Get Rich in Small Business

There is no secret. It is the thesis of this book that:

1. Ownership wealth derives not from the owner's wages or the profit earned, but from the growth of the value of the company, and

2. The growth and the value of the company derive from its employees.

It is the purpose of this book to convince you of these facts and equip you to make use of them.

Small business owners do not believe in magic: a secret source of wealth. But they have the source.

There is a source of wealth in small business that can make a business grow and make you rich. This book will help you make plans for your business and make changes in the way you run your business. The goal is a million-dollar company.

In this first chapter shows two things: THE SOURCE OF WEALTH in business and WHO HAS THE MONEY. When you see how much money many people have, you will want to get your fair share. Knowing the source of business wealth will make it possible to run your business in a way that will rapidly increase your income.

There are seven possible sources of wealth in business--the contacts between the company and the world. Listed here are the people who bring money to the company and those who take money away from the company:

    1- the banker (if there is one)
    2- the buyer of your company (if any) 
    3- the owner
    4- customers
    5- suppliers
    6- employees
    7- the government

Employers are secretive about the wages paid to employees. When I was a Vice-President of a West-coast electronic company, I often set the wages of employees. On my request, the Manager of our personnel department would take out of a locked lower desk drawer a secret book. It was a tabulation of the wages paid by all of the nearby electronic companies for each category of worker. This information was collected among the companies by their industry association. It was distributed so that each company would know how much to pay and wouldn't compete for employees by paying higher wages. The existence of the book was a tightly-kept secret. (And if anyone asks, I've really forgotten the name of that personnel manager.)

For employees to be a continuing source of wealth, they must not find out how the wealth is divided. Employees are generally content. Most workers are not even organized. Strikes usually involve minor working condition disputes and requests for small wage increases. The wage increases are only partially proportioned to increases in productivity and don't quite keep up with inflation. The increases do not touch the employee / owner sharing of the wealth. The employees have at most a vague feeling that something may be wrong with their share of the wealth they create.

You, as the owner of a small company, will not increase your employee's awareness of the situation by flaunting your wealth--at least not in your home town. You will spend it quietly at one of your homes and freely on trips and private clubs.

After reading this book, you will know the importance of your employees, you will treat them better than will owners who have not learned the truth. You will build your company more wisely. That is to say; you will get richer quicker.

You may not yet believe that employees are the source of wealth. It is a fact not readily accepted by the owners of companies. Let us look at the other possible five sources. Then in the next chapters you will see the details of how employees are the source and how that can be shown in financial statements.

SIX WHO'LL NEVER MAKE YOU RICH

A friend of mine with a million dollar company noticed that one of his customers had a habit of being unreasonably slow to pay for the machines he purchased. He walked into the customer's factory "to adjust the machine" he had sold to them--but not yet paid for. Then he announced that he would have to take the machine back to the factory for repairs, walked out with it, and refused to sell them anything without cash payment in advance. They will never get special services from his company.

If you don't treat your suppliers fairly--let them get rich too--they will serve you poorly. You won't get rich with unhappy suppliers. Your good suppliers will help you get rich so they can get rich too. There must be, somewhere else, a source of wealth for both of you.

Finally, the government. The government exists to provide certain critical services including national defense, police, courts, and the national infrastructure of roads, libraries, schools, bridges, prisons, water lines, sewer lines and much else. Without such facilities and services it would be impossible to operate your business. You pay taxes for them and, by-and-large, you get what you pay for. If not, you have the vote and, when you're wealthy you can make some campaign contributions. Essential as it is, the government makes it possible for you to become wealthy but is not the source of the wealth.

We have eliminated six of the seven six possibilities: customers, suppliers, bankers, yourself, the buyer of your company (if any), and the government. None of them will make you rich but they'll help. There can be only one source: your employees.

At this point, some readers will still not believe that employees are the source of wealth. There is a good reason for your doubt. Your doubt is caused by your deeply set beliefs

Anyone who has an interest in going into business and anyone who is already in business believes that free enterprise, capitalism, and the American way are good. They are absolutely right. A nation in which people can go into business for themselves will produce more goods and services for the people and provide more and better jobs than any other system. The free system is good but it is too easy to slip from knowing it is good to thinking that the system is exploiting the workers. It is fear of such thinking that keeps us from openly recognizing the role of workers in creating the wealth of business owners. We fear getting on the slippery slope from fact to fiction, but it is helpful to know the facts.

In the following chapters you will see how the system works and how employees are the source of wealth. You will see financial statements that show the dollars that employees give you to make your company grow and to make you wealthy.

Before looking at the details of the source of wealth, you should know where the wealth is. Employees have only a portion of the wealth. They only create it. They have been doing so in the United States for more than 200 years. Let's learn who now has the vast wealth that employees have generated.

The wealth distribution in the United States is important to small-business owner for two reasons: You need to know where the money is to know who can buy your product. Secondly, if you know how wealthy are the richest people, and how much of the nation's money they possess, you will be inspired to get your share.

WHO HAS THE WEALTH?

   The richest 7% of the population has half of the nation's wealth.

   The poorest half of the population has only 3% of the wealth.

   The super-rich one-fourth of one percent have 16% of the wealth.

   There are 520,000 millionaires United States in 1979.

The number of millionaires is growing by 15% each year. In 1985 there will be 180,400 new millionaires in that one year. Will you be one of them?

The number of millionaires is increasing much faster than the population and much faster than can be explained by inflation. The number of millionaires has been increasing at almost the same rate during years of little inflation.

Becoming a millionaire is one of the best ways for you to protect yourself from inflation.

The fact that 520,000 people are millionaires should incite you to get your share. The system is set up to encourage a few smart people to become very wealthy, leaving many to be poor or middle class. You surely want to be rich, not among the poor, and why be mediocre?

THERE ARE NO DEBTS  The richest ten percent of the people have more than half of the nation's wealth. They have more than $3,360,000,000,000,

The total of all government and personal debts in the United States, including the federal debt, all state debts, all city debts, all personal debts including home mortgages and installment buying, and all small business debts, but not the debts of corporations, is $2,940,000,000,000. The top ten percent of the wealthy could pay off all of those debts and still keep their positions as the richest of us all.

THERE ARE NO DEBTS. There is only a distribution of the wealth. Go with the system. Become one of the chosen wealthy.

Knowledge of the system of wealth has enabled many small-business owners to become wealthy rapidly. They found products or services they could sell at high prices to the wealthy people, examples are the famous-name luxury department stores, such as Nieman-Marcus, who cater to the rich.

The 520,000 millionaires are not smarter than you. A few had rich grandfathers who owned small business that grew. A few were lucky in real estate. Most of them stumbled on the secret source of wealth. They formed small companies to make a living and were surprised to find themselves rich.

Remember these facts and use them:

    Half of the people have 97% of the wealth.

    Half of the people have 3% of the wealth.

In which group will you be? To which group can you best sell your products or your services?

You need have only a small company to be a millionaire. Don't let the thought of owning such a large company scare you. You'll grow into it. Those millionaires are no smarter than you. If they can do it, so can you. They once had to learn to tie their shoes, deal with accountants, choose good lawyers, and hire employees. In this book you will learn much of what you really need to know. You can fill in the details as they are needed for your particular business.

First, you must know exactly what it is you are going to do. You must have a target. Aristotle said it 2000 years ago: "Are you not more likely to score if you have a target?" In the next chapter you will see the accounting sheets needed for this target.

Action

2. If you can't believe that your employees are the Secret Source of wealth, read on. You will believe it when you read the next chapters. Then you can use the information to make yourself wealthy.

Your Little $1,000,000 Company

You should aim higher!   One million dollars in 1980, when this book was first published, has become closer to ten million dollars and making it has become easier.

Knowing the source will lead us immediately to a method of making your company grow. The growth of your company gives you a hidden income-especially hidden from the income tax collector, but also hidden from all too many company owners who don't understand the system.

This is not a book on conventional accounting. In fact, such accounting is full of deceptions. No matter how much you think you know about accounting, don't skip this or the following chapter.

In order to understand the American Millionaire's Method of getting rich and the Secret Source of the millionaire's wealth, we must rearrange the financial statements so that they report reality, not fictions for the Internal Revenue Service and hot profit-hiding schemes to keep employees and the public happy. You, the company owner, must have a clear picture of what is really going on in your company.

You must learn about things that accountants do not write or talk about. In fact, the millionaires themselves will be annoyed with this exposure of their method by the revised financial statements in the next chapter. Some will say it isn't so. You be the judge.

What you need to know is: what size and sort of company do you need in order to be a millionaire? You must know a little about company financial statements and the numbers needed on your statements to make you a millionaire. In short, you need a target.

GROWING NET WORTH IS INCOME FOR YOU

There is an additional source of income. The government will give you, the company owner, many tax advantages which amount to additional income.

You can see that there is more than one way to be a millionaire. Straight salary is the most difficult. Growing net worth is easier. Let's set up your target company and learn what is happening.

If you have not been looking at company financial statements, don't worry, they are simple. Start by making out your own personal financial statements. During the time you own your company without incorporation, you will have to combine your personal affairs with the company when you make out your income-tax reports. For all other purposes you should keep separate statements. For our purpose here, we will concentrate on your company, but start with your personal statement as an introduction.

YOUR PERSONAL BALANCE SHEET

That's the basic equation of accounting. You could go to a business school and learn that in less than three months.

What you have is called your "Assets". What you owe is called your "Liabilities". The difference is called your "Net Worth". Your Net Worth is your Assets less your Liabilities.

Accountants make things complicated. On a Balance Sheet they say, "the Liabilities plus the Net Worth is equal (balances) the Assets." Their way of doing it makes the numbers look bigger on the corporation annual reports.

     Assets         5,000   OR:  Liabilities   2,000
     Liabilities   -2,000        Net Worth     3.000
                   -------                    -------
                    3,000                      5,000
                   ="="="="="="="                    ="="="="="="="  
     Net Worth      3,000        Assets        5,000 
                   ="="="="="="="                    ="="="="="="="

If bookkeeping and accounting really worry you, get a copy of the book: Small Time Operator by Bernard Kamoroff, A C.P.A. Written for the "little" man or women in business, especially in a small retail store. A pleasure to read, it is loaded with ideas about how to succeed with a small business, has many comments from small business experience, and gives additional references and forms for small-company bookkeeping. Like all other books before this one you're reading, it does not mention the source of wealth.

The source of wealth must be hidden somewhere in the bookkeeping and in the financial statements. We'll find it.

You should have no trouble listing your assets and liabilities and subtracting to find your net worth. But you cannot do this precisely. The fact is that the best corporate financial statements are not accurate. It is necessary to make up arbitrary rules. Accountants have devised many such rules and some are more confusing than helpful.

It is not easy to determine what an asset is worth. For example, you own some old furniture. To find out what it's worth, you would have to get a dealer to come and look at it, then to be sure, you would have to get a second appraisal--and a third when the first two disagree. That gives you an estimate of the market value. But you aren't going to sell it so the real question is; what is it worth to you or what would it cost to replace?

Companies have old furniture, old machinery, old buildings, and old land. They don't know what they are worth, so the accountants have evolved and invented schemes called "generally accepted accounting principles applied on a consistent basis."

Property that wears out or gets old is "depreciated." By formulas that the Internal Revenuers approve, the initial cost is taken as the value, then reduced in an arbitrary way each year. Both the Assets and the Net Worth are reduced so the Balance Sheet still balances. The depreciation is listed among the costs on your Earnings, Income, or Profit and Loss Statement--as it's variously called--and thereby reduces both your profit and your income tax. Reducing profit is good. Reducing tax is good.

