The Bureau of Business Research July-August 1979 The Small Business Te:xas BUSINESS The Bureau of Business Research The University of Texas at Austin Vol. 53, No. 4, July-August 1979 A Successful Small Business: An Interview with Ginny Geery 109 Lorna Aldrich Monti The Small Business Owner: What It Takes to Succeed 113 George G. Eddy Planning for Small Businesses 116 Floyd S. Brandt The Plight of the Successful Small Business 119 Henry M. Rollins Managing Service Capacity 125 James A. Fitzsimmons Profile of the American Small Businessman 129 Norval D. Glenn and Charles N. Weaver Computers and Small Businesses, Part II: An Interview with Harry A. Levine 133 Kenneth W. Olm and Helen R. Baca Retail Adjustment to Rural Industrialization 137 Claud M. Davidson Cover design: Eje Wray Bureau of Business Research Charles C. Holt, Director Review Staff Lorna A. Monti, Editor Lois Glenn, Publications Manager Charles F. Dameron, Jr., Managing Editor Mary Jo Powell, Editorial Assistant John A. Burghardt, Data Consultant Mildred Anderson and Jean Hall, Data Compilation Daniel P. Rosas, Printing Coordinator Joan Farnham, Compositor Subscription rate : $9.00 per year. Single copy: $2.00. Pub­lished six times a year. Second-class postage paid at Austin, Texas. Publication number 540-400. ISSN 0040-4209. Copyright © 1979, Board of Regents, University of Texas System. Address manuscripts and communications to Texas Busi­ness Review, Bureau of Business Research, P.O. Box 7459, Austin, Texas 78712. Telephone: 512-471-1616. Texas Business Review is indexed in Marketing Information Guide and Public Affairs Information Service and is avail­able on microfilm from University Microfilms. A Successful Small Business An Interview with Ginny Geery Review: Could you describe your business? Geery: Well, it aims at meeting communications needs for people who have relatively short-run copying, duplicating, printing, and binding needs. Our customers include graduate students just before deadlines and business people with peak overloads who have rush projects-everyone who needs anywhere from one to a thousand copies of any number of originals. We have six shops now operating-three in Austin, one in Houston, one in San Marcos, and one in Lubbock. We have about fifty people working now. Review: How much of the business is copying and how much is other services? Geery: Use of our Xerox and IBM equipment is about 60 percent of total sales; so about 40 percent of sales comes from other things, such as offset printing, various kinds of binding, and word processing. Review: What was the business like when you started it? Geery: I started it in October 1971 at the comer of 22nd and San Antonio streets, one block from the Uni- Ginny Geery is founder of Ginny's Copying Service, based in Aus­tin. Loma Aldrich Monti is Editor, Texas Business Review. Lorna Aldrich Monti versity of Texas. The shop had about 300 square feet . At that time the business was exclusively one to ten copies per original. When we began doing one hundred to two hundred copies of each origi­nal , our customers started talking about needing other services, and we got into them. R eview: Why did you start the business? Geery: I had reached the point where I didn't want to rely on anybody else; I needed to be in business for myself. I started Ginny's rather than some other kind of business after I looked around Austin to see exactly what kinds of things seemed to be needed that my background had prepared me to do. When I heard there was a demand for cheap copies that were of good quality, I knew that was something I could handle. I had had a lot of ex­perience in office management, and I knew I could run a copying machine. Had I had any idea when I started that I was going to get into something like the business I've got now, I wouldn't have had the nerve to try it. But as I've gotten into the copying business, I've gained the experience at each point so that I could go to the next step . R eview: What personal traits do you feel helped you the most? Geery: I love working with numbers. I'm very optimistic, and I have a very strong need to succeed-a very strong desire to do everything that I do just as well as I possibly can . I have strong religious con­victions. I feel that work is a form of worship, and I like to help other people. The more that can be done to make things more cost efficient, the more I like it. I've always been a numbers freak. Review: What business strategies have helped you the most? Geery : I think the most important one has been my need to know why a certain method would work better than another method-why it would save money, why it would save time, all of these kinds of things. I put a pencil to every suggestion that somebody comes up with and try it out on paper to see if it will work. Another thing is that I'm never afraid to try some­thing new. I'm never going to accept other people's ideas that something can't be done until I've tried it myself. I think another thing is my belief that people will perform at whatever level you expect of them. That's been very important. I feel that we've had some absolutely phenomenal people in this busi­ness from the very beginning. Review: The good people who help you manage-you don't manage fifty people all by yourself-were they hired as supervisors or managers? Geery: We have in the past hired some people with the idea that they were going to be managers and hired them at very high pay to do that specific job. In every instance when we've done that, we've been disappointed so we've gone back to the con­cept of training and developing within the com­pany. Review: Something that many people mention about run­ning a small business effectively is the need to select good professional help. How have you gone about that? Geery: I have an accountant who's on retainer with us as well as a treasurer (with an accounting background) who's in charge of the bookkeeping staff, and I have a couple of other people on the bookkeeping staff. When we went to computer conversion, the first thing we did was hire a computer consultant to help us select a computer and program it. We have an excellent business attorney who is also a CPA. I definitely wanted my lawyer to know about accounting. We always look for professional real estate people when we are getting ready to buy a lease or something like that. I guess occa­ sionally I've also hired an architect or a mechanical engineer to look at one situation or another. Review: You started very small and needed to raise money. What were your initial sources of finance, and did these sources change later? Geery : I'll answer the question about our initial sources of financing first. I had figured out a budget based on what it would take to keep the doors of the shop open for three months-$3,000. So I looked for financing for $3,000, because I didn't have one penny. I went to the banks; they weren't at all im­pressed. So I looked elsewhere, and I found two professors at the University of Texas who thought the copying service was a good idea. They put up the initial $3 ,000. Then I bought them out about a year and a half later, after I had gotten my first loan from the bank. Review: How did you succeed with the bank the second time? Geery : Our Xerox sales representative worked with me very closely in preparing a proper loan application. Review: Which consisted of what? Geery: It consisted of a resume, an explanation of our company in writing, our financial statements up to that point, and an explanation of what we wanted to do with the money and why that loan was a solid loan, because we were paying out the money anyway every month on supplies. We were just not getting nearly as good a price as we would be able to if we could buy the supplies at one time. I real­ize in retrospect that if I had prepared a good pro­posal for the banker in the first place I might have had a chance of getting that loan the first time. Now almost all of my financing is done for leasing or purchasing equipment. Obviously, when I lease equipment the financing is through leasing com­panies and when I buy it's through bank loans. Since our business is still primarily a cash rather than a charge business, there have been very few times when we've had a cash-flow problem. For the most part, we've needed to borrow money only when we've needed to buy something new. Review: When you have bought new equipment or have gone into new lines, how did you go about analyz­ing them and from whom did you seek advice? Geery : Other people who were in the industry, either in Austin or outside of Austin. I have many friends in the industry across the country now. I talk to them a lot. I talk to our sales representatives, I talk to our customers, I talk to our employees-I get every bit of input I can from them-and I test equip­ment. We have been able to get a lot of equipment on trial at various times in order to find out if that equipment would do what we wanted it to do. Review: You haven't gone into anything without examin­ing it, without knowing it? Geery: I can't say that because our word processing has not done as well as I expected it to do. I'm not sure I did it properly. Review: Why do you feel it didn't work? Geery: I'm not sure yet. I wish I knew the answer to it. I don't know if it was our marketing. Maybe there really wasn't a need for it, and I misjudged the need for it in advance. I don't know if the problem was the personnel we had in charge of the depart­ment when it first started. Maybe our kind of business and a word-processing service don't mesh as well as I had expected them to. I just don't know the answer to it. I wish I did. Review: Do you feel that a successful business person does not need to have a perfect record, just a good record? Geery: I think that people who have perfect records haven't ever tried anything new. I think that a perfect record is probably one of the worst things that can be used as an indicator of a successful business person. Review: You've had a good record, and you seem to attri­bute it to having had good people work for you. How do you manage to pick good people? Geery: We do an awful lot of interviewing. We ask a few specific questions-name, address, phone number, social security number, date of birth, what brought you to Ginny's, experiences that you feel are per­tinent to this job, and comments about yourself in general. When I interview anybody, the first thing I always ask is "Tell me about yourself." We look for people who can carry themselves well and are intelligent-people who have ideas, people who are fast moving, fast thinking, people who are quick learners. I look for as many different things as I can that will show me that this applicant is a person who is going to do her best or his best at whatever needs to be done. Review: Once you get good people, you need goals and, some would say, planning. Do you plan much? Geery: Constantly. Review: How far ahead do you plan? Geery: Well, we have a ten-year plan. We are three years into our ten-year plan right now. We also have a yearly plan and a six-month plan. Review: How do you formulate your plans? Geery : To formulate our ten-year plan, six of us got to­gether with a sales representative for three days. We analyzed what we thought the market was go­ing to be like ten years from now, what we wanted our company to be like ten years from now, where we wanted to be, what we wanted our people to be like, what we wanted our services to be like. All of these kinds of things. Now, when we formu­late something like a ten-year plan, we expect to make changes in it as we go along. For instance, by our initial plan, we should have had ten shops by now, but we've just opened our sixth. When we opened our second shop shortly after we formu­lated the plan, it was such a disaster in the begin­ning that the first thing we had to find out was all of the things that we had done wrong with that, and then we had to get those things corrected. It took nine months from the time that we started correcting until we got the person who ended up being our manager. Review: If you put so much energy into planning, how much of a role do you assign to chance? Geery: Chance fits into business constantly. In looking for a new location, you determine generally what loca­tion you want to be in, but chance determines what