had? What the president and cashier formerly carried in their heads, the credit department of a bank or supply house now carries in its files, with much more that seems impertinent to the old school of business. A manufacturing house, established eighteen months, doing a good business, desired to make its first loan. Its chief official made his application in person at the president's office. With some pride he exhibited a se- ries of photographs showing the plant exterior and interior. The banker fumbled the photographs and compli- mented their artistic finish, then he tossed them aside. "Photographs do not represent the best security/' he CREDIT POINTS N s J . I i 2 , i 1 1 i, 8 I 3 s 1 |1 ! ! 3 in !_. 1 err =r s- 2 5 ill! 1 i > a 1 I riy aod How Valued and under What Ceaeri 1 1 l ); ether Actual Inventory. le, by Whom Made and ccfs and Bills Rec. Are rial Dalance and if Same 1 ! 1 i Uiiiii .9 I .s i 1 J * * ?l S "8 o 1 o = "3 fil| |^||| 7 l| ? S 2 J .2 III! riiii'ii lift i J 1 i S 5 |i i 1 1 s \ a i. I if ||| ifi Bills Payable for Murrhin Jts Bills Psysble to Own Banks Bitli Payable for Paper Sold i 5 fi Deposits of Moneys with t Interest on Bonded Debt _ Bonded Debt (Whpn n,i Mortgages or Uenj on Real Chattel MrtrtOTBM Other Liabilities . and of Wti Total Liabilities ii jl illii utttanding , . Annual Expenses oo R_ Estate ,_, ~ (i 111 I! 1 I] jl |ll 5 ll . i i h3 r 1 To The Fourth National Bank: - 1...?" 1 ' "" *** For the purpose of procuring credit, from we furnish the following as being a fair ao s 1 j | = , c i 1 Bills Receivtble.Coud. Pug from Custome Accounts Receivable. Good. Due *wn r.,.lnm i 1 t - II J 1 Other Quick Assets, and of What Compos. 1 1 1 1 i i 1 i 1 1 Bills Rec'ble, from Officers and Stockhold Accounto Rec'ble from Offkers and Trvf.1 CooUngen, Liability jAon Specify Any of Above Assets Pledged as Specify Aay of Above Liabilities Secured Amount o. Annual Business , losurance C.rried on MercharuJise g-3 58 HOW TO USE CREDIT said. "We do not loan on real estate or on factory equipment. Here is what we shall have to ask for: (1) a statement showing what you have done in the past six months; (2) a list of your accounts receivable with all information you can furnish concerning the firms that owe you money; (3) facts about yourself, your capital, stockholders, officers, stocks of goods, or- ganization, system of accounts and cost keeping, insur- ance, advertising, buying and sales organization." The manufacturer went away with an entirely dif- ferent viewpoint. He made up a list of his accounts receivable. On every big account he gave the rating and financial condition of the concern, showed how much they owed, how long the account had run, the average time in which this firm had paid before. He proved that his customers were mostly solid con- cerns who paid on long time but regularly. He showed that his accounts payable were more than covered by the raw material at his plant. Then he explained to the banker his organization, his various production units, his selling plan ; he pointed out his costs, his small sell- ing expense and his safe margin of profit. When the banker had this information he was quite ready to make the loan. The information demanded by the supply house credit man is no less complete and exacting than that required by the banker. Whether you are buying nails or ce- ment, fruits, drugs, or raw material, such as steel, iron ore or cotton, the same facts concerning personality, condition of business and assets control the decision. In this chapter is shown the blank required to be filled out by every applicant for a loan at one large city bank. This statement makes you dig down to the blunt reality. In country banks the credit information is CREDIT POINTS 59 more a matter of general knowledge and is obtained with less formality. But in both cases the demands are the same. Items That Should Have Prominence in the State- ment of Your Business The details of the information wanted vary to a cer- tain extent. Some banks place emphasis on all facts concerning ability and integrity, while other banks em- phasize assets. What your statement should show de- pends largely upon the kind and extent of your busi- [ 1 Habits j . _. [ Associates | H T" - 1 Honesty | 1 Frankness ] 1 ( Co-operation with Creditors | 1 Age and Health ] 1 Education j 1 Ability 1 ., . 1 Income by Personal Effort J 1 Business Experience ] Personality Factors ' 1 Personal Resourcefulness Underlying Credit 1 1 Promptness in Paying Debts | 1 Record of Success or Failure | [ Recommendations of Employers ] 1 Business Reputation 1 1 Courtesy ~j 1 Progressiveness ~j I | Profits on Capital Invested J | 1 Habits [ 1 Personal Expenditure j 1 Standing in the Community ~] No security exists which does not suffer fluctuations in value. A well-balanced and powerful personality, favorable in all the details here listed, stands very high in the es- timation of men who offer credit ness. A corporation statement should comply with the following requirements : 1. It should be made out complete in detail and pre- ferably certified by a public accountant. 2. It should take up capital stock, preferred and 60 HOW TO USE CREDIT common. It should give details concerning history, ownership, legal aspects and dividend policy, and should show the surplus belonging to the shareholders, 3. It should include a series of inventory tables giv- ing merchandise, prices, real estate values, accounts and bills receivable and payable. 4. It should give detailed tables of income and ex- pense; also the annual and average profits. 5. It should contain a list of creditors, with amounts and dates due, and the names of the officers of the important corporations to whom money must be paid. 6. It should include a list of the amounts of insur- ance carried in different companies. 7. Individual records of the applicant's officers, in- cluding age, salary, business record, duties, life insur- ance payable to the company, liabilities, outside in- terests, health and education should also be shown. The statement of a small manufacturer, merchant or professional man is less complicated. Any statement, however, should show in particular the record for the past six months ; accounts receivable ; accounts payable ; capital, stockholders, officers, stocks of goods, organiza- tion, insurance, together with any significant facts that apply to the particular business. Upon such a basis, financial accommodation may be assured to the maxi- mum of good business practice. IT is not prudent either from the standpoint of the borrower or the bank to have the bank supply money for investment in a plant or in real estate. George E. Roberts CHAPTER VIII How to Build a Reputation That Assures Credit ESTABLISH a credit standing! No concern has enough money to escape consid- eration of this question. Too much money in a business means little or no profit from the investment. Too much credit is unheard of, except where the privilege is wrongfully used, and then credit is soon lost alto- gether. You should spare no pains to prove your stability to your creditors. Use diplomacy; use every honorable method within reach to have credit brought to you. Do business in so progressive a manner that you will be asked to accept credit. In building up your credit standing, you should un- derstand the importance of little details, and make con- scious efforts to show up those that are of value. Con- sider first, the importance of superficial appearances of prosperity and strength. Small creditors, local trades- men and those who supply the everyday necessities of office and store especially rely upon the prosperous man- ner and appearance of the man with whom they deal. An eastern concern decided to start a branch in an Arkansas city, The firm was developiug fast and a 61 62 HOW TO USE CREDIT full line of credit was always in use. There was great temptation to economize on office rent and fixtures. The firm reasoned, however, that especially from a credit standpoint, retrenchment here would be poor economy. The offices finally chosen were in a building where sev- eral powerful concerns were located. The fittings of the office, as well as the location, implied such prosperity that small creditors granted accommodation eagerly. Appearances are important. A mahogany desk has delayed the presentation of many small bills and a bird's-eye view of "our factory " effectively hung where all may see, will often extend credit. Back of appear- ances, however, must lie the solid, consistent business power which never fails of obligations and integrity. Building Up a Credit Standing through Frankness in Dealing with Creditors Especially in a new business absolute frankness is a requisite of credit. Show your creditors facts concern- ing the condition and prosperity of your business; tell them why you need long time; explain to them exactly the basis on which you buy and sell. If you ask for sixty or ninety days' time, show why it is advisable to have the money for that period, how you will profit by the loan, whence you have the future income to meet your bill. The business of a southern manufacturer has grown very fast in the last five years and his capital has never caught up with his needs, but the credit he has secured has more than compensated for the lack of capital. Whenever he asks for more than the usual thirty days' time he explains to his creditors exactly why. He shows that the purchase on which time is sought will not bring a return for at least as long a time as the BUILDING A CREDIT REPUTATION 63 credit asked. For instance, if he buys material whose processing is very slow, so that there will be no re- turn short of three to six months, he asks ninety days. If he intends to put out a new line upon which he is going to give his customers long time four to six months he asks corresponding credit. This shows the creditor that he is supplying money only for temporary needs or opportunities, and it also impresses him with the fairness of the debtor. These are some of the means by which credit may be consciously cultivated. Credit standing is being de- veloped month after month by shrewd merchants; but will not grow of itself. To build it up requires daily attention to the credit and other management factors of your business. How You May Lose Your Credit Standing through Abuse of Credit Your credit established, the most important advice is : Never abuse it. Make extraordinary efforts to meet just demands at the time you have set. It is not always possible to meet a bill on the date it is due or to pay a note on maturity, but never let these payments go by default ; do not wait until the collector is at your cash- ier 's window. Foresee and foreplan. Management regards not only sales, buying and ex- pense, but also accounting. You should keep a record of amounts payable so that you will have an absolute check on notes due; you should handle disbursements to take care of these amounts before everything. With your financial condition well in mind, then, if you can- not meet a note, take up the matter with your creditor and come to a definite arrangement to extend the note, to give new notes or to make part payments. 64 HOW TO USE CREDIT The same holds true of open accounts. Settle tie terms on which you buy before you place your order, then observe these terms. Never tell a collector to ' ' call tomorrow/' or that you will ''send a check/' when ac- cording to the terms of the sale, payment was then due. If you cannot pay a bill when due, say so at once, and either set a definite date and then observe it, or ask that the matter be taken up again at a specified time. In regard to your bank balance, conservative bankers contend that twenty per cent, of the amounts of your loans should be kept in the bank as a non-interest bal- ance. This is evidence of good faith, and offers a fair margin of safety to the bank. By maintaining a rea- sonable balance rigorously, your credit is strengthened. When you deal with the bank, understand and respect the rules that its interests make necessary. Do not ask for accommodation it cannot grant. Comply, on your own initiative, with all the reasonable requirements of your creditors, whether you are dealing with banks, supply houses, or private investors. Business Methods by Which Shrewd Financial Heads Steadily Strengthen Credit Reputation Merchant and factory men versed in finance have worked out a consistent plan of credit building. Points of business policy in line to this end are : 1. To submit an accurate and detailed statement of affairs at least once a year to the bank. In the case of a manufacturing concern, or any large company, the statement is best made by a reputable firm of certified public accountants. It shows all the essential details of the business, disclosing losses from bad debts, contingent liabilities, the ratio of expenses and profits, the gross volume of business. BUILDING A CREDIT REPUTATION 2. To fix the maturity of your obligations so that you can meet them promptly when due; neither to ask nor to expect to borrow continuously; in so far as pos- sible, to maintain balances on deposit in reasonable pro- portion to the credit sought. _J Completeness and Veracity in Statements Frankness toward* Creditors Proportion between Balances and Credit By Observance of] [ Creditors' Interests Personal Relations with Creditors Obligations Due Creditors' Regard for Certified Reports By Avoidance of Continuous Borrowing Overdrawing Contingent Obligations .Payment Evasions Credit Abuses Delays in Payment The credit reputation of many experienced business men is a powerful financial tool and an important asset in times of money need. Such a reputation is the result of unfail- ing adherence to the principles here outlined 3. To avoid overdrawing your account. When it be- comes necessary in emergencies to do this, the over- draft can be arranged for in advance. 