Starting an Enterprise
By Orin Laney
PO Box 1746
Mountain View, CA 94042

Copyright 2000

This was written as a book chapter. In such a short space, it is
impossible to adequately cover even a fraction of the topics that
need to be considered. The author welcomes suggestions, comments,
and feedback from readers.

1.0 Introductory Business Concepts
1.1 Engineering and Business
1.2 What is a Business?
1.3 The Small Startup
1.4 Venture Capital and Small Startups
2.0 Launching a Startup
2.1 When to Begin
2.2 Timing vs. the Economy
2.3 Required Experience
2.4 Qualifications to Run a Business
3.0 Preparation
3.1 Big Co. / Small Co. Strategy
3.2 Seminars
3.3 The SBA
3.4 Incubators
3.5 The MBA Degree
4.0 The Mechanics of Startup
4.1 Organizational Forms
4.1.1 Incorporation
4.1.2 Partnerships
4.1.3 Proprietorships
5.0 Finding Business
5.1 Print Media
5.1.1 Editorial Content
5.1.2 Advertising Content
5.1.3 Selecting Publications
5.1.4 Testing and Frequency
5.2 Free Publicity
5.2.1 The News Release
5.2.2 Articles
5.2.3 Reviews
5.2.4 User Groups
5.3 Paid Advertising
6.0 Running the Enterprise
6.1 Wholesale Suppliers
6.2 How to get Paid
6.2.1 Creating an Invoice
6.2.2 Receiving Inspection
6.2.3 Accounting Review
6.2.4 Making the System Work
6.2.5 Counter Sales
6.2.6 Variations
6.2.7 Accounting Automation
7.0 A Two-Step Approach for the Employed Engineer
7.1 The first Step
7.1.1 The Hobby Approach
7.1.2 The Consulting Approach
7.2 The Need for Balance
7.3 Cutting the Knot
8.0 The Financial Universe
8.1 Clerks
8.2 Bookkeepers
8.3 Accountants
8.4 Financial Officers
8.5 The Startup Entrepreneur
8.6 Using Outside Services
9.0 Double Entry Bookkeeping
9.1 Fundamental Concepts
9.2 Arithmetic Usage
9.3 The Accounting Basis
9.4 The Accounting Perspective
10.0 Financial Statements
10.1 The Balance Sheet
10.1.1 Assets
10.1.2 Liabilities and Equities
10.2 Profit and Loss Statement
10.3 Relationship between the Statements
10.4 Choice of Fiscal Year
10.5 Financial Ratios
10.6 Accounting Credibility
11.0 Scams, Traumas, and Learning Experiences
11.1 Toner Phoner
11.2 High Price Hookers
11.3 Stock Brokers
11.4 Charity Pitches
11.5 Promotional Gadgets

1.0 Introductory Business Concepts TOP

1.1 Engineering and Business
Too often, engineering is like being locked in a room where paychecks are thrown in over the transom and designs are slid back under the door. Engineers are often kept locked away to allow them to concentrate, also because they habitually blab about costs, problems, and other proprietary data. Those who are trusted to contact customers often discover that they enjoy comprehending a customer's needs well enough to diagnose his problems and propose a solution.

These first stirrings of an appreciation for business are to be encouraged. Since the typical technical education does little to address the real world operations of companies, many engineers flounder over fundamentally simple business issues precisely because they lack exposure to the basic principles of commerce.

This chapter spans many topics that the fledgling entrepreneur should gain familiarity with, but the discussions are necessarily brief and limited to some of the more important aspects of business, such as accounting and advertising. Perhaps of equal importance, there is an outline for a deliberate approach to starting one's own business that is less likely to violently implode.

1.2 What is a Business?
This seemingly obvious question can be answered by pointing to examples that are not businesses. For instance, the IRS has well developed criteria for spotting businesses that are actually hobbies with no profit making intent. Other examples are charitable institutions and governmental bodies. The point to be emphasized is that a genuine business meets certain expectations about its activities and appearance.

The question of what constitutes a business varies tremendously by industry. "Electronics" is a concept, not a business per se. The field includes basic research, the repair trade, consumer retailing, government sales, component manufacturing, equipment manufacturing, import and export, certification and testing activities, and a host of other areas, each of which is a distinct industry with its own vocabulary, channels of supply and of sale, customer base, and financial structure. Thus, a fundamental question faced by any engineer who wishes to start a new business is, "What business am I going to be in?" "Electronics", or "chemistry", or whatever happens to be the degree area is not a satisfactory answer. One purpose of a business plan is precisely to bring the vision of what the business is supposed to be into focus.

The field of engineering is one where change and progress are normal facts of life. This places a demand upon technology based businesses to continually adapt or die. Engineers are in a dynamic environment that has little in common with dry cleaning establishments or lawn care services. As a consequence, a great deal of the literature available for the would-be entrepreneur must be read with care, for much of what is available does not translate well to technical activities.

1.3 The Small Startup
Businesses are started for many reasons, but small startups are seldom the result of cold business judgement. Starting a business, particularly when you are short of funds and experience, is an intensely personal process. Temperament, willingness to learn, to take risks, and tolerance for one's own foibles are easily as important as the product, because the entrepreneur is the single most valuable asset of the new enterprise.

The various routes to the decision to start a business include love for a burning hot idea, a desire for independence, and getting fired and vowing not to work for such jerks again. Some people face otherwise impossible commuting distances, or need to work at home in order to take care of a loved one. The reason may be as simple as a lack of job openings, or even of personal salability, making self employment the best alternative to unemployment.

1.4 Venture Capital and Small Startups
The engineering world is permeated by a venture capital mythos, fueled by trade press reports of well funded startups embarking on complex projects. Venture capitalists place considerable emphasis upon the individuals who will handle the day to day operations. A track record can be more persuasive than any product. Achieving the credibility, competence, experience, and contacts necessary to reach that state in life requires laboring in the trenches of your own business on your own capital. Most small startups use whatever capital can be scraped up by the owners.

The first responsibility of anyone aspiring to arrive at the point where someone would entrust them with millions of dollars of someone elses money is to get experience. For recent graduates, this especially means industrial experience. Knowledge of the culture, vocabulary, and practice of engineering is the core around which a future business may be wrapped.

2.0 Launching a Startup TOP

2.1 When to Begin
The best time to begin is when you feel inspired to do so. Nevertheless, inspiration comes in many forms. The determination that can come from getting fired is well known. Recessions are also generators of change. In every recession, newspaper editors feel compelled to publish human interest stories about people who got laid off and went on to better lives. The real life examples of stockbrokers who opened restaurants, junior lawyers who became photographers, and middle managers who tried their hands at farming sound a common theme of deeper satisfaction, and often one of realizing how confining their previous career choices were.

This sense of satisfaction is often couched in terms of personal growth. In other words, farming is not necessarily more satisfying than designing circuits, but there is personal power in opening up a world of your own choosing. In large measure, those who consider a layoff as a curse are indeed cursed, and those who look for blessings in it tend to find them.

2.2 Timing vs. the Economy
It is also fortunate that "inspiration" often arrives when times are bad. This forces you to count your pennies and learn to distinguish what you need from what you would merely like to have. Customers will be vocal about what they will and won't pay for. Startups that begin during a recession will have an established base and a running start when the economy turns around, providing a distinct advantage over Johnny-come-lately competitors that pop up like mushrooms after a spring rain. For a time, these make money too, but when the economy cycles down again, a recession startup will have already learned to operate efficiently. Fair weather startups will have the double handicap of wasteful practices such as bloated staffs and budgets, and an institutional momentum for these practices that is hard to change quickly enough. A business that knows how to work in a recession can even pick up business as undisciplined, inefficient competitors fold.

This is not to say that inspiration is best forced upon you by circumstances, or that it cannot come during good economic times. It is more likely, however, that an engineer will consider beginning a business when not distracted by heavy projects, steady raises, and sweet job offers.

2.3 Required Experience
There is some controversy over how much experience an engineer should have before starting a business. In truth, the primary effect of whether an engineer has 2 or 10 or 20 years of experience is the type of business the engineer prefers. Those of lesser experience tend to create specific products, while those of greater maturity tend to have a wider viewpoint and offer system level and enterprise level solutions.

It should be noted that for any branch of engineering there tends to be a "sweet spot" for experience where an engineer is most salable. Reviewing classified advertisements for electronics engineers reveals that three to five years is a preferred range for this field. Several factors seem to prevail at that level of experience, the bottom line being that the engineer has enough experience to become valuable, but hasn't been out so long as to become expensive. Engineers who start a business at or before the sweet spot tend to do so out of a sense of adventure. Engineers who have matured into more senior roles tend to be seeking personal fulfillment or other more sober reasons.