will be available to rent, lease, or buy at the time. You buy a piece of equipment, and then a brand-new model comes on the market two weeks later. Or a used piece of equipment might come on the market and you can't pass it up. There are a lot of chance things. I don't think that the deter­mining factor is what chances you had or didn't have, but what you did with the chances that happened. Review: You've learned how to manage your resources and take advantage of chances. What are the other issues that you and other people who are running small businesses have to face? Geery: Well, I think one of the most important ones that we are facing today is the rapid rate of inflation and all of the things that go along with that. We have to make sure that we don't allow our prices to get to the point where we can't replace equip­ment, for instance, when it wears out. Another thing that I think every business person, small or large , has to look at is personal integrity. How they handle choices involving making more money and personal ethics. I think that another major issue is the government and what kind of impact it has on the amount of paperwork that we have to generate to satisfy gov­ernment forms, regulations, health and safety re­quirements, and equal opportunity requirements. Review: How much of your time goes to regulations and paperwork connected with regulations? Geery: I couldn't begin to say how much staff time is involved in that. I would guess at least one of our four bookkeepers would not be necessary if we did not have so much government regulation-that's a 25 percent cut in one department. It very likely could be that we could cut half of them. You know, I have to keep two sets of books. I keep the set of books that the government requires for taxes, but they don't tell me one thing that I need for business management. So we have to keep a separate set of books to give me the information that I need for business management. There is an awful lot of duplication of effort. I guess if I were going to name one thing that is my biggest concern, it's the amount of govern­ment regulation that has cut down on free enter­prise instead of encouraging it. I'm totally in favor of a free society. Review: Let me move back a little bit to yourself. How do you allocate your time? Geery: I would say that I spend approximately half of my time either sitting at my desk or talking to people on direct planning activities. I spend probably about 10 percent to 15 percent reviewing all of the data that I get, doing the controlling that is sup­posed to be done, and looking for things that are out of whack. Why is it out of whack? What can be done to correct it? Then I think that the next largest portion of my time-and it sometimes becomes the largest-is talking with all of our managers in our different shops. Seeing what 's going on there, helping with anything that's corning up-something that pro­vides new impetus-and reviewing what's going on. I talk with our shop managers, our various depart­ment supervisors, and the other officers of the company. I make sure that I continue to know all of our people-I usually do all of the final inter­viewing for any position in the company. The last thing that I spend my time on, I guess, is all kinds of meetings and community involvement. I'm on the board of the National Association of Quick Printers, I'm the president of the local chap­ter of Printing Industries of America, and I'm on the board of Junior Achievement. All of these demand certain amounts of time. I keep in contact with people whom I think it's important to keep in contact with; I talk at various seminars. Review: You mentioned Junior Achievement, a program that works with high school students. Were you interested in business at that age? Geery: For three summers, beginning the summer after I graduated from high school, my two sisters and I ran a day camp for children up to 12 years old. It put all of us through school and provided summer jobs for a number of other kids as well. It was really exciting and fun, and we were outside all the time and we made pretty good money for teenagers. Review: Why did you start the day camp? Geery: My sisters both had done counseling at a day camp, and in Fort Lauderdale, where we lived then, we had heard complaints that there wasn't a camp on our side of town. I had just finished the Junior Achievement program in high school, and, because of that experience and how well I had done in that, my dad had the confidence in us to be will­ing to let us try it. Review: How would you describe your political and social orientation? Geery: You know, it's funny. I have gone through almost every phase that somebody could go through along those lines. I supported John F. Kennedy back in the sixties; I was a Goldwater Republican in 1964. I felt that every option was a disaster after Bobby Kennedy was killed. I voted for George McGovern. I moved back and forth over and over again, from super right wing to super left wing. I feel the thing I have looked for and the people I have supported have been people with high integ­rity. And I have been disillusioned time and time again, frankly , by the fact that the people had their integrity but didn't seem to be able to be efficient. People who were effective seemed to lose their integrity. About two years ago, I became involved in religion very heavily. I had been very active in religion in all my early years. Now, for the first time, I have found a way to make all of the different parts of my life fit together. My religion, the Baha'i Faith, teaches unity, and it has provided the unity in my life. The Small Business Owner What It Takes to Succeed It is more difficult than ever to succeed in a small busi­ness; according to Dun & Bradstreet, more than half of new small businesses close in five years or less. The attrac­tion of the small enterprise, however, remains strong. Op­portunities do exist for creative and aggressive entrepre­neurs; out of the 13 million to 14 million business enter­prises in this country, over 9 5 percent are considered to be small firms. In Small Business Management Paul Harmon cites several studies of small business failures, reporting that "the odds ... are stacked heavily against a new manager going into business today. Three out of five new firms are out of business after the first two years. They may not have de­clared bankruptcy, but they have quit for one reason or another. Retail firms have the highest failure rates: 51 per­cent quit or fail within eighteen months, and 70 percent quit or fail within three and one-half years. " 1 Causes of Failure In reviewing the 11,432 reported business failures in 1975, Dun & Bradstreet concluded that 41.2 percent were caused by incompetence, another 21.l percent by unbal­anced experiences, and nearly 17 percent by lack of experi­ence in the line. The underlying and apparent causes of business failures have been listed in some detail (see table). According to W. H. Kuehn in The Pitfalls of Managing a Small Business, the following circumstances have plagued small business owners and managers: lack of experience, lack of money, wrong location, inventory mismanagement, too much capital in fixed assets, poor credit-granting practices, taking too much out for yourself, unplanned expansion, and having the wrong attitude (for example, refusing to seek help when the situation is out of control).2 George G. Eddy is Lecturer in Management, University of Texas at Austin. George G. Eddy More often than not, unfortunately, a small business is launched without any appraisal of the needs of the market or the managerial requirements involved in transforming an idea into a commercial success. Apparently, many would-be entrepreneurs are content with the unverified assumption that the still-to-be defined market is there and that the ven­ture surely will work because the idea seems so good to the originator. The practice of such self-deception is widespread. When a new venture is begun, it usually depends on the ability, experience, and energy of one individual or a hand- What the owner of a small business most often neglects is proper record keeping. ful of hopefuls. Seldom does the owner-manager recognize how much time and effort will be required just to survive or how much operating capital will be needed to pay all the bills every month. As it is manifestly impossible for an individual to possess all the knowledge and expertise needed, the usual result is a concentration of effort on what the owner-manager knows and likes. What is most often neglected is proper record keeping, both for financial statements and inventory management. When records are kept by a bookkeeping service, for example, the owner­manager may not examine or understand the statements. Once a year they are dispatched routinely to the Internal Revenue Service, as if the latter were operating the busi­ness. If the IRS did not insist on getting them, these state­ments probably would never be prepared. Consequently, the owner-manager does not know what the costs of the business are and is unable to control them. The owner may run out of cash and then discover that there are still bills to be paid. This situation is similar to that of the old man who was interviewed about his typical monthly living expenses. "Well, let's see," the old man said, "I spend 60 percent for food, 40 percent for rent, 20 percent for clothes ... " "Wait just a minute," interrupted the interviewer, "that adds up to 120 percent already!" "Oh I know, I know," the old man responded sadly, "and it gets worse all the time. " Many small business owners have other shortcomings. The owner usually is inordinately vague about personal goals that the business is to satisfy. The business may be so underinsured that one adverse litigation could wipe it out, and the owner may be so unaware of tax laws and other legal problems that his formal organization structure (partnership, corporation, etc.) and operating practices may be depleting operating capital needlessly. Most small business owners are also ill informed about choosing and working with the right banker, uninformed as to the various sources of information pertinent to the business and the cost and availability of expert advice, unclear about respon· sibilities and authorities within the organization, especially when it grows, and reluctant to develop a budget and apply it. Small wonder that the incidence of collapse is so high. Characteristics of Successful Small Businesses A study of chief executive officers of several successful small businesses showed the following profile of the sue-that there may be prob· Causes of 11,432 Business Failures in 1975 lems that cannot be solved by Percentage Percentage current efforts. It is indeed pos­ Underlying causes of failures Apparent causes of failures sible for a competent outsider Incompetence 41.2 Inadequate sales 51.3 to develop practical solutions to Unbalanced experience 21.1 Competitive weakness 22.3 such problems without bruising Lack of experience in the line 16.9 Heavy operating expenses 15.9 Lack of managerial experience 13.7 Receivables difficulties employee and owner sensibilities 9.5 Inventory difficulties 8.3 or costing more than the firm Poor location 3.4 can afford to pay. Excessive fixed assets 2.5 Other The small business owner 1.8 should also be aware of a num· Neglect 1.1 Bad habits 0.4 ber of other sources of informa· Poor health 0.3 Marital difficulties 0 .1 tion, which include chambers of Other 0.3 commerce, municipal planning Disaster 1.0 Fire 0.4 offices, local business organiza· Flood 0.0 tions, trade associations, public Burglary 0 .0 or school libraries, the Small Employees' fraud 0.0 Strike 0 .0 Business Administration, Service Other 0.6 Core of Retired Executives (SCORE), the Small Business Fraud 0.5 Irregular disposal of assets 0.2 False financial statement 0.1 Reporter of the Bank of Ameri· Premediated overbuys 0.1 ca, and financial ratios for com· Misleading name 0.0 parative analyses between the Other 0.1 owner's firm and industry aver· Reason un known 1.5 ages as provided by Dun & cessful small business owner-manager: a moderate risk taker who possesses a passion for achievement and is decisive, versatile, self-confident, and a finisher, as well as a benevo­lent despot.3 In Successful Small Business