ASSETS

Cash on hand and in bank                $_________
Savings accounts in banks               $_________
U.S. government bonds                   $_________
Accounts and notes receivable           $_________
Life insurance cash value               $_________
Other stocks and bonds                  $_________
Real estate                             $_________
Automobiles                             $_________
Other personal property                 $_________
Other assets                            $_________

       TOTAL ASSETS..............$_______

LIABILITIES

Accounts payable                        $_________
Notes payable to banks                  $_________
Notes payable to others                 $_________ 
Installment account (auto)              $_________
Installment account (_________)         $_________
Loans on life insurance                 $_________
Mortgages on real estate                $_________
Unpaid taxes                            $_________
Other liabilities                       $_________

          TOTAL LIABILITIES.......$_______

 NET WORTH (Assets - Liabilities).......$_________

TOTAL LIABILITIES + NET WORTH =" ASSETS..$_________

There are trick formulas for depreciating fast or slow so as to reduce the income tax. The simplest formula is to take a thing that will last five years and reduce its value by one-fifth each year. When you start making a lot of money, your accountant will use the tricks. You can wind up with equipment and perhaps a building which is written off your book but is still useable. Financial statements are full of such lies.

A different problem is posed by things that don't depreciate fast enough to get them off your books. For example, land. Land usually increases in dollar value. Accountants don't like to acknowledge this. Their rule is: if there is no transaction, there is no change in the value on the books. So, many companies have hidden assets. They have assets whose value has increased far beyond their value on the books.

I was once robbed by this rule. I owned a piece of a company that had bought land in a fast-developing city. The land went up greatly in market value. When the company forcefully bought back my shares, they ignored the value of the land in determining the price of the shares. The accountants will have their way.

Now you know all you need to know to make up a balance sheet that will satisfy the accountants and the banks and the Internal Revenue Service. As your company grows, your bookkeepers and accountants and tax lawyer will take care of the complex details.

Make up a balance sheet for your personal property. Do it, it's a fun exercise and useful. Figure the depreciation and market or replacement values in any way that seems reasonable to you. No one is looking over your shoulder. Later, if you want to expand your company rapidly by borrowing, you will need just such a balance sheet to show the bank. In a later chapter, you will learn how to expand safely and rapidly with little or no borrowing.

You can use the balance-sheet form provided here. You may not have many of the items listed--you don't have the million yet. You can make a sheet just as accurate as any an accountant can prepare for you. He can only put down what you tell him.

It will be nice if your assets are more than your liabilities. They may not be. Ten percent of the people have assets less than their liabilities. They have a negative net worth. They expect to pay their debts, mostly due to installment buying, from future earnings. Inflation will help them if it doesn't ruin us all.

Even people with negative net worth can start companies--and often do. Not having money is one of the strongest incentives for getting rich.

YOUR $1,000,000 BALANCE SHEET

You will not have accumulated so much depreciation and you should have less of such liabilities as mortgages and loans. Your assets should be higher and your liabilities should be lower, if you follow the instruction in later chapters. Therefore your net worth will be greater.

The $1,000,000 Balance Sheet is based on annual sales of $285,000. This is calculated to allow you to live like a millionaire. After you study the Earnings Statement and learn the principle of using employees to make yourself a millionaire, you may wish to revise the Balance Sheet and the Earnings Statement to suit your own goals. (A retail store must have higher sales to make you a millionaire.) You may adjust your target to the level you think you need. Look at your target again after you have finished the book and understand the whole story.

At this point, some readers will feel that they are being cheated--that I am calling them "millionaires" when they have a company and an income too small.

It is a common illusion that millionaires are mysterious tycoons surrounded with bodyguards and tax lawyers. We read about Howard Hughes [and Bill Gates--1999 editing] and don't notice the owner of the little factory on a back street. He is not eccentric, doesn't show off his wealth, looks human, and has more money than he knows how to spend.

In the beautiful village on the Wisconsin River where I came from and in the town where I now live, and in your town, there are printing shops. The owner of the Wisconsin village shop writes, sets type, prints, and mails the town paper. He prints nothing else. The California shop prints everything except newspapers. Neither has employees. When I asked each owner why he didn't have employees to help him do more, they both replied that "employees were too much trouble." Each business owner is making a bare living.

Also in my California town, and up the Wisconsin river a few miles, are printing shops with a different way of doing business.

When George Woodman decided to get out of the electronic industry, he studied the small printing-shop business. He chose to start with used equipment and used employees--both had experience and cost little. He knew the value of employees in creating wealth. In a few years he developed a printing business with 12 employees.

You know that these employees are the source of wealth and you will learn in the next chapter how much 12 employees are worth to the owner of the company. George Woodman is rapidly becoming a wealthy man.

The company owner's income is much greater than it seems, and the government provides the company owner with tax advantages which add still more to his income. In this chapter you learn about true owner income. In a later chapter you will learn about the government's contributions.

First--the Balance Sheet. Look at the model sheet. It has assets divided into Current Assets and Plant and Equipment. The Current Assets are moneys you can get your hand on quickly. The Accounts Receivable may have a few bad debts. Make allowance for them. The Inventories are supposed to be saleable at the value you have placed on them. The sale may never take place at that price. Inventory lies are commonplace.

ASSETS          % of    Based on sales | Your preferred
                  sales   of $ 285,000   |  target      
  CURRENT ASSETS                         |
                                         |
  Cash and equivalents  $17,000          | _______
                    6%                   |
  Accounts receivable    37,000          | _______
                   13%                   |
  Inventories            40,000          | _______
                   14%                   |
  Other current assets    6,000  100,000 | _______ _______
                                         |  
 PLANT and EQUIPMENT                     |
                                         | 
  Plant and equipment   150,000          | _______
                   53%                   |
     Less depreciation   65,000)         |(_______)
                   23%                   |
  Other assets           25,000  110,000 | _______ _______
                    2%                   |
          TOTAL ASSETS.........$ 210,000 | _______
                                         |
LIABILITIES                              |
                                         |
 CURRENT LIABILITIES                     |
                                         |  
  Notes payable          26,000          | _______
                    9%                   |
  Accounts payable       29,000   55,000 | _______ _______
                   10%                   |
  LONG-TERM DEBT                         |
                                         |
   Mortgate               52,000         | _______
                   18%                   |
   Long-term loans         5,000  57,000 | _______ _______
                    2%                   |
         TOTAL LIABILITIES.....$ 112,000 |         _______
                                         |
NET WORTH                                |  
                                         |
   Owner's investment      1,000         | _______ 
                 0.35%                   |
   Retained earnings      97,000         | _______
                   34%                   |
         TOTAL NET WORTH...... .$ 98,000 |         _______
                   34%                   |
TOTAL LIABILITIES & NET WORTH..$ 210,000 |         _______
                      73%                |

        Based on $ 285,000 sales         |     Your
                                         |    target   
                                         |
SALES                          $ 285,000 |       ______
                                         |
COSTS                                    |
                                         |
 Labor             64,000                | ______
                                         |
 Material          78,000                | ______
                                         |
 Overhead          37,000                | ______
                                         |
 Interest on Loans  6,000                | ______
                                         |
 Growth Expenses   51,000        239,000 | ______ ______
                                         | 
REPORTED PRE-TAX INCOME           46,000 |        ______
                                         |
INCOME TAX                        17,000 |        ______
                                         |
OWNER REPORTED AFTER-TAX INCOME   29,000 |        ______
-----------------------------------------|--------------
                                         |
*GROWTH OF VALUE OF THE COMPANY  51,000  | ______ ______
                                         |
*OWNER'S TOTAL AFTER-TAX INCOME  80,000  |        ______
                                         |
*OWNER'S EQUIVALENT NET-ASSETS $1,000,000|    $1,000,000
                                         |
* usually omitted from conventional Earnings Statements

                            First Year        1978     

SALES                      $ 5,368.64   $ 2,361,000,000
COSTS and EXPENSES
   Cost of goods sold        2,666.38     1,106,000,000
   Research and Development      0.00       204,000,000
   Marketing                   410.12       362,000,000
   Administrative and General  649.02       291,000,000
                             3,725.52     1,963,000,000
INCOME before taxes          1,643.12       398,000,000 
TAXES                            0.00       195,000,000
NET INCOME                   1,652.89       203,000,000

                            First Year     March 1999  

SALES                      $ 5,368.64   $ 47,064,000,000
COSTS and EXPENSES
   Cost of goods sold        2,666.38     
   Research and Development      0.00     
   Marketing                   410.12     
   Administrative and General  649.02       
                             3,725.52     
INCOME before taxes          1,643.12      4,091,000,000
TAXES                            0.00       1,146,000,000
NET INCOME                   1,652.89      2,945,000,000

Accounting for the Millionaire's Secret Source

The profits of companies are small--a few percent. The growth of most companies exceeds their reported profits. A few companies grow rapidly and make their founders wealthy while operating at a loss--profit is not necessary. The profits reported on the bottom line certainly are not the source of wealth and not the source of company growth.

Where then does all the wealth come from? Somewhere in the system there is a source. We already know what it must be: employees. We must find where that source is concealed in the books. To do this, we must rewrite the financial statements.

Because of the tax laws, the accountants play all kinds of games with every item on the statements. This makes such statements obscure to the untrained reader. The goal is to pay as little in taxes as possible. This is proper and legal.

In the words of the distinguished Judge Learned Hand:

  "Any one may so arrange his affairs that his 
   taxes shall be as low as possible.  He is 
   not bound to choose that pattern which will 
   best pay the Treasury.  There is not even a 
   patriotic duty to increase one's taxes."

                                       Finished
                             Worksheet Statement
GROSS SALES (less sales tax)  $ 285,000  285,000

INCOME TAX collected from customers       17,000

     Net Sales of products or services   268,000

NECESSARY COSTS

    Owner's Salary    $ 20,000

    Labor               64,000
 
    Material            78,000

    Overhead            40,000

    Interest             6,000   208,000 208,000

COMPANY PROFIT (workers' surplus) 77,000  77,000

USES of WORKERS' SURPLUS

    Reinvested for Growth         51,000  51,000

    Unused Profit                 26,000   9,000

OWNER's SALARY drawn              20,000  20,000

OWNER'S REPORTED PRE-TAX INCOME   46,000
    INCOME TAX                    17,000
OWNER's REPORTED AFTER-TAX INCOME 29,000  29,000
------------------------------------------------
Total contribution
  to Net Worth of Owner: Company Growth   51,000

                         Take-home Salary 20,000

                         Take-home Profit  9,000

         OWNER's TRUE AFTER-TAX INCOME  $ 80,000

The Truths About Your Profits

THE FIRST TRUTH -- PROFIT AS THE GOAL

Kenneth Mason, the president of the Quaker Oats Company, tells us the first truth about profits:

Profit, at least long-run break-even, is essential to the survival of a business. It is not the purpose of the business.

The purpose of your business is to produce something of value to the people. If it does not do so, it should be shut down. It is a misuse of natural resources and a misuse of the labor of its employees. The public will shut it down in due course by refusing to buy its useless product.

Let's you and I shed, once and for all, this foolish myth that the goal of business is to make a profit. The yardage, the error is common enough among economists, bankers, and businessmen who have not yet stopped to think.

You know that a business cannot operate for long with a loss. If the money flowing out exceeds the money flowing in, the business must soon close its doors. This does not mean that the purpose, the goal, is profit.

The goal of a football team's offense is plainly marked on the field. Its goal is not the gaining of yardage. Many a football game has been lost by an offense that gained much yardage and never reached the goal. Like yardage, PROFIT IS NECESSARY -- IT IS NOT THE GOAL.

THE SECOND TRUTH -- THE SIZE OF PROFITS

The public perceives that businesses are growing, that they have money to buy one another, that the banks are putting luxurious buildings on every street corner, and that company owners are getting rich.

The profit the public perceives is not the profit shown on the financial statements. It is not the profit reported to the income-tax collector.

Here are some conventional profit figures for various kinds of business, as published by a businessman's magazine, Dun's Review:

TYPE OF BUSINESS             PROFIT
                        percent of sales 
----------------------------------------- 
Dairy Products                1.10
Bakery Products               1.86
Office and Store Fixtures     2.32
Amusement & Sporting Goods    3.20
Confectionery                 3.43
Auto Parts, Accessories       4.14
Special Industry Machinery    4.58
Laboratory Instruments        4.59
Cutlery, Hand Tools, Hardware 4.79
Communication Equipment       4.79
Books, Publishing, Printing   5.03
----------------------------------------

A better measure of profit would be the increase in the net worth of the company owners. This should then be divided by the owner's investment to get a fair percentage measure of profits. Neither the total benefits of the owners nor their actual investment is easily determined.