2.4 Qualifications to Run a Business
Not everyone ought to try running a business. Some people are sufficiently challenged just trying to remember which end of a pencil to hold, and belong under the watchful gaze of a supervisor. Others are unquestionably competent, but prefer a role that is defined for them. For every designer who goes independent, there are ten more who would sweat every minute until another firm gave them a desk to sit at. Just as there is a particular type of mind that is best suited to accounting, another to engineering, and another to the literary life, there are certain personality traits that make one individual better suited for business than another. Fortunately, these qualities are often found in tandem with engineering ability, so that far from being mutually exclusive, they create a powerful combination for those who test themselves and discover entrepreneurial potential within.

The primary impetus for running a business should not be a desire for wealth. While "the sky is the limit", getting there is usually quite a journey that will require sacrifice and hardships. Many entrepreneurs, looking back, feel that the lessons of their early experiences, bruises and all, were the most valuable. The truth of the matter is that true entrepreneurs pursue business as a challenge in and of itself, and wealth is but one means of keeping score.

The pleasure derived from such activities as creating new designs and making deals is a noted phenomenon. Many engineers are delighted that not only do they get to work with enough equipment to build a starship, but they get paid for it too! The formal name for this is "psychic income". The happy individuals quoted by newspaper editors are thriving on the psychic income of having a direct hand in their own destinies. By comparison, their previous lives seem impoverished to them, and this even for those who experience a drop in their monetary income.

True entrepreneurs are not born but made, discovering through circumstance that they have or can develop the abilities needed to run a business. In many respects, an ability for self-development is the single most defining skill. Engineers represent an interesting class of potential entrepreneurs. They are intelligent as a class, but often narrow in their education and world view. They also vary tremendously in their communication and people skills. An outstanding asset of engineers is the ability to learn quickly. Nimbleness of mind is probably the most important compensation for lack of experience. Engineers also tend to exaggerate the applicability of their academic skills to many of life's problems. Knowledge of calculus does not reduce accounting to a trivial problem, for instance.

There are also bad reasons for running a business, such as the owner observed cursing and harassing his employees, at one point chasing a subordinate around his shop with a hammer. Having his own business was the only way he could abuse people without getting fired. Others have been known to pack their businesses with every tool and piece of equipment known to man. Running a business as a way for a gadget freak to create a vast playroom just results in rich pickings at the bankruptcy auction.

On the whole, engineers are prolific founders of new businesses. Their participation in the economy is especially important, because the fruits of engineering create new economic areas rather than simply expanding existing ones: anyone can open another car wash and employ dozens, engineers can pioneer whole industries that employ tens of thousands.

3.0 Preparation TOP

3.1 Big Co. / Small Co. Strategy
While it is unquestionably true that many businesses are founded as a reaction to circumstances, nevertheless there are certain ways in which one can be better prepared than otherwise. Staging ones employers in a deliberate sequence is one method of preparation. Given that the responsibility of a new engineer is to get technical experience, this is best done by working at large companies where the engineer is well supported by secretaries, technicians, senior engineers, a drafting department, etc. and is exposed to clear lines of authority, formal signature requirements, and specialists in other disciplines. This is valuable conceptual preparation for service with smaller employers that might have fuzzy or overlapping job duties. It also serves as a blueprint for understanding other large companies as customers.

Having acquired a solid grounding in the culture and practice of engineering, the best vantage point for gaining useful skills on the business side is at a small company, where an engineer is forced to handle things that large companies insulate their technical staff from. This often includes doing actual purchasing rather than filling out purchase requisitions, or negotiating with customers directly rather than simply being handed a set of specifications.

Visibility into the operational details of a small business also provides the singularly important benefit of removing the mysteriousness of it. More than one engineer has been heard to remark that "if these bozos can do it, then I can too." This insight can actually make it harder to return to employment with a large corporation, since the empowerment of being able to handle your own support tends to puncture tolerance for corporate politics formerly taken for granted.

3.2 Seminars
Seminars constitute a short duration, high calorie means of gathering business startup information. A typical approach invites a CPA to talk about accounting, an intellectual property attorney to talk about protecting your ideas, a marketing type about marketing your product, and a venture capitalist (always a venture capitalist!) to speak on start up funding. Often someone from the Small Business Administration is invited too.

This common seminar format misses the point and moreover tends to be boring, because the individual topics are presented as disconnected pieces. Furthermore, while each speaker may be an expert in his own field this does not guarantee competence in others. The result is a certain amount of bad advice mixed with the good. For instance, the fact that a venture capitalist is invited to speak can create the mistaken impression that they are a suitable source of funding for your first, one person startup. An accountant may salivate at the quantity of business that can be generated by selling to the Federal government, but totally fail to appreciate the special difficulties of this business area.

The assembly of those pieces into a complete business is as important as the pieces are. The seminars that you must attend feature a panel of successful entrepreneurs describing how they each made it. The first type of seminar is like trying to understand an animal by examining the results of a dissection. The second is like watching one pacing in its cage, feeding and snarling. True entrepreneurs (as opposed to those who merely work for themselves) have real life stories of cunning breakthroughs, around the clock work sessions, skullduggery attempted by competitors and suppliers, financial miracles pulled off with credit cards and bluff, and marketing victories that make you want to run out and start a business on the spot. Successful entrepreneurs tend to be shameless self promoters, and they tell not so much the bare facts of what a CPA or an attorney does, as illustrate how to make those people work for you rather than the other way around. They speak of the process of running a business, and illustrate attitude, not just mechanics.

3.3 The SBA
The Small Business Administration is an obvious source of information for would-be business owners. As a taxpayer, you can have their materials for free, but there are cautionary notes to keep in mind. One is that the scope of all possible small businesses is so vast that SBA materials are at times general to the point of vacuousness. A deeper problem is that the SBA definition of "Small Business" is by no means the typical small startup. The government definition varies by industry, but can include companies of up to 500 employees! In other words, the SBA is primarily concerned with ongoing enterprises rather than new business formation. The SBA is a government agency, and is most assuredly not a fountain of entreprenurial wisdom. The typical one or two person startup is not, and indeed cannot be serviced by the SBA in the way that established enterprises are. Some familiarity with SBA programs and resources is a reasonable thing, but specific reliance upon the SBA for start-up purposes speaks to issues rather different from the aspirations discussed here.

3.4 Incubators
An increasingly important trend is the availability of small business "incubators". Many are state sponsored and located on or near university campuses. Incubators provide startups with inexpensive rent, access to low cost shared secretarial and accounting services, ready access to faculty consultation and student labor, and possible eligibility for grant programs and tax incentives. Incubators are mostly new product oriented, and carefully screen applicants for viability. Contact your state government to determine if there is a program in your geographic area. Even if you cannot or choose not to participate in one, the insights and information you will gain by studying incubator programs constitute an inexpensive and valuable source of learning.

3.5 The MBA Degree
If an engineering degree is one's poetic license for business on the technical side, the formal business degree is the MBA. The information gained by earning one completely vaults you past this chapter. Of the various combinations of degrees, business and engineering mix especially well. Possession or nonpossession of an MBA is generally not a factor in whether to begin a business, but just as a formal engineering education greatly assists in high technical achievement, formal business education greatly increases the upside potential of how far you can take an enterprise. Many self employed engineers remain stuck in consulting mode precisely because they lack the knowledge of how to proceed beyond this simple form of business.

The MBA is a professional degree, and as such there are no requirements for previous business experience. Students are taken from all disciplines, but backgrounds that feature mathematics and rigor, such as economics and engineering, are favored. MBA courses are taught with a faster pace and greater emphasis upon conceptual understanding than undergraduate offerings in identical subject areas. Further, the courses are taught from the perspective of managing a business rather than the undergraduate perspective of working for someone else. One role of an MBA degree for eventual entrepreneurship is that it teaches the language and culture of business with a breadth and velocity that is difficult to gain through experience alone. The education also unfolds to understanding many otherwise mysterious experiences that come to anyone in business, and offers some vision of the paths to trod in reaction to such circumstances.

MBA skills are general purpose and portable. Notwithstanding the time spent to earn the degree, an MBA can pay back the investment many fold with avoidance of time and grief that would otherwise be spent at the School of Hard Knocks.

One "danger" of an MBA degree is that there is tremendous temptation to go into all kinds of fields that you gain insight into, but which lack the entrepreneurial openness of engineering and manufacturing. Another trap for the future entrepreneur is going too fast from engineering to MBA school. Simply having an engineering degree does not make one an engineer. That requires engineering experience. However, it is hard to leave a career with good income, possibly after you have a spouse, a mortgage, and a few screaming kids, to go to business school. There is no real resolution possible for the conflicting demands other than perseverance if you want to be an engineer in business with an MBA degree to back you up, rather than an MBA with an engineering background.