Management, Curtis E. Tate and his associates have noted that most successful small business managers have limited formal education, watch their time carefully, and have a great sense of independence, a strong sense of enterprise, and expectations of quick and concrete results.4 To these should be added an enduring zest for the enterprise. While some of these personality attributes, such as ver­satility and decisiveness, may seem beyond reasonable dis­pute, we need to go further than a study of personality to a recognition of the lessons that should have been learned from studies of the failures. At the outset, goals must be defined in specific, reason­able, and measurable terms. If a goal cannot be readily and easily checked, it becomes merely a platitude of no prac­tical value. Specific functions and the associated skills and experience needed to implement them to conduct the busi· ness efficiently must be defined, and these functions must be assigned to the best qualified people. These goals must then be incorporated into a plan of action of at least one year. An appropriate record-keeping system and a budget, including cash-flow analyses, must then be developed to support the plan. Successful small business owners select experts to pro­vide advice as needed on banking, legal, tax, and insurance matters. From time to time, a business consultant may prove helpful. There will always be occasions when outside help will be needed and should be sought. Most small busi· ness owners find it difficult to admit Source: W. H. Brannen, Successful Marketing for Your Small Business (Englewood Cliffs, N .J.: Prentice­Bradstreet, Robert Morris & Hall, 1978). Associates, and others. Chief Factors in the Small Business Environment Internal (largely controllable): • Strategy, goals, and policies • Identity of skills needed • Selection of key staff members • Authority and assignment of duties • Organizational structure • Selection of location • Physical plant • Procedures, processes, and systems • Training and educational programs • Performance Individuals and groups (largely mobile): • Attitudes and beliefs • Values • Motivation • Experience and background • Abilities • Needs and desires A marketing strategy based on a determination of the firm's logical market segment, the business location approp­riate to this segment, and the supporting pricing, promo­tion, and advertising plans should be developed. A contin­ued appraisal of marketing information, including what the competition is doing, is essential. The owner-manager of a small business may also want to consider joining such an association as the National Federa­tion of Independent Business (NFIB) to bring the unique problems and circumstances of small businesses to the at­tention of elected officials. If elected officials are influ­enced by large numbers, it seems unbelievable that some 13 million small companies could not attract attention. It would appear largely to be a matter of organization and articulate persistence. Otherwise there will be no abatement of regulations that increase the costs of doing business or of taxes that impede capital formation. The Small Business Environment For any small business there are two principal environments-one external, the other internal (see chart). The internal environment is largely controllable, whereas the external environment is largely uncontrollable. Both environments influence the manager's decision-making process, and each also acts upon the other in varying ways. The boundaries are not as distinct as the chart might imply, and usually a certain amount of territorial crossing occurs as events unfold. While it is true, for example, that the choice of the location of the business is an internal matter, once the decision has been made the firm is subject to whatever influences that location entails. The employees also bring to the company attitudes, education, and experi­ences provided by the environment external to this organi­zation; but, once employed, they are influenced by what occurs during the working day on the job. Increasingly, it seems, the external environment is be­coming more influential, impinging significantly on what a firm can do and what it cannot. All businesses face an ex­ternal environment of regulation in which compliance costs appear to balloon without limit. Recently, the CBS televi­sion documentary program 60 Minutes estimated that small businesses pay $20 billion a year to respond to government paperwork requirements. Since the typical small business External (largely uncontrollable): • Bankers • Community (beliefs and customs) • Competitors • Courts • Customers • Economy • Educational institutions • Government • News media • Religious institutions • Suppliers and distributors • Technology • Unions • Weather has few resources and little or nothing in reserve, it is espe­cially vulnerable to external factors that add to the costs of doing business. Current and significant examples of this situation are the recent substantial increases in social security taxes and the minimum wage. Most small firms are labor intensive; therefore, whenever payroll costs rise appreciably, it becomes more and more difficult to pass these costs on to customers. More than forty years ago, Will Rogers pinpointed the essence of this problem when he remarked, "It's not what you pay a man, but what he costs you that counts." In a competitive market, the small company generally has little or no influence on prices. To compete successfully, the small company must control ex­penses effectively on a sustained basis. It is not surprising, therefore, that concern is mounting about the impact of government on small businesses. According to a survey by the U.S. Chamber of Com­merce, as reported in the December 20, 1976, issue of U.S. News & World Report, the top ten problems worrying small business men and women in 1976 were government regulations in general, inflation, taxes, government paper work, labor unions, the federal deficit, high interest rates, environmental restrictions, lack of available capital, and minimum wage laws. Presumably, energy would now top this list, with those firms most vulnerable to fuel shortages exhibiting the greatest anxieties. It is clear that as the role of government expands the latitude for independent action diminishes correspondingly. Nearly all of the top ten prob­lems result from government action of one form or another. If the rules of the federal regulatory agencies continue to proliferate and if the tax laws persist in unduly penalizing small business, it may well be that the small firm will be­come an endangered species in our economy. Notes 1. Paul Harmon, Small Business Management (New York: Van Nostrand, 1979), p. 59. 2. W. Hayden Kuehn, The Pitfalls of Managing a Small Business (New York: Dun & Bradstreet, March 1973). 3. C. N. Baumbeck and K. Lawyer, How to Organize and Operate a Small Business, 6th ed. (Englewood Cliffs, N.J.: Prentice-Hall, 1979), pp. 56-57. 4. Curtis E. Tate et al., Successful Small Business Management, rev. ed. (Dallas: Business Publications, 1978). Planning for Small Businesses Floyd S. Brandt Many small business people fail to plan because they do not know how to plan. They do not know how to start, and they are unaware of the consequences of not planning. Some fear the responsibility of a failed plan or believe that they are too busy with present activities to think of what they should be doing five years hence. As a general rule, however, business people who plan are more successful than those who do not plan. The reason for planning is that the future is uncertain. The example given below of a small lumber mill and its foray into fashion may emphasize the utility of planning and be useful in examining the steps involved in planning. The Case of the Wedgie Heels Several years ago I was invited to assist with some gen­eral management problems in a small wood-milling concern located in the white pine forests of New England. This small company manufactured the heels for women's wedgie shoes. These platform heels were shaped from white pine because it was light, soft, easily formed , and less expensive than cork or the plastic moldings of the time. The seven members of the family that managed and owned the com­pany soon realized that there was a much better profit mar­gin in wedgie heels than there was in the firm's traditional milling business so they aggressively sought to secure a large share of the wedgie heel business. They captured a large share of the rapidly growing market, immediately ex­panded their milling operations, and almost stopped other woodworking activities. The initial lucrativeness of the new business deafened management to the cautions from many sources that wedgie heels were a fashion item with a poten­tially short life. Floyd S. Brandt is Professor ofManagement, University of Texas at Austin. Because the milling of the heels converted about two­thirds of the lumber used into high-grade sawdust, the com­pany bought a wood-flour plant to produce filler for lino­leum and other products. A balanced wood-flour plant re­quired more sawdust than the heel milling produced so the management sought out new sources of wood. Because the manufacture of wood flour requires sawdust, chips, and slabs free from any bark, the company installed a $25,000 debarking machine. The demand for wood flour was high, and the company needed more raw material to operate the The initial lucrativeness of the new business deafened management to cautions that wedgie heels might be a short-lived fashion item. wood-flour mill at capacity. Since additional slabs that were still encased in bark were available at other lumber mills in the area , the company agreed to purchase and re­move the slabs from other mills and to install a debarker at each of its own mills. This agreement also necessitated pur­chasing several trucks and hiring additional employees to load and move the slabs. The company also bought a wood­chip plant to supply the paper industry. The demand for wedgie heels began to decline rapidly, and the company found itself operating somewhat higher­cost wood-flour and wood-chip plants and supplying prod­ucts to low-margin industries from an isolated and relatively high-cost location. The company narrowly averted bank­ruptcy and returned to operation on a smaller scale. If the managers of the wood mill had paused to consider the resources at their disposal, investigated the nature of the products that they were manufacturing, set realistic goals for their company, and planned, it is quite possible that the results would have been substantially different. The wedgie heels were a profitable opportunity, but inade­quate as the base for a wood empire. How to Plan Nine basic steps are involved in planning for a small busi­ness. Step 1: Look at Your Business Walk across the street and look at your business. Ask, "What business is it?" Is it a dry cleaning shop, or is it a component in a fabric maintenance system? Is it a tackle shop, or is it a supplier of products and services for the rec­reation industry? Step 2: Determine What Is Important Ask yourself what items, persons, or activities are so im­portant that their absence would most likely destroy the business. What is least important? What do you have to work with? Step 3: List Key Business Activities Begin to prepare a list of key business activities. Do not list products handled or reproduce organization chart titles but segregate and describe the key activities in your busi- Figure 1 Planning for the Future ness: purchasing XYZ; manufacturing ABC; transporting and storing BCD; selling HIJ. Step 4: Scan the Environment Now look outside your business and record those forces or trends over which you have no control but which affect your business. This activity, which is often described as environmental scanning, records those trends important to your business. For example, inflation, local or regional growth patterns, changing patterns of competition, interest rates, governmental regulations, and changing consumption patterns are factors that will influence your company's future. Unless you can identify several dozen factors, you are probably not scanning the environment carefully. Step 5: Relate Environment and Key Activities Draw a diagram similar to the matrix