One measure of owner benefit is the stock market value plus the dividends received. Over the last 37 years the sum of the increase in stock- market value and the dividends adds up to an annual profit to the owner of shares of corporations of 10.4%.

This 10.4% is the average of 500 companies listed by Standard and Poors and includes only well- established corporations. They are not representative of small companies, such as yours. The owner's profits in smaller and newer companies are much larger.

It is noticeable in the list at the left that the profits are lowest in those businesses that are the most stable--those that deal in necessities. Because of the steadiness of these businesses, their managers can keep the profits low without danger of slipping one year into a loss.

The control of profits at a minimum is necessary. Excess profits invite competition. Half of such profits go to the government as tax. If the money is spent for growth, the government doesn't get it.

It is not practical to operate at exactly a zero profit. In a bad year your company might then be forced into a loss. This would worry you--and your shareholders, if any.

A persistent loss could, of course, drain the company's capital, stop its growth, and finally kill the company. The ideal is to operate at a very low and steady profit. Managers have learned to do this very well, as the profit figures in the list above show.

It is because of the increasing ability of managers to control their profits that profits have been steadily decreasing during the many years of stable and growing economy since 1945.

Real profit is much greater than the reported profit. Real profit is the surplus of money from sales after all necessary costs have been paid. These costs are those incurred in selling, producing, and delivering the product. The costs of developing the product are necessary. The costs of developing additional products are not necessary.

Real profit is the money that the manager can spend as he sees fit.

The manager must pay the costs of selling and delivering the company's products. He can decide as he sees fit how money is spent to make the company grow. These decisions are rarely revealed in the company's financial statements, except for a few incomplete items.

One estimate of the real profits can be made by adding the reported profits to the growth rate. This assumes that the money spent for growth is 100% efficient. It is not, particularly in large companies.

Large corporations are wasteful. They misspend money because the top managers cannot possibly know what is going on--the company is too big.

Assuming a realistic efficiency of 50%, the true profit is the reported profit plus twice the growth rate.

For example, the Band-Aid company, Johnson and Johnson, reported a profit of 8.5% on sales and has consistently had a growth rate of 18% per year.

Such a well-managed corporation as Johnson and Johnson is probably quite efficient--for a giant company. You can do better with your small company.

Here is how the growth of Johnson and Johnson may have been financed, although it doesn't show in its financial statements:

     Profit reported        8.5 % 
     Paid dividends         3.5  
       Reinvested           5 
     Profit not reported   31 
       Total real profit   36 
         efficiency ="      1/2 
     Growth rate, actual   18  % 

The data is inadequate and the calculation can be criticized. The essential point remains: TRUE PROFITS ARE FAR GREATER THAN WHAT IS REPORTED. In your company you will have all the facts--and all the profits.

HOW TO MAKE HIDDEN PROFITS

You can operate your company in either of two ways. You can make as much profit as possible then invest that profit in your company to make it grow. Or you can spend money for growth, increase your costs, show a small profit, and get rich.

             GETTING RICH QUICKER

                          High     $1,000,000
                          profits    method

                  Sales $ 285 000  $ 285 000
       Necessary costs   -188,000   -188,000
          True profit      97,000     97,000
       Growth reinvest               -51,000
       Reported Earnings   97,000     46,000
          Income tax      -41,000    -17,000
       After-tax profit    56,000     29,000
       Owner's salary     -20,000    -20,000
       Company profit      36,000      9,000
       Growth reinvest     36,000    +51,000
        Owner's salary    +20,000    +20,000
        Owner's income    56,000   80,000

In the first example, the reported earnings were maximized. As a result, the income tax was also maximized.

The high tax left $56,000 to be used for the owner's (or manager's) salary and only $56,000 to be reinvested for growth.

The second case reduced the reported earnings to $46,000. The income was thereby cut to $17,000 and $29,000 was left for the owner/manager.

In the second case there was $51,000 reinvested for growth. The second case is the millionaire's way.

Counting salary, company profit, and money reinvested, the millionaire has an income of $80,000. The high-profit owner has an income of only $56,000.

The difference is even greater than it appears. As a later chapter shows, keeping your profits in the company will give you a real money bomb. Your wealth will increase explosively.

But there is a problem.

You can't buy heavy Capital equipment buildings, or land with the $51,000 you would like to reinvest.

Long-life things are not expenses on your Earnings Statement for tax purposes. They are not used up in the year in which they are purchased. Their cost must be spread over their life. Only the interest on money borrowed for such purchases and the depreciation and maintenance of such properties can be charged as expenses.

Use your company's after-tax profit for capital expenditures. Borrow--to buy the largest items, especially land and buildings--but only if necessary.

Spend your before-tax growth money on the development of new products. Develop another product line. ADVERTISE. Use the capital facilities you already have, but on added new products. Keep your fixed costs to a minimum--learn about fixed costs in the next chapter.

Small items may be purchased and charged as expenses. It is customary and permissible to write off all small items as expenses because it is not practical to keep track of them as capital. This is true even if they have a long life.

Small hand tools are not classed as capital items. They get lost too easily. Usually a company sets a rule such as "over $200 is capital." Items costing less are charged as expenses. With such a rule you can buy small things and assemble them into a big machine. The pieces and labor are expenses--a part of your $51,000 of growth expenses. But if the machine is too well built, the Internal Revenue collectors may claim that it's capital.and disallow the expense, increase your profit, raise your tax, and make you less rich.

Things can get complicated, you see. When your company is growing and making a lot of money, you will have accountants to fix your books, honestly of course.

Action

2. Using the ideas in this book, plan how to insure that your company makes a profit so it can reach its goals.

3. Make separate lists of the expense and capital investment items for your company. Set up separate accounts for each.

4. Study the two ways of reinvesting in your company--before or after reporting earnings. Plan the best way to reinvest for growth.

The Value of Your Company

Now you need to know how a company acquires value. You may be surprised to learn that making a profit is not even necessary to make your company valuable. You may be surprised to learn that your company's value will not be dependent upon owning a building or land or equipment. You may be surprised to learn that a company may be worth a million dollars even though it has little Book Value or Net Worth.

THE VALUE OF YOUR COMPANY

Some buyers of common stock want dividends. As an investment alternative to bank accounts and bonds, the value of a company depends upon the dividends paid or expected in the future. You should not pay dividends. Spend the earnings for growth before taxes for growth expenses, after taxes for capital equipment. Then sell your company to buyers who want growth. They pay more than do dividend investors.

Hewlett-Packard paid its first dividend twenty-five years after its founding, and still pays modest dividends. Every one of those first twenty-five years was profitable. By the time the company paid its first dividend, the founders were each worth at least $50,000,000. Don't pay dividends and get rich quicker.

The lesson to you, the owner of a small business that has no stockholders, is that you should not take home your profits. Leave profits in the company where they are safe from the tax collectors and will make your wealth grow.

Your company will be valuable because it makes money for the owner--or may do so in the future. Your company can make money by surviving and growing, even if it doesn't make a profit. Of course, persistent losses will deplete your company's assets. To survive, your company must break even over the long run, but you do not need to make a profit every month--or even every year.

PROFIT AND COMPANY VALUE

A company is a thing of value, even if it's losing money. I'm not recommending that you deliberately own a loser. It's better to make a profit. You can sleep better, pay your bills on time, and borrow money more easily when a rapid increase in sales requires more cash. For you to be a millionaire, you can own either a small and profitable company or a larger and losing company. Profitable is easier to sleep with.

Here is a graph of the market value of companies versus their reported earnings. You can see that there is little relation between the value of a company and its profit. The losing companies grouped at the left seem to be valued as if they were profitable. Many losing companies are worth more than profitable companies of the same size. A LOSER WITH HOPE IS WORTH MORE THAN A WINNER IN TROUBLE, WHETHER THE TROUBLE IS REAL OR IS IMAGINED.

You have good reason to wonder what makes a losing company valuable. If it is not profits, if profits are not even necessary, then makes a company valuable? You may think Assets or Net Worth are the answer. Let's examine these for a relation to the value of your company.

BOOK VALUE AND COMPANY VALUE

Net worth, commonly called Book Value, is a number which balances the Balance Sheet, nothing more. It is the difference between two large numbers, one of which (Assets) is largely a figment of "generally accepted accounting principles," not a reality. Buildings and equipment may have been depreciated too slowly and be worn out while still nor low. Look at the scatter of on the books--like the tracks of the Penn Central, whose maintenance was not a part of the grand plan of the railroad management. High profits will increase your Net Worth and hurt your company.

You will see here a graph showing lack of relation between the Net Worth or Book Value and the market price of a company. This is a random stocks in the fall of 1976 when the stock market was neither high now low. Look at the scatter of points. The market does not depend on the Book Value. The price of the shares ranges from five times the Book Value to one-fifth of that value. For example, if you know the Book Value of a company is $10 per share, the share scatter of points suggest that the market value of the shares may be anywhere from $3 to $30. It is futile to give your company a high Net Worth in the hope that it will sell for a higher price. There must be something else that makes your company valuable.

EMPLOYEES AND COMPANY VALUE

In fact, the average market value of a company of the kind that you own is about $40,000 per employee. This is a conservative figure in these days of a giant government devaluing the dollar. The figure varies from industry to industry. It is higher for small companies, which are more efficient than the giants. It is lower for retail stores, whose employees too often do too little work. It is higher for well-managed retail stores that have a system and have employees that work.

For a company making small, technological things, the figure is higher. The value of Hewlett-Packard has ranged from $40,000 to $90,000 per employee. In 1980 they have 55,000 employees and a market value of about $3.7 billion. This is a company value of about $67,000 per employee.

A company with 25 employees should be worth $1,000,000. This $40,000 "rule-of-thumb" will give you a good idea of the worth of any business. But the value depends upon how you manage your company, and sometimes on the whims of the company marketplace.

Let's look at some examples of the actual values of some companies.

In the Statistical Abstracts of the United States, we learn that in 1976 the average manufacturing employee produced $59,000 and was paid wages of $10,500. Allowing for fringe benefits of $2,500, they produced a surplus of $26,000 apiece. What would you be willing to pay for a machine that produced such a surplus over what it cost?

The average retail worker sells about $40,000 per year of goods which were purchased wholesale for about $20,000. With total wages and fringe benefits amounting to $7,000, they produced a surplus of only $15,000--half that of a manufacturing worker. Do not expect to be worth a million with 25 employees in a retail store. Plan to have a chain of stores or franchises. In a later chapter you will learn to SELL franchises--not to buy one.

Suppose you "own" a manufacturing employee. He or she will produce a surplus or true profit for you of about $26,000 each year. This is equivalent to your having invested the sum of $525,000 at 8% interest. Having employees is like having money. Having employees is as good as having savings in the bank. Use your employees' surplus to expand your company and get more employees.

To be sure of being able to sell your company for $1,000,000, you should have about 25 employees worth $40,000 apiece. You do not need so large a company to just live like a millionaire. Ten or fourteen employees should be enough.

The reason you need a bigger company if you are going to sell it and retire is that owning a company gives you certain privileges you will lose when you sell. The owner of a company has privileges which are worth a great amount of money. A company with as few as seven employees might allow you to live like a millionaire. A company of 25 employees, after being sold for $1,000,000 will do the same for you when you retire.

When my friend, Bob Denman, was making his product in his garage and had no employees, he took no vacations and worked 14 hours a day and seven days a week. All of his travel and entertainment expenses came out of his own pocket. He didn't travel much. When he had a few employees he worked less, traveled when he wanted, and entertained out of the company expense account (tax deductible). Now, with 43 employees, he is long past the $1,000,000 mark. His employees make him worth two million and the government pays half of all his personal expenses that he can relate to his business. Rather than sell, he is turning the management of his company over to his employees and living the life a millionaire deserves. You can do the same.