To a certain extent, the MBA degree has been cheapened by schools that have added programs apparently to gain another source of revenue. Nothing has happened to degrade the quality of good programs. The question to ask yourself as you look at an MBA program is: are your prospective fellow students future captains of industry? If the school is marginal, the more likely it is to be populated with middle management aspirants attempting to keep promotions coming on schedule. Few of these corporate creatures will every try to start a business. To the very real extent that your fellow students will help form and shape your own educational experience, you want to interact with others of similar ambition to your own.

Avoid narrow credentials such as "Masters of Engineering Management". These are middle management counterfeits. "Credit for Life Experience" programs are a way to retread older executives. Night and weekend programs fill a need, but have difficulty duplicating the rigors of a full time program. Remember that interaction with your fellow students constitutes an integral and highly valuable component of a quality MBA program.

The MBA can also be overrated or misapplied. Knowledge does not equate with wisdom. There are plenty of wily executives with little or no formal business education who enjoy eating MBAs for breakfast. They are smart enough to use MBAs and others where their own knowledge falls short. The intellectual tools of an MBA education are a definite asset, and if you can intelligently apply them and accept learning wherever you find it, the "good ol' boys" might at least respect you, and perhaps even appreciate you.

The laws of Nature are sufficiently immutable that the distribution curve for school quality assumes the familiar S-shaped cumulative curve. This curve rises slowly at first, then rapidly in the middle region and then flattens out again. Schools at the bottom of the curve are more or less equally lousy, and by the same token the best ranked schools tend to be of similar quality, notwithstanding variations of style. Those on the steep slope in the middle are problem children. The cost of education, on the other hand, correlates only loosely with the quality of the education.

Although you want to get into the best program that you can, the information in the curve tells you that in addition to the schools with the very best reputations, there are other schools that lack the name and reputation of the very best, yet offer an excellent education at a reasonable price. This is called value. The reason that top schools are preferred by employers is not that the education is necessarily better, but simply that by and large, student quality tends to be guaranteed. Schools of lesser reputation on the same end of the curve have students just as good, but the corporate recruiters have to pick and choose to select them. Once you experience a few typical "Human Resource" staffers, you will appreciate the futility in asking then to select among people too smart to go into human resources. And this is said with all due respect to those few sharp HR professionals that I have met over the years that I actually respect.

4.0 The Mechanics of Startup TOP

4.1 Organizational Forms
The procedure for beginning a business varies according to the chosen business form. One may choose a corporation, a sole proprietorship, or a partnership, and there are variations on each of these. Each has distinct advantages and disadvantages over the others.

4.1.1 Incorporation
A corporation is a business entity that for legal purposes is treated as if it were an individual. It can sue or be sued, enter into contracts, and so forth. Because a corporation is a legal entity unto itself, in theory the individuals running it are insulated from the consequences of lawsuits, bankruptcy, and similar contingencies as long as they have properly discharged their duties. This insulating property tends to fail where the business is so small that the management essentially is the enterprise. Corporations must handle a larger record keeping and paperwork burden than other business types. Several simplified variations, such as the "S" corporation, are preferred when small businesses wish to incorporate.

Corporations may be chartered on the state or federal level. The mechanics of doing either are not overly complex, but as there are specialized legal requirements, this task should be done with expert assistance. An attorney can be used, but for straightforward needs, there are incorporation kits that can be found in bookstores. There are also businesses that will do the incorporation for you, that advertise in such places as the Wall Street Journal. The advice of a good accountant is recommended for assisting you in determining record keeping requirements and the relative tax advantages of the various forms of incorporation. Many libraries carry specialized reading materials that will help to steer your decisions.

4.1.2 Partnerships
Partnerships have distinct advantages and disadvantages. One distinct advantage is that any partner can act on behalf of the entire enterprise. This allows any partner to run the entire business when the others are not available. One distinct disadvantage is that any partner can act on behalf of the entire enterprise. This makes every partner liable for the mistakes and financial losses created by any one of them. Partnerships are organizationally inflexible as the addition or loss of any partner necessitates dissolving the partnership and setting up a new one that reflects the changes. By contrast, a corporation continues without changes in legal form despite changes in personnel.

Since each partner has equal authority, any partner can order parts and equipment, accept or reject contracts, and hire and fire independently of the others - even in direct contradiction to the actions of the others. Overall, partnerships work well for parties that trust each other implicitly and have an established history of working together. Where these assumptions are not met, there are inevitable stories of partners who crash the business and leave the honest partners with the legal responsibility for the debts, or partners whose differing styles result in nasty disagreements without an ultimate authority to resolve disputes. While the partnership may evolve along lines of natural authority, a rogue partner can create a disaster.

In forming a partnership, it is imperative to have a competent business attorney draw up the partnership agreement. It should never be on a handshake basis.

4.1.3 Proprietorships
A sole proprietorship is the easiest form of business to create and run, and is preferred for new, small enterprises owned by one individual. If circumstances eventually require it, the proprietorship can later be converted to a corporation or partnership. The essence of a sole proprietorship is that an individual deals as a person with the public at large. This may be done directly in the name of the proprietor (Jack Smith) or through a fictitious business name, often called a DBA (Doing Business As) or TA (Trading As), for example, "Bob Klutz DBA Precision Bagel Foundry". If someone asks for your DBA, your fictitious business name is what is meant.

Your fictitious business name must be officially sanctioned. No bank can legally issue business checks in a fictitious name without presentation of official authorization to do business under that name. Nor will the state issue a sales tax account number to an unregistered name. Registration is simple, and typically involves travel to the county office and payment of a fee. A search is made to ensure that your chosen name isn't already taken or confusingly similar to an existing one. Public notice that you intend to adopt the name is normally required, and this is satisfied by publication of a notice in a newspaper that serves the locale where you intend to do business.

All businesses are regulated on city, county, and state levels. The registration and permit processes amount to three things: (1) to ensure that the laws are followed, (2) to ensure that the various levels of government and any other interested parties know who you are and where to find you, and (3) to ensure that taxes, license fees, and other charges are extracted from you.

To begin a proprietorship, start at the most local level, namely city hall if your city is incorporated, or at the county level if it is not. Rest assured that the clerks are used to answering questions and supplying forms, and they will walk you through the process. The sequence typically involves a trip to the zoning department, where the allowable commercial activities for your proposed place of business will be determined. In general, the laws will not prevent you from earning a living regardless of location, but do place limits on the manner in which business can be conducted.

Commercial space may have few restrictions. However, in residential neighborhoods it is common to forbid use of a showroom window and inventory of "stock in trade" i.e. boxes of merchandise stacked in the garage and living room. Visits must be by appointment and few in number. You will not be allowed to operate heavy machinery, or create odors or loud or unusual noises. You will be permitted few or no nonresident employees. The basic rule is to operate the business in such a way that neighbors will not be impacted by it. Consulting, writing, designing, programming, showing of samples, and similar small scale activities are typically pursued under these rules.

At the state level, you want to obtain a sales tax account number that allows you to collect sales tax from your retail customers, and allows you to purchase without paying sales tax to your wholesale suppliers. Some states will issue a tax number during a visit to their offices. This makes it possible to register your business name and pay a newspaper to publish a notice, obtain a city permit, open a business bank account, and get your tax number all in a single day and be in business by that afternoon. Some states with lesser enlightenment require tax registration by mail and can take up to six weeks to process the request.

Proprietorships without employees are not required to obtain a federal tax I.D. number, since an individual already has a social security number for identification purposes (a proprietor is by definition not an employee, neither is an unpaid spouse). However, the federal number is free and more professional appearing when requested by clients, who will do so when required by tax record keeping requirements. This is something to be considered when time permits. When you first hire employees, a federal I.D. number is a requirement, as is worker's compensation insurance, a state unemployment insurance account, payroll withholding, and observance of state and federal record keeping and report filing requirements.

5.0 Finding Customers TOP

5.1 Print Media
In order to understand print media, it is necessary to understand the economic rationale of commercial publishing. Commercial newspapers and magazines do not make a living from subscription fees. Although subscription fees help to offset the costs of delivery, the level is normally chosen not so much for revenue generation as to ensure that those who subscribe meet a minimum standard of interest. Many publications targeted to narrow audiences exact no subscription fee at all, but require that each individual be qualified by means of a questionaire. Commercial publications make money from selling advertising space.

5.1.1 Editorial Content
The editorial content (articles, reviews, etc.) of the publication defines the demographics of the desired subscriber base. If the content is broad, it maximizes the total audience and will attract advertisers of broad appeal products, such as automobiles and cold remedies. Specialty publications deliberately speak to a narrower audience. Many products cannot be successfully marketed in broad appeal publications at all. Engineering consulting services, reagent grade chemicals, and missile instrumentation each require targeted publications to achieve cost effective exposure.