4. Never to give checks in excess of your balances, even with the understanding that they are not to be presented until tomorrow or next week; nor to send checks to distant points in the expectation of making them good before they are presented. Never to ex- change checks for your own benefit or that of your friends; never to lend your credit in any manner, whether by the indorsement of paper or by going upon 66 HOW TO USE CREDIT surety bonds. If you should incur such obligations, yoia should at once inform your bank. 5. To show a willingness, in your dealings with the bank, to leave it a fair margin of profit. It is wise to make your account as valuable as possible to the bank, to cultivate the acquaintance of the officers per- sonally and to show a disposition to advance its in- terests in every fair way. t . Never to be too optimistic on the one hand, nor enshrouded in gloom on the other ; to conduct your busi- ness with the bank in a quiet and business-like manner. Remember that a good credit standing is an asset, and only proper use and cultivation covering your busi- ness career in its entirety will develop this asset to its best. Confidence before Credit THE cardinal virtue most important in the establishment of credit is veracity. Veracity or truthfulness car- ries with it by implication the posses- sion of certain collateral traits which are essential to business success. It cannot fail to command the confidence of the banker, without whose confi- dence no business man, even though possessed of abundant tangible proper- ty, may hope to establish and main- tain a permanent basis of credit. Part HI EMERGENCY METHODS OF FINANCING Resources That Count in Tight Places BUSINESS incapacity, linked with abundant capital, usually goes to wreck. But resourcefulness often wrenches profits from financial destitution, and practically assures the success of a well-backed enterprise. Every business has certain intangible factors which your resourcefulness should fasten upon and develop into unique assets. Personality, selling ingenuity, an advertising test, factory inventiveness, a trade mark, a trade secret, a neglected opportunity or field, the possibility of definite profits on a future transaction these and other factors which clever business men are continually unearthing often solve the situation when money fails. The man who starts big comes to failure through un- known unlearned duties and problems. He has never developed those final assets of business skill and knowledge upon which financial success is most easily reared. If in mid-career your business comes to a tight place, therefore, look back at the years of business expertness you have been accumulating look about at the productive power your enterprise embodies. These are assets more im- portant than money assets which can not be bought. Even the enterprise that has gone down in failure still has these assets. Moreover, it knows as never before that certain of its practices must be changed. Quick recovery in case of business failure growth for the new enterprise progress for the hard pressed business, all de- pend upon learning from mistakes and profiting by these invisible and intangible assets, even more than upon cap- italizing the accepted resources of finance. IIP iii: "HOW TrO" FINANCE * IN EMERGENCIES *" ~ Your Ability Your Experience Your Technical Knowledge Your Business Prospects and Patented Ideas V. Appeals to Private. Business and Public" t Interests Secure Addi- tional Loans or Investments Based on Building - on Small Capital - Keeping down Fixed Investment Quick Turnover of Working Capit Widest Safe Use of Credit Keeping down Expenditure j Expanding from Profits Make the - Profit Chances Count by r Establish a Credit Reputation through Attention to Personal Standing Proof of Business Progress Correct Credit Practice Tightening Collections Closing out Stock Converting Fixed Capital Speeding up Sales by Schemes and Advertising Reducing Expenditure Stopping Leaks Demonstrating Business Prospects Reforms in Management Offering Further Assets as Security Showing Increased Value of Assets Increase Income by Handling Finances in a Pinch Close Get - Extensions of Credit by ^ Showing Creditors Disadvantage of Foreclosure remonstrating Future Prttlit Chances to Investors Playing op Interdependence of Interest* Interest New Capital by Raise - More Capital through - Use of Remaining Credit Mutual Interest Appeal to Creditors New Credit on Business Prospects Sale of Partial Control Assuring Sufficient Capital Restricting Fixed Investment Finding an Opening Building Slowly Limiting Credits Controlling Expense AssuringQuick Turnovers Providing against Contingencies Reforms in Management Conservative Beginning Expanding Gradually and from Profits Keeping to a Familiar Field Indicating Business Experience by Good Management Demonstrating Insight and Caution Acquired through Failure Building up after Failure Avoid Past Dangers by * Build New - Credit Reputation by Under stress of scant capital and money troubles, it becomes necessary doubly to test every step for safety and profit. The correct measures HIE: CHAPTER IX Building a Business on Three Figures CARLSON had five hundred dollars and an idea for a kitchen cabinet : Seven years later he had a fifty- thousand-dollar furniture factory. Gates was a clothing salesman who had less than one thousand dollars. He invented a scheme of selling cloth- ing at a dollar down: Within ten years credit to the small salaried person made him a fortune. A traveling salesman went into business and paid cash for small lots of goods. Low prices and quick turn- overs enabled him to treble his capital in the first year. Seven years later he was worth a hundred thousand. A printer made partners of his chief employees: By the deduction of small payments on their stock from their weekly pay envelopes the business quadrupled in two years because of expert workmanship thus inter- ested. These men had ideas clever schemes or points of manufacturing or retailing or wholesaling but they would still have failed had they not done keen, astute and concentrated financing. Peculiar money problems come to the man who wishes to take advantage of a business idea, who hopes to pro- tect himself from competition and to build up, rapidly, 70 EMERGENCY FINANCING yet who has only a few hundred dollars capital. First of all, additional capital must be found and this must usually be done by an appeal to interest or confidence rather than upon a basis of securities. Capitalizing ex- perience, ability, or technical knowledge in the line of the proposed work is one method. Borrowing by an' appeal to business and public interests, as in the case of the man whose factory is an important aid in building up the town, is another way of securing temporary funds. Gilbert, a New York newspaper man who made a fortune in the real estate business, borrowed on his business prospects. He noticed that the first floor of a desirable busi- ness block was seldom rented because of the forbidding, old-style exterior. He paid eight hundred dollars for a quarter's rent of the floor and secured an option for a ten-year renewal of his lease; then he went to an architect, had a new store front designed and cut up the floor into seven shops. By showing the blue prints to proprietors of small stores, he secured ten- ants before the work of remodelling began. Money borrowed on leases, signed by reputable firms, paid the contractors. The income of three stores paid the rent and built up a sinking fund covering the cost of re- modeling. The rent of Gilbert's four remaining stores was net profit, and in ten years amounted to twenty- five thousand dollars. With this as a basis, he advanced to assured success in real estate work. How to Get a Quick Start and Make Your Money Count on Essentials The standard by which the beginner in business is measured is 'the rapidity with which he builds. He must SUCCESS FROM SMALL CAPITAL 71 make every profit chance count without departing from a plan of economy and wise spending. The cardinal rules which have built up the small business conserva- tively but quickly, are: 1. Getting an economical start by keeping down the fixed investment. 2. Guarding the income by eliminating credits and watching collections. 3. Making capital grow by a shrewd system of quick turnovers of money invested, and by reinvesting profits. 4. Protecting finances doubly well by avoiding every possibility of a difficult position until sure of capital and ability. Eents, leases and real estate buying questions often mark the line between profit and loss. Two Philadel- phia young men hesitated about entering the wholesale grocery business in their city on account of high rents in the downtown section. When almost persuaded to postpone their plans, one of them noted the business activity in an outlying district and conceived the idea of establishing the store in that locality. The rent was one-fifth that of the downtown location,, but the idea of establishing the wholesale store in the suburb seemed revolutionary. The scheme was tried, however, and the partners met with instant success. Hundreds of retail grocers flocked to them to save the long hauL The two partners had substituted special service for location and the difference in rent made their first year safely prof- itable. Limiting credits and watching collections must be a prime consideration of the small proprietor. External appearances often indicate the prosperity of the man who asks for credit, but his prosperity is by no means an indication of his willingness to pay. Look up un- 72 EMERGENCY FINANCING failingly the credit standing of the man who proposes to postpone payment. If his record is bad, refuse him. The customer lost will be dollars saved. For the small manufacturer the cash on delivery sys- tem, if diplomatically carried out, lessens collection costs and insures payment. A printer on the Pacific coast kept his shop busy on orders which seldom amounted to more than five dollars. The expense of collecting small bills was heavy and creditors frequently passed the printer's account because of its insignificance. To get money quickly the printer followed a scheme of attaching a bill to each order of job work when it was wrapped for delivery. The amount due was so small that it could be settled without draining the cash drawer and the full payment was generally brought back by the delivery boy. (Every small business which has achieved success has followed some principle of quick turnover of capital. A Chicago salesman who entered the dry goods business, adopted a plan of selling out all slow-moving stock to west side peddlers every Sunday morning. The cash paid for the job lots of goods earned a profit the next week in the business. The general manager of a chain of retail stores, by a scheme of turning over capital, attained affluence in less than a decade. He began business in a town near Chicago and every evening ended the day with a study of his stock. Orders mailed or telephoned to Chicago jobbers kept the store full of the goods which were in eager demand. Because of limited buying the few 4 ' stickers" on hand represented only a negligible frac- tion of his small capital. While small orders made it impossible to get the lowest prices, this loss was more than counterbalanced by repeated profits. SUCCESS FROM SMALL CAPITAL 73 "Buy light," is the first rule laid down by this mer- chant. "Find, by watching the way goods move over the counter, where profits lie. Weekly, or even daily orders to replenish stock are better than shelves crowded with goods that look like sure sellers in the jobber's salesroom, but really have no appeal to trade. "Watch the salary list also. Payroll expense is one of the heaviest costs of a business. The beginner must allot himself a frugal salary and give overtime to the selection and training of low-priced but promising ap- plicants. "Brass and oak and mahogany make a store attract- ive, but fixtures are not the first essential of profits. Quick turnover of goods makes for fresh stocks and right prices the ultimate appeal to the consumer." How to Minimize Financial Risks and Difficulties during the Infancy of Your Enterprise Among the chief causes of bankruptcy are insufficient