in figure 1. Within each of the boxes, record the impact of that trend on your business activity with a plus, minus, or zero; then enter an S to indicate short-range impact (likely to be most important in one to three years), an I for intermediate range (three to seven years), and an L for long range (seven years or more). Then try to estimate the impact upon future profits for each trend and activity. For example, the effect of inflation upon manufacturing will likely decrease profits by S percent to 10 percent. By making a decision regarding as many squares as possible, the small business person is also thinking critically and precisely about the potential of his or her business. By summarizing each environmental trend, the planner can then assign varying weights or levels of importance to each and see which activities will require special attention in the future. If the wedgie heel manufacturers had employed a scan­ning device, for example, the short-term characteristics of fashion heels and the potential effect of their investment activi­ ties might have been apparent. Step 6: Set Objectives Selected environmental trends Selec ted key business activities Cumulative effect Purchasing Manufacturing Transporting and storing Selling Inflation (6-10 perce nt) Increase in local population (3-4 percent) Interest rates (8-12 perce nt) Stable number of competitors Technology changing rapidl y Cumulative effect Using information from the scanning exercise, the decision maker should review existing ob­jectives and write new ones if they are needed . Objectives are unique to each organization and should reflect the goals and de­sires of those responsible for the business. A goal might be stated, for example, "To achieve a re­turn on investment of 14.S per­cent by January 1, 1982." The goals should be phrased in such a way as to leave no doubt whether or not the objective has been achieved and should be re­viewed each month or quarter Figure 2 Variables in Planning Outside strategic variables Financial rates Societal and markets Competition changes Technology Others d~:!;~ Desired business p"""'b"';"'/ / l~ Organizational Performance Personnel Policies and Others structure standards policies procedures (such as costs (such as records and output) and compensation) Inside operating variables and changed as new information becomes available. The process of setting objectives should be continuous and flexible. Step 7: Make a Strategic Plan and an Operating Plan Begin the process of drafting a long-range plan for your business. Three years is a long-range plan for some busi­nesses, but for others ten or fifteen years would be more appropriate. Any plan, however, should include a strategic plan and an operating plan. If the business planner remem­bers that organizations do not change just for the sake of change but that the environment changes and then busi­nesses adapt to that change, then it follows that the plan must first account for strategic variables, over which man­agement has no control. The other half of the plan should account for operating variables to determine how the opera­tion of the organization must be structured to adapt to the environment in a manner most likely to achieve the goals set for the business. Figure 2 describes the process. Step 8: Make an Implementation Plan Operating variables must then be adjusted to achieve the business goals with due consideration for the strategic vari­ables that affect the business. Often, implementation plan­ning requires some thought and review of existing policies and procedures, written and unwritten, to determine if they impede the implementation process. Step 9: Follow Up and Plan for Contingencies The last step is to define the procedures for reviewing and measuring the performance of the business in achieving its objectives. What information will be needed at what time? What alarms will warn against departures from plans? Who is responsible? This time is also appropriate for devis­ing contingency or catastrophe plans that will provide guid­ance when things go wrong. Planning as a Management Development Program There is never a guarantee that planning will be success­ful or that future decisions will be correct, but there is evi­dence that business people who plan are more likely to be successful than those who do not. Many planners do not follow their plans precisely and often change them. For any business, the process of planning may be an exercise in or­ganizational development more valuable than the plan that it produces. Planning provides a rapid and efficient educational meth­od for improving the quality of management in any organi­zation. To plan effectively a manager must define present and future problems within the business, gather informa­tion and data pertinent to the organization and record it for future use , define alternatives and establish objectives, and follow up with implementation plans. Perhaps the most valuable addition of planning to management skills is the improved quality of the questions that the manager asks. When the manager thinks about establishing a goal of doubling the business size in four years, the planning sequence will also require answers to such questions as these : How much space will be required? How much capital? How many people? How much equipment? The result may be a vastly improved understanding of the business and the manner in which its components interact toward success or failure. The Plight of the Successful Small Business After years of struggling to survive, when the successful small business finally begins to make money, when its prod­ucts and services find an ever-expanding receptive market, when it really needs bigger and better production facilities, more inventory, more sales locations-the money runs out! Sales and collections are higher, and profits may be greater than ever before, but the needs of the business are so much greater that despite the bigger profits-and greater dollar cash flows-there just never is enough money. There is a rather simple explanation for the problem: the increase in sales requires a substantial increase in total assets-perhaps forty cents to seventy cents for each dollar of additional annual sales. The problem lies in the fact that after-tax profits are likely to be five cents on each dollar of sales; and, when sales are increasing at rates of 20 or 30 per­cent per year, the profits cannot provide all of the neces­sary funds. The owner-manager must bring in funds from the outside or forego the opportunities for growth. (The successful businessman who wants to reward himself with a well-deserved raise and bonus and wants to begin to enjoy some of the expensive perquisites of office-a bigger com­pany car, a company plane, more elegant business trips, and so on-finds that these appropriate expenditures further complicate the cash shortage.) At this stage the entrepreneur already has a well­developed relationship with the local banker, and in fact the entrepreneur has begun to cause the banker some con­cern because his notes are seldom if ever repaid but are con­tinually renewed year-round. No longer is the bank credit line used for occasional or seasonal needs-it has become a permanent investment in the firm. A considerable liquida­tion of accounts receivable and inventory and a disruption of business would result if the notes were called. The entrepreneur has also probably learned that the bank has a legal loan limit for one borrower ( 10 percent of bank capital) that forces the bank to invite correspondent banks to participate in covering the entrepreneur's loan Henry M. Rollins is Lecturer in Finance, University of Texas at Austin. Henry M. Rollins requirements-an arrangement that is sometimes inconve­nient. If the business continues to grow , the fund requirement will be even greater, and the limited accommodation of bank credit simply will be inadequate. The entrepreneur must face up to the necessity for some new long-term capi­tal: loans in large amounts with a long-term maturity or a permanent commitment of funds in the form of equity. Debt Financing Sources of Debt Financing The owner-manager of a growing and successful business has at least half a dozen sources for borrowing funds. I. Local Banks. A commercial loan from a local bank is the appropriate and predominant source of credit for the small business. Unfortunately, commercial banks lend funds that are held in trust for their depositors, and bankers must stand ready to repay those deposits on short notice. They therefore are restricted to making loans that will mature in a short time (typically less than one year). Bankers further want to ensure that repayment will be made, and they will insist upon some form of security-an assignment of ac­counts receivable or a lien against inventories-and usually a personal endorsement of the principal officers as well. 2. The Big City Bank. Large banks (typically located in major cities) have substantially larger capital structures so that loan limits to individual borrowers are proportionately bigger; and, because of a much larger and more diverse de­posit base, the term of loan maturity offered by these larger banks may be extended to several years (typically three to five years, with installment reduction of the principal on a six-month or annual basis). Multibank holding companies have greatly increased the capacity of Texas banks to extend larger and longer-term loan accommodations to their borrowers. This form of local competition has brought to Texas loan generation offices that represent Chicago, San Francisco, and New York banks and compete in Texas cities for commercial loans. Even international banks from various foreign countries have established branches in major Texas cities. 3. The Small Business Administration. Congress created the Small Business Administration to assist small businesses in many ways, but of particular interest are the three mechan­isms of financial assistance : SBA loan guarantees, direct loans, and loans from special funds for minority businesses. When a small business has attempted unsuccessfully to obtain intermediate-term loans from commercial banks, it may apply for an SBA guarantee of such a loan. The SBA will guarantee up to 90 percent of the face value of the loan. This additional support may be sufficient to encour­age the bank to make an intermediate-term loan-typically for three to seven years in duration. It is still a bank loan, however, not a government loan. In addition to guarantees of bank loans, the SBA has been granted authority to administer a program of direct government loans. The availability of these funds is limited and is subject to periodic renewal of funding and authority by the Congress. Financial Terminology Bond: A certificate representing a contractual agreement between a borrower and a lender specify­ing the amount of the bond (usually $1,000), the in­terest rate to be paid, the data on which interest is to be paid, and the dates on which the bond matures. Usually secured by collateral. ConJ1ertible bond: A bond that may be converted into another security of the issuing corporation (usu­ally common stock) at a fixed conversion price at any time before the maturity date of the bond. Debenture: A certificate or legal instrument repre­senting a long-term debt contract that is not secured by specific collateral. Equity: The net worth of a business, consisting of capital stock, paid-in surplus, and retained earn­I ings. Common equity is that part of total net worth belonging to the common stockholders. Total equity is the common equity plus the par value of preferred stock. A sale of common stock or the retention of earnings would increase the common equity. Synergy: A situation in which the whole is greater than its parts; after a synergistic merger the post­merger earnings exceed the sum of the premerger earnings of the separate companies. Warrant: A long-term option to buy a stated num­ber of shares of common stock (or other securities) at a specified price. Source: Adapted from Eugene F. Brigham, Financial Management, Theory and Practice (Hinsdale, Ill.: I The Dryden Press, 1979). Congress has also established a priority for assistance to businesses owned and operated by persons from minority groups, and special funds and procedures have been estab­lished for SBA loans to minority businesses. 