5.1.2 Advertising Content
In reviewing candidate publications, it is not the editorial copy that should be given the most attention, but the advertising copy. Remember that the purpose of editorial copy is to attract an audience because that is what readers look for. However, the purpose of the audience is to attract advertisers. Careful inspection of the advertising purchased by other companies, most of whom have advertising staffs far more expert and better financed than a small startup, is the simplest and best way for a small, inexperienced advertiser to assess the suitability of a publication for a given product.

Look at five to six months of issues for a collection of candidate publication. The advertisers can be segmented into several groups. One distinct category is advertisers that appear issue after issue across multiple magazines. These advertisers consist largely of companies selling products with broad appeal and that have a sales volume that justifies large advertising budgets. Word processing software, for instance has a more universal audience than compilers, and food more than medicine.

The most important group for your purposes is those advertisers that appear issue after issue, but only in one or several selected magazines. These advertisers have found their audience, and often only need repetition of modest ads to obtain the desired effect. Especially look for advertisers in this category with offerings related to yours, in other words, to see if this is your audience too. Note whether they rely on toll free telephone numbers, accept credit cards, use a P.O. Box or a street address, print their hours of operation, and so forth. They offer what their particular customer base expects in terms of information and indeed, help shape the expectations. Successfully inserting yourself into this customer relationship will require that you meet these expectations. Offering less might compromise your legitimacy in the eyes of this customer base, while offering more might be a waste of money for the audience.

Finally, look carefully for advertisers that appear once or twice and then disappear. This will be especially apparent in the smaller ads typically at the rear of the publication. These ads are problematic, but rich in information. Some such ads represent test marketing by competent marketers, and the cessation of ads means that the test failed. Some others of such ads are from distinctly incompetent marketers. You may find examples of bad layout and advertising copy, inappropriate products for the audience, badly conceived products, etc. Contacting the companies can do much to explain why they discontinued advertising in the publication. Talking to the person that placed the ad is one thing, but sometimes you encounter other things that explain enough by themselves, such as impossible layers of automatic phone attendant menus, people that are never available, or literature that takes forever to come when requested or is incomprehensible.

5.1.3 Selecting Publications
Even if you already receive publications that you feel are your natural forum, it is instructive to visit the library at a university (maximum selection) and browse through the periodicals collection. Your personal demographic profile kept by mailing list brokers limits and defines the subscription offers that come addressed to you. Unless your targeted field is very narrow and you know the publications serving it well, you will likely be surprised at how many choices there are. Also inquire at the library reference desk for directories of periodicals. Explain your purpose -- most librarians are delighted to introduce you to the tools that they themselves use.

Researching the prospective customer base is fundamental groundwork that should precede the decision to market a product in a particular publication. In each publication of interest, you will find an area called a "masthead". This states the name of the publication, gives the names of the editors, publishers, marketing directors, circulation directors, and the like. The masthead is for advertisers. From it you will obtain the telephone numbers for advertising representatives. For publications of interest, call and ask for a media kit. This will contain a sample issue, a rate chart, and information on the size and demographics of the circulation. Much of this can also be found at their web site. From this and your own research on advertising content, you can draw a reasonable picture of who reads the publication and what sorts of things they buy.

Requesting media kits will generate a certain volume of followup calls asking or sometimes pressuring for placement of your ad. Handling such calls is an ordinary business responsibility, and the best response is a polite one. Tell callers that you are only gathering information at this time (unless you are actually ready to place an ad in the publication), and though you are interested (or else you wouldn't have requested a media kit), you have to be very careful with your limited ad budget (amen!) and hope to use them in the future (assuming that is the case). Each time you publish an ad, there will also be a number of "me too" calls. This is a normal fact of life, and the ability to say no in a courteous way is an asset that you will do well to develop. If you have some interest, and don't already have the media kit for the calling publication, this is an ideal time to request one while they are paying for the call.

5.1.4 Testing and Frequency
When placing your advertising, you will be gently pressured to commit to four, six, or more insertions in order to gain a frequency discount. Notwithstanding the savings over the single insertion rate, it is wise to test before committing to more. Most national publications have a lead time between receipt of camera ready copy by the publisher and mail delivery of the issue of three months. This means that you have two more months of billable advertising already in the pipeline should you discover that the first insertion is not pulling well. On the other hand, if your ad does pull well, a single insertion means two lost months before you can run the ad again. The choice is yours, but if the ad insertion is a first time for that publication, remember that the publisher will typically allow the first insertion to count against a frequency discount requested later on. Publishers are far less sanguine about multiple insertion commitments that are terminated prematurely.

As a general rule, an untested publication should be tested with a single insertion of a successful ad, an untested ad should be run once in a tested, successful publication, and a successful ad in a successful publication should be tinkered with only minimally and incrementally and run as often as required to keep up customer interest. The products offered can change, but the essential elements that create the overall appearance are part of your business identity and should not be reinvented with every insertion. As for the size of ad or the choice between black and white or color, the best guide will be your pocketbook, your conscience, and the approach of your competitors of equal size.

Every magazine has graphics artists on staff, and will attempt to aid an inexperienced advertiser by offering their services. Better results are obtained by using local talent. The ability to look over sample work, to interact with and learn from the artist, and to influence the results are worth the effort. Magazine staffs should be reserved for deadline emergencies or other compelling circumstances, and hopefully used only where a preexisting ad is available as a guide, and only new copy needs to be inserted.

5.2 Free Publicity
5.2.1 The News Release
News releases are a time honored way to place information on new products before your audience. Editors print news releases for several reasons. One is that they may consider the information of genuine interest to readers. Another is that printing a news release acts as a demonstration of pulling power for you as a prospective advertiser. Editors receive many more news releases than they can print, and many are not truly newsworthy, such as unremarkable price changes, or announcements that so-and-so was promoted to vice president of sales for North Dakota. Of more interest are new products that distinguish themselves in some way from competitor offerings, news of mergers and acquisitions, and noteworthy business successes (new startup lands major order).

News release formats vary, but an example illustrates a typical approach:


Light Emitting Transistor Corporation
811 Eimac Way
Glowfet, PA 12345



FOR IMMEDIATE RELEASE Contact: Varian Machlett

January 1, 1999 (215) 555-1212

LIGHT EMITTING DEVICE HAS BUILT IN FAILURE INDICATOR

Glowfet, PA -- Light Emitting Transistor Corp announced a series of electrically rugged, hermetically sealed devices similar to high voltage J-FETs. A unique feature of this invention is a

red indicator which goes dark upon device failure.

.

.

.

kilovolts. Another benefit is a soft saturation characteristic

-more-

-----------------------------------------------------------------

LIGHT EMITTING/ 2

which reduces harmonic content when the device is overdriven.

Further research promises a quantum leap in performance for

.

.

.

tolerates far higher temperatures than is possible with solid state devices. A vibrant future is seen for this entire class of devices.

Founded in 1998, the Light Emitting Transistor Corporation specializes in the development of high performance semiconductor alternatives. Previously announced products include the thyratron - a replacement for SCRs, and the hexadecimalode - a truly versatile alternative to traditional logic gate implementation.

-30-

-----------------------------------------------------------------

As seen in this example, the basic features of a press release are a date when the release is allowed to be made public, the date of preparation, the name of a contact for further information, and the contact's phone number. A title follows, and it is echoed on continuation pages along with the page number. A "-more-" tag is used on each page to alert the editor that additional pages follow, except for the final page, which uses "-30-", "-end-", or some other mark to signal the end of the release.

Since the document is a news release, it should not read like advertising copy. It will be edited rather than printed verbatim, so it is better to include as much explanation as is useful rather than attempt to boil it down yourself. The contents should include background information, which may include something about individuals, company history, financial backing, or other relevant facts. When photographs are included, they should be separate, glossy prints rather than halftone or inkjet. Check with the publisher if there are questions about suitability for reproduction. Each print should be marked on the back with the company name, name of the product, and a brief description of what the photograph shows.

5.2.2 Articles
An article featuring your product can be very productive. If your product is unique enough and of sufficient appeal, it may merit coverage as a single topic. Editors and subscribers both demand balanced coverage, so an article is not a license to publish a thinly disguised long advertisement. A dispassionate comparison of alternative products, including your own, is more likely to be accepted. A tutorial on the general subject of your product area that happens to use your product as an example is also an acceptable approach. The most instructive way to learn what is useful to a given publication is to study the articles in three or four issues as a minimum. Look for articles that you especially like and emulate their format. Many publications offer author's guidelines that can be had for asking.