capital, incompetence, inexperience, unwise credit, fail- ure of others, extravagance and speculation every one a plague upon the small, struggling enterprise. More than half the chances of success for a small business depend upon its admission that it is weak financially and must protect itself in every fair way from financial flurry until capital and stability are assured. Just as the beginner must "build to windward" in every possible manner by increasing his capital through every profit-making plan, by laying up a cash reserve and by gaining a high place personally in the re- gard of creditors and customers, so he must rigidly avoid and insure against every risk and contingency. Short capital is another term for undertaking too much for incurring liabilities that were unwise for signing notes 74 EMERGENCY FINANCING without mathematical assurance that the funds would come in to meet them. Unwise credit, and the failure of others, brands the small business with attempting to take the same risks that the great, established enterprise finds heavy. The little businesses that have grown fast are cash stores. "Let the big shop keep its vault full of bills until fashionable customers come back from summer and winter trips/' said a dry goods man; "my capital is small and I have to have a profit on it five times a year just to make a living." Extravagance and speculation, with incompetence and inexperience, come under the same heading, of risks that might have been avoided. Just as the farsighted mer- chant protects his assets at the start by liberal insurance, so before he launches into any new phase of his business he insures himself by test that it offers an excellent chance for profit. Hundreds of small businesses have been saved by test- ing out contemplated sidelines, new selling plans, new advertising devices, new delivery methods, new account- ing schemes and new phases of the problem of store or factory help. Ignorance of this ru 1 j caused the ruin of a western clothier, who, after getting a fair start, planned to profit by dull season opportunities which a chance salesman described to him. He installed a sport- ing goods department, but the ability which had made him a successful clothier did not adapt itself to this line and he failed. Had he tested his idea by catching "drop- in" trade, he would either have learned his mistake at a slight risk, or would have acquired, by degrees, the experience which insured success. The beginner in the business field will be watched more closely than he realizes. He will be less able to bear financial strain than other men, but more certain SUCCESS FROM SMALL CAPITAL 75 to suffer it whenever he takes chances. For the begin- ner, these rules have been laid down by a man whose practical success has covered several lines: ' ' When you enter business, make the most of your fresh point of view. ' ' Reduce each problem to its elements reject the non- essential. "Make swift credits the basis of your selling plan. Make your collections, not your banker, carry your busi- ness. "After good goods, service is the first essential to good trade." The peculiar responsibility of the beginner who would seore quick success may be summed up in the sentence : More rigidly than any established business, avoid risks, enforce economies, make personality count with those about you, keep the fog away from your accounting sys~ tern, and, as far as possible, let no financial problem get to you unforeseen. These principles, linked with a good proposition, have rarely failed of success. Personality in Business PERSONALITY is the chief factor -* in building a business, because personal power is the strongest bond between men, and a unified organiza- tion is chiefly the result of that same power personality. [ George H. Barbour CHAPTER X Handling Finances in a Pinch JONES, a clerk, had saved some money. He decided to start manufacturing ice cream in a large eastern city. There was competition fierce competition but he had a plan which he thought would insure success. It was to establish a reputation for absolute purity, a quality which recent exposures had shown to be strik- ingly absent from the product of competing firms. 'Jones' enterprise was successful from the start. His reputation grew fast. His name alone came to be con- sidered a guarantee. The business so exceeded his an- ticipation that, although he was an unusually hard- headed business man, he made the fatal mistake of in- vesting too much in machinery and fixed improvements; that is, he stretched his credit too far for slow returns. The cold \veather came earlier that fall than usual. 'Jones' business fell off. He had a large plant, ma- chinery and other assets, but they were now of little value as security. His credit situation became desperate, and one day an order for goods failed to come. Then came a period of emergency financing and a search for credit. One evening, early in November, he reviewed the sit- uation with his wife. HANDLING FINANCES IN A PINCH 77 * c We must get some money, ' ' he said, ' ' or our business career is over. But I don't know how we can do it. I have cashed already on everything I have. ' ' ' ' Well, try Brooks. Ask him what our trademark is worth." "Brooks! He would be glad to celebrate my bank- ruptcy. ' ' "Brooks knows better than anyone else just what our business is worth. Pie would give a good deal to get it. We are facing bankruptcy. He knows it as well as we do. I think he would consent to a loan if he thought he had a chance to get our business. If we get the money, we can substitute winter catering for the ice cream we eati't sell. We can use our reputation that way." Brooks was surprised one day to see his chief com- petitor enter his office. "We had a hard fight last summer," 'Jones began, "and, as you know, I'm about at the end of my rope now. But I have a proposition lend me $8,000 until January 30th at eight per cent. I will contract, in de- fault of payment, to surrender to you my trademark, business and good will. If I pay, you lose nothing. If I don't, I quit the business and you head the list." Brooks thought a while. He had followed Jones' financial situation. He was sure that Jones could not pay the note when due; that if he did not accept the offer, one of the other competitors would, and that he would suffer from competition again as he had during the previous summer. He knew nothing of Jones' plan to substitute a new line. He granted the loan. With this money, Jones adapted his places of busi- ness to the making and sale of refreshments that are in demand during the winter months. He took advan- 78 EMERGENCY FINANCING tage of his reputation and the Christmas shopping rush, Brooks' loan was paid when due. In the spring the old ice cream trade revived. Jones paid his creditors. He had passed the danger point. When you are in need of money, remember that it is not what you think your assets are worth, but what others think they are worth, that counts. You may know that your stock is valuable, but everyone may not. You must be sure that the person you ask for a loan on that security knows something about it. Regard your assets from the lender's point of view. It is the only way to get the most from them. Temporary financial difficulties are due : 1. To mismanagement. 2. To lack of financial knowledge. 3. To general financial stringencies or panics. 4. To crop failures or other natural causes. 5. To lack of sufficient capital. Your ability to deal with these situations depends upon your resourcefulness your ability to use what you have to best advantage. Tangible assets are most gen- erally appreciated. Intangible assets are often over- looked. If you have an established business, good will, future prospects, a trademark, life insurance, a lease on a good building, personality, character, experience, rep* utation, publicity, knowledge of markets any of these may save your business and the list is far from ex- hausted. Haw a Temporary Financial Difficulty Was Over- come by Increasing Production A large piano house in a southern city daringly en- larsed its business^ The. owner Itxad alwava financed tarerufiy. On this occasion, however, he admitted that HANDLING FINANCES IN A PINCH 79 he had extended his business beyond his capital. One day he and some of his associates went over their situation. They made a complete list of their assets and their liabilities. They were careful to note just how much money they would have at every given time. In ninety days, several large notes were due. They saw that they would not have enough money to meet their obligations. The first plan suggested was to increase sales. The firm had, however, anticipated high sales in making its calculations and it could not see how, without adopting some entirely new schemes, it would be able to cover the deficit. After repeated conferences and a week of considera- tion, the president offered a solution. "I have a plan," he said. "We'll start publishing music again. This line never made large profits and had to be dropped to enable us to care for our heavy trade in instruments, but we still have the plates, which caused our greatest expense. "We can use some of them again, and the margin of profit should thus be in- creased. We have a list of high-grade customers who would go in for an edition de luxe. We will put out advertising and selling tests at once. On the security of the first successful test, we can get two volumes printed. We can deliver these volumes in ninety days and get one-half of the cost of the books as the first payment. The profit on the deal will cover the notes. When the second payment is made, we will have enough money to pay for the publishing work." The plan, was carefully considered. Test advertise- ments were run in leading papers so that the firm was able to estimate the demand for the edition. The idea was finally adopted and proved successful. 80 EMERGENCY FINANCING Again in this case, it was only the ability of one of the members of the firm to understand the situation and see what could be done with its assets. The plates had practically no value as security ; not a cent could be bor- rowed on them. But there was a way to realize some- thing from them ; it was a question of knowing how. Personal resourcefulness is only a name for business judgment and knowledge of financing. It is not a method of getting capital in itself capital cannot be conjured out of the air it means ability to see what you have and ability to use it. The owner of a canning factory, whose business was long established and whose name represented years of trade building, faced a liquidation. A note for $5,000 was due. The company could neither meet its obliga- tions nor secure an extension. The manufacturer went to one of his largest creditors. He spoke without any appeal to sympathy. He presented a purely business proposition. "I have a note coming due this week," he said. "I will either have to meet it or liquidate. My business has got into a bad hole, solely through that failure of last year's crops. The prospect for this year is good. My product has a ready market. If I am obliged to liqui- date, you will lose as well as I. My trade is established and is worth more than all liabilities, but it is about to be sacrificed. " The creditor made a complete investigation of the business of the factory. He arranged for a conference with several other creditors. They decided to have the note extended to avoid the liquidation. These money difficulties were overcome by ability to cash on intangible or apparently worthless assets a trade name coveted by a competitor, apparently obsolete HANDLING FINANCES IN A PINCH 81 property in the form of electrotype plates, a reputation and future selling prospects which held for creditors a warranty of payment. Many firms which liquidate are solvent; except where the business has been grossly mismanaged, knowledge of financing could almost always save them. There is one principle which holds good in every case. It con- cerns foresight and forethought, making the most of assets, discovering hidden resources, ability to appre- ciate the value these assets have to others, or in what way they are of value, and ability to use them accord- ingly. Face the Crisis WHEN the crisis has come, many a business man has lost his head and gone under, although courage, re- sourcefulness, and a shrewd plan of cam- paign would have carried him through. Resourcefulness means ability in dis- covering new schemes to increase in- come or credit, to find hidden assets, and to capitalize assets to advantage. CHAPTER XI How to MaKe a Fresh Start after Failure WHEN one evening the final formalities in bank- ruptcy had been concluded, White, a machinery manufacturer of the middle west, closed his desk, put his feet on the table and, meditating, lit a cigar. Bit by bit he put together the story of the past eight months. When he had started, he had invested all of his money in his factory. Raw goods needed were bought on credit and he borrowed from banks to meet his payroll. His liberal terms to jobbers had flooded his plant