4. Small Business Investment Corporations. Small Business Investment Corporations (SBICs) are private companies chartered under license from the Small Business Admini­stration to make both equity and term-loan investments in small businesses. SBICs enjoy certain tax advantages under the Internal Revenue Code. The typical SBIC financing of a small business involves a purchase of debentures issued by the business with warrants attached that give the lender the option to purchase shares of common stock of the borrow­ing corporation at a fixed price within a limited time period (frequently five years after the loan has matured). An alter­native security could be a bond, convertible into common stock at a fixed conversion ratio during the period before the bond matures. Typically, certain assets of the borrower would be pledged as collateral for the loan. These securities offer to the lender a reasonably certain fixed income stream, a priority claim upon assets in the event of a liquidation, and the further incentive of possible equity participation at a favorable fixed price in the event the borrower company is successful. Conversion of bonds to common stock or exercise of warrants might occur at the time of the first public offering of common stock, giving the lender an opportunity to reap his capital gain through the sale of registered common stock. 5. Venture Capital Groups. Several different types of pri­vate venture capital groups are organized to finance small companies with the anticipation of future capital gain through the sale of common stock. Venture capital groups range from wealthy individuals or family foundations through limited partnerships and syndications to public stock companies. While SBICs seldom make equity purchases directly, ven­ture capital groups frequently use equity participation, as well as debt with warrants and convertible bonds, as their investment medium. While SBICs are most likely to lend to well-established operating companies, venture capitalists may help in starting a company. Venture capitalists want to see a venture through to success and have the flexibility to assist in ways the Small Business Administration or SBICs could not. 6. Insurance Company Investment Departments. Since the early 1950s major insurance companies have made direct intermediate-term and long-term loans to small businesses as well as buying the bonds of major companies when of­fered in the markets. This source of intermediate-term (five to fifteen years) financing fills an urgent need for the grow­ing firm that has funding requirements for facilities, equip­ment, and working capital that are not cyclical or seasonal but permanent and continuous. Since the requirement is for funding assets that will not generate enough cash in one year to repay the loans fully , short-term commercial bank financing is inappropriate. The term loan can be structured in many different ways: ( l) repayment of principal annual­ly or semiannually, with simple interest calculated on the unpaid balance, (2) interest payments only for the first year (or first two or three years), (3) repayment of principal on a reduced schedule with a large lump-sum payment at the end, or (4) uniform annuity payments of combined interest and principal reduction for the life of the loan. The loan agreement characteristically will contain certain covenants restricting the borrower from diverting the proceeds of the loan from use within the firm. Included in such covenants would be restrictions on loans to officers, employees, or subsidiaries; repurchase of the securities of the firm or its subsidiaries; extension of credit to customers outside of the normal terms of trade; excessive dividends; excessive compensation of officers; and unreasonable leasing commit­ments. Positive covenants require that the company main­tain present levels of fixed assets and working capital and limit short-term bank borrowing to a specified amount with full repayment for a minimum period each year. While Prudential Insurance Company was a pioneer in this lending activity (there are regional offices in Houston and Dallas), it has active competition in the Texas market from Equitable Life Assurance Society and from the larger insurance companies based in Texas. Nature of Debt Financing While the small business borrowing on ninety-day notes from the local bank may view debt financing as temporary and somewhat undesirable, the larger firm recognizes debt as a permanent and necessary source of funds that can be properly used to extend the investment of the firm into more productive assets. The limitation on the use of debt by the stable and growing firm is not the issue of when the debt can be repaid, but rather how the debt can be serviced in interest charges and occasional installment repayments. The lender is concerned first with the stability of the future income stream of the firm and its continuous liquidity and only secondarily with the general capital structure in terms of percentage of debt to total assets. The debt-servicing ca­ pacity is determined by calculating the ratio of income be­ fore taxes to interest payments to be made or the ratio of income before taxes plus lease payments divided by the total of interest and lease payments to be made. The lender also wants assurance of continuous liquidity and will be looking at ratios of current assets to current liabilities, in­ ventory turnover, and the collection period for accounts receivable as measures of the company's control of its liquidity. The owner-manager will never repay that loan. When the notes come due, the business person will just borrow from Peter to pay Paul, and as the company gets bigger and big­ger it is hoped that the debt segment of capital will grow proportionally as the company grows. Limitation on Debt While the ultimate limitation on borrowing is the ability of the firm to service the debt, ratios of total debt to total assets are a proximal measure of that debt-servicing ability. Therefore lenders will frequently set restrictions on debt by using the ratio of the debt to total assets and will refuse to supply additional funds unless additional equity is added either by retaining earnings for reinvestment within the firm or by the sale of new common stock. Equity Financing 1. Internally Generated Funds Cash flows available for reinvestment within the firm come from only one source: the generation of revenues through production and sales. The cash flows are the re­sidual of those revenues after all cash expenses are met, including tax payments. Part of the cash flow results from depreciation. These funds are presumed to be used for maintenance of productive capacity by replacement of existing machinery and facilities rather than for expansion. Earnings of the firm, the other portion of cash flow, can be paid out as dividends or reinvested in the firm as re­tained earnings, increasing the equity of the firm and cor­respondingly increasing the borrowing capacity of the firm. The greater the proportion of earnings paid out as divi­dends, the smaller the retained earnings and, correspond­ingly, the slower the growth of the firm. 2. Going Public The day a company holds its first public common stock offering is a major landmark in the history of the firm. Five objectives are achieved by that sale. First, the corporation receives a necessary input of equity capital, and the door is opened for future public issues as equity needs continue to expand. The former private owners, then, find that there is a market for their common stock and that there is a means of measuring value of that stock for estate tax purposes. Third, an active trading market can provide some liquidity for the original owners or for their estates, if that need should occur. Unfortunately, securities regulatory law re­stricts this liquidity. Also, the principal shareholder will find the company is no longer a personal thing, but a public one. Fiduciary duty to minority shareholders and to the corporation may re­strict to some degree the principal shareholder's freedom to use corporate facilities. As a last result of going public, the corporation, its of­ficers, and principal stockholders now must report to the Securities Exchange Commission regularly on corporate affairs, and corporate officers must rigorously observe a code of conduct that prohibits private disclosures of corpo­rate information that might give some individuals an advan­tage over the general public in the trading of corporate securities. Preparation for a first public offering. When the firm reaches a sales volume of $10 million to $20 million in annual sales and its growth rate is 20 percent or more annu-ally, its need for external equity financing is probably in excess of $3 million, which is a low threshold for an under­written public offering of common stock. The cost of regis­tration (including legal and printing fees), the underwriting costs, and the sales commissions are too large a percentage of the total funds raised to make a smaller public offering attractive. Even more importantly, for the stock offering to achieve the major objective of establishing an active market for the stock, there have to be enough shares in the hands of the investing public. For several years before the stock offering the company can begin its preparation for the event. First, minimizing current taxes by expensing all possible improvements in facilities must give way to maximizing earning by capitalizing all improvements and amortizing them over time. When the stock price is going to be deter­ mined by a multiple of earnings, it is more important to maintain a pattern of continuous earnings growth than to minimize current taxes. Similar considerations may govern discretionary changes in inventory accounting practices, scrapping of machinery, excessive compensation, or large bonus payments that will affect reported earnings. In addition, registration of securities for a public offer­ ing will require audited statements by an independent certi­ fied public accounting firm for several years before the time of going public. Audits by a major national firm will have more acceptability with the investing public than will those of a small local independent auditing firm . A registration statement will also require complete dis­ closure of any special relation with principal stockholders or with related firms so that any such relations that are not necessary or are not clearly arms-length transactions might be terminated or rearranged. In this category are leases or rental of land, buildings or machinery from affiliated owners, purchase of supplies from affiliated firms, or sales to affiliated firms under favorable terms. Unrelated security investments or investment in such properties as ranches, undeveloped real estate, or life in­ surance policies on the lives of principal shareholders, which will not be necessary to future operations of the business, should be disposed of through orderly sale or transfer as "dividends in kind" to improve the firm's use of assets and to eliminate any possible conflict of interests of principals with the corporation. Last, any intended sale of common stock to favored employees or affiliates as a reward for service or in recogni­ tion of importance to the firm must be accomplished on a private treaty basis between the principal stockholders and the favored individual before any public offering occurs. After the public offering no special considerations can be granted except stock options priced at essentially the mar­ ket price of the stock. Selection of an Investment Banker. The selection of an in­vestment banking firm should be accomplished well before the need for a public sale of securities becomes critical. This selection will be based upon consultation with friendly business associates who have experienced a public offering, with local brokers who are familiar with the previous under­writing performance of various firms, and, finally, by per­sonal interview. When the selection process is completed, the investment banking firm will make an exhaustive inves­tigation to determine its willingness to represent the com­pany as an advisor and underwriter of its securities. The inquiries will include a review of financial statements; an investigation of market relations