You can write your article on speculation, or you can approach an editor with a query letter asking if the topic is of interest. The latter approach is superior in that it promises some degree of professional oversight in preparing the article if the topic is accepted. Before sending out query letters, time should be spent at a library consulting any of various books for writers that cover copyright concepts, manuscript formats, and the like.

5.2.3 Reviews
Giving away free copies of product is a classic way of promoting sales. The critical issue is to place the samples in the right hands. A review editor can be one of the best places possible. Many consumer oriented publications produce review articles that compare various products against each other. These are heavily relied upon by individuals who lack the time, resources, or expertise to evaluate products on their own. A good review can equal the value of tens of thousands of dollars in advertising. However, a well deserved bad review can all but end the value of advertising in that publication until your product improves.

Contacting prospective publications that use the review format is the best way to learn of upcoming review topics and to be invited to participate. Sometimes it is sufficient to send a sample to the editorial staff hoping that it will capture their interest. It is also inescapable that current advertisers are the first pool that any publication will draw upon for review products.

5.2.4 User Groups
Consumer oriented products can also be publicized by user groups. Reduced price coupons and other offers are often used. Some groups are quite influential, and have an effect far beyond their direct memberships. Others are merely local clubs. Locating user groups is best done by scouring publications that list them. Mailing list brokers specializing in the personal computer industry and related areas can also provide up-to-date addresses. Local groups will often to invite you to speak and demonstrate your product in person. Many companies use qualified groups as forums for evaluating initial reactions and obtaining expert opinions of product value. This may even justify airplane travel.

5.3 Paid Advertising
In theory, the advertising rates published by magazines and other media are the price that companies must pay. However, published rates are "commissionable", meaning that professional advertising agencies receive a 15% discount from the published rate. The advertising agency charges clients the published rate and keeps the commission as its fee for its services. Thus, advertising agencies are "free" to the advertiser in the same way that travel agencies are for travelers.

For larger companies with substantial advertising budgets, this system works well. There are two considerations that kitchen table startups must consider. One is that 15% of nearly nothing is an even smaller nearly nothing. A $500 ad placement would only net $75.00 to an agency. This is small change for the amount of effort required, and the typical agency will either turn down this size of job or ask for additional payment directly from you.

The other consideration is that in practice, the 15% discount is commonly available to anyone who provides camera ready copy. This means that a small shop can keep the discount if they are willing to put their own ads together. However, the ability to create an effective ad depends heavily upon the writing abilities and artistic sense of the creative team. These abilities are, to say the least, in uneven supply among technical professionals.

A graphics design shop can do artwork, typesetting, and create camera ready copy for you. A CAD system or a desktop publishing program can also be used, although the results often look exactly like they were done on a CAD system or desktop publishing program. The key factor is: what does the target audience expect? Consumers often expect four color pictures, good typography, and other things to cut through the clutter. Potential customers looking for highly technical things sometimes prefer a CAD looking ad. Comparison with competitors of equal size is the best guide.

Although no one knows your product better than you do, the ability to write clear prose is a skill that often eludes even the best intentions. Finding someone competent to act as a freelance editor can be as critical as the choice of publication. If they truly are good, further assistance with user manuals and data sheets is also highly recommended.

6.0 Running the Enterprise TOP

6.1 Wholesale Suppliers
Wholesalers are armored against consumers attempting to evade retail prices by masquerading as legitimate retailers. On one hand, any wholesaler is happy to make a sale, but on the other they are not inclined to anger their legitimate customers for the sake of small, one time orders. Wholesalers often set a minimum order amount ranging from $50 to $500. Then there is the issue of credentials. A wholesaler will want to see as a minimum a state sales tax certificate and business checks printed with your business name. That is just for C.O.D. purchases. To do business on credit, they will also want bank and trade references.

Fortunately, it is not necessary to have a well appointed office with a receptionist, plants in the lobby, and art on the walls. The choice of surroundings tends to be an issue of customer contact, not supplier contact. Suppliers understand that businesses operate under all kinds of circumstances from all kinds of locations. Many successful businesses operate from greasy warehouses, basements, and small offices. If the orders are steady and the checks are prompt and clear the bank, that is what wholesalers care about.

Although salespeople, field representatives, applications engineers, and others who call on you in a supplier relationship will willingly disregard your physical surroundings, your credibility will suffer if your business displays the earmarks of individuals attempting to pass as businesses. These include telephone numbers answered "Hello?", misspelled correspondence, correspondence handwritten on plain paper, lack of business cards or no listing under the business name with directory assistance, lack of internet access or fax capability, and screaming children and a blaring television set in the background when you use the telephone.

6.2 How to get Paid
The invoice is a fundamental document of commerce. It differs from a receipt in that it not only acknowledges that a sale was made, but does so in a manner that interfaces with your customer's payment system. Open account sales (sales made on credit) require invoices.

Commercial invoice forms involve three to five copies. To understand how the sales and payment functions are interrelated, it is illustrative to trace the use of each of the copies through a typical transaction. We will assume that five part invoices are used.

The transaction begins with the receipt of a purchase order, whether mailed, faxed, or telephoned in. Not every sale uses a formal purchase order or a customer assigned purchase order number. In this instance, the seller relies upon his own internal paperwork to document these less formal sales. We will assume that a formal purchase order has been received. Some larger companies include acknowledgment copies that are supposed to be signed and returned. Failure to do so may result in a phone call from the customer's purchasing department.

6.2.1 Creating an Invoice
When the order is shipped, an invoice must be generated. The contents of an invoice include the seller issued invoice number, the customer issued purchase order number, the date, the quantity, description, and dollar total for each line item, and shipping instructions as applicable, shipping, tax and other additional charges, and the invoice total. Informational items such as the salespersons name may appear as well.

A commercially printed five copy invoice has individual layers that are color coded. In the customary color scheme, the top copy is plain white, and the second yellow. These two copies are mailed to the customer's accounting department upon shipment of the order. The next two copies are pink and green. These are retained in the seller's accounting department. The pink copies are inserted into a chronological file. The green copies go into the history file for the customer account, and are filed in alphabetical order. The final copy is goldenrod in color and has the dollar amount column blacked out. It serves as a packing list, and may be put in the box with the merchandise but is often placed on the outside using a clear, adhesive-backed envelope made for the purpose.

6.2.2 Receiving Inspection
When the package is received at the customer location, the receiving department accepts the package and checks it for obvious external damage, which may prompt them to file a claim against the freight carrier. Then, they use the packing list to verify that the contents listed on the packing list are inside the box. The individual contents may then be inspected for damage, conformance to specifications, and the like. Often, special expertise is required to perform inspection, so that this step might be performed several days later in another department. In any instance, the checked packing list and approval of the merchandise are forwarded to accounting.

6.2.3 Accounting Review
The customer's accounting department matches the invoice copies received by mail with the purchase order and the packing list forwarded by the receiving department. Given both a demand for payment in the form of an invoice, and proof that the items received correspond to a valid purchase order and were received in good order, the accounting department will approve and schedule payment. When the check is written, the white invoice copy is retained and filed as paid. The yellow copy is normally returned with the payment. The packing slip can be filed with the white copy if it contains useful additional information, but is often discarded at this step.

Meanwhile, the seller's accounting department periodically reviews the file of unpaid pink copies to find out which payments are overdue, so that timely phone calls can be made to find out if anything is amiss, or if the customer merely needs prodding. When payment is received, the returned yellow copy serves to match the check with the invoice. The yellow copy may then be discarded, or filed with bank deposit information.

6.2.4 Making the System Work
It should be apparent that this protocol interlocks the accounting systems of the buyer and seller in a rational way. While there are many variations to suit the circumstances of particular industries, in large measure the basic format is recognized worldwide. Sales of consulting services and other arrangements that may not generate a shippable item in and of themselves are often made to fit the system by sending the customer a schematic, progress report, or some other physical token of the work performed so that the normal cycle through receiving and accounting can be satisfied.

Some touches are for the benefit of customers. Placing the packing list on the outside of the shipping box allows the packing list to be separated without opening the box. This allows the customer to control pilferage by having the packing list handled separately from inventory of the shipment contents. The external packing list also serves as an emergency source of shipping information should the shipping label become lost or damaged. Writing the purchase order number on the label itself is a common customer requirement to allow the package to be identified both before the packing list is read and after it is removed.

6.2.5 Counter Sales
If the package is picked up by a customer representative, common procedure is to have the representative sign his name and the date across the surface of the invoice. The representative is then given the packing slip but unless payment is made during the pickup, the white and yellow copies are mailed. This protects against failure of the pickup person to turn in paperwork. Some customers require telephone verification of pickups on credit, showing of ID, or other procedures to prevent unscrupulous employees from placing bogus orders and signing for them under false names.