But don't do what Dan Newcomb did. I was asked to invest in his company and studied it thoroughly. He had an excellent consumer product: needed, offering outstanding features, easy to sell for a profitable price. His prospectus showed that he had a sales rate of $85,621" per year and expected to have a rate of $119,544 in the next quarter. He offered a part of the corporation at a price that corresponded to a total value of $240,000. Because the company could grow rapidly, this price was reasonable. I didn't invest. No one else would. The company went out of business. The reason: there were no employees. Dan did everything himself. He had not learned to use employees. A company is a group of employees--that's what the word "company" means. Employees are the source of wealth.

The free enterprise system is the best system for employees, even though it makes employers rich. The surplus the employees create goes mostly back into company growth and more jobs.

More jobs means more competition among employers to hire good people, and this means higher wages. Other systems (socialist, communist, fascist) harm the workers. Because their government planning and operation of the economy is ineffective, the standard is lower under such systems. Because such governments must control everything, there is little freedom.

Free enterprise lets people be free, provided only that they have jobs. You can help by having more employees.

EMPLOYEES - THE SOURCE OF WEALTH

                                         Per Employee  
                        $millions    |    Company
                       Sales Employed|  Sales  value
Osmonics                $3.0     75  | $40,213  $96,700
Sonic Development        3.1"     40  |  76,300   67,500 
Techtran Industries      3.1"     79  |  39,190 
Nutrition World          4.2    160  |  26,344 
LRC                      4.3    114  |  37,544   64,900 
Teleconcepts             4.4     47  |  92,957 
Time Sharing Resources   4.6     80  |  57,975   63,800 
Tratec                   5.2     92  |  56,783 
Galaxy Oil       **      5.9     44  | 134,182  434,900 
Gallon Petroleum **      6,8     39  | 173,846 
Norstan                  6.8    225  |  30,427   42,200 
Raycomm Industries       7.3    304  |  23,937    4,600 
Custom Alloy             7.6    191"  |  39,618   14,100 
Med General              8.3    148  |  56,047  182,000 
Dranetz Engineering Labs 8.4    182  |  46,132   76,400 
Par Systems              8.6    218  |  39,596   36,700 
Compact Video Systems    8.7    169  |  51,651"  141,000 
Salem National           8.8    139  |  63,165   33,000 
Thermal Industries       9.9    470  |  21,162 
Modular Ambulance       11.4    168  |  69,101

                   Johnson & Johnson        Percentage
                                                of sales
SALES 
Gross             $ 5,514,564,000               100%
 less income tax      215,156,000 5,199,408,000   6  94% 

COSTS
Employees (67,000)  1,101,585,000                31
Material & Services 1,687,575,000                48
Capital               311,907,000 3,101,063,000   9  88%
NET EARNINGS RETAINED               198,545,000       6% 

                                             Percent
                                             of sales   
 SALES
  Gross              $ 285,000              100 %
    less income tax     17,442   267,558      6    94 %
 COSTS
  Employees (5.4)       89,319               31" 
  Material & Services  136,857               48
  Capital               25,292   251,468      9    88
 NET EARNINGS RETAINED            16,090            6

     Owner's salary               20,000            7
     Increase in company's value  43,910           15
 OWNER'S TOTAL INCOME . . . . . .80,000        28 %
 

3. Compare your company' s figures with those percentage relations based on Johnson & Johnson on the previous page.

Your $1,000,000 Money Bomb

Your company is capable of explosive growth. The littlest, faltering company has the potential of making its owner a millionaire. A company that Costs little to start and little to run has the greatest potential. If little money is needed to start, little money is needed to grow. A company that needs little money to run can stay out of the hands of bankers and speculators. You can retain owner- ship, avoid financial risk, control your company, and get rich. What you need to know is how to finance the growth.

$1,000,000 FROM NICKELS

Many, perhaps most, of America giant companies started small, in someone's house, garage, or basement. The Mattel toy company was started at home--making dolls. Hewlett-Packard started in Bill Hewlett's small garage. Firestone started in Firestone's kitchen where he cooked rubber on the kitchen stove. The examples are endless. You don't need to own a giant corporation.

You can start your small company on the growth path. If you start getting too rich, you can get out. The rate at which you get rich may amaze you.

In three years, Wally "Famous" Amos grew a $3,000,000 business with 100 employees. His product is a cookie: a chocolate-chip cookie. People don't want cheap cookies. They buy his high-priced cookies as fast as he and his 100 employees can make them. Wally Amos was surprised when he got rich.

He tells us he "just wanted to make a living." Surprise by riches is common among millionaires who didn't know the secret source of wealth.

Most American millionaires were surprised when they found themselves getting rich. They just wanted to make a living. They hired more employees without knowing that employees are the Secret Source of wealth. You have the advantage of knowing. You can plan the growth of your company better and get rich quicker.

Whether you are making an established company grow or starting a new company, you may have to depend on money from sales to purchase the materials and labor you need to make the next lot of product. As fast as the customers pay, you can make more product or undertake to perform more services. Later you can show your books to your banker and get money to speed up the process--but you will not need to.

When Hewlett and Packard were starting their billion-dollar company, they had to pay cash. An acquaintance of mine, the president of a company, told me how Dave Packard would come to his plastics company with cash in hand to buy knobs for his instruments, his product. Dave Packard took his knobs in a brown paper bag back to Hewlett's garage to make more instruments; to pay for more knobs.

Using income to finance the next production is called "bootstrap" financing. By this method a company can grow "with no visible means of support." It grows with no outside money, no bankers, no investors, with the founder/owner keeping the company entirely under his control. The owner increases his wealth. The rate of increase can be explosive.

The sales price of your product will be about twice the necessary production cost. Your financial statements will not reveal this because costs will be inflated by money spent for growth.

For the 900 big corporations listed by The Value Line Investment Survey, the average price is 1.4 times that inflated cost. Because your small company will be better managed and more efficient, you can do better, even if you hide no more profits than they do.

     Net sales                 $1,433,510  100 %
     Cost of products sold        734,895  -51 %
                               ----------  -----
     Gross margin                 698,615   49 %

     Operating expenses:
      Research, development
       and engineering            171,195  -12 %
      Marketing and selling        87,627  - 6 %
      General and administrative   99,634  - 7 %
                               ----------  -----
                                  340,159   24 %

     Interest expense              11,883  - 1" %
     Interest income               25,950  + 2 %
                               ----------  -----
     Income before taxes          354,226   25 %
     Provision for income taxes   109,810  - 8 %
                               ----------  -----
     Net income                $  244,416   17 %

Accounting is a clever business. Nowhere in this statement do we see either the purchase of new production equipment nor the depreciation of the old. The depreciation is included in the Cost of Products Sold. The purchase of new capital assets appears only in the Balance Sheet. Where did than money come from for the capital purchases?

There are various sources. One way is by borrowing it, which increases liability. Another is to sell stock, which reduces the value of existing stock. To the extent that the stock market is pricing the stock above a realistic value, this new stock really is freshly printed money. Thirdly, income can be reinvested. This is what most interests us here. If net income, i.e. "profit" is 15 percent and is all reinvested, the company should grow at 15 percent each year. This bootstrapping can make your company grow beyond your wildest dreams. Dave Packard remarked that when he and Bill reached sales of ten million, he thought that was it: a great success in creating company and big enough. Only later did he realize they were on a growth path they could ride to billions.

THE WHEELS OF YOUR COMPANY

Your company has two wheels. One carries cash in one direction. The other carries materials, labor, and your product in the other direction. The outer wheel starts with your first production--either product or service. production goes into inventory, then to the customer.

The inner wheel circulates money. Your customers put money into your cash account, and into your tax account. With the money, you buy more material and labor. You are a tax collector. Let your accounting department pay the taxes from the money your customers pay you. Set your prices up to furnish this money. Don't worry about taxes. You don't pay them. You just collect them.

Companies collect taxes from their customers and deliver the taxes to the government. The tax-collection function has nothing to do with the operation of your company, except that your bookkeeper or you must transfer the money from your customers to the government.

A later chapter discusses taxes in detail.

The amount of your company's income tax is based on your profit. You will collect more taxes than you need to if you let your profits get too high. If you collect more taxes from your customers than do your competitors, your price will be higher and you may lose business.

Keep your profits as low as possible, but have enough control so that you can quickly make adjustments and show a small profit in each month. In a later chapter you will learn how to keep your costs controllable. One important controllable cost is the cost of advertising. Advertising is too often neglected and needs special attention.

YOUR COMPANY LOCOMOTIVE

Mr. Wrigley, of chewing-gum fame, was asked why he advertised so much when he was already selling more gum than anyone else. He explained: "Advertising is the locomotive that pulls the train. When the locomotive is running smoothly, the passengers don't even know it's there. If the locomotive stops, the passengers know it immediately."

It is advertising that makes the wheels of cash and product rotate. Somehow, one way or another, your customers must learn that you have a product which they should buy. When business is good, it's easy to fall into the trap of cutting your advertising expenses. Nothing is more dangerous than to stop advertising either because business is too good or to cut costs when business is bad.

An acquaintance of mine had a thriving hearing-aid business. He sold it. The new owner saw that business was good, so he stopped advertising. In just a few months his business was in trouble. He didn't understand why and begged my friend to come back and help him.

Advertising may well be the first step in starting a business. Many businesses have been started by first running an ad to see if anyone wants the product. When there is a good response, the entrepreneur apologized for the slow delivery, finished his product design, and started production.

My friend, Bob Denman, started making a product in his garage. To build sales, he visited schools and donated free samples for the students to use. Later, the students went into industry and ordered the product they had learned to use. The advertising paid off, a million dollars plus in fact.

To make a million you have to get out to the customer. As Denman says, "no bee ever got honey by staying in the hives."

While advertising is the engine that makes the wheels turn, it is the employees who do the work and generate the surplus for you. If you get things set up right, you do not need to be present at all in your company. Just collect the money.

In my town there is a book store. On the last Friday of the month the owner makes an appearance. He looks the place over, collects the money, and disappears. He has his employees in place to both manage and operate the company.

You now know the source of the book-store owner's monthly check: his employees. You may wonder how he got so many employees that he no longer needs to work. He has a very large bookstore. To be a millionaire in retail, this is what you need. But, the question then is: how does any business get so big? You see many businesses around your town that never grow. There must be a secret of growth which they don't know about.

The secret of growth is feedback, POSITIVE FEEDBACK. You saw an illustration of positive feedback in the table that showed how a sale could pay the costs of a larger sale--and so on for rapid growth. Production leads FORWARD TO sales. Sales FEED BACK MONEY to finance larger production.

But that is only one of the ways the idea of positive feedback can make your company grow. If you understand positive feedback, you will not take home as much profit, but you will get rich quicker.

POSITIVE FEEDBACK -- THE GROWTH SECRET

The drawing shows the feedback paths of your company. The heart of your company is the "total necessary cost." This is the cost of keeping your business going without growth and without profit.

After subtracting your necessary costs from your gross sales, there remains the gross profit or "employees" surplus." The gross profit is used for many things: cost reduction, quality improvement, advertising, and new product development. These uses should be sufficient to absorb almost all of the gross profit and keep it out of the hands of the government.

Positive feedback is explosive. A bomb is an example of positive feedback. A slow fire in a closed place heats itself and speeds up the rate of burning. The faster burning raises the temperature higher and again speeds up the burning. As the fire spreads more heat is fed back and the thing blows up. Positive feedback makes bombs. You can have a money bomb.

If the output increases the input, there is positive feedback. For example, if the profit of your company is used to increase advertising and increase the input (the sales), the output is increasing the input. There is then more output (profit) to pay for more advertising. And so on.

Advertising is not the only way to use positive feedback. You can use your output to develop new products, to increase the quality of your products, and for cost-reduction measures. Each of these uses of profit will increase your profit. Remember to spend your profit before it shows--before the government sees it and wants half.