with customers, competi­tors, and suppliers; a visit to inspect offices and production facilities; and an evaluation of technical, production, mar­keting, and accounting personnel and of the depth of management. Once the investment banking firm is satisified on these matters it can offer advice on interim financing, preparation for a public offering, and selection of the timing and medi­um for sales of securities. Investment bankers will assist in preparing and filing a registration statement with the Securities Exchange Commission and state agencies, organize an underwriting syndicate and selling group of investment bankers, and arrange for making a market in the security after the offering. After the registration is accomplished, the principal underwriter will contract to purchase securi­ties at a fixed price and resell them to the public or, in smaller offerings, to agree to sell the securities on a "best efforts" basis, without contracting to purchase the entire issue for resale. If all goes well, the firm will receive a check at a closing ceremony a few days after the offering date, and the new equity funds can be put to work. Sale or Merger: Alternatives to Debt and Equity Financing The successful business person has not exhausted the possibilities with sources of debt financing and sources of equity. The best course of action may lie in preparing the company to be acquired by a larger, better financed firm through sale of the stock of the firm for cash, by sale of the stock in an exchange of securities, by the sale of the princi­ pal assets for cash, or by sale of the assets in an exchange of securities. A properly prepared firm is in a position to nego­ tiate a wide variety of results in an acquisition to achieve a number of different desired goals. If the principal stockholder wants to continue partici­ pating in the management of the firm but simply wishes to achieve greater financing to exploit economic opportuni­ ties, he or she can negotiate for subsidiary status for the unit, with an employment contract ensuring continued participation in management. If the owner-manager prefers retirement, an orderly transition of management succession, ensuring continued employment opportunities for faithful employees and continuation of the business, can be negoti­ ated. If the owner-manager wishes financial liquidity, a sale of the business for cash will provide this result (but implies a substantial income tax liability). A tax-free exchange of securities under the provisions of Section 368a of the Inter­ nal Revenue Code is also a possibility. Presumably the secu­ rities of the acquiring company will have a fully developed market, perhaps a listing on an exchange, and, if the shares Securities Regulations I The Federal Securities Act of 1933 requires that any sale of securities by an issuer, underwriter, or dealer must be reg­istered, and part of the registration statement is a descriptive prospectus that must meet the requirement of the act and must precede or accompany any delivery of newly issued securities. Sales or offers to sell such securities while a regis­tration is not in effect are a violation of the law. The purpose I of the prospectus is to provide full disclosure to the investor of all of those facts needed to evaluate the security. Any false or misleading statements of material fact or omissions of material fact necessary to prevent misleading a prospective investor are also a violation of the act. Persons who are dam­aged by a decline in the market value of such securities may sue for recovery of damages if there is an omission, a mislead­ing statement, or incomplete disclosure in the prospectus. The right to sue remains in effect for one year after the issue of securities, and the persons liable to be sued include all who signed the prospectus (who would be the officers of the corporation), the directors, the underwriters, and such experts as accountants, appraisers, or engineers whose reports were a part of the prospectus if those reports were mislead­ing. I Restrictions on Trading SEC rules imply that an affiliate person (an officer or director) who receives securities directly from the issuer and subsequently resells those securities to the public becomes an underwriter in the chain of distribution and is therefore re­stricted from selling those securities unless there is a regis­tration in effect. An affiliate person is permitted to sell shares under the "dribble" rule, Rule 144, that permits members of the affiliate group to sell not more than one percent of the total outstanding shares within any six-month period. If the stock is traded on an exchange, the permitted number is the maximum number of shares traded in any one week of the preceeding four weeks. The Securities Exchange Act of 1934 deals with securities transactions between investors in the secondary market. Two specific sections are of particular interest to principal stock­holders-Section lOb (interpreted by Rule lOb-5) and Sec­tion 16b. Section lOb and Rule lOb-5 prohibit any device or action in the purchase or sale of securities that might tend to mis­lead or defraud parties to the sale or purchase. The classic case illustrating the application of this rule to corporate in­siders is the Texas Gulf Sulfur Company case, in which offi­cers, directors, and other employees (as well as outside per­sons informed by insiders) were found guilty of defrauding others when they purchased stock (and options to purchase the stock) when in possession of secret knowledge about a major ore discovery without disclosing that information to the unknown sellers (and thus to the public). As a result of this case insiders are severely constrained in selling or pur­chasing securities of their own firm and in disclosing infor­mation except through public financial reporting media . Section 16b of the 1934 act provides that if an officer, director, or controlling shareholder (anyone who owns as much as 10 percent of the shares) buys and subsequently sells or sells and subsequently buys the securities of his firm within a six-month period, any profit received belongs not to that person but to the corporation. If the corporation will not sue to recover these profits, any shareholder may sue in the name of the corporation to recover the profits. Exemptions from Registration Sales of newly issued securities may be exempted from registration under the Federal Securities Act of 1933 if the transaction is not a public sale. Rule 146 defines such a sale as one involving not more than thirty-five purchasers, each of whom is determined by the issuer to be a person able to stand the economic risk of the purchase and each of whom has the necessary information and the capability to evaluate the risk of the purchase. Such persons are deemed not to need the protection of the disclosure law. Sales of newly issued securities by an issuing corporation in the state in which it is chartered, and in which it is doing business, solely for investment purposes to persons who are residents of that state are exempted under an intrastate clause from the registration provisions of the Federal Securi­ties Act of 1933. State Registration Requirements Texas has its own securities act, which requires registra­tion of securities sold by an issuer even if the issue is simul­taneously registered under the Federal Securities Act. No state registration is required if upon completion of this issue there will be no more than thirty-five securities holders. If there are more than thirty-five securities holders, securities may be sold without registration to an additional fifteen securities holders within any twelve-month period if the state securities commissioner is advised five days before the sale of the names and addresses of the issuer and each purchaser and if a principal corporate officer certifies that information necessary to evaluate the purchase has been furnished to each prospective buyer. Texas has one additional requirement not found in the federal law. The commissioner is required to refuse authority for sale of the securities if he finds that the offering is not fair, just, and equitable. The federal law has no such fairness standard, and there have been instances when securities offer­ed under a federal registration could not be granted authority for sale in Texas because the commissioner did not find the offering to be fair, just, and equitable. are registered at the time of the exchange, they could be sold or traded in the market place without restriction. It is important that the acquirer agree to file a registration state­ment as a part of the transaction. The merger of the firm provides a number of attractions for the principal shareholder. Personal investment is chan­neled into a larger firm that is better financed and has broader interests and, therefore, is more likely to withstand economic crisis. The merger also provides liquidity for the owner-manager's estate, a market-determined valuation for estate purposes, personal liquidity of investments, and the opportunity to build a diverse portfolio of financial assets. A last benefit of the merger is that it provides for the continuous operation of the firm, an assured management succession, and an assurance of continued opportunities for advancement for faithful and capable employees. While the owner of the firm that is acquired may lose direct and free control of the firm, he or she may very well become one of the larger and more influential shareholders of a much bigger entity. Methods of Valuation for Mergers Three basic methods of valuation are commonly used in determining value for an entity that is to be acquired : net book value (or net asset value), market value, and earnings value. Of these three, earnings value is typically most im­portant since it is the earning power of the entity that the buyer wishes to acquire. Net Book Value and Net Asset Value. Net book value is the book value of total assets minus total liabilities and repre­ sents the book value of the equity investment in the firm, including preferred stock (if any) at par value, common stock at par value, any paid-in surplus (from stock sold above par value), and the cumulative value of all earnings retained and reinvested in the firm. The net book value is not a very useful figure since the value of total assets represents the historical cost of each asset when purchased, adjusted by an accounting conven­ tion for its loss of value because of age, use, and deteriora­ tion. It in no way represents the current market value or replacement cost of the assets. In an inflationary period asset values may be greatly understated. If one obtains an appraisal of the present market value or replacement cost of the assets then one might determine the net asset value, a figure that is representative of the minimum cost of a comparable set of assets assembled for the use of a going concern. This amount is probably greater in dollars than could be achieved in a forced liquidation of the assets on a piece meal basis in a short period of time. The net asset value should be the minimum price for the sale of a going concern. Market Value. If the shares of the firm are actively traded by knowledgeable investors in an unrestricted market, the present market value of the firm is significant. Market values of small firms are usually meaningless since there is seldom a free and active market for these securities. Earnings Value. The most meaningful value determination is the earnings value of the firm, obtained by multiplying the current total earnings by an appropriate price-to­earnings ratio for firms of this size and type. The price-to­earnings ratios for listed stocks are published daily in the Wall Street Journal and are determined by the daily stock closing price divided by reported earnings for the previous four quarters. While these ratios are for large firms with well-developed markets for their stocks, the price-to­earnings ratio indicates the dollar amount the marketplace is willing to pay for each dollar of annual earnings as demonstrated by the last four quarters. The small company, with no market for its stock and with minimal diversification of products and markets, would find it appropriate to discount the price-to-earnings ratio of large public companies in the same industry. The Exchange Rates. Given