6.2.6 Variations
Some customer accounting systems require as many as five invoice copies. These can be ordinary xerographic copies included with the yellow and white originals. Often the yellow copy will not be returned and instead the payment will include a check stub that notes the invoice number, or it may be written on the check itself. These are normal variations.

Simplified systems using three or fewer invoice copies dispense with chronological files and/or returnable invoice copies. They are more typical where transaction volumes are small or most sales are on a "cash and carry" basis. Alphabetically ordered account history files are still maintained. Miscellaneous sales that do not merit opening a separate account folder are lumped together into pseudo accounts by type. For instance, one time cash sales are placed into an account called "cash sales".

6.2.7 Accounting Automation
The system just described is an essentially manual one. Computerized accounting systems can eliminate much of the tediousness of record keeping. However, notwithstanding that engineers are enamored of computers, there may be no sense in computerizing your books unless the volume of sales transactions demands it. Far more important than the automation of your financial records is their adequacy. Accountants want "audit trails", meaning the ability to go back and find out where cash came from and where it went. Conquering this requirement outprioritizes any attempt to replace a professional bookkeeper (who is already using a computer) with an accounting package. Many businesses have enough to do without taking on this burden at the beginning.

7.0 A Two-Step Approach for the Employed Engineer TOP

Many engineers dabble on the side. A small consulting project is a way to keep current, is good for the ego and the pocketbook, and the projects can look good on a resume'. Nevertheless, most engineers who do this are snared in a trap of their own choosing. The trap is this: they can't let go of a paycheck. Such engineers moonlight forever, or at least until some responsibility at work consumes so much of time that the moonlighting has to be given up "temporarily".

The fact is that the dream of growing a business on the side until you are busy enough to quit and gracefully transition into self employment is normally an unrealistic dream. There aren't enough hours in a day to put adequate time into self employment and keep up with your day job. Few persons ever successfully transition into self employment by backing into it.

7.1 The first Step
However, there is a middle ground. There is nothing wrong with beginning a small side business with the explicit understanding that learning is the purpose and that the business does not have to grow during this period. This first stage allows you to experience the classic mistakes while you are small and have a cushion. It will also demonstrate to you why full time attention is needed to make the business flourish. During this period, you will begin to observe things about the operation of your employer's business that you never noticed before.

Learner business though it may be, this still means getting a business license, business cards, fax capability, and other resources needed by your business, and acclimating yourself to their use. These should not be not be left as a shock to deal with when you leave your employer to begin in earnest. This is also a good time to pay down your credit cards, because you will need them later.

Your starter business should work on things that are not in conflict with your employment agreement. There is no point in setting yourself up for legal scrutiny. Since the purpose of your business at this point is to learn, it probably doesn't matter if you choose a different industry altogether, and it may help. A design engineer can discover that he is not happy as a retail shopkeeper as easily in greeting cards as in computers, and a lot less expensively.

7.1.1 The Hobby Approach
A common tactic is to try to turn a hobby into a paying occupation. There is nothing wrong with that - it can be a classic formula for success. However, sometimes it is attempted for the wrong reasons. A love of books is a great asset in running a book store, but if the intent is to party at trade fairs and get books for your personal library at wholesale, this is not a valid reason to be in business.

7.1.2 The Consulting Approach
For skilled professionals, consulting is the most common first approach to self employment. The reasons for this are simple: anyone can call themselves a consultant, it doesn't take much cash, and you can work from your kitchen table. When discussing the things that make a business successful, some otherwise competent engineers opine that an advanced technical degree is one of the best things you can get. Within the narrow context of consulting this tends to be true, but technical ability alone is insufficient for a successful business.

7.2 The Need for Balance
One trivialization of what is needed is to state that the ideal is business acumen AND advanced technical knowledge. The problem with this statement is that the route to a goal governs its attainability as much as the choice of goal. Since the ideal is to combine both types of knowledge, this implies maintenance of some degree of balance as one learns in each of the two areas. It is instructive to ponder why it is that most of the smart people in this world work for others less brilliant than they are: mere brilliance is a commodity. There is no consolation in an advanced degree if undergraduate classes in accounting and business law are what are required to get your receivables under control.

7.3 Cutting the Knot
Once you have grown in experience, own or have access to the critical tools of your business, successfully satisfied more than one customer and have confidence that you can find more, the time comes to complete the transition. You can close your learner business and prepare the foundations of a serious startup, or carry forward the momentum of the starter business, but you must act. Since trying to fudge into the transition is largely futile, the method is to close your eyes, hold your nose, and jump. You can cut the knot gracefully and let your colleagues give a little party and a promise of your job back when you come to your senses, or you can make the speech to the boss about what a bastard he is and kick the door open to leave, but you must cut the knot. Getting fired can be a genuine blessing (albeit in disguise). Blessed is he who is prepared. More blessed is he who is willing to accept merely adequate preparation and get moving, rather than dilly dally trying to make sure that every little thing is perfect.

8.0 The Financial Universe TOP

When venturing into the business world, it is important to understand that if mathematics is the language of science and engineering, accounting is the language of business. To avoid confusion, it is important to distinguish between the various participants in the accounting and finance worlds.

8.1 Clerks
The finance and accounting community can be divided into four layers or tiers. At the most fundamental level you have clerks. These employees handle the fundamental tasks of the business and generate a record for each transaction. Sales clerks trading cash for merchandise at a cash register, shipping and receiving clerks, purchasing agents, and the like fall into this category. Employees keeping time cards act as clerks for their own labor.

8.2 Bookkeepers
The next level is that of bookkeeping. A bookkeeper takes the transaction records generated in the course of business, enters each into a journal of financial activities, and then "posts" or enters the transactions into account ledgers, such as one for sales, one for product returns, one for purchases of resale inventory, a separate ledger account for office supplies, and so forth. Thus, the purpose of a bookkeeper is to gather the information generated by clerks and others, and organize it according to the demands of the accounting system. The bookkeeper then uses the tabulated information to generate various reports such as daily or weekly sales, payroll amounts, overdue receivables, and similar information.

8.3 Accountants
The fundamental business of accounting is measurement and control. To implement control, accountants have the task of organizing and monitoring the work of clerks and bookkeepers. The accountant passes on to management various measures, such as return on investment calculations, balance sheets, and the like. The intent of control is to make certain that the accounting system properly represents the activities and state of the business, for instance that clerks aren't helping themselves to the till, and that invoices from suppliers represent merchandise actually ordered, received, and accepted. The accountant is in charge of the design of the paperwork system to ensure that these tasks are properly and honestly carried out.

Since it is the accountant who ensures that others are honest, naturally the most insidious and nefarious embezzlement schemes are perpetrated by accountants. Therefore, it is standard practice to have an outside accounting firm perform an annual audit. It is important to understand that there are different branches of the accounting profession, such as tax accountants, managerial accountants, and certified public accountants. Tax accountants are specialists, and CPAs are just accountants who have passed the CPA exam. This allows them to put their shingle out for the general public, for whom the exam is a putative guarantee of competency. The accountant most often found on corporate staffs is the managerial accountant.

8.4 Financial Officers
Finance is mentioned primarily as a matter of completeness. Where the job of the accountant is to report to management, the Chief Financial Officer is that management. Accountants ensure straight and level flight, but the staff financial genius determines where the flight is headed. For instance, should the company raise funds via stock issue or debt, and how much? Does it make more sense to keep a division that is ailing and put in money to fix it, or sell it off, or close it? These are matters for the executive suite and are beyond the ken of accounting. Finance is a different world. The Wall Street Journal is about financial affairs, and mentions accounting as an area of related interest.

8.5 The Startup Entrepreneur
If you are starting a business on your kitchen table, you can only dream about these levels of expertise. You will be your own clerk and often your own bookkeeper. Your forms will come off the rack at a store. An accountant should be consulted about your record keeping needs, especially where taxes are concerned, and should inspect your books and prepare basic financial statements not less than annually but preferably quarterly or monthly. The accountant should also remind you when various state and federal tax payments are due, possibly computing these amounts as well. For the daily demands of processing routine paperwork, you will find that the yellow pages list bookkeeping services one letter of the alphabet away from accountants. While they cannot substitute for an accountant's advice they are much cheaper for the mundane tasks that a college educated, self respecting accountant would just as soon pass on to others.

8.6 Using Outside Services
Some accountants keep bookkeepers on staff as a natural extension of their services. This makes them a one stop, full service provider. However, some business owners prefer the unbiased opinion that comes from an accountant looking over work that is not his own. There is also an advantage in being able to sack either the bookkeeper or the accountant independently of each other and move on with a minimum of disruption.

9.0 Double Entry Bookkeeping TOP

Most consumers are familiar with single entry bookkeeping, such as for their personal checking accounts. Deposits and checks are recorded in chronological order, and a running total is kept and compared against the monthly statement. This level of bookkeeping works as long as all cash flows of interest pass through the account, and the cash being accounted for belongs to only one individual. As soon as either assumption is violated, single entry bookkeeping is inadequate.