with orders. Then, in spite of prospects for a money-making future, his creditors had grown uneasy and closed in. White attempted to collect from his customers to meet his bills, but only a few of them were able to pay in less than sixty days. The time was twice too long. He had assigned. "If I only had had more capital," he mused; but then recalled that when he had opened for business his capital had seemed ample. " Ample " yes, that was exactly the trouble his supply of money had eemed more than enough to meet every demand. It had seemed unnecessary to limit his credits either in amount or in time ; indeed, it had seemed good manage- 82 RECOVERING FROM FAILURE 83 ment to give extra inducements to buyers in order to fill his plant with orders and set at work the ample capital in hand. As he meditated, his mistake in financing took on these definite outlines, and reforms which would have saved the business sprang to his mind. "I could make good if I were back three months, " he concluded. "How can I get another chance?" Before he left the office that night he had sketched out a plan of reform and reorganization. First, he noted down the main factors in his former financial policy, challenged those which he now considered dan- gerous, and indicated the changes he had determined upon. Next he formulated a scheme for collecting from his slow pay customers. These evidences of having learned from his severe financial experience he dete^ mined to put before his bankers and creditors. At the end of three weeks he had collected enough conclusively to demonstrate the genuine value of his accounts receivable. This showing, together with his plan of reorganization and the opportunity to secure his exclusive financial patronage, induced one bank to advance the sums White needed to resume business. The bank also influenced the other creditors to post- pone foreclosure awaiting the outcome of the new ven- ture. Business was resumed, and by gradual growth, with the coooperation of the bank and creditors, achieved success. White had solved the difficult prob- lems of finding new capital; of analyzing his failure and correcting his mistake; of getting a new credit chance through frank acknowledgment of his errors and definite evidence that he had profited thereby; and, finally, of building upon his shattered credit a new and enduring reputation for business soundness. 84 EMERGENCY FINANCING Ninety-five per cent, of business men fail. Of eleven thousand failures, as listed by one of the large mercan- tile agencies, one-third were due to lack of capital. In- competence, the second cause, has practically the same sum of failures traceable to it. Inexperience, unwise credit, competition, fraud, failure of others, extrava- gance and speculation were other listed reasons why men were compelled to close up shop. A majority of the failures step back to the ranks from which they rose. Many of them might have re- sumed, had they analyzed the causes of their downfall and profited by the experience. Many others might have rebuilt in months, where it has taken years, had they learned how to handle every financial factor with a margin of safety, but with expert efficiency in profit making. Study of the careers that have built success on bank- ruptcy is a financial education. Rogers, a factory head, found after failure that his product had cost an un- seen fifth more than he had anticipated. He had sold goods steadily at a loss. After challenging and tight- ening up his system of cost accounting, he prospered. Steinfeldt, a hardware retailer, bought a carload of stoves too expensive for his trade. Study of the retail situation and reforms in his buying mended the fabric of his business. Gregg, a cigar man, was forced out of his location when the building was torn down to give place to a sky-scraper. His customers failed to find him in his new location and he was forced to the wall. By taking his books to his banker, however, by dem- onstrating the unavoidable nature of his handicap, and by producing an option on a shop in the new building, he got sufficient support to resume business. Rebuilding in each of these cases was a problem RECOVERING FROM FAILURE 85 (1) of financing; (2) of good business management. Each man shrewdly analyzed the causes of his failure and adopted definite plans of reform. With this evi- dence that they had learned, that they had the persist- ency and the integrity to face out the situation, they took up the problems of getting more money and re- establishing their credit standing. Where to Go for Money with Which to Try Again after Failure in Business How may the bankrupt, enfeebled financially by some apparently unavoidable catastrophe or beaten down by the results of his own faulty financing, get the funds and the chance to try again? Practice indi- cates two classes of resources that remain after failure: 1. Some fragment of credit some confidence which still exists in the mind of a banker, creditor or private investor. 2. New credit and confidence which the assignee may establish in the mind of someone by a frank presenta- tion of his case, indicating an unavoidable cause of downfall or mastery of the business forces that for- merly overpowered him. White's remaining resource was the interest his cred- itors had in him because they believed that eventually they would get their money back and because his col- lections strengthened this belief. Gregg's remaining credit depended upon the security and the profit chance represented by his option of desirable store space in the new building on his old corner. Credit may be had on the business prospects that still remain after bankruptcy; confidence remaining or re- established in the minds of acquaintances may induce new partners or stockholders to contribute fresh cap- 86 EMERGENCY FINANCING ital. A man with determination rapidly to regain foot- ing lost by bankruptcy looks for those whose interests are his own and who have most to gain or lose in his success or failure. The problem resembles that of the salesman ; to make your application for additional funds attractive through all possible profits, appeals and con- cessions is to find the answer. Even when obvious sources of money have been tried in vain, possibilities of new capital may be located by checking over every individual and corporate interest concerned with your enterprise. Parker, a manufacturer of machinery in the middle west, confronted a problem which, viewed from any angle, seemed impossible. Fire destroyed his plant and the insurance money, which under ordinary circum- stances might have been sufficient, was eaten into by living expenses during a long period of delay in re- building. Every possible item of credit seemed to have been exhausted in an attempt to avert the crash. When he emerged from receivership all usual sources of capital seemed closed to him. But to the last he had given employment to his men, and they now evidenced their loyalty to him. He determined to appeal to them for temporary funds. He spoke to them of the mutual in- terest of master and man ; he pointed out the prospect of steady employment and the advantages of staying in the little city where they owned their homes, remind- ing them that each would lose hundreds of dollars if forced to sell out and seek employment elsewhere. His workmen were not slow in realizing that this industry was the backbone of the town. All volunteered to ac- cept half wages for a short period, and many advanced small sums from their savings accounts at ordinary RECOVERING FROM FAILURE 87 interest. The few thousand dollars so secured enabled the manufacturer to bring his finances under control. How to Reestablish Your Credit and Build up a Rep- utation for Sound Business Judgment With money at hand for reorganization, every day in the years that follow brings anew the two-fold prob- lem of enforcing reforms that safeguard your business from failure, especially at those points previously left open, and of developing the sort of reputation which gives greatest strength in financial operations. A grocery clerk, having bought out an established business in a town on the Great Lakes, attracted favor- able attention by his aggressive campaign to secure new customers. Shortly, however, his unpaid bills for goods reached a total which alarmed his creditors. He seemed bewildered and unable to find ready money; his credit- ors closed in, and he assigned.. The assistant credit man in one of the wholesale houses came to aid in his settlement and at once showed the grocer that lax collection methods had trapped him. "Do you know," said the grocer, "I have puzzled my head off over how to get in the money due me. I am a salesman, but no bookkeeper. If you would put in enough money to get the business on its feet and would take charge of the accounting and collections end, we could make things hum." A partnership was formed with limited credit, firm control of expenses and modern collection facilities. Every possible dollar was put into quick selling stock. Records were kept to indicate the best sellers, and within a year, all debts having been cancelled, a small reserve was established against* contingencies. Of chief importance, however, was the fact that in this short 88 EMERGENCY FINANCING time the concern had become widely known for the precise balance which existed between its selling forces and its administrative factors. The credit of the firm, besmirched by failure, had quickly been cleared and accorded a high standing among bankers and whole- salers. Failure challenges over again those principles which underlie correct management in any business, whether in the supply and investment of the capital, in the soundness of the proposition and the location of the plant, in the handling of expenses and credits, in the assurance of profits or in protection against the future. To build a new credit reputation demands observance of these principles so strict that the keen scrutiny of creditors shall be satisfied. The business man who un- derstands the basis of finance will therefore make his new beginning conservatively, keeping to a familiar business, and, under ordinary circumstances, to a famil- iar locality. With correct practice and sound, gradual growth, time will be saved in the reorganization, and taoney made. Permanent Credit TRUE credit is built only through fair representation. This is the credit that stimulates industry, inspires confidence, and creates a healthy ac- tivity. Henry Clews CHAPTER XII Don'ts in Money Matters IGNORANCE of financing and misuse of credit caused the failure of a large drug business in a western city. To establish the business, the proprietor secured a loan of five thousand dollars from his banker on a promissory note. It was not a conservative loan. The banker granted it on the strength of the druggist's ar- gument, and because he hoped to build up a good new account. The druggist also secured an additional $5,000 from another bank on the basis of a favorable lease. This gave him ten thousand dollars <3ash money bor- rowed entirely on his personal qualities and on his business prospects. He started his business with a splurge. At first sales were heavy. Shortly after the opening, however, a slump came. Because of the falling off in trade, he moved to another section of the city. By doing this, he sacrificed the initial advantage of low rent, destroyed the security of the second five thousand dollar loan, and shook the confidence of his banker by this confes- sion of bad judgment. Although sales increased, the climax soon came. The enterprise was like an inverted pyramid, and a little pressure from creditors made it topple over. 90 EMERGENCY FINANCING The first necessity in a new business is to understand fully the nature of the different sources of capital. The money the druggist secured should have been obtained, not from the bank, but from his own funds or from a partner, from an issuance of stock, or from long time loans. By persuading the banker to violate an estab- lished banking policy, he compassed his own failure. As a last mistake, he ruined his credit standing his only asset by allowing the spread of the bad impression made by his misjudgment in regard to his lease. To mistake the nature of money obtained from dif- ferent sources is to invite failure. Try to avoid short time loans unless protected by quick assets. Do not put bank money into fixed improvements. Reserve your bank accommodation for short time needs. Moreover, you should keep your outlay within your capital. If your capital is small, start small. Establish your credit by maintaining a policy of conservatism and financial security. Too much capital invested in fixed improve^ ments; unwarranted expansion; stretching credit; ex- tending too much credit to customers; failure to keep an efficient check on the business, are the chief difficul- ties in financing any business. Ability to recognize these dangers, and to profit by the experience of others are the safeguards that the successful business man will cultivate. An average of more than 3,000 failures a year