As your uses of gross profit increases your sales, you will have more gross profit to use. You will be busy spending money to get more money to spend. What will happen, as you now know, is that your employees will be generating wealth. You will be using that wealth to make your company grow.

The test of good feedback is that it must produce more than it costs. An amount of money spent on quality improvement must produce more than that amount of increased gross profit. An amount of money spent on advertising must produce sales which yield more than that amount of gross profit. An amount of money spent on new products must be repaid by a larger increase in gross profit.

One of a company manager's most important jobs is to provide and to control these feedbacks. There is always the temptation to stop the feedback and take home the profits.

If you take home the profits, the government will mug you on the way home and try to take half. You will have left an immediate cash income and you won't get rich quick.

By taking your profits out you will slow the growth of your company. A company that is not growing is in danger of shrinking. Nothing stands still. A stagnant company loses value by standing still.

POSITIVE FEEDBACK and GROWTH are what you need. Take action to get them.

Action

2. How many products can you deliver for the money received from 100 sales?

3. Take action to shorten the turn-around time.

4. Take action to increase the prices of your product or service and to reduce the costs. Use quality and service as the basis for the high prices you ask.

5. Review your advertising program.

Make sure you are testing your advertising whenever possible.

Keep records of the costs and the results of each advertising effort.

6. Act immediately to improve your advertising. Make certain all of your potential customers know you exist.

7. Review the ways in which you are using your employee's surplus to make your company grow. Act to improve your feedback.

Your Management of Company Money

Our business is booming.
Profits are high and rising. Our sales volume 
has risen by over fifty percent this month. 
Profits are up by sixty percent.
New orders have reached a record high.  

Unfortunately, we have no cash to meet the 
payroll Friday and will have to shut down.  

CASH

You buy a year's supply of material for a bargain price. Your advertising has worked well, so you order more. Everything is going great. You are getting rich quick.

Suddenly: you are out of cash, out of business, and not rich at all. You didn't know about CASH MANAGEMENT.

More companies get into trouble by running out of cash than for any other reason. A very profitable company can run out of cash. The best product is just the product most likely to deplete your cash and get you into trouble.

Cash is not the only thing you need to know about money management. You need to know about the many BREAK EVEN POINTS. Many company founders never stop to calculate their break-even points and can't understand why their company is in trouble, nor why the bank won't lend them money. You must understand break-even points--all of them.

Finally, you must know how to set the RIGHT PRICE for your product. Prices are not determined by costs or by supply-and-demand or by competition or by price-fixing or by price leadership. They are influenced by all of these--but usually set by whim.. You must strive to do a little better. Pricing requires continuous attention by the company owner, YOU.

Your American Millionaire's Method is to have employees generate a surplus for you, the owner, to re-invest. You will use feedback. The profits from each sale will pay the costs of producing many more sales. To do this requires a controlled flow of cash from your customers to your employees and suppliers. Controlling that flow of cash requires a CASH BUDGET.

THE CASH BUDGET

You need a realistic cash budget. You must review your cash position weekly, if not daily. This requires that you keep up-to-date books. The more successful you are, the more necessary is the control of cash.

Positive feedback depends on a flow of cash. But the sources of cash are not always dependable. Customers can be slow to pay. Banks can back out of promised loans. Suppliers can demand cash on delivery. Explosive growth demands more and more cash, but you shouldn't have excess cash on hand, doing nothing.

If pay-day comes and you don't have cash to pay your employees, you'll lose your secret source of wealth-and it will be no secret.

I have had personal acquaintance with companies that had severe cash problems. One was a fast-growing California electronics company. The owner told me of his adventure on Wall Street, desperately seeking cash to save his profitable company. He was confronted by young Harvard Masters of Business Administration" who had no comprehension of how a small company grows. Their training had been directed to the management of giant corporations. They were mainly interested in getting a "piece of the action." He gave up in disgust, went back to Los Angeles, pulled hard on his bootstraps, and survived.

I was the first customer of a Santa Clara County "silicon valley" semiconductor equipment company. One day I received a telephone call form Wall Street (a young MBA) asking about the company, which was seeking cash.

The company was growing rapidly and running out of cash. They got it and grew into a large company. One of the things they had to do was visit their customers and ask for money.

Their newly-hired controller appeared in my office one day. He wanted to negotiate some cash for a piece of equipment they had not yet completed. We negotiated a completion schedule and a discount. In return, I went to my accounting department and got them a check for the work already completed. Without such resolutions of their cash shortage, they might not have been able to stay in business. They were growing and profitable--and in danger of not meeting their payroll.

    1999 NOTE: The company was Applied Materials.     In 1980 I did not want to name them.

Profit isn't enough to insure survival. You must have cash when you need it. The smart company owner keeps a cash forecast--in his head or on paper.

On paper is better:

                                 January February March

Cash on hand, beginning of month  $  700 $ 1,200  $ 900
Cash receipts during the month     4,300   5,100  6,000
         Total cash available      5,000   6,300  6,900
Cash disbursements during month    3,800   5,400  7,200 
Net cash at end of month           1,200     900   (300) 
Loan received during month         --O--   --0--  1,000
Cash on hand at end of month     $ 1,200   $ 900  $ 700

     Materials        Rent 
     Payroll          New Equipment 
     Advertising      Owner--cash draw

    Cash Sales 
    Collections of Accounts Receivable 
    Other Cash Sources

Our famous bootstrap (feedback) company, Hewlett-Packard, which avoids loans like the plague, once saw its cash position drop by twelve million dollars in three months.

The customers were the cause. They were suddenly slow to pay their bills. The government had tightened credit to hold back the inflation caused by deficit spending for the Vietnam war. The customers were using their suppliers as sources of cash--by withholding cash from them. The discounts for prompt payment were not enough to discourage the practice because the interest rates and rate of inflation were as high as the discounts.

Terms...How the money will be used, in detail. The security and the agreements as to how the company will operate (insurance carried, cash kept in the bank account, repayment schedule).

Resumes...The qualifications of the owner and key employees--the source of the wealth with which to repay the loan. Credit references.

Personal Financial Statement...The owner of a privately-held company is responsible for its debts.

Business Plan...A detailed description of the business, its history, its competition, its growth potential, its sales plan, its method of operation, and its capabilities.

Profit-and-loss Statement...Previous and projected. Balance Sheet...Current and projected.

Cash-Flow Statement... Previous and projected.

If you establish credit references for your personal money and develop the required accounting statements as you go along, you will be prepared to go to your bank and get a loan when you need it.

You can get a loan even if you don't have a profit, but you must at least be able to show that you know your break-even points. Before getting to them, what about getting cash without a loan?

Rather than borrow money, you can sell a piece of your company. To do so, you must complicate the legal structure of your company. You must have a partnership or a corporation. If you sell shares, you get involved in the laws controlling the sales of securities. When you are done, you will own less of your company.

Success may force you to sell part of your company. You may need far more money than you can borrow. The trick is to get cash by selling a part of the company, but still keep firm control of your company.

You will need good and honest lawyers and accountants. Pay them for their work. Stay away from those who want part of your company in return for a few weeks work. These experts well know that the way to wealth is through owning at least a piece of a growing company.

In due time, you can share your company money with those who have made the largest contributions to the growth of your company--your key and longest employees.

To keep things under your control, to avoid being forced to give up the control of your company, you must be able to control your break-even points.

Breaking even is the secret of keeping control of a live and growing company, getting loans when you need them--if ever, and keeping yourself free of the fear of risk.

BREAKING EVEN

At first, each new product was sold at a loss. Then the sales volume rose until a break-even point was reached. When the production was expanded by means of new machines and new buildings, there was always the possibility of a loss and the necessity of reaching a new break-even point.

To reach your first break-even point you must increase your sales while keeping your costs under control.

In my busy and wealthy little town of Los Altos, California--and probably in your town--there are retail stores which start and vanish every month. What is obvious to the explorative pedestrian is that the public does not even know that some of these stores exists.

They open in small obscure passage-ways and by-ways, lie quietly for several months, do little or no business, and just as quietly close.

Some are in elegant new buildings, have expensive inventories, and great hopes. Occasionally we see a notice of bankruptcy taped to the locked door. Others just close. Their owners didn't know about break-even points.

If the owners of these failing stores knew about their break-even points, they would know they had to increase their sales--and by how much.

The owners of the unknown stores would stand on the sidewalk and call out to passers-by. In fact, none paint the name of their store on the side of their private autos. They would rather have their store fail.

Failure to advertise and increase sales is not the only cause of failure. Another cause is excessive fixed costs.

The owner who rents the biggest, fanciest store or factory space in town may have started with fixed costs which exceed the possible total income. Look around your town at the little stores and think about how much they must sell just to pay one fixed cost, the rent. Apply these thoughts to your company.

The break-even graph shows something else. As your volume increases--and time goes by--the price may decrease. Competition and increased production efficiency may cause this. (Inflation is besides the point--it raises both prices and costs.)

What is important is that you have always the right price. Too high will bring you no business. Too low and you will not break even.

THE RIGHT PRICE

                               Total      Each 
    Direct material           $ 70,000  $ 7.00
    Direct labor                60,000    6.00
    Manuf. overhead             26,000    2.60
    Product development         51,000    5.10
    Selling                     20,000    2.00
    General & Admin.            12,000    1.20
        Total cost ....        239,000   23.90
    Profit & owner's draw       29,000    2.90
    Taxes                       17,000    1.70
    Total sales and Price    $ 285,000   28.50 

Your Management of Company Wealth, Taxes, and Inflation

The government loves company owners and the managers of large corporations. This is not the place to think about the social merits of this system, both good and questionable though they may be. What you want to do is get into this system and enjoy the benefits. Let some one else worry about social philosophy.

A FEW GIFTS FROM UNCLE SAM

Deductions for your spouse's expenses...it may be a good idea to take your spouse along to help on business trips... you can probably deduct more than your half of the total cost even when your spouse is just along for personal reasons.

...how to set things up so you get 100% reimbursement plus an over $1,000 tax deduction as well for car expenses.

...two approaches to obtaining business deductions for entertaining in your home.

...the tax-wise way to handle such small items as taxi fares, phone calls, tips and so on.

How to nail down credit-card deductions.

...the one sure way for the top executive (you) in a close corporation to get every legitimate deduction .

Mixing business and pleasure...

here's how to add substantial sums to your total tax savings.

Dolling up your office?--An important Tax Court ruling has opened a great tax-saving avenue for executives (you) who take it upon themselves to add some extra class to their office decor beyond what is provided for them.

You will be able to travel to a distant city or country, take your wife for half-price, stay in the best hotel at company expense, invite your friends to an expensive restaurant with the taxpayers paying half the bill--the company paying the other half. You want to help share the wealth and the taxes. The wealth for you. The taxes for someone else.

"The United States tax system imposes tax essentially proportional to income for the vast majority of families and therefore has little effect on the distribution of income."

The graph above was the conclusion of a careful study by Joseph Pechman and Benjamin Okner of the Brookings Institute. Their study included state and local taxes as well as the federal income tax.

In our proportional tax system, almost everyone pays the same percentage of their income as taxes. When the study was made, the percentage was twenty-four. The very poor and the very rich pay slightly more.

The tax leaves the rich with income to put into savings investments. These investments, often tax-free, give them more income. This positive feedback makes the wealthy richer. The worker has much less opportunity to do this. He and she must spend most of their income for necessities. They cannot accumulate large savings to earn them more money.

You can accumulate great wealth by starting with a small business. The growth of your business will be your greatest savings and tax-free. Your savings kept in your company will earn more money, tax-free, and will pile up so high you won't know how to spend it.

Here is how you, the business owner, will get rich while your employees are getting nowhere. Which would you rather be?

                             OWNER   | EMPLOYEE
     Wages or salary        $56,000  |  $12,000
     (less 25% taxes)        14,000  |    3,000
     After tax income        42,000  |    9,000
     Cost of living          25,150  |    8,000
     Savings, yearly         16,850  |    1,000
     Savings, 30 years               |
     (with 5% interest)  $1,120,000  |  $66,000
     Retirement income               |
     (at 5% interest)       $56,000  |    3,300
                  plus the company   |

The million dollars of savings is in addition to the value of the company and its profits. The company owner is a millionaire twice over: first by means of dollar savings and then by ownership of the company--which he can sell for $1,000,000 or more.