Businesses are rather more complex, and require double entry bookkeeping. Double entry bookkeeping treats the business bank account as just one of many reservoirs of monetary value that can be tracked. Examples of others are receivables, inventory, and business equipment, for starters. Double entry bookkeeping also tracks multiple ownership claims, or liabilities. There will be inventory not yet paid for, paycheck amounts not yet issued, refunds owed, taxes collected but not yet remitted, and so forth. Each of these outside claims against a portion of the business assets must be added to the equity claim of the owner/entrepreneur.

9.1 Fundamental Concepts
The fundamental entries in double entry bookkeeping systems are called debits and credits, abbreviated "Dr" and "Cr". The two terms arise from Latin. The original sense of debit is "to owe", and the modern term "debt" has the same derivation. For credit, the sense is trust or belief. By convention, debits are entered into ledgers on the left, and credits to the right. The earliest double entry bookkeeping systems used this convention when a merchant would first enter a description and price for an item handed over to a customer (the debit), followed by a notation of the payment terms (the credit) agreed to by the purchaser. The merchant might mutter to himself "I just handed you a pig so you owe me the pig until and unless you pay, but I trust you to hand me twenty guilders by the next fair."

In modern usage, debits and credits represent increases and decreases in assets, respectively, or the mirror equivalent -- decreases and increases in liabilities, respectively. The universal debits to the left, credits to the right format is maintained. Every transaction requires one debit and one credit (double entry), and the two must be equal in amount, i.e. balance. There are instances where a debit or a credit is split into several pieces, but the same rule applies - the sum of debits equals the sum of credits for each individual transaction.

9.2 Arithmetic Usage
Because debits and credits are entered into separate ledger columns, the net effect is that increases and decreases are all accomplished with positive numbers. This is not for arithmetic simplicity, but because the entries represent different types of things that should not be mixed directly. Given two entry types, debit and credit, and two types of ledger accounts, assets and liabilities, there are four ways to apply one debit plus one credit entry:

The debit and credit can both be applied to asset accounts, leaving the asset total unchanged,

The debit and credit can both be applied to liability accounts, leaving the liability total unchanged,

Debiting an asset account and crediting a liability account increases the asset and liability totals by equal amounts, and

Debiting a liability account and crediting an asset account decreases the asset and liability totals by equal amounts.

A fundamental accounting course is the proper introduction to the full scope of double entry bookkeeping.

9.3 The Accounting Basis
The accounting basis can be either cash or accrual. Cash accounting recognizes revenues only when received, and debts only when paid. Accrual accounting recognizes revenues as soon as they are owed to the business, and debts as soon as they are owed to others. Cash accounting is the norm only for small enterprises not able to maintain detailed records or for business that deal primarily in cash on the spot. Accrual accounting is the standard for everyone else.

9.4 The Accounting Perspective
Newcomers to accounting often sense an inversion of meaning from what they are familiar with, in that to a consumer, "credit" means receiving money, not having less, and debit or debt means paying money out, not receiving it. However, the terms are applied by the bank or credit card company from the vantage point of their own accounting systems, and indeed, loaning money to a consumer decreases their cash, and receiving debt payments increases it. A consumer who keeps a personal double entry accounting system realizes that the credit in the bank's books is reflected as a debit in the personal system and vice versa.

To continue the example, banks like to assure depositors of their stability by stating an impressively large figure for assets. However, the majority of a bank's assets are customer deposits which are offset by corresponding liabilities for each individual depositors. When these are subtracted out, many local banks are found to actually be small to medium size businesses with modest investments in the buildings they are housed in and the equipment required to run the bank.

10.0 Financial Statements TOP

The world has no shortage of business owners who cannot read financial reports and have even less interest in them. Such owners tend to have lawn care businesses, install sheet rock, or run fruit stands, and they see financial statements as a necessary evil to keep tax collectors off their backs. No sophisticated enterprise can afford this type of attitude.

Just as a real engineer is not content to stay at the "I push this button" level of understanding with equipment, a real business person finds periodic financial statements highly interesting reading. These are the dials and gauges of the financial engine. Financial records and statements not only provide a history of what happened and diagnostics of why, but they also provide valuable clues for the future. Furthermore, a healthy interest in the financial position of your business does much to forestall laziness and chicanery among bookkeeping and accounting personnel.

10.1 The Balance Sheet
The balance sheet, also known as a position statement, is one of the two most fundamental business statements, the other being the profit and loss statement. The balance sheet is a condensed inventory of every financial component of the business. As such, it is a "snapshot" of the business for the day on which it was prepared. However, businesses rarely change radically in the space of a few days, and the information in a balance sheet can be valid and useful for weeks or months after it was prepared.

10.1.1 Assets
The structure of a typical balance sheet follows a universal format. Listed first are the assets, and these are further divided into current and long term assets. The current assets are those that are cash or are converted into cash in the normal course of business operation, usually within a year. Current assets include the bank balance, the total of accounts receivable, the value of inventory held for sale, and certain other items. Long term assets include furniture, equipment, land and buildings, and other things intended for long term use and which are not normally for sale.

10.1.2 Liabilities and Equities
The liability side of the balance sheet uses the same conceptual split. Current liabilities include trade payables and taxes due. The long term liabilities include mortgage balances, stock held by shareholders, and the like. Stockholder capital is conceptually different from a loan, for it is permanently placed in the business and is not expected to be paid back. Hence, this item is referred to as an equity. The sum of liabilities and equities numerically equals the sum of the assets, i.e. the categories balance, hence the name of the report.

Long term debts such as mortgages affect both current and long term liabilities. Each month, the payment due appears as a current liability until paid, and the remaining long term balance is adjusted downward to reflect the fact of the payment.

10.2 Profit and Loss Statement
The Profit and Loss statement, also known as an operating statement, is the other most fundamental statement. It also follows a widely accepted format. Listed first are the gross revenues. From the revenues, expenses are subtracted, category by category, until the net earnings remain. The first category subtracted out is the cost of goods sold, leaving the gross margin, i.e. that portion of the sales total that directly contributes to profits. Next out are selling expenses such as commissions and advertising. Then general and administrative expenses that do not have a direct connection to sales are taken out, leaving the earnings before interest and taxes. Finally, taxes, interest, and similar charges that have no direct connection to revenue generation are subtracted out, leaving net income.

10.3 Relationship between the Statements
Since the profit and loss statement represents the business performance over an interval of time, and the balance sheet represents the state of the business at the end of an interval, it is standard practice to prepare a balance sheet and a P & L at the same time. The relationship between the two types of statements is fundamental. The P & L statement shows the financial flows of the business; the balance sheet shows the accumulations of those flows. The two must be read in tandem to get an accurate picture of the business much as the instantaneous water level behind a dam and the rate of flow of the river feeding the lake are both required to forecast what the water level will be tomorrow.

10.4 Choice of Fiscal Year
For tax reasons if no other, all accounting systems prepare statements at least once per year. Not all businesses use a calendar year. Tax authorities allow businesses to adopt fiscal years that end other than on December 31st when it makes good sense to do so. Many retailers, for instance, would find it artificial and distorting to split the Christmas season, their busiest of the year, between two accounting years. However, the calendar year is a logical choice for most small technology based companies. The fact of employees and customers alike being absorbed in holiday activities usually creates a lull in business at that time of year, and the owner's personal tax reporting requirements remain on a calendar year basis.

10.5 Financial Ratios
Taken together, the balance sheet and operating statement provide the savvy manager with a great deal of information above and beyond the bare facts shown on these documents. Common engineering practice relies upon "figure of merit" computations to assess the relative performance of components and systems. So too, the financial community uses some obvious and not so obvious manipulations of statement items to generate metrics of business health. As most of these involve division to normalize the results and make them independent of business size, they are called financial ratios.

Financial ratios conceptually group into four categories.

Liquidity ratios measure the extent to which a firm is able to keep up with bills, debts, and other short term obligations.

Profitability ratios measure the overall effectiveness of the business in creating profits.

Leverage ratios measure the extent to which the business is financed by debt.

Activity ratios measure how effectively the firm is using its assets.

For instance, the "current ratio" is obtained by dividing current assets by current liabilities. It is a measure of the ability of the business to pay its debts over the next thirty days, and is therefore a liquidity ratio. Suffice to say, current ratios below 1.0 are a bad sign. Current ratios above 2.0 are usually a sign of health. The normal range varies considerably by industry. Ratio statistics for various industries are published by the U.S. Department of Commerce, and it is instructive to compare your ratios against the averages for your industry segment.