in the United States are ascribed to insufficient capital. In most of these cases the fault is not so much a lack of capital as the folly of going beyond capital. A competitor entered the field of a merchant in a small western town. The old established merchant was not so much afraid of losing his trade as of seeing the other man have a bigger store. "I'm going to beat DON'TS IN MONEY MATTERS 91 Jones," he boasted to his friends. "With this end in view, he stretched his credit, and unable to meet bills due, his business collapsed. He had failed to see the danger signal. Necessity and that alone should underlie expan- sion. When a business is thriving, and customers are clamoring for more goods than can be sold or manu- factured conveniently, or for greater variety than pres- ent facilities afford, then is the time to let the plant broaden out if capital can, be had. How Extending Too Much Credit to Customers Ties up Capital and Invites Failure Unwise credits are seldom recognized until too late. Over-accommodating buyers has the same result as growing 1 too fast, or over-buying. Two young men em- barked in the shoe business in a small eastern city. Their capital was small, but trade began to come to the store from the day it was opened, and it was just the kind of trade they had wished for. It included forty or fifty of the best families in the city. Accounts were started and the store soon had outstanding among the best families about two thousand pairs of shoes. Since all their capital had been used up in the orig- inal investment, the outstanding accounts were a serious matter. They knew that they could do nothing to col- lect from the wealthy slow-pay customers, except to keep sending them bills and wait until they remitted. They knew that many of their customers were in the habit of going away for the summer and that they might have to wait from three to six months for the money. The firm struggled along for several months, and then, pressed by their creditors and unable to collect from their debtors among the rich, assigned. 92 EMERGENCY FINANCING The unwisdom in this particular case lies in allow- ing any credit at all on such small capital. With the money they had on hand, the young men should have confined their business to an actual cash basis. The influences which are constantly operating to in- duce a firm to make unwise credits are powerful, and they should be all the more carefully guarded against. Do not grant credit when you have insufficient capital. If you do extend credit, arrange with your suppliers beforehand for long time credit on the basis of your credit business. But in no case should credit exceed one-third of your working capital. An excess of credit granted to customers not only puts a business in a dan- gerous position from want of ready funds, but it also impairs your credit standing. How Indulgence of the Borrowing Habit May Be a Cause of Failure The greatest and most constant temptation confront- ing a veteran wholesaler in New York has been the impulse to run to the bank for a loan at every. sign of financial shortage. Borrowing is advisable only when it is necessary. It is often such a simple matter to sign a promissory note that this borrowing habit becomes a real danger if not kept in check. Once this wholesaler thought it imperative to borrow ten thousand dollars. He got the money without the slightest trouble. When he returned to the office, he opened his ledger and sat for ten minutes looking at the entry. Trade conditions were not bright. He looked ahead sixty days and wondered if he would have ten thousand dollars to spare when the notes came due. The next morning he took up the note as soon as the bank opened. He was convinced that borrowing had DON'TS IN MONEY MATTERS 93 become a habit and that in this case it was unnecessary. He put the screws on his collection department, and got up a series of letters to his salesmen asking for their cooperation in bringing sales up to a certain figure during the next sixty days, offering a special bonus for results. In this way he made solid develop- ment replace a makeshift financial measure. When you have once established your credit, guard against the borrowing habit. It is like the drug habit it grows with indulgence. When you are threatened with a stringency, instead of stretching your credit, follow a policy of entrenchment. Look for leaks there are always leaks in every business cut expenses, in- crease sales. If possible, acquire a surplus to meet these conditions. Avoiding Future Money Troubles through Knowledge of Financial Rules Knowing what not to do is often a means of knowing what to do. Bankrupts, failures, "down-and-outs" have ^earned these don'ts, but at the wrong end of their business careers. Financing a business is like climb- ing a cliff. The steps are many and difficult. The best safeguard is to know the slippery places. Don't mistake the nature of the different sources of capital. If you want capital for establishing your business, take in capital either by issuing stock, by ne- gotiating an individual long-time accommodation or by admitting a moneyed partner. Use the bank especially for the every-day needs. Don't stretch your credit too far. Secure credit in relation to the amount of your quick assets. Be sure that you can meet your notes, then sign them. Don't misuse your credit. Guard against the bor- 94 EMERGENCY FINANCING rowing habit. Meet obligations promptly when they are due. Don't overdraw. Don't misrepresent facts in your statements or in conversation with your creditors. Don't take partners or large stockholders withoiit testing them as to their ability and character. Prepare in advance for the contingencies that may arise. Don't neglect details that affect your credit standing. Keep your stock fully insured. Deal courteously with your employees and with your customers. Do not over- stock. Keep your goods well displayed. Be progressive. Don't get discouraged when the business gets into a tight pinch. Ingenuity, resourcefulness, energy have carried business men through difficulties greater than any met in the ordinary course of business. Your chief safeguard lies in the records you keep and your ad- vance knowledge of financial requirements. Remember that conscious attention to the every-day uses of capital and credit, persistence in "following the rules," and avoidance of common dangers, determine the safety of your business and the character of your ledger balance. Go Slowly HHHE successful business houses are - those that have grown slowly and from their profits. They have limited fixed investments, guarded their credit standing and profited by the experi- ence of others. ii" " ! Part IV HOW TO MAKE THE MOST OF YOUR CAPITAL Keeping Money at Work IDLE workmen draw unearned wages; ill -directed workers draw half-won pay. Money is a workman that figures large on every pay roll; whose wages never halt. The clever office manager, storekeeper and factory foreman plan and chart the future work of every employee so that it may be uninterrupted, well directed, ministered to by every convenience constantly profitable. Those who handle money must exercise the same foresight: to be productive, finances must be kept wisely busy. You must not employ more money than you need, else you have idle funds on your expense account; you must not employ less, else you miss opportunities and fail to meet demands. Cash in hand is not the final, ruling factor in business. It must be hired and handled with foresight and dominant personal force. Drive your in- vestment. Enlist funds ahead to meet bills. Outline work in advance for the surplus funds that certain seasons bring. Know the work before your funds and make your capital produce. If you have funds beyond your present need, farm them out against future demand, as you would expert workmen in dull times. As you would watch the work of your men, watch for losses and economies in money matters. Finances will prove an adaptable tool, when your plans keep you in touch with your financial condition, so that time and forethought may go into procuring and using your money. an iaa BI: KEEPING THE MONEY BALANCE &VEN Receipts and Disbursements ~ Tabulated Daily .! Monthly jYearly -] Department Quotas and Records Covering r- Your Business Classified Income and ~ Expense Records ^ Comparative Records on Each Item | State- ments ^ Business Details by Districts or] Trade Classes | -| Money Rates Covering 1 ~j Business Conditions Conditions | -j Markets on Your Materials *-j Markets for Your Products Receipts and Disbursements Tabulated Daily, Monthly, Yearly Plans to Keep Check -j Department Quotas and' Records on Your Business Classified Income and "~ Expense Records Covering Your Comparative Records on Each Item Business Business Details by Districts or ~ Trade Classes -j Cash Balances j -| Reserves | Charts - and - Graphs -| Depreciation j Demands of Business Growth | | Money Rates j Business Conditions , Covering - Commercial - Conditions -] Approach of Crisis -] Markets on Your Materials j Markets for Your Products Definite fore-knowledge of finances may be had by itemized statements, or by charts and graphs which picture money matters. ^ By clever use of these methods keen financiers make every detail and important comparison En: evident at a glance CHAPTER XIII Planning to Meet Your Bills WILSON, a hardware merchant in a small western town, had laid in a large stock of dishes that he could not sell. At one time, partly as a result of this purchase, he found himself in a difficult situation. He had only thirty days in which to meet a large sum of obligations. As he looked ahead, he saw that his best chance was to close out his stock of dishes. He knew, however, that no ordinary sales scheme would suffice. He could advertise a bargain sale, but his line was not big enough to draw business from the country, and the ordinary bargain sale had been advertised until it had lost all meaning. He adopted the following plan: He went to all the merchants on the main street of the town and proposed a general town stock clearing sale. He proposed to run a full page advertisement in all the papers of the territory, offering to refund inter- urban fares to customers who bought goods up to a cer- tain value. The space was to be divided equally among all the merchants. In this way the country people, who were busy with their crops, would be attracted to the store, although an advertisement of dishes alone would not appeal to them. The plan was successful. In two days the entire stock of dishes was sold. The sale en- 97 98 KEEPING CAPITAL AT WORK tailed a sacrifice of about one-third of the cost price of the goods, but the hardware merchant disposed of a stock that he could sell in no other way, and he also secured the money he needed to meet his bills. His ability to deal with the situation was due, in the first place, to the fact that he fully analyzed his situa- tion. He foresaw the difficulties that were ahead of him. He kept a detailed record of his business, so that he' knew closely how much money he would have on hand and the amount of his obligations at any time. This estimate gave him warning in plenty of time; thought and ingenuity furnished the needed solution to his puzzle. How to Prepare for Business Needs and Opportunities Increasing Income and Perfecting Credit Looking ahead and planning in advance is necessary not only in finding money to buy goods, to make in- vestments, and to plan advertising or sales campaigns, but also and chiefly in the ordinary course of meeting your business obligations. The necessity for planning ahead applies equally well to opportunities and to emergencies. It is one thing to see opportunities it is another to prepare to take ad- vantage of them. A South Dakota merchant, by plan- ning ahead, was able to buy out the stock of a dealer in a similar line. He knew that this merchant was spec- ulating heavily in land that his regular business was falling off through neglect. He knew that he would either have to sell or make an assignment, so he reduced his own stock, secured a full line of credit and accumu- lated a surplus. When the opportunity came, he was able to take advantage of it. In planning to meet cash needs, there are two courses PLANNING TO MEET BILLS 99 open: (1) to increase production within the business and (2) to secure additional credit. Ability to use these methods depends upon the completeness of your forecast. There are many ways to increase production or in- come within a business. One method, as in the case of the hardware dealer, is to adopt a new sales scheme. A manufacturer in Texas who was facing a stringency hired an efficiency expert to go over his business. He found that on some products the firm was actually losing money, while on other lines it secured a large profit. The manufacturer immediately concentrated all his efforts upon one leading department of his plant, for he saw that he could cut the price of this article and through increased sales could more than cover the de- ficiency he was facing. Another manufacturer, in a similar situation, had a large stock of raw material on hand. He worked a double shift to convert this into salable goods, and for the period up to the time when his notes were due he reduced other expenses and buy- ing. A large advertising agency which had notes due on the first of the month that it could not meet, to- gether with the payroll, changed the pay day of the salaried employees from the first to the tenth of the month. When the need came, the change, which had long been contemplated, offered an easy solution for the problem. Another firm in need of large sums adopted a freak collection letter, consisting only of the heading and a question mark, which secured results from debtors who never gave the ordinary statements more than a glance. A jewelry house which had been idle a greater part of the dull summer seasons put in a line of souvenirs and other articles to attract the tour- ist trade. 