With less than five times the income, the company will have more than sixteen time the savings--plus the company. This accumulation of wealth can be continued by your family from generation to generation. The company owner could spend a million and still have a million. He has both high savings and the ownership of the company.

As a rich company owner, you will be able to get more interest on your savings than will your employees. Your company Treasurer will be happy to advise you.

You can buy tax-free government bonds and invest in tax shelters. Each tax shelter will be some scheme that will lose money for a year or two, then become profitable. During the losing years the losses will reduce your income tax so you won't lose half as much as it seems. Then when the tax- shelter scheme becomes profitable, you can sell it for a capital gain. The capital gain tax is much less than the income tax your employees pay.

Although you can save more money than your employees can, because you won't need all your income to live on, the government has made special provisions to help you. It has done this by making many ways in which a company owner can reduce his taxes.

These tax reductions are a form of expenditure by the government. Rather than collect the tax, then spend it as a return to certain taxpayers, the tax is simply not collected.

Such tax relief is called a "tax expenditure." These expenditures are recognized by the Congress as a way of spending. They are now tabulated in the national budget. These moneys go only to those who would otherwise have paid the highest tax--company owners such as you.

The Treasury Department has listed 57 regulations which provide such gifts to taxpayers. Of those, only ten are advantageous to workers. The workers receive only 17% of this money. The richer half--mostly company owners like you--receive 83% of the money.

The richest 1.2% of the people get 15% of the tax-expenditure money. (1999 NOTE: that's 1980 data.) To get your share you need to own a company. Regardless of the size of your company and regardless of the profit it may make, the fact that you own a company opens the door of the U.S. Treasury to you.

As a business owner, you have a right to your share of these subsidies. Owning a company is the surest way to get a capital gain. A company can own property. The government will return part of the cost of the property as tax deductions. You can depreciate your property fast. The faster your company grows, the greater will be your share of the tax subsidies.

The income tax has peculiarities not only in its treatment of the workers and owners, but also in the social values it supports. This book is not about social values. Our purpose here is to make millionaires.

The point here is that the government will penalize you as an employee and reward you handsomely as a company owner. Be an owner and take full advantage of the system.

The wealth of company owners is above and beyond what they might rightly expect from their creativity, daring, and hard work. Compare yourfself with one of your employees. Call him Charlie, your bookkeeper.

Here are some of the money transfers from workers to company owners, according to the U.S Office of Management and Budget.

1999 NOTE: this is 1980 data. Company Owners THE FEDERAL TAX SUBSIDIES YOU CAN USE get these Capital gain tax $ 6,150,000,000 yes Home mortgage interest 4,870,000,000 yes Home property taxes 4,060,000,000 yes Rental housing fast depreciation 375,000,000 perhaps Life insurance interest 1,420,000,000 perhaps Charitable contributions 3,820,000,000 probably Tax-free state & local bonds 1,060,000,000 probably Farming expense & capital gain 1,100,000,000 perhaps Imputed net rent, owner 500,000,000 perhaps Untaxed capital gains at death 700,000,000 probably Dividend exclusion 320,000,000 yes Investment credit 880,000,000 yes Excess depletion 305,000,000 perhaps Excess depreciation 220,000,000 yes Personal total ....$ 28,300,000,000 Corporation subsidies...$ 20,260,000,000 especially Total subsidy...$ 48,560,000,000

CHARLIE: YOUR BOOKKEEPER

Charlie earns $15,000. It is taxed. Your son can receive $15,000 income from a trust fund you set up. The trust fund will be invested in tax- free bonds. Your son need pay no income tax. Money earned by Charlie's labor is taxed. Money earned by the clever investment of money earned by someone else is not taxed.

Charlie earned $1,000 on a part-time night job. His extra money will be taxed (unless he can arrange to be paid in currency, not reported, and risks the penalty for tax evasion). You can receive $1,000 in gifts from you best supplier friends. Gifts are not taxed. Only work is fully taxed.

Charlie keeps his savings in a bank, they pay him 5^% interest, which is less than the rate of inflation. So,

Charlie is losing his savings. This is a form of taxation we'll come back to later in this chapter. You can avoid this tax by keeping your savings in your company.

You, the company owner, keep your cash savings in "money-market" certificates or funds, municipal bonds that are tax-free, and other places that pay interest equal to the rate of inflation. But most of your savings are safely in your company.

In his spare time, Charlie writes a book on bookkeeping. When he sells it he will pay income tax on what he gets. If in your company an invention is made and patented, perhaps by one of your employees, you can sell the patent and pay only a capital gain tax. On the same income, your tax will be much less than Charlie's.

Charlie takes night classes to learn to be a paramedic. He wants to help humanity. He cannot deduct the cost of the school to reduce his tax. You can take all the classes in money- making, business management, and investment that you wish. You can deduct the cost because the class is related to your business. Almost anything is. You get your school for half of what Charlie must pay.

Poor Charlie gets hit by a tornado and the medical bills come to $1,400. Only $990 will be deductible and that only reduces his tax by $250. The accident costs Charlie $1,150.

The same tornado wrecks your car. Your loss is also $1,400 (dents in your Mercedes). Your loss is all deductible. The U.S. Congress rates property more important than people.

Go along with the system: get more property. Then share it with your employees.

HOW TO SHARE YOUR WEALTH EQUALLY

We have seen that there may be some doubts about the sharing of the taxes. Let's next look at the sharing of the wealth after taxes.

An instructive example of free-enterprise at its best is the Hewlett-Packard corporation. Because the company has grown from two people to a giant with little of the confusion of mergers, corporate buyouts, and the like, the records are clear and available to us.

Starting in a very small garage with one drill press and a great deal of ability. Bill Hewlett and Dave Packard built their two-billion dollar company with more than 50,000 employees and still growing. Their company facilitated the electronic industry of the United States and of the world. Their instruments are in every laboratory and engineering room. For this there was a profit.

Hewlett-Packard was incorporated in 1947 for tax advantages and for the limitation of liability. All the shares belonged to the founders. This was the first money printed by the company. By 1980, the company had issued 59 million shares and the market value of those shares was more than $5.4 billion.

The company never sold shares to the public at large. It did not "go public" directly. Of this I was informed by the Treasurer of Hewlett-Packard in 1980. Shares were sold to key employees by way of stock options and to all other employees through stock-purchase plans. Such shares were sold at a discount from the market price.

The employees and the founders sold shares to the public from time to time. Both the employees and the public, as well as the founders, benefitted from the growing value of the company.

Most of the company's capital came from earnings retained (positive feedback). As of October 31, 1979, the company had raised only 26% of its capital by selling 59 million shares for $326 million, mostly to employees. (Some shares were traded for other companies acquired.)

Therefore all the share owners together had gained a total of $3,074 million. This was over many years and many trades of shares among employees and the public.

The employees received a total pay-roll of nearly three billion dollars from the start of the company in 1939 until 1980. This can be computed from occasional reports of the number of employees and the payroll.

The share holders (owners) of Hewlett-Packard have gained about three billion dollars. The employees gained wages of about three billion dollars. This is the formula between owner's gain and employees' wages:

EQUAL SHARING:

         The owner's wealth is equal to the sum of all wages
         paid to employees since the founding of the company.

If you own the whole company, you will gain as much wealth as the total wages of all your employees over the life of your company. The sharing is equal.

If there are many shareholders, they necessarily divide up the owner's gain. For the greatest wealth, let your company grow slowly if necessary but keep the whole thing for yourself.

You do not need to incorporate your company and sell shares. As the case of Hewlett-Packard illustrates, the money you get by selling shares can be and probably should be a minor and unnecessary part of your financing. The main purposes of incorporation are to avoid taxes and to give shares to your key employees.

Your employees can be given a more equal share. There is nothing to prevent this except greed on the part of the company owner. For many years the San Francisco attorney, Louis Kelso, has advocated a distribution of ownership to employees. We mentioned his books in Chapter 1.

Kelso proposes that the workers be given shares in the companies for which they work. Such plans have been offered in a minor way by some corporations. They sell their shares to employees at a discount. Several "Kelso plans" have been formulated, called Employee Stock Ownership Plans (ESOP's) and Employee Stock Ownership Trusts (ESOT's). More common are less formal plans for employees to buy stock at a small discount if they wish to.

You should be aware of the possibility that such a plans might be used to unload a failing corporation on unwitting employees.

Nothing prevents the owner from sharing fairly with his employees. At present, employees are not aware of the inequality of the prevalent sharing formula.

Now that you know how valuable your employees are, you will give them a bigger share.

You can still make your company grow by reinvesting the employee's surplus production. If you give shares in the company to your employees, the money stays in the company. In other words, you are printing your own "company" money which costs you nothing. But your employees can gain if your company grows. They'll work harder to make it grow if they have a share.

The distorted system of distributing the wealth is largely due to the ways in which the governments collect taxes. You and your company are parties to that system.

YOUR COMPANY IS A TAX COLLECTOR

A century of propaganda and legal mumbo-jumbo has taught us that the corporations are persons who have Constitutional rights. More than anything else, this novel notion has led us all to think of corporations as people. They are not people and certainly not freed black slaves. But it is a fact that the status of corporations, which you should take advantage of, has derived from a Constitutional amendment which makes no mention of corporations.

The 14th amendment was intended to give equal rights to the freed black slaves. It was not used for that purpose for one-hundred years. In the meantime, the corporations were given equal rights with persons. They were declared by the Supreme Court to be persons under the 14th amendment. "Persons" is the word used in that amendment. Few who voted for the amendment thought it meant corporations.

Persons though they are, corporations cannot pay taxes. They have no magic source of money, no hidden treasure, from which to pay taxes. Only workers have such a source: their labor.

Real people do have a source of magic money with which to pay taxes. They draw money from their earnings that would otherwise have been spent for food, clothing, housing, and fun. Taxes are paid only by individual, real people who shift their consumption from private things to government things.

The shift is enforced by the collection of taxes. Retail stores collect "sales" taxes in a direct way. Corporations also collect taxes on sales, but this tax is not identified as the sales tax that it really is. They add to their prices amounts equal to what they pay in income and other taxes.

There is a "sales tax of approximately two-percent attributable to the income tax on businesses. As tax collectors, corporations set their prices up by two percent to get money to pay the tax. This is recorded on conventional financial statements as a part of "gross sales." When we trace this amount down the Earnings Statements we find that it accounts for half of their before-tax reported profit. (You know that true profit is much greater.) Then they pay that half of their profit as income tax--just what they collected.

In round numbers, this is how the national total profit and tax statement looks:

    SALES                $ 3,000,000,000,000
    "SALES TAX" COLLECTED     60,000,000,000----
    SALES REPORTED         3,060,000,000,000    |
    ALL COSTS             -2,940,000,000,000    |
    PROFIT REPORTED          120,000,000,000    |
    "INCOME TAX" PAID        -60,000,000,000----
    AFTER-TAX PROFIT        $ 60,000,000,000

       Federal income tax 
       State income taxes 
       Local payroll taxes 
       Social Security taxes 
       Federal unemployment insurance 
       State unemployment and disability 
       Sales tax 
       Property tax

      Dollar-valued           Property-valued 
   (lost to inflation)       (inflation-proof)
   Currency                   Your home
   Checking accounts          Real estate 
   Savings accounts           Personal property 
   Bonds                      Skills  
   Savings bonds              Company money 
   Life insurance             Food in storage  
   Social Security Fund       Precious metal

Action

   Your      What you'll be able to buy at age 65    What you
   present  (if this is the average inflation rate)       put
   age       4%       6%      8%      10%     13%     in bank
   
   20    $ 39,000   16,000   7,000   3,000   1,000   $ 45,000
   25      34,000   16,000   7,000   4,000   1,000     40,000
   30      30,000   15,000   8,000   4,000   2,000     35,000
   35      26,000   15,000   8,000   5,000   2,000     30,000
   40      22,000   14,000   9,000   5,000   3,000     25,000
   45      18,000   12,000   8,000   6,000   4,000     20,000
   50      14,000   10,000   8,000   6,000   4,000     15,000
   55       9,000    8,000   7,000   5,000   4,000     10,000

2. Notice that even with an inflation rate of 4% less than the assumed interest rate you will end up with less real value in your savings than the dollars you put in the bank. Take action now to get your savings into your own business, where it can grow and be safe from inflation.