A detailed discussion of financial ratios is beyond the scope of this chapter. The interested reader is directed to further study in the areas of accounting and finance. You are urged to be interested. Explanations applicable to your business should be forthcoming from your accountant.

The business owner should not rely upon his accountant to choose and compute the appropriate ratios, but should learn to apply these tools directly. It is not the accountant who is running the business.

10.6 Accounting Credibility
Virtually all business literature proceeds as if proper accounting information exists and is reliable. For many small businesses, this is a dubious assumption. The fact is that mistakes happen, some bookkeepers are incompetent, and some CPAs are better able to derive sense from chaotic books than others. It is imperative to create a good paper trail of invoices, purchase orders, check stubs, and other primary documents. It is wise to keep xerographic copies of checks received for payment and copies of deposit slips. Likewise, due attention to backup diskettes and virus protection for computerized records, and a known safe place for storing tax returns and employee folders is no more than proper caution.

A truly competent CPA will read your balance sheet and P & L like a novel, and have questions, explanations, and suggestions within minutes of reading them. Do not settle for a relationship where you drop off a collection of documents and weeks later your reports are mailed back. That is for fruit stand owners and small restaurants and is not a proper approach for the needs of a small, high technology startup with competent management.

11.0 Scams, Traumas, and Learning Experiences TOP
Almost never mentioned in standard business literature, but a constant hazard for the small enterprise, are various scams, legal shoving matches, and irritations. Apparently, small business owners are widely regarded by dishonest enterprises as easy marks. Businesses lack many of the legal protections granted to consumers. The small business advantage of being able to do things quickly with minimal procedural fuss is an asset for dealing with legitimate customers and suppliers, but also a hazard for those not paying attention when contacted by illicit or ill intentioned parties. Since a business listing in the telephone directory is sufficient to trigger such contacts, you should be aware of the more common scams, and develop an eye for spotting uncommon ones.

11.1 Toner Phoners
The fact of the matter is that most small enterprises are hard pressed to keep up with the daily demands of work. One result is that the typical entreprenuer keeps a close eye on funds spent for such things as inventory, advertising, and labor, but often delegates the procurement of humble office supplies; things like yellow pads, napkins, cleaning supplies, and pencils. Whichever long suffering person gets this duty likely also serves as receptionist and secretary, and probably bookkeeper, shipping and receiving clerk, and general all-around gofer and reminder of appointments. (S)he will be as overloaded and pressed for time as anyone. So it is, that when this person receives a phone call asking a trivial favor, the conditioned response is to take care of it quickly and go on to another problem. The conversation goes something like this:

Secty: "Joe Blow, Inc., how may I direct your call?"
Scammer: "This is Brett over at the Corporate Copy Center. I'm just checking our records to make sure they're up to date. All I need is the number off the front of your copy machine."
Secty: "Uh, sure. Hold on a minute."(pause)
Secty: "It's a Xerox 5558. Is that all you need?"
Scammer: "Yeh, that's it. What was your name?"
Secty: "Francine, but everybody calls me Fran."
Scammer: "Thanks a bunch, Fran."
Secty: "You're welcome. Bye."

The whole thing lasted maybe a minute. "Brett" has used a tone of easy familiarity as if you have done business with him before. The generic sounding company name is intended to be the sort that you would swear you have heard before, but can't really remember either, as bland and forgettable as the wall paint in a government office. The request is innocuous on its face, trivial, and easily handled. Plus, when Brett calls again, he has an already established rapport of sorts. And he will call again, probably in about a week. You have done him a favor, now he is prepared to give you one...

-ring-
Secty: "Joe Blow, Inc., how may I direct your call?"
Scammer: "Is this Fran? This is Brett over at the Corporate Copy Center. We just got notice that the price is going up on toner for your Xerox 5558. Just to thank you for your past business, I wanted to let you have a case at the old price. We only have about twenty boxes left, and they'll be gone by lunch. Can I put you down for one? I can ship it this afternoon, OK?"
Secty: (As busy as ever, thinking fast) "Uh, sure."
Scammer: "Great, let me verify your address."...

Comment: This time, Brett has made every appearance of a legitimate call. He knows Fran's name and the model of copier, and has once again invoked a phantom memory of a past relationship. Then he baited the hook and she took it. In a few days, just enough for the fine details to fade, the toner will show up. It will be proper merchandise at a reasonable, everyday price. The invoice will arrive, and Fran will pay it in due course. So, what is the problem here?

Over time, Brett's contact will fade into the background. He will follow up with other supplies, but not quite in the same way. Items will appear that were never ordered. Prices will rise. And boxes will simply arrive without any contact with Fran or action on her part. The items will always be generic things that can be found around any office, and shipments will not be so frequent as to be obvious. What Brett has found is another small business that pays little or no attention to this type of purchasing. He will bleed money through this leak as long as he can, though he will never be so stupid or greedy as to invoice without actually shipping product. That would be illegal! One fine day, while visiting the supplies closet, you will remark over the large quantities of copier paper, paper clips, floor cleaner, and fluorescent bulbs (which might not even be the right type) that are crammed in there. When you ask Fran why she has ordered so many supplies, she will look at you in astonishment and reply that she didn't order them -- she thought you did! And then realization will dawn.

Trying to contact "Brett" will likely be an exercise in futility. The invoices will go to a PO Box, rather than a street address, and probably in another state. The invoices will likely not bear a phone number, or list one that only reaches a recording. If you are smart, you will simply refuse to pay any outstanding invoices from "Corporate Copy Center". In due course, a friendly but worried sounding Brett will give Fran a call to ask if she forget to pay her bills. He will bluster when told that the invoice(s) will not be paid. His tone will stiffen somewhat when you tell him that you never ordered the goods, but when you tell him that he also won't get the goods back unless someone picks them up, you will never hear from him again.

A bit of healthy interest in anyone trying to get your copier information works wonders. Telling the caller that you need to call them back and asking for a phone number can have interesting results, ranging from a nebulous explanation about why they "can't" receive incoming calls to an abrupt hang up. Asking for the correct spelling of the company name and a street address also helps weed the fake from the genuine. Checking your records and cooly informing a caller that, in fact, you have never done business together has its charm.

11.2 High Price Hookers
There are legitimate businesses that offer their wares most conveniently. If Francine the secretary is too busy to run over to the local "Warehouse Club" for yellow pads, then she is probably too busy to know what their prices are, either. There is value in the convenience of being able to pick up the phone and order whatever is needed. The fact that even the "special deals" are at twice the going rate is not the problem of the seller. If Francine is too busy to know or care what fair prices are, she is their legal prey.

11.3 Stock Brokers
One hazard of being a recognizeable small business owner is the sheer number of calls possible from stock brokers. On one hand, theirs is a legitimate business. On the other hand, not all brokerages are created equal. High pressure pitches asking that you send cashiers checks in large amounts should not be taken seriously. Your own business probably needs all of your available cash, and you should not allow yourself to be distracted by dubious offers that play on your greed and ego. If you can hear a babble of voices in the background, you are speaking with someone at a "boiler room" operation who is "dialing for dollars". Don't waste your time with them, and don't be shy about hanging up either. Many have instructions to stay on the line as long as you do, and they are brazen, shameless, and can't be insulted. A legitimate broker is polite and business like, and knows the value of his own time.

11.4 Charity Pitches
There are a lot of troubles in this world. Small business owners are in a position to help as much as anyone else. However, it is important to approach this area of service in a measured, rational way. A good policy is to find a monthly or annual allocation that is within your means, and stay within that budget. Throwing out a token donation to any charity that calls is a shotgun approach, and simply guarantees many more calls in the future. There is no shame in telling a caller that you already supported the American Cancer Society or United Way, and that there are no more dollars to allocate at this time. There is also wisdom in requesting literature from organizations you are interested in, rather than just responding to a voice over the telephone. Charities that refuse to send mail are not professional. Another good policy is to focus your efforts where you feel a genuine interest in the topic. Look for causes that you believe in, rather than coldly forking over cash as some sort of compassion tax. By the same token, don't pick a cause and slam the door to all others. An open mind and an ear for genuine need is a key to effective giving.

11.5 Promotional Gadgets
A common marketing practice is to hand out keychains, pens, hats, or mugs with your business name and logo on them. Regardless of whether or not this is a fit to your business needs, you will still receive unsolicited mail and phone calls offering such merchandise. If you are interested, do not be hasty to place an order. As with copier supplies, take care to ascertain the company name and location. Take time to research your needs rather than make an impulse purchase. Especially be wary if the supplier is out of state and there is some representation that you have won a big screen TV or other prize, but that for "tax reasons", you need to place an order to claim it. Such inducements are probably bogus, and prizes, giveaways, and sweepstakes are a dubious basis for any proper business decision.

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