100 KEEPING CAPITAL AT WORK These are only a few of the solutions that have been effectively used to cover foreseen stringencies. The clever manager first considers sales and advertising. He sees if the production by these means can be in- creased. He also tightens up on collections and restricts credit. He reduces stock to the bare necessities of the business. He endeavors to discover unprofitable depart- ments, and does away with them. He makes additional efforts to stop leaks. Extraordinary needs are met with extraordinary actions or appeals. The first point to remember, however, is that the ability to provide for opportunities and contingencies depends upon the abso- lute check you have upon your business the accuracy of advance knowledge of available resources and pend- ing obligations. Laying Plans for More Credit to Meet Your Future Needs for Money An eastern manufacturer saw that in thirty days he would need twenty-five thousand dollars. He had al- ready been refused credit by the banks, but, since the dull season was coming in his business, his only chance was to overcome their distrust. He knew that his assets the value of his equipment alone warranted a loan of much more than he needed. He was certain that if he could convince the bankers of business methods in his enterprise, they would agree to extend accommoda- tions. He could borrow, but he must first re-establish his credit. His first step was to secure the report of a public accountant. This showed that the condition of the busi- ness was sound, but that the credit standing of the firm was impaired by poor organization and management. When the report was completed, the owner of the busi- PLANNING TO MEET RILfo) 101 ness completely reorganized every department of his concern. Then he went to the banker with his report, showed him how he had reformed some of his manage- ment methods and that he had ample security. The loan was granted without hesitation. By foreseeing the need for money, the owner of the business was able to put it in a condition that made his credit standing right. What to Consider in Planning to Meet Every-day Financial Needs The keen financial head will not only foresee and plan to meet contingencies that threaten his business exist- ence, and opportunities for larger profit, but will also plan his financing so that he can meet his usual bills with the greatest convenience and least anxiety, with- out impairing his credit standing. In planning to meet regular financial obligations, there are four points to consider: 1. Purchases. Purchases should be planned in rela- tion to obligations. When the business is heavily bur- dened, it is often best to sacrifice market advantages, to purchase conservatively and to reduce stock. 2. The maturity of new obligations. By knowing the cash receipts assured at every date in question, the executive can spread out the maturity of his notes so that it will not be necessary either to put off creditors or to secure additional funds from the bank. 3. Collections. When credits extended to customers make too great inroads on the working capital, you can afford to offer discounts for cash, to put pressure on your slow-pay customers, or to arrange as a last resort for loans on the security of your accounts receivable. 4. Shortage in money markets. When money prom- ises to become tight and discounts are beginning to 102 KEEP(\G' CAPITAL AT WORK rise, arrange to have cash on hand, or to have long- time credit agreed upon beforehand. A study of threat- ening money conditions enables the merchant to use his credit in time to supply the needs of his business at a saving impossible if he waits until everyone is demand- ing accommodation. The basis of good financing, however, is good account- ing. The wise financial head first makes sure that the money facts of his business come to him regularly, auto- matically, accurately. Having secured this information, he can match his approaching obligations against his resources, and can foresee those unusual demands that call for increased output, reduction of expenses, and a reinforcement of credit standing. Govern the Expense IF HE has the proper system, the executive can scan the expense streams from the eminence of his own desk. No rivulet will be too small to see. Each entry will be itemized under its proper classification. In running through the accounts each morning, he can place his finger on items that ap- pear too large or uncalled for, or which need explanation. He can point out the spots where expense streams can be dammed. Edward L. Wedeles CHAPTER XIV Keeping Extra Money Busy WHETHER idle money or idle money possibilities in any other form really exists in a business is a question of viewpoint. Many merchants let their sur- plus dribble away unnoticed, leaving a sense of always being pressed for funds. A great manufacturer came home from Europe to find his executives nursing a big bank balance merely for the sense of safety it gave them in his absence. "I hire you not only to make money, but to use it to put it back at 8% in the busi- ness rather than to lock it up in the bank at 2%," was his caustic word to them. , "My store managers go up or down put five figures of profit or only four upon the January balance sheet just in proportion as they keep their capital turning constantly, " said the head of a chain of retail stores in towns of from 10,000 to 150,000. These statements show the attitude of the successful man towards idle money. In his case surplus funds are foreseen, eagerly seized upon and put to work as they develop. Lines which prove slow are closed out so that the cash can be put into fast sellers. Every item of equipment, ground rent and payroll not highly pro- ductive is cut off. 103 104 KEEPING CAPITAL AT WORK In every business the pendulum swings between ex- cess receipts and excess disbursements. The publisher of a farm journal finds his advertising and subscription returns for December and January seven times as large as those for July and August, while his current expenses vary not nearly so much. The furniture house, the tailor, the manufacturer of stoves, the dealer in farm implements, have similar problems. When, in going over his monthly balance, however, a merchant stumbles upon a $400 surplus he is in no po- sition to make the most of it. It is only by records plus foresight, by watching money pouring in through many channels, by shutting off extravagances which follow at the heels of easy money, and by making extra efforts to " bunch " idle funds for new uses, that they can be made to pay their toll to the business. A successful manufacturer has chosen the year 1910 as the standard or average year in his business. His daily, monthly and annual statements always compare the range of receipts and expenditures with correspond- ing figures for 1910. Twenty Uses That Have Made Idle Money Pay Back Profits to Store, Office and Factory A business whose capital runs into eight figures re- ceives similar cash forecasts thirty and sixty days in advance. At those seasons when surplus assets appear, the management at once begins to plan the use of this extra money. ' ' Shall we need this balance shortly?" is the first question asked. "Is this an actual profit item which we can afford to withdraw from our operating fund and put into fixed improvements?" is the next inquiry. USING SURPLUS FUNDS 105 "Is there no profitable use for this surplus within our business and should we invest it as a reserve in outside securities or enterprises ? ' ' This question is taken up only after the inside needs of the business have been canvassed. The most common surplus is that which accumulates merely for a short season and, as the records show, will soon be needed to meet bills. Short time uses which have returned good profits on extra money are : 1. To buy raw material on a low market. 2. To buy job lots for quick sale. 3. To establish a temporary branck for seasonal trade, as a summer shop at a pleasure resort. 4. To tie up by option a lease or location of which a competitor threatens to make dangerous use. 5. To manufacture, buy, or stage a sale for a spe- cial season or occasion. 6. To discount bills, or call in obligations that are drawing interest. 7. To extend extra credit to a valued customer. 8. jTo make up supplies or lay in equipment for the plant during dull days. A jeweler in an Atlantic Coast city found his store and capital practically idle during eight months of the year while his trade luxuriated at seaside and mountain resorts. For three years he had seen his winter surplus eaten up by summer expenses. During the fourth win- ter he formed a resolution to seize his annual excess money and make it produce. His plans, laid far ahead, were to establish a branch store at a fashionable Maine resort. He took a summer lease upon space in a lead- ing summer hotel, hired furnishings, sent down two of his salespeople and freshened his display weekly with new lines from his metropolitan store. The result was 106 KEEPING CAPITAL AT WORK dull season profit on what had been idle money, idle labor, idle overhead expense arid idle stocks. Idle money or the ability to "take the discount' 7 gives the clever purchasing agent and store buyer an important advantage in the market. The merchandise manager of a great department store, when formerly buyer for the haberdashery section, often turned the department surplus in a single day. During a lull in an extraordinarily good business day, when stocks had been pulled over, he was accustomed to drive to the wholesale quarter, buy for cash an attractive lot of neckties, hosiery or hats, pile them into the cab and rush them to the store. The new merchandise fresh- ened the display and started a new buying impulse which made the departmental balance that evening the envy of other buyers. Business expansion ought to wait until accumulated profits or new capital warrants the move. Where such a surplus has been foreseen, however, many profitable avenues are open to its use: 1. To enlarge the factory or store. 2. To develop the manufacture or sale of a particu- lar line, or to take on new lines. 3. To buy patents resulting in the sale of new lines. 4. To develop a special advertising and sales cam' paign. 5. To devise an improved delivery system. 6. To reach a new class or a new trade district. 7. To reorganize departments. 8. To open new sources of material. 9. To give the business a financial overhauling which will result in economy and better credit. 10. To develop a new system of hiring, handling and paying employees. USING SURPLUS FUNDS 107 11. To secure real estate deeds or leases on future business sites. 12. To put on foot an investigation of conditions that threaten the prosperity of the business. An investment in permanent improvements ought to stand this test: Does the business warrant this ex- pansion and will it mean an improvement in credit standing or financial efficiency? Reinvesting a Surplus for the Enlargement and Greater Stability of the Enterprise A clever druggist planned ahead for three years and by concentrating all the surplus which rigid economy enabled him to accumulate, purchased three suburban stores at strategic points, installed motorcycle delivery and opened a plant for making his own frozen dainties. By these measures he at once put his idle money back into the business in a way which gave him trade con- trol on an extraordinarily economical basis. A stone cutting and sawing concern was accumu- lating a surplus which, month by month, mounted from 2 per cent until it promised to total 12 'per cent of the capital stock. Already it had lain in bank at nominal interest for several months, w r hen, at the sales man- ager's suggestion, the money was put into a branch shop in a neighboring city which offered an unusual oppor- tunity. Operated as a branch, this required but small capital, and soon became a source of profit. Too often extra funds blind the owner to dangers which threaten the life of the concern. The first office of profits in the wisely conducted business is to safe- guard the future, not merely by contingent reserves, but also by furnishing funds for investigations and tests of better business methods. 