How to Make Yourself a Winner

You want to be a millionaire. You now own a company. You have company money, but you must make it valuable.

You know how owning a company can make you rich. You are examining product ideas--perhaps you are already in business.

But, are you a winner? Do you feel sure that you will succeed? Are you afraid to start? Are you afraid to expand your business? Fear is the reason there are only 520,000 millionaires in the United States. Every man who has a job could become a millionaire if he could overcome fear.

Are you a future millionaire? Can you start your company and make it grow? Do you know how to adjust your- self to become a winner? You are not the first future millionaire to have doubts. There are things you can do about your doubts.

THE ENTERPRISING MAN

A study of entrepreneurs was made by Michigan State University researchers. They learned these things about the enterprising man:

Has it occurred to you?

Has it occurred to you that there is a possibility of establishing a business of your own? American millionaires are enterprising men--except for those who limit themselves to being the sons and grandsons of enterprising men. Some millionaires knew the method of using the system and knew the source of wealth. Most did not know these when they started. None talk about them.

Some millionaires started companies only to earn a living and accidentally became wealthy. It is typical of millionaires to say, "I just wanted to make a living. I had no idea that I would get rich."

They did not know that they were using a method or gathering about them a Secret Source of wealth. You will have the advantage of knowing the system from the start.

You have title to a company. Almost all American millionaires got their start by owning a company. No matter what the method used to make money, owning a company to do it is the surest way to get rich.

Any man who has ideas and can make decisions needs helpers to use those ideas and carry out those decisions. The man who gets help is an ENTREPRENEUR. Men or women who do it by themselves are ECCENTRICS. The man or woman who works for another is lazy, ignorant, or simply a casual person who prefers to have someone else make the decisions. And what is bad is that the employed worker is the one who takes the risks.

Nothing is more dangerous than to be an employee. Five out of six employees who live to be 65 will be unable to support themselves in old age on their savings alone. To say nothing of the continual risk of losing a job. Workers think they are playing it safe by working for a pension and not taking the imagined risks of starting their own companies. It is they, the workers, who take the greatest risk.

The fact that you are reading this tells us that you don't want to take the great risk of being a worker. You want to be an employer--to own your own business. You want to know the American Millionaire's Method and his Secret Source of wealth. You are an ENTERPRISING PERSON.

You are not alone. The number of millionaires in the United States is growing more and more rapidly. The enormous variety and growth of our industry provides more and more opportunities to become wealthy. There is room for more millionaires, including you, if you are a winner.

ARE YOU A WINNER?

"In speculative markets the emotions are nearly all that count. Intellectualism has little meaning there, for the markets are primordial jungles requiring elemental survival characteristics."

You should stay out of the stock and commodity markets until after you have made your million dollars, then the loss of a hundred-thousand dollars now and then won't matter much.

What Dr. Hayden shows us is that people can be classified in two ways:

FEARLESS? RISK-AVOIDER? OPTIMIST? PESSIMIST?

Now pause in your reading and place yourself on the chart. Be honest with yourself. Nobody is watching. If you are fair about it, you need take no costly psychological tests to learn if you can be a successful company owner.

Place yourself first with regards to your feelings about the future of your business. This is the optimism/ pessimism scale. Then place yourself on the scale of risk-avoidance. You know yourself.

The exercise of locating yourself on this chart will help you make the adjustments that may be needed.

ADJUST YOURSELF

You must have little fear of risk, that is to say, you must be able to act on the first good information, not wait to be told over and over again.

You must have a balance of optimism and pessimism. You cannot be ignorant of the dangers and you cannot be overwhelmed by them. You must be able to use your opportunities. You can, but you may have to make some adjustments.

How to Make Yourself a Winner

You can change your position on the chart, both as to optimism/pessimism and as to risk-avoidance. You can manage your company so that you have little risk to fear. You can become better informed so as not to be extreme in either optimism or pessimism.

On the scale of optimism/pessimism you must be neutral. Excesses on this scale lead to bad decisions. What keeps people off center on this scale is an excess of bad news or a lack of knowledge of the world.

There are, in fact, disasters waiting for us to turn the page of the calendar. There always have been. Some people are too aware of these dangers. They are storing dry foods and gold bars in anticipation of the day of doom.

The optimists see a great future in the dry-food and gold-bar businesses.

Excessive optimism is the result of ignorance. No one in the United States today who is aware* of the realities of the operation of our economic system can be optimistic about the world economy. In spite of this, you can be optimistic about your own economic system.

You should become informed so as to cure yourself of excessive optimism. This doesn't mean you should become a pessimist. The fact is that, in the worst of all possible futures, there will be Americans getting rich. Pessimism about your future possibilities is not justified. (Unless you sit on your duff in a job, with your dollars in a savings account or in government bonds.)

Excessive pessimism is easy to get from the daily newspapers and TV. Their business is disasters past, present, and future.

Seek out the good news to balance the bad. Reduce your exposure to "gloom and doom." Balance yourself on the scale of optimism/pessimism. Balance will make you wealthy.

By using the methods of making your company safe that are described in the next chapter, you can remove the fear obstacle. You will have little or no risk to hold you back. This is one way to reduce your risk-avoidance tendency--remove the risk.

If you know how to start and run a business with patience, with safe financing methods, and with safe operating methods, you will be able to proceed as though you have no fear of risk.

Action

2. Take action to adjust your sources of information so as to be neutral on optimism/pessimism. Make yourself a realist and well informed. Ignore the prophets of gloom and doom--they're making money at it.

3. Design the operation of your business so that you can make your company grow while keeping the risk acceptable to you. Use the methods described in the next chapter.

Small-Business Ownership Without Risk

You own a company. You know who has the money. You know how the government will help you with tax advantages. You know that, until you get your company moving, the government will be taking your income with taxes and your savings with inflation.

You have a product in mind, or you have already started a business. You know that the millionaire's Secret Source of wealth is employees. You know how positive feedback, the re-investment of the employees' extra production, will make your company grow.

But perhaps you are still afraid of taking risks and making decisions that might get you into financial trouble. Such fear is healthy and understandable. There is a way to get around such fear. This chapter and the next will show how a business can be run so that you will have nothing to fear.

FAILURES ARE PLANNED

My friend suggested that the company be shut down, but that it might be possible to start a new company: starting with only the engineer and the product idea. The organization was that of a multi-million dollar grand plan. The funding was that of a mom-and-pop grocery.

The money used to start a mom-and-pop grocery can start a million-dollar business. But the money must fit the organization and the organization must fit the money.

There will be no Vice-Presidents in your small company until after you've made your first $1,000,000. You don't need a Treasurer until after the money starts piling up too high to count.

What you need is workers: the makers of products and the doers of services. Then you need more workers, some of whom can be supervisors of others.

When the orders are coming in fast, you will need a clerk-typist-bookkeeper to handle the paper: the orders, the invoices, the payroll.

You will have to do the selling at first. This follows naturally from the fact that you have chosen the product. You know who the customers are and why they should buy your product. You will soon need sales representatives. They work on commission so they cost you nothing unless they make sales. Later you will need to hire a full-time salesman who can become your sales manager.

As the money starts flowing freely, you must get a part-time accountant. Find a retired CPA or former treasurer of a big company who wants to have a little fun helping a small company.

One day your company will get its first Vice-President. But that will be long after you've set this book aside and bought your summer home on a lake in Canada and your winter home in Hawaii. Then you can promote one of your employees to manage your company.

When Mike McNeely started Applied Materials, he first hired technicians who could build his product. He did not need managers or secretaries or accountants. There was nothing to manage, no letters to type, and no money to count. He made two sales (one to me) and hired technicians to build the machines he had sold. Because his technicians were good, the machines worked, and I placed an order for a second and larger machine. Within a year his company needed a comptroller to count the money. His employees were making him wealthy. Employees that make and sell the product are the key. McNeely's company was valued at $27,000,000 recently and had not yet paid a dividend--but it has lots of employees, the source of wealth.

Bob Denman, my friend with a million-dollar company, goes to any machinery auction he learns about. His excellent shop has been built largely with used equipment. His company has never been in danger although it is in an industry that swings from boom to bust and back. He buys used equipment and hires used (experienced) workers. Now that he has many employees as a source of money, he can spend more for used equipment, new equipment, executive cars, and a company airplane.

I worked as a middle-level manager in a $20 million company whose president tried to hire managers and with-draw. He spent his time in a remote office, never ventured into the factory, didn't know what was going on, and lost his company.

I also worked as a middle-level manager in a $120 million company whose president managed. He now has a two-billion dollar company. All of his employees knew he was "around." Everybody worked and everybody was prepared to explain what they were doing. Everybody was happy because they knew they were part of a company whose owner "cared" and managed.

1999 NOTE: Dave is gone now but Hewlett-Packard has sales of $50 billion.

The trick is to hire assistants, but only as fast as they are needed. Call them assistant managers, directors, or vice-presidents (titles are cheap) but never stop doing the managing, directing, or presidenting that is necessary.

Let your assistants know what is to be done. Let them do what they can. Don't hide in a remote office. The captain of a safe ship does not hide below decks, especially in a storm.

ONE MAN OR MANY MEN

The next owner of the store at that location was my friends, the Wickards. They converted the ice-cream shop into a frozen-yogurt shop. The previous owner could have sold frozen yogurt very easily but he wasn't there.

The Wickard's shop is making a lot of money. They have now opened more stores. Their employees are working. What they are selling is good service by working employees. If their employees ever stop working, yogurt will go out of style--or so it may seem. The fact is, the product is not yogurt, it is service. Ice-cream, cookies, candy, vitamins, stationery; any number of different kinds of store could succeed in that location. But the employees would have to be working.

1999 NOTE: I'm sorry to report that the Wickard's may have over-reached. The retail business is risky.

Action

Million-Dollar Problems

You have the great advantage of understanding how the system works. Most millionaires did not know the system when they started their company. You know that employees produce wealth and that each employee is worth at least $40,000 to you. You also know about the positive feedback, called "bootstrapping," which will make your money grow. You know that you must advertise and that you must watch your cash supply.

But you may not know about some of the big problems. You will meet most of them in your business. You may not recognize them.

THE PROBLEM WITH PROBLEMS

     "incompetence" 
     "unbalanced experience" 
     "lack of managerial experience" 
     "lack of experience in the line"

    1.  Downgrading the need for experience
    2.  Sloppy record keeping
    3.  Reckless money management
    4.  Assuming an improper role
    5.  Failure to plan
    6.  Inattention to marketing
    7.  Ignoring the human factor

Don Ross bought a company which made a unique kind of furniture. After the customary problems one has in buying a company, such as lost process secrets, former owner walks out too soon, and unexpected bills, his company began to succeed. But the retail stores were slow to pay. The slow-paying stores kept ordering more furniture. They claimed they needed it so they could earn money to pay their bills. My inexperienced friend sent them more furniture.

He should have sent a bill-collector first. Eventually my friend's company failed because it couldn't pay its own bills.

Don't be anxious to sell to people who beg for shipments, but haven't yet paid for the previous shipments. Tell them you will ship as soon as they pay what they owe. They may reply, as one did, "Cancel the order. I can't wait that long."

I was a manager in the research and development department of a company which was founded with a great deal of money. The intent was to manufacture a specific product as a base for the company. The company was never in its history able to manufacture that product. The reasons were highly technical and never understood. In spite of that, the company grew to gross sales of more than $20 million in a few years.

In the process of preparing to manufacture one product, the company had established the capability to manufacture others. After losing a few members of the founding group, the company discovered its product.