the basic valuations listed above, it is possible to determine exchange ratios of the number of shares of the acquiring company to be given for each share of the acquired company on three bases: net asset value, market value, and earnings per share. When a substantial synergistic effect is to be expected from joining the two entities, the anticipated earnings of the combined entities can be used as a measure to deter­mine the maximum acceptable exchange ratio for the acquiring firm and the minimum acceptable exchange ratio for the acquired firm. Summary The successful small firm will find that external funds are necessary to sustain the rapid growth of the firm. The use of intermediate-term debt together with retained earn­ings will sustain a moderate growth rate, but new external equity funds from the sale of common stock may be re­quired for more rapidly growing firms. An alternative to the use of long-term debt and to the sale of common stock is to permit the company to be ac­quired by a larger and better-financed firm. The acquisition alternative can fulfill a number of objectives of the present owners, including continuity of opportunities for present employees, personal liquidity, and orderly management succession. Note The following publications are recommended for additional reading on small business financing: Eugene F. Brigham, Financial Management, Theory and Practice (Hinsdale, Ill.: The Dryden Press, 1979); Small Business Administration, SBA-What It is-What It Does, OPI-6 (Washington, D.C.: Government Printing Office, August 1974); Ernest W. Walker and T. William Petty II, Financial Manage­ment of the Small Firm (Englewood Cliffs, N.J.: Prentice-Hall, 1978); Ernest W. Walker, ed., The Dynamic Small Firm : Selected Readings (Austin: Austin Press, Lone Star Publishing, 1975); and Francis M. Wheat and George A. Blackstone, "Guideposts for a First Public Offering," The Business Lawyer, April 1960, pp. 539-64. Managing Service Capacit)I Service is a perishable commodity; it is consumed simul­taneously with its production and, unlike products that can be stored in a warehouse, cannot be transferred to another person. Small service businesses-such as retail stores, res­taurants, professional offices, hotels and motels-face spe­cial difficulties because idle servers and facilities are the re­sult when demand falls short of capacity. In fact, our culture and habits help create fluctuations in demands for service. We all take our meals at the same hours and our vacations in July and August. This natural variation in demand creates periods when servers are idle, on the one hand , and when customers are waiting, on the other. This inherent variability of demand creates additional challenges for managers and owners of small service busi­nesses who are trying to make the best use of capacity. As noted by W. Earl Sasser, 1 the problem can be approached in two ways. One strategy focuses on smoothing consumer demand to permit fuller use of a fixed service capacity. Various alternatives for altering demand are available, such as offering pricing incentives, promoting off-peak use, and developing complementary services and reservation systems. The second strategy considers the problem from the sup­ply aspect. Work-shift scheduling, the use of part-time em­ployees, increased consumer participation in the service process, cross-training of employees, and sharing or adjust­ing the capacity of the business are some of the possibilities for controlling supply. Microcomputers enable small businesses to use sophisti­cated on-line reservation systems and work-shift scheduling techniques. The use of computers and other creative ap­proaches to matching supply and demand in services can represent an effective competitive advantage for the small James A. Fitzsimmons is Associate Professor of Management, Uni­versity of Texas at Austin. Jam es A. Fitzsi1n1nons business since consumers will spend less time waiting, ser­vice will be more personal, and prices will be competitive. Strategies for Altering Demand Fluctuations in demand for service are not necessarily inevitable. Service managers can smooth demand through active and passive measures. The arrival of individual con­sumers will still occur at random intervals, but the rate of arrivals can be made more nearly constant. Smoothing Demand Figure 1 illustrates the results of smoothing the daily de­mand for physician visits at a health clinic. Demand is sel- Our culture and habits help create fluctuations in demands for various services. dom homogeneous. An analysis by E. J. Rising, R. Baron, and B. Averill2 of a health clinic showed that there were many walk-in patients on Mondays and Tuesdays with the fewest during the remaining days. This walk-in demand was considered uncontrollable, but appointments are control­lable. If appointments were scheduled for the latter part of the week, demand would even out. Using data for the same week in the previous year, the number of walk-in patients for each day was subtracted from the daily total. The result yielded the number of appointments that should be as­signed to each day in the week to smooth demand on the physicians' time. For the example week shown in figure 1, this calculation yielded the following number of appoint­ment periods: Monday, 84; Tuesday, 8 9; Wednesday, 1 24; Thursday, 129; and Friday, 114. The daily smoothing of demand was further refined by scheduling appointments at convenient times of the day. After a two-month shakedown period, the number of patients seen by the physicians had increased by 13.4 per­cent, even though 5.1 percent fewer physician hours were being scheduled. The overall average time patients spent Differential pncmg often results in generating unex­pected demand. Instead of redistributing peak demand to off-peak times, off-peak pricing may tap a latent demand for service. Thus discriminatory pricing fills in the valleys (periods of low demand) instead of leveling off the peaks. The result is overall better use of a scarce resource and in­creased sales volume. Promoting Off-Peak Demand Creative use of off-peak capacity results from seeking out different sources of demand. An example is the use of a resort hotel during the off-season as a retreat for business or Differential pricing, such as reduced afternoon rates at movie theaters and off-season hotel rates, is a common method of attracting demand during off-peak periods. with physicians also increased 5 .0 percent because of an increase in the number of appointments, while the average waiting time for patients remained the same as it had been. Interviews by a team of sociologists before and after the change concluded that physician morale had increased. Price Incentives Differential pricing is one common method of attracting demand during off-peak periods. Matinee prices or reduced afternoon prices at movie theaters and off-season hotel rates at resort locations are two examples of this approach. Figure 1 Percentage of Patients above or below Daily Average 0 Before smoothing visits to physician23% D After smoothing visits to physician 8% 8% Wednesday Thursday Friday 0% 0% Monday Tuesday -8% -8% -9% -16% Source: Adapted from E. J. Rising, R. Baron, and B. Averill, "A System Analysis of a University Health-Service Outpatient Clinic," Operations Research, September 1972, p. 1035. professional groups. A ski resort can become a staging area for backpacking during the summer. A demarketing approach, such as an appeal for early Christmas shopping, can be used to discourage overtaxing a facility. Off-peak time can also be used effectively for main­tenance, employee training, cleaning the premises, and preparation for the next peak. Developing Complementary Services Restaurants have discovered the benefits of such comple­mentary services as bars. Diverting waiting customers into the lounge during the busy periods results in both a profit for the business and a diversion that may please consumers. Movie theaters have traditionally sold popcorn and soda and recently have also added arcade games to their lobbies. These examples illustrate complementary services offered to a captive audience of waiting consumers. Convenience stores have extended their services in a complementary fashion by adding self-service gasoline and fast-food meals. Reservation Systems Reservations presell service. When certain time periods become booked, further demand often can be deflected to other times at the same facility or to other facilities of the same organization. Consumers benefit from the reduced waiting and the im­plied guarantee of service of a reservation system. Problems do arise, however, when consumers fail to honor their reser­vations. John F. Reckart describes an on-line computer ap­pointment system used by a medical clinic to eliminate "psuedo-no-shows."3 Before installation of the computer system the following would be a common situation: a patient with a March appointment would fall ill in February and be seen by a physician as an emergency. The physician would instruct the patient to return in two months for a visit in April. The patient in turn would assume his March appointment to be cancelled automatically. It was not, and when mid-March arrived the patient was considered a "no­show." The result was lost physician time. The computer appointment system maintains a file of all future appointments. Before a new appointment is made, existing unneeded appointments are cancelled, thus freeing physician time for other patients. To avoid losing available physician time, the system also automatically highlights unscheduled time in the next two days and gives these times priority for filling appointments. The system has re­duced by one-half the loss of unscheduled physician time . Another approach to avoiding the loss of service capaci­ty from "no-shows" is overbooking, the strategy used by airlines and hotels. An excellent treatment of this policy can be found in "Decision Theory and the Innkeeper: An Approach for Setting Hotel Reservation Policy" by Fred E. Williams in the August 1977 issue of Interfaces. Strategies for Controlling Supply For many services smoothing demand has its limits. Figure 2 represents the daily demand at a drive-in bank in Austin. The peak volume of 262 cars occurs on Friday and the minimum of 180 cars on Tuesday. Off-peak induce­ ments will not materially change this demand pattern. Ser­ vice capacity must be adjusted to match demand . By careful scheduling of tellers, service capacity can ap­ proximate demand. With a forecast of daily demand, com­ puter models can predict customer waiting for different staffing levels. Progressive banks define a service level, such as staffing tellers, to ensure that 95 percent of their custom- Figure 2 Average Daily Demand at Drive-in Bank Number of cars 300 262 250 205 200 192187 180 150 100 so 0 Monday Tuesday Wednesday Thursday Friday ers will not wait in line for more than five minutes. Using a computer model and knowledge of the desired service level, bank managers can determine the schedule of required tell­ers for each day . Figure 3 shows the average waiting time for customers at this bank. The large daily variation in waiting time suggests that teller staffing could be improved. Increasing Consumer Participation The strategy of increasing consumer participation is best illustrated by the fast-food restaurants that have elimi­nated the waitress and the busboy. The customer not only places his or her order directly from a limited menu but also is expected to clear the table after the meal. Naturally the customer expects faster service and less expensive meals to compensate for his or her inputs. The service provider, however, benefits in many subtle ways. First, there are fewer personnel to supervise and fewer fringe benefits to pay. More importantly, the customer provides the input at just the moment it is required; thus, service capacity varies with demand rather than being fixed. Some drawbacks do exist because the quality of labor is not completely under the service manager's control. A cus­tomer at a self-service facility may pump leaded gasoline in­to a tank designed for unleaded gasoline or may fail to check tire pressure and oil levels regularly. Self-service could also lead to do-it-yourself once the consumer be­comes confident; but such do-it-yourself activities as auto repair or divorce without legal counsel may be counterpro­ductive if failures or complications occur. Creating Adjustable Capacity Through design a portion of capacity can be made vari­able. For example, airlines routinely move the partition be- Figure 3 Average Waiting Time for Drive-in Customers Minutes 2.0 1.5 1.4 1.0 0.7 0.7 0.5 0 Monday Tuesday Wednesday Thursday Friday tween first class and coach to meet the changing mix of pas­sengers. An innovative restaurant, Benihana of Tokyo, has arranged its floor plan to accommodate eating areas serving two tables of eight diners each. Chefs are assigned to each area, and they prepare the meal at the table in a theatrical manner with flashing knives and animated movements. The restaurant can thus effectively adjust its capacity by having only the required number of chefs on duty. Capacity at peak periods can also be expanded by effec­tive use of slack times. Performing support tasks-such as cleaning the premises or filling sugar bowls in a restaurant­during lulls allows employees to concentrate on essential tasks during rush periods. Sharing Capacity Providing a service often requires considerable invest­ment in expensive equipment and facilities. When this equipment is unused , sharing it with others becomes a very attractive option. Airlines, for example, have cooperated in this manner for years. At small airports, airlines share the same gates, ramps, baggage-handling equipment, and ground personnel. In an attempt to curtail rising medical costs, hospitals are being asked to reconsider the need to duplicate equip­ment found elsewhere in their communities. Every hospital in a community does not need a cardiac-care wing, heart- Questions for the Service Manager Altering Demand 1. Is part of my demand controllable? 