108 KEEPING CAPITAL AT WORK For years an ominous increase in selling expense had been cutting into the profits of a nation-wide hard- ware business. Finally it was voted that the semi- annual surplus be used to conduct an expert investiga^ tion of jobbing, direct selling and advertising, with comparative records over a period of three decades. These records laid a warning finger upon several line? for which the future was closing and proved by tests* the growing profitable demand for other numbers. This result illustrates the most valuable function of extra funds in your business ; not merely to pay a nom- inal percentage in some quick turnover, but to plumb your business difficulties and opportunities, so that the first may be corrected and the business may go forward to success upon a thorough understanding of the latter. Checking Up T^XPENSE is best controlled by cen- ^ tralizing its supervision. All its details should be subject to some sys- tem that reduces them to the daily scrutiny of a higher executive. Edward L. Wedeles CHAPTER XV Handling Reserves and Investments FOLLOWING the panic of 1907, a firm of retail jewelers in an eastern city faced the necessity of raising a large sum in ready cash. The firm had made its usual purchases for spring payment, considering the money flurry only temporary. When spring arrived, however, the goods were still in the show cases. More- over, several jewelry supply houses, hard pressed by their creditors, had given advance notice that they must insist upon prompt payment. Here is a condition which, over and over, has put the label of failure upon short-sighted store and factory organizations. By patience,, foresight and wise invest- ment, however, the jewelers were prepared for precisely this emergency. From the first they had realized that in a business based upon the sale of luxuries financial stringency must mean short funds. During ten years of remunerative business, therefore, they had rigorously set aside a percentage of their profits as a reserve asset, invested in first-class bonds yielding a fair percentage and possessing unexcelled stability. Upon these securi- ties as collateral the head of the firm easily borrowed funds sufficient to meet demands and maintain its high credit reputation. 113 110 KEEPING CAPITAL AT WORK In every line of manufacture and service like con- tingencies often arise which can be met only by the conserved strength of the concern itself. A mine may be flooded. A factory may be wrecked by a gas or steam explosion. There may be a disastrous strike, a crop failure, a series of losses from bad debts, a costly dam- age suit. Depreciation of property, redemption of bonds, the necessity to scrap old-fashioned machinery and to reorganize upon improved lines, the danger of calamity not protected by insurance these are some of the factors, self-evident or unforeseen, which may, unexpectedly wipe out a man's capital, make it non- productive or tie it up beyond reach when ready money means business life. Men trained in finance and business have come upon certain definite principles, by observing which it is feasible to store up the strength of prosperous times for the "rainy day." But the accumulation of surplus funds and reserve assets, whether in the business of one thousand dollars or one million dollars capital, is a source of strength only when carefully adapted to the particular needs most likely to appear and when in- vested in such a way as to bring in profits, yet be ready for instant use in any emergency. A fifty thousand dollar concern in a Wisconsin city determined that from the outset reserve assets should be set aside. The executive committee did this consist- ently, even in the face of bills payable which continually had to be met by bank loans. "I understand," said the banker, "that it is your wish to operate on the most conservative basis. What you are actually doing, however, is to borrow money from us to invest in outside securities. You are letting the other man use your credit to make a profit which RESERVES AND INVESTMENTS 111 you seem fearful of attempting. I shall have to insist that you put your collateral back of this loan/' The result of thus attempting to set aside reserve assets drawn from loans and working capital instead of from the profits of the business was that the reserve securi- ties were already on the table just when the corpora- tion, caught by a demand for cash, most needed to play them. An expert accountant has laid down the rule that capital and earnings (after providing for de- preciation and obsolescence) are to be used first to supply all the permanent funds necessary for the op- eration of the factory or store. If, after paying the dividends properly due, profits are then sufficient, it is wise to set aside a certain portion of them as an emergency or definite purpose reserve. The objects of such a reserve may be divided under two heads : 1. A reserve may be built up to meet periodical or seasonal demands, as where the forecasting of receipts and disbursements indicates that bills may profitably be discounted with surplus funds in May and Novem- ber, while later receipts will replace the reserve for future demands. 2. A reserve may be laid by blindly as insurance against unforeseen catastrophes or a financial crisis; or as a "war chest " with which to carry on operations when conditions of supply, demand and competition offer unusual opportunities. In deciding upon and establishing reserve assets the in- dividual merchant or manufacturer who has become ex- pert in finance guides himself by the character and needs of his business. He considers the various situa- tions in which a reserve would be of vital importance. He makes certain that his operating capital is sufficient and that his reserve might not better be invested to 112 KEEPING CAPITAL AT WORK , develop his plant and trade. After studying the pro- cedure of clever business men in his own and allied lines he calculates whether three, four or five figures will adequately take care of short-time demands and un- foreseen needs. Finally he fixes upon the terms under which the reserve will be put aside and invested, so that his withdrawals will not overtax the business and will go into securities well adapted to his needs. How to Select Investments That Will Maintain Your Surplus Intact and Ready for Instant Use Having laid down the definite financial policy which brings your reserve to your bank book, the wise and shrewd investment of the funds demands attention. Four general tests of an investment are laid down by men of financial acumen : 1. Are your principal and interest safe or certain to come in when due ? 2. Is the net return or rate of income on the invest- ment advantageous? 3. How does the security rank as to ease of convert- ing it into cash and how staple is its market value in times of crisis? 4. What are the prospects of the security increasing in value? A Georgia manufacturer whose big selling season fol- lowed cotton marketing time, invested his cash reserve in the purchase and development of an interurban sub- urb. The needs of the business were for a reserve which would meet expenses during the dull spring and sum- mer seasons. The gradual depreciation of the plant, the necessity for new machinery at the end of five years and the imminence of seasons when sales would be seri- ously affected by drought and the ravages of the boll RESERVES AND INVESTMENTS 113 weevil, constituted a grave responsibility in the use of this surplus accumulated during six prosperous seasons. The investment, however, took the surplus out of the business and put it into another business which offered golden possibilities of increased value, but as a preliminary demanded large additional funds for de- velopment. Under the most favorable conditions, more- over, neither returns nor profitable sales could be hoped for under two years. Instead of adding strength to his business, the ex- ecutivr had doubled his risk and bled his growing con- cern to start another. An unforeseen period of de- pression, coming simultaneously with irresponsible man- agement of the real estate enterprise, affected the con- cern's final resource its bank credit so seriously that the executive suffered months of stress, and the sacri- fice of his entire invested " reserve " before he brought his business to safe ground again. By matching every proffered investment with these four tests, and with the requirements of your par- ticular business, you may make your reserve almost absolute insurance against financial wreck. To pay for inapt advantages is a waste, for the presence in a high degree of one desirable quality always means a propor- tionate lack in some other advantage. The man of small capital must count safety as the prime requisite, and be contented with a smaller return. Wealthy mer- chants or corporations may sometimes take chances with unrecognized stocks on the chance of increased income ; but the small retailer or manufacturer will remember that his securities must be " quick assets," to protect him from unforeseen money demands. Where, how- ever, a fixed or semi-fixed investment is sought, better 114 KEEPING CAPITAL AT WORK interest and the promise of good increase in yalue may be had. Investing a surplus calls for financial knowledge usually beyond the field of the business man himself. The expert advice of professional investors and trusted "bank officials should go into the handling of your busi- ness reserve. Study and calculation of the needs of your business come first; then tests, investigation, and selection among the securities available. To get invest- ments averaging well in respect to all four tests, keen business executives make up a list of securities to include "gilt-edged" securities on which safety and solid value as collateral compensate for the low rate of interest; lower grade bonds and stocks which pay well, but may decline in the crisis when prime bonds are at their best, and real estate or real estate mortgages and leases, affording rapid increases in value and perhaps some special advantage to the business. Paying Dividends t^INANCIAL sagacity and control * are never better evidenced than by modest living and conservative person- al withdrawals by the owner of a bus- iness. Dividends ought to be kept down to amounts the enterprise can spare without hurt. CHAPTER XVI Where to Look for Leaks and Savings INCREASED profits means increased sales or greater economy. The opportunity to cut costs and stop leaks belongs to every department in every business and touches economy of labor, of time, of supplies, of material, of power, of service. But the treasury of tho business, that department which handles the money, uses the credit and makes permanent investments of the capital, has a chance to save, which is greater and less often turned to advantage than that of perhaps any other unit. "To allow money to lie in bank," said the cashier of a metropolitan concern, "is to cut the firm's just profits, for the amount earned in interest will never approximate what a judicial discounting of bills will yield. Interest on a checking account is insignificant compared to discounts, which range all the way from two per cent up to the maximum of six or seven per cent sometimes offered on dry goods, jewelry, notions and merchandise lines." Use of surplus funds or easy credit to discount bills is an elementary source of saving; yet it is often neg- lected or passed over as an unfamiliar operation. How 115 116 KEEPING CAPITAL AT WORK to keep check upon bills payable and discount the largest possible total of them is thus detailed by a cashier who saves hundreds of dollars to his concern monthly in this way: "At the beginning of each month," he said, "I make a list of the bills that fall due that month, arranging them according to dates of maturity. Every fifth day I go over this list to post myself as to the cash required in order to get full advantage of discounts. If more cash receipts come in than are demanded to care for current bills, I frequently anticipate bills and pick up extra discounts. Where I can call in funds for discount use at a profit, I offer such terms as will bring the needed money at a margin." Handling Funds and Using Credit on the Basis of Least Loss and Greatest Profits Financial savings as contrasted with economies in other operations of a business have been worked out by skillful cashiers and executives under two heads: A. Leaks and savings in the handling of current funds and credit. B. Leaks and savings in the long-time investment of money within or for the business. In either case the leak may consist (1), in a loss of actual funds in hand; (2), in keeping funds idle, which represents a loss not of capital, but of possible return thereon; or finally, (3), in the use of funds so as to earn only a low return instead of a possible higher rate. The cashier who in his daily handling of the check book neglects to discount bills while a surplus stands to his credit in the bank, is allowing profits to leak away through idle money; or