You don't have to be right the first time. You must be ready to change your sights if you are missing the target. The stubborn founder deserves to lose who insists on staying with the original concept long after it has been proven wrong. Often, the successful business is much simpler than the original "great idea." The first idea is often too clever or too far ahead of its time.

One of the best sources of second ideas lies in the inability to produce the first idea. When for some reason, the first idea is failing, look closely at the reason. Perhaps the necessary material or machine is not available. Perhaps a new technique is needed. If you can supply what is missing, consider selling that as your product. Having found a solution, sell the problem.

A company was set up in New Jersey to make sophisticated television test equipment. To work on this complex electronic apparatus, they needed a small laboratory tool--a controllable and precise power supply. They couldn't buy such things so they made their own. The resulting power-supply company was later sold for several million dollars. They were too busy getting rich to bother with the original idea.

Your by-product may be the idea that will make you rich. Your by-product may also create a new problem. It may sell into a market that is new to you. For example, suppose you have started with a tool as your product, then learned a new process to make that tool. The process may be more valuable than the tool. But the process will sell to tool-makers, not to the tool- users who were your planned customers. You will have to pay attention to marketing.

INATTENTION TO MARKETING

I know a man who didn't know the territory. He was induced by a company selling printing shops to rent a store location. It was one of those "non-franchise, franchise" deals which have appeared since laws were passed to regulate franchises. Such deals promise to do "market research" without specifying what they mean.

For this man the market research consisted of riding around town looking for a vacant store. Being trusting, although dismayed by the procedure, he rented the store, paid for the printing equipment and opened his shop. Then he began to learn about market research.

There were few customers in the territory. There was a lot of competition for those few.

The market is the difference between the customers and the competition. If the supply already equals the demand, there is no market for you.

The new print~shop owner soon learned about the supply in his territory. There was a print shop down the street one block. But that was the least of the competition.

His print shop had been located in a working-man's residential district. They were working. There were print shops hidden in the local garages. Independent printing salesman blanketed the territory, selling low-priced garage printing. The market, such as it was, was well served. He was in for a hard struggle to make a living.

You must know the territory, the supply as well as the demand. The territory need not be geographic, as in the print-shop example. The territory can be a particular type of customer, scattered over the nation, perhaps small in number, but wanting your product. You may be able to reach them directly, through an existing distribution system, or by advertising in a specialty magazine. Montgomery Ward found such a territory.

When Montgomery Ward started his mail-order business, he identified a territory in need of his product: the farmers and their families. The farmers and their families were dependent on drummers. The drummers were traveling salesmen who went from farm to farm selling for a commission what they got from distributors who bought from manufacturers. Each "middle-man" raised the price so that the farmers were paying much more than the city people.

Montgomery bought from the manufacturer and sold directly to the farmer, without salesmen. He identified a special group of farmers who were prosperous and could be reached. He joined the Grange, a farm organization. As a member, he could use their mailing list. He mailed a one-page catalog. Four years later he mailed a 150 page catalog and was already a millionaire. He knew the territory--the Grange farmers.

If your product is derived from your personal experience, you will already know who the customers are.

If you are a baker and have a gadget to help bakers, you know where to find your customers. Send your sales brochure to bakeries, addressed to the "Chief Baker." If you have a better hole-maker for golf courses, find the golf courses in the phone books and send your sales literature to the "Head Greenskeeper."

You can get mailing lists for any specific group of customers. You can go and talk to the customers. You must do this to know the customers' reaction to your product.

Going and listening may well be the key to successful marketing. If your idea is new, your customers may not understand it. Then at least you know you have a problem. The most important marketing task then will be to educate your customers.

Education has limits. Too often, an inventor starts a company because he "knows" that people should use his product. He learns the hard way that it is only the customer's opinion that matters. The clever inventor has not only the usual problems of starting a company--he also has resistant customers. Do you need such a problem?

Start with a product the customers want immediately. Educate them later by offering your "great idea" as an alternative or as an additional product after you have established contact. The human factor with customers is similar to the human factors inside your plant.

THE HUMAN FACTOR

Here are a few good ideas you should keep in mind:

     Listen to your employees.  
     Never criticize one before others.  
     Do praise one in front of others.  
     Make sure every one is busy.  
     Explain what you are trying to do.  
     Admit your own mistakes.

How You Can Make It Big

Healthy businesses, like people, are always growing--one way or another. Plan and have targets. Make targets of:

     1. new products,
     2. increased sales,
     3. more customers,
     4. better trained employees,
     5. faster accounting reports,
     6. more help for you.

Look for new products. As you get more employees, especially salesmen, your employees will recommend new products.

Rather than add new products, you can expand and diversify your company around one product by making a vertical company.

VERTICAL INTEGRATION

For example, an oil company is vertical if it drills for oil, pumps it out of the ground, pipelines it to a refinery, refines it, trucks it to a gas station owned by the oil company, and sells it to the final consumer. You can do the same.

Your product will require some parts or material. Your retail store will need things to sell. You can expand by making some of your own parts of products. This will keep your employees busy.

The grocer who owns some land out of town and grows some of the vegetables he sells is vertically integrated. But don't get carried away.

The founder of the Chun King Chinese-food company, Jeno Paulucci, tells of the mistake he made by trying to grow his own celery. Growing celery is an agricultural art. His company didn't have the art. He had to get out of the celery business.

Stay out of the celery business. Any business you don't understand will be a celery business for you. Do what you know how to do.

When you start, you will depend upon suppliers. Some of these suppliers will be doing simple things that you can do. Some of the suppliers will be doing things badly. You can do better. You know what your suppliers customers want--you are one.

Make it a cardinal rule never to be at the mercy of suppliers. Have more than one supplier for everything you need. If you cannot find two reliable suppliers, you have found a need. Become a supplier for that article.

Look for customers for your new capability, but don't help your competition. You have now begun to integrate horizontally. You have a new kind of product.

HORIZONTAL INTEGRATION

You must recognize the differences that are important. The "rules of the game" may not be the same. You may have to deal with a different set of customers with quite different manners and practices.

Hewlett-Packard found that it could not depend on its suppliers for certain critical parts for its products. It set up a new division to make these critical parts.

I was a manager in that division. The division was successful. It produced the critical parts and sold them to outside customers at a profit. But there was a chronic problem.

The parts were not sold to the regular customers of the large company. The big corporation sales department did not understand the product.

The selling methods differed. The manner of pricing the product was not the same. The parent company sold its catalog of products at fixed prices. The customers of the parts division wanted custom specifications for each part and a negotiated price. The parent company sold its products one at a time. The components company needed to sell by the thousands.

The large company wanted to sell all its products, including the parts, through one marketing department and with one crew of salesmen. It seemed more efficient but didn't work.

Because of the failure to understand that the new products were different in important ways, the organization of the new division was subject to frequent changes. The parent company could not resist trying to make its child conform.

One company I knew let things get out of hand. The owner thought that expansion meant adding anything. He added everything he could get his hands on. But nothing fitted.

His plant became a clutter of odds and ends of little companies. Scraps of unused equipment and unused people filled the building. A new manager was imposed on the founder. The new manager had trucks carting the odds and ends to the junkyard every day for three months. The company never did recover from the unenlightened expansion and belated contraction.

To sell a company or to borrow money or to sell shares, your company must be well-groomed.

Let me tell you about a company that was not well-groomed, and the consequences for the owners.

I was a member of a committee of three managers who evaluated a small company. The company was very new and very small. In fact, there were only the three founders. They had certain skills. Their product would have mated well with the products of the company I represented. But the company was not well-groomed.

They had rented adequate space in which to manufacture their product. Had we acquired them, we would have moved them into our existing large plant. So you might think the appearance of their plant would not have been important. In fact, it was decisive. We did not acquire them.

They had failed to prepare a plan. They talked of how they would manufacture their product. But nowhere on paper, or with chalk lines on the floor, was there a display of a plan. I could envision a layout of the manufacturing area--an arrangement of machines and assembler ladies and test stations and a shipping area.

The three company owners may have had such a vision. They didn't show it. If they had taken one hour to move a few benches into place and to mark locations with chalk on the floor--if they had groomed the place-they would have received financing and would probably be wealthy now.

Grooming counts. Good grooming shows the world that you know what you are doing. And what you plan to do.

Usually the most important grooming is the preparation of the accounting records. Not just the financial statements--auditors for the buyers look at other books: customer lists, inventory records, advertising responses, employee records, your personal income tax reports, etc.

Orderly books impress the bankers much more than does a good product. They don't understand how a small company operates. They don't understand much of anything except the money books. That is their business. Unfortunately, the money books really don't tell whether a company is a success or not. But that's beside the point.

If a banker visits you, you must show good accounting records. If a stockholder visits you, you must show him how fast "his" company is growing. If a customer visits you, you must have piles of products to show him you can deliver. If a supplier visits you, you must show him how much you are growing and how much you will buy from him in the future if he is a good supplier.

Good grooming starts before your company begins. Your planning should include the factors which make for a good-looking company. Begin with your choice of product.

Is the product one that will look good to a banker? You know it must look good to the customer, but the bankers and future investors or the some day buyer of your company have a different point of view. You may want some money from them. You may want to sell out for your $1,000,000.

Bankers and investors can most easily be impressed by a product they do not understand. Some kind of magic scientific machine can always be financed. A product that cannot even be seen is also impressive. A gold mine in Texas or a product too secret to be shown will always find bankers.

Bankers and investors best understand money. They little understand real things. That is why mysterious machines are easy to finance. If you want to go the big financing route, find a scientific product. Make your product impressive.

After the product, consider the package. The Pet Rock was not much of a product but the package was great. Many products, including some breakfast cereals, don't amount to much. But the package is great.

Right from the start, look at your company from all points of view. Is it well-groomed? Does it look like a good, growing, profitable company or does it look disorganized, unplanned, unsure of its own identity?

How your company looks may very well decide its fate at the hands of your bankers, customers, suppliers, and your employees.

Your employees will work harder and more effectively if they feel they are a part of a good-looking company. Well-ordered work space, well-planned work, reasonable but tough quotas of expected production, and businesslike managers will get more output from your employees. The Secret Source will produce more wealth for you.

The name you choose is a part of its grooming. Don't be frivolous when you choose a name. And don't be in a hurry to add "Inc."

DON'T INCORPORATE

No doubt you have heard about the advantages of incorporating in Delaware. You've heard of a book called How to Form Your Own Corporation Without a Lawyer for Under $50. The book tells you how to incorporate in Delaware by mail order. It can be done. Hewlett-Packard changed its incorporation from California to Delaware for their own good reasons. But they did so after they were well established.

You can get into a really complicated tangle if you incorporate in a "foreign" state and then try to sell stock in your home state. By the time you get through, you may pay a lawyer much more than if you'd hired a lawyer in the first place.

This is not to say there are no advantages in incorporating in certain states such as Delaware of Nevada. There are. These states have corporation laws designed for the benefit of corporation managers. They make a profitable business of selling charters to those managers.

Nevada sells corporate charters to California companies. The companies establish an office in Nevada or perhaps a small facility with one or two employees. They open a bank account in Nevada. If there are only one or two owners, they may establish residency in Nevada on one day of the year, they avoid California property tax on their inventory.

When my friend and former business associate, Bernie Mills, sold his company, the buying company (a giant corporation) quickly dropped his product. What they kept was his group of employees. The employees were what they wanted and what they paid for. My friend retired at 43.

It is not unusual for an acquired company to be dismantled and only the employees kept. The employees are the "thing of value" that has changed hands. Sometimes the acquiring company does not understand this and causes such confusion that the key employees all jump to other jobs, leaving an empty shell' of little value. Keep this danger in mind when you buy another company.

To live like a millionaire, you need to build your company up to at least seven, and possibly as many as fourteen employees. In retail you need more. To sell your company for $1,000,000 you may need twenty-five employees and a good prospect for growth. At $40,000 each, 25 employees should bring a million dollars for you easily.

AND WHEN YOU ARE RICH