if he might negotiate a bank loan ahead of a stringency for the purpose of discount- MONEY LEAKS AND SAYINGS ing these bills when cash secures him unusual prices, he is neglecting the use of idle credit on which a profit might be earned. Much less excusable is a loss of actual capital, dis- bursed without receiving an equivalent. In checking over his books the cashier of a Chicago wholesale house noticed that the charges for postage were running unusually heavy. An investigation brought out the fact that in one department the private use of stamps of the concern was responsible for a definite and by no means trifling loss of capital. Further study; of the books and bills payable or paid showed that a public accountant had overstated the time spent on the installation of a new voucher system and that there was also an over- charge for warehouse storage, covering several crates which did not belong to the concern billed. Attention to the financial mechanism of his own department thus enabled the cashier to save his firm leakage of the actual working capital. It is upon such considerations in the daily handling of interest items, discount items, overcharges, time of payment, employ- ment of surplus and the opening of new channels of constantly higher return on the working balance, that expert financial heads of stores, offices and factories are saving their salaries five and tenfold every year. Stopping Losses and Gearing up Profits upon Your Fixed Investment The junior partner of a New England factory, hav- ing recently come into active control, was discussing with his board of directors a bond issue for the purpose of doubling his factory floor space, when his auditor brought out the fact that the old management had allowed the accumulation of certain stock to the amount 118 KEEPING CAPITAL AT WORK of nearly $200,000. This figure meant that nearly a quarter of a million dollars was constantly tied up in goods which, during the busy season, could not be con- sumed under ninety days. A special sales plan was developed, which cleared out nine-tenths of this slow- selling stock and at once furnished the working capital for the enlargement of the plant. The investment of this amount constantly in stocks which were unnecessary to meet any probable demand, represented at five per cent a loss of $800 a month through idle capital and without considering the depre- ciation of the stock. Wherever money has been put into long-time investments, the profits it earns are a chal- lenge to this test on the part of wideawake executives who realize the tremendous losses possible from dead in- ventory items, overbuying and of idle finances. Capital may be invested for business locations, for fixtures, for equipment, for raw material, for stocks of goods, for credit afforded to customers, for advertis- ing and selling, for overhead expenses or for securities intended to give the concern reserve strength in case of unusual need. Every one of these items may be, and in well-conducted financial divisions is being put to the threefold test already mentioned. First, are these funds themselves safe from actual loss; second, is this invest- ment productive or idle ; third, acknowledging that this capital is returning a profit, would it be possible to secure a higher return without sacrificing any impor- tant quality of the investment ? How to Make Comparisons Show up Leaks in the Financing of a Business Controlling funds and investments finding and stopping leaks making money excel past records of MONEY LEAKS AND SAVINGS 119 productiveness means to classify, to tabulate and to compare the fiscal items for the day, month or year. A new business is often handicapped by ignorance and lack of data or records as to the proper amounts to be put into fixed investments or reserved as working cap- ital; as to proper percentages on and savings in the handling of funds; as to the use of different kinds of collateral at the bank and the importance of bulk buy- ing, as compared with discount purchases for cash. The clever business man supplies this lack through the accumlated knowledge of his banker and of credit men in firms from which he buys; through the assistance of expert auditors and the averages of good business men in competing shops or allied lines. This technical insight into financial routine he applies to the study of alternative estimates in his own financial operations, with the inevitable result that in the handling of money, as in the use of electricity or coal, savings and increased efficiency are developed. Stop the Leaks WASTE saps the life of a business. Detecting waste is not a matter of judgment but of system of com- parisons. Waste grows with the num- ber of untagged items in the accounts. CHAPTER XVII Checking Up and Making Financial Forecasts DETAIL was the stumbling block in the growth of the business of a large real estate dealer in a southern city. He was kept working late at night to get through the mass of detail that kept piling up with increasing confusion on his desk. Besides, he never knew exactly how he stood financially. It took hours to get the simplest facts concerning vital money mat- ters in his business. One night when he had just finished clearing his desk, he looked at the clock it was almost midnight. 1 ' Something must be wrong, " he said to himself, "when I spend most of my time merely checking up business, instead of getting out and leading the sales force. My business has been my master I must learn to master it." That night marked the beginning of a new policy in handling the business; in calculating the records of expense, receipts, profits, obligations outstanding and amounts due; the condition of each department, the present balances and the cash that would be on hand at any time. An expert was employed who not only relieved the executive of his unproductive work, but 120 BALANCES AND FORECASTS 121 boiled down the details of all accounts and reports into one sheet of exact results which gave in convenient form an absolute check upon his business that showed just where the business stood and whether it could cover the ledger liabilities. It enabled the owner to look ahead, to plan his financial moves so that capital was never Monthly Balance of Departmental Expenses, and Earnings to be .Checked against Quota President's Sales [Acreage and North Suburban Loans !l ~* West Suburbs Injtenirban Addition 1 1 Rents and Leases Odd Sales Office Sales (- Rent 15.90 15.90 15.90 15.90 15.90 15.90 15.90 15.90 7.90 32tOO 7.90 r (LTS.QS 175.00 Extraordinary Expense ^Fi .Postage and 'Carfare 5.38 5.38 .38 . 3.00 3.00 3.00 3.00 12.00 1.80 14.91 3.00 (50.03 Incidentals 28.55 28.55 31.55 28.55 28.55 28.55 28.55 78.10 14.30 28.55 14.31 Su 'Telephone 4.23 4.23 4.23 4.23 4.23 4.23 4.23 4.23 4.23 6.58 2.40 CgTwJ ' 47.05 Light .98 (ToT^ Fuel, Water. Ice, etc. 2.46 2.46 2.46 2.46 2.46 2.46 2.46 2.46 2.46 3.83 1.40 QL0.5J) 27.37 Printing 11.50 22.25 (5Q753 33.75 Uvery 60.96 76.20 91.44 76.20 76.20 76.20 48.77 48.77 24.38 31.27 30 .AC 640 .V? Advertising 33.41 33.41 70.73 45.49 45.49 75.83 12.73 117 .39 10.73 36 .52 10.73 49^46- Signs 1.90 1.90 1.90 1.90 1.90 1.90 1.90 1.90 1.90 23.75 1.90 Salaries Direct 300.00 200.00 180.00 150.00 150.00 125.00 73.35 208.32 50.00 210.00 570.83 1646.67 Administrative Salaries 64.98 64.98 64.98 64.98 C4.98 64.98 64.98 64.98 36.10 129.96 36.10 ,; Mar: Apr. May Oct- Nov. Dec; Total .Comparative Expense Units of Outlay Electric Light and Power x Motet No. 1 Light Meter -No. 2 Meter Arc No. 5 Light! Elevators Total. :al ; ^^ General Statistics Percentages Percentage of Single Expense Item to Total Expense Items 1908 1909 1910 1911 1912 1913 |!(|e&!i!^ SiilM^f' ;oiifc8::;i!:;;;' A FORMS III VIII: Six forms comparing expense in different ways that enable the executive to forecast and control the financial situation. The upper form is used for a daily report of expenses, item by item. The monthly total on each item appears in the same order on the next form. The third form shows an analysis of a single item of ex- pense electric lighting and power developing specific leaks in different departments. The lower three forms are used for an annual total of each expense item, indicated as a percentage respectively of the sales total, the expense total and the gross profit horizontally and then vertically a point is found whicK corresponds with the conditions to be graphically rep- resented, and the line is made by connecting the differ- 126 KEEPING CAPITAL AT WORK ent points. These graphs not only save the time of the executive, but they also give warnings, of new conditions and provide danger signals. The line of the graph shows the actual tendency of the business, and does this much better than a column of tabulated figures possibly could. Furthermore, these graphic records give an opportunity for comparison of results with correspond- ing periods of former years. The graph literally pic- tures these comparisons. A rise or a fall of the line shows immediately the tendency of the business and the management is able to provide in time fop the condi- tions that the graph foreshadows. Keeping an Accurate Check upon Your Business and Making Money Forecasts In determining the exact condition of a business the following suggestions are important: In the first place, separate accounts should be kept of each department. By means of these accounts any department which does not pay is easily detected and may be done away with; also the effect of certain fac- tors upon the condition of the business may be accu- rately determined. A record similar to that of the real estate dealer will show not only the condition of the whole business, but the actual state of each component part. For the store, office or factory in which the employ- ment of an expert accountant is too expensive, it is generally possible to secure an expert for two or three evenings in each month. Some methods must be found to get full and accurate statements, balance sheets and money forecasts at frequent intervals. Manufacturing plants and industries of complex and technical character should get expert reports at certain definite periods, BALANCES AND FORECASTS 127 especially concerning deterioration and other conditions that are difficult to determine. Graphs are easily kept and they are of great value even in the small business. They make comparison extremely simple and the factors which effect business may be isolated and thus determined. These records give warning of contingencies in time to provide for them. Jan. 1911 Feb. 1911 Mar. 1911 Apr. Week Ending - 3 S $ 3 2 > 3 2 S <* 2 S900I1IJI || .. | r i : i, i;ii nin'irmr 800 t i ------ TT : : i : : : profits 4CO iSiLtgjtga3::t. :+;g;i ; Per Week 3^ p^SSSH:|:|:: ::::i::|:: : 1911 May 1911 Jim. 1911 Jui7l911 flp||l;|;||lil|| % -Of Money 12' iSEH5|;;| i!|S , "^::t:::::|: ;;;;;! ; jiiilj !!|!!!ji!!|lil!!; i-s ^ ^i;iii:hi;; iiiiiliii^ii^ lpll:||||||ip::::!H ||H |pj||||||;j||;|| , t fl nTtTfmifi-^H^4fiiti^f miffffifrri MLJiiiMMmmyiHi , itn Tliis graph shows how a manufacturer has plotted his total profits by weeks and made a striking picture of the decrease in his profits during May and June from over six , three per cent. Such charts covering all receipts and disbursements for years are easily made and are the basis of estimates for ensuing seasons in many offices Success in financing a business depends largely upon ability to provide for future money opportunities and emergencies. Guesswork is only self-deception. Rec- ords are the prerequisite of foresight, but this is not their only value. They enable you to secure the confi- dence of the banker and your creditors through your ability, knowledge and progressive spirit. They enable 128 KEEPING CAPITAL AT WORK you to plan ahead for emergencies and secure funds when hopes presented instead of facts, are futile. They warn against money waste and offer the basis of measures that meet the crisis. With efficient finan- cial records, the executive needs only study and inge- nuity to dominate his business and push it to solid success. What Gains Success BUSINESS success results from the *~* combination of efficiency in man- agement with wise use of capital and credit. Foresight, planning ahead to meet money demands, conscious atten- tion to the details of credit standing, records and financial advice that show up the danger signals, courage and re- sourcefulness in emergencies, the max- imum use of capital and credit within the bounds of safety these are condi- tions that fix the bank balance, that determine the growth of a business* that mtv'ie its course sure. RETURN TO the circulation desk of any University of California Library or to the NORTHERN REGIONAL LIBRARY FACILITY Bldg. 400, Richmond Field Station University of California Richmond, CA 94804-4698 ALL BOOKS MAY BE RECALLED AFTER 7 DAYS 2-month loans may be renewed by calling (510)642-6753 1-year loans may be recharged by bringing books to NRLF Renewals and recharges may be made 4 days prior to due date. DUE AS STAMPED BELOW OCT 3 1 2001 12,000(11/95) YB 18685 5561)32 UNIVERSITY OF CALIFORNIA LIBRARY