2. Would my customers be interested in making ap­pointments? 3. Can I attract customers to off-peak times with dif­ferential pricing? 4. Am I advertising off-peak use of facilities? 5. Are there any natural services complementary to mine? 6. Should I overbook my reservations? Controlling Supply 1. What should be my service level? 2. How does my demand vary from day to day? 3. Is my work schedule adjusted to my peak demand? Could it be? 4. Could the customer become involved in the ser­vice? 5. Is my capacity potentially flexible? Can I close cer­tain rooms, tables, or other components? 6. Could I share capacity-parking, rooms, telephone answering-with another business? 7. Could my employees learn each others' jobs and substitute during peak hours? lung machines, or a $700,000 CAT scanner to visualize cross sections of the human body. Through cooperation and sharing of equipment, hospitals can use expensive re­sources more efficiently, and medical care would probably improve since a patient's odds for recovery are greatly in­creased if a procedure has been routinely performed by an experienced medical team. Cross-Training Employees In a service system that consists of several components, one component is often busy when another part of the sys­tem is idle. Cross-training employees to perform tasks in several areas creates flexible capacity to meet localized peaks in demand. The gains from cross-training employees can be seen in supermarkets. When lines develop at the cash registers, the manager calls on stockers to operate registers until the surge is over. During slow periods, the cashiers stock shelves. Cross-training can also help build espirit de corps through shared assistance and give employees relief from monotony. Using Part-Time Employees When peaks of activity are persistent and predictable, such as mealtimes for restaurants or paydays for banks, regular employees may be supplemented by part-time help. If the skills and training required are minimal, a ready part­time labor pool is available from high school and college students and others interested in supplementing their pri­mary sources of income. Off-duty personnel can also be placed on standby for call up when needed. Airlines and hospitals, for example, often pay their personnel a nominal fee to be on standby for service when needed. Vincent A. Mabert and Alan R. Raedels describe a method for developing part-time schedules in a bank to sup­plement the full-time tellers to match the variations in de­mand .4 Scheduling of part-time tellers had to meet the re­quirements with a minimum of teller days. In addition , the part-time tellers were restricted to a two-day or three-day workweek. The manager of any small service business who asks the right questions about altering demand and controlling sup­ply should be able to make the best and most profitable use of the business's capacity. Notes 1. W. Earl Sasser, " Match Supply and Demand in Service Industries," Harvard Business Review, November-December 1976, pp. 133-40. 2. E. J. Rising, R. Baron, and B. Averill, "A Systems Analysis of a University Health Service Outpatient Clinic," Operations Research , September 1973, pp. 1030-47. 3. John F. Rockart, "An Approach to Productivity in Two Knowledge-Based Industries," Sloan Management Review, Fall 1973, p. 30. 4. Vincent A. Mabert and Alan R. Raedels, "The Detail Scheduling of a Part-Time Work Force: A Case Study of Teller Staffing," Decision Sciences 8, No. 1 (January 1977): 109-20. Profile of the American Small businessmen are one of the most economically successful segments of the American labor force, although they differ greatly in their prosperity. In spite of their suc­cess, they are a somewhat marginal segment of the Ameri­can middle class, since few of them are well educated. Many of the more successful serve as reminders that small business is still a feasible, if somewhat constricted, avenue to economic success and one that does not require educa­tional credentials. They are rather older, on the average, than males in other occupational groups, are predominately of rural and small-town origins, and are generally from rather low socioeconomic origins. About half are the sons of self-employed fathers. Much of the above description would seem to confirm the image of small businessmen as relics from the past, and they do provide a kind of continuity with America's past. They are not, however, generally reactionary in their politi­cal attitudes, being more liberal, as a whole, than salaried managers and administrators. If they have any important conservative influence in the nation as a whole, it is per­haps because their existence tends to keep alive the "Ameri­can Dream," the belief that through hard work persons of low socioeconomic origins can still "make it" in American society. Small businessmen are an important repository of some of the values that may be increasingly needed to help the nation deal with its changing circumstances in the last quarter of the twentieth century. The self-employed are a shrinking proportion of the American labor force (now numbering Jess than I 0 per­cent), and professionals rather than small businessmen are, as a whole, the most prosperous and secure of the self- Norval D. Glenn is Professor of Sociology, University of Texas at Austin. Charles N. Weaver is Professor of Management, St. Mary's University. Small Businessman Norval D. Glenn Charles N. Weaver employed . Small businessmen are often depicted as vainly fighting big business, big labor, and big government to re­ gain the importance they once had in American society. The one good study of the political views of small busi­ nessmen rather conclusively refutes the view that they are highly reactionary, 1 but there is little evidence about the other attitudes and values of this group, including those toward work and their own situations. The literature pro­ vides even less information on the background and demo­ graphic characteristics of this group. Two surveys conducted in 1977 and 1978 of cross­ sectional samples of American adult males2 provide some basic information about small business. We define small businessmen as all men in occupations other than farming and the professions who said that they worked for them­ selves. Most of these men are proprietors of retail stores, wholesale distributorships, or service establishments, but a few are self-employed artisans, peddlers, and similar persons sometimes excluded from traditional definitions. Excluded here are some persons usually considered in this category­ namely, the officers and part owners of small corporations who did not say that they worked for themselves. Background and Demographic Characteristics Some of the major background and demographic charac­teristics of the small businessmen sampled in the two sur­veys can be compared with the characteristics of male pro­fessionals (both salaried and self-employed), salaried manag­ers and administrators, clerical and sales workers, and man­ual workers (see table I). Since the data are subject to sam­pling error, little confidence can be placed in differences of less than about eight percentage points. Nevertheless, it is clear that small businessmen are unique in a few respects and that they differ from one or more of the other occupa­tional categories in several others. The small businessmen differed from all other kinds of workers in two important ways: they were older, on the average, and a larger percentage of them had fathers who were self-employed. The median ages of the different kinds of workers varied from 47.7 for small businessmen to 39.0 for professionals; the second highest median was 44.4 for salaried managers and administrators. 3 Therefore, a larger percentage of the small businessmen than of the other workers grew up when a large proportion of the labor force was self-employed. At each specific age level, however, the small businessmen still had the largest percentage of self­employed fathers. Many of the small businessmen were probably inclined toward entrepreneurship by the examples of their fathers, and of course some of them inherited established businesses. More surprising, in view of the strong trend away from self-employment, is the fact that two-thirds of the small businessmen younger than age 40 had fathers who were not self-employed. The small businessmen were very similar to manual workers in two important ways. A high percentage of both of these kinds of workers had fathers who were farmers, and a low percentage of both grew up in medium-sized or large cities or their suburbs. In several other respects, the small businessmen and the manual workers differed in the same ways from the other workers, but the small business­men differed less. For instance, the small businessmen saw themselves as coming from higher economic origins than did the manual workers but from a lower level than did any of the other categories of nonmanual workers. Likewise, the small businessmen had more years of education on the average than did the manual workers but fewer than any of the other three categories of workers with whom they were compared. The current economic status of small businessmen war­rants special attention. Their personal incomes were more diverse than those of other kinds of workers; they had both a high percentage (exceeded only by that for manual workers) with annual incomes below $10,000 and a high Table 1 Characteristics of Small Businessmen and of Males in Four Other Occupational Categories, United States, 1977-1978 (Percentage response) Professionals Salaried and wage workers Small (salaried and Managers and Clerical and Manual Characteristic businessmen self-employed) administrators sales workers workers Fath er self-employed Sl 31 34 31 29 Father fa rmer 24 6 11 16 21 Father manual wor ker 40 4 8 44 43 62 Father no nmanual worker 36 4 6 4S 41 17 Fam il y of origin below average econo no mic status 33 36 24 20 37 Famil y of origin above average econo mic status 20 2 6 26 26 11 Grew up in cit y of S0 ,000 or larger o r in suburbs 30 4S 43 4 3 26 Grew up Protestant 62 6S S8 66 79 Grew up Catholic 24 26 32 23 28 Grew up Jewish s 6 6 8 0 Grew up in So uth 24 21 24 28 37 Grew up in No rtheast o r East Central 46 S3 S3 4 8 4 3 Grew up in West or West Ce ntral 2 3 20 18 2 3 17 Grew up o utside United States 7 6 s 1 3 White 9S 92 98 9 1 8S Black 3 6 1 9 14 Less t han high school educa tio n 33 2 10 18 4S At least some college 33 87 62 SS 17 Present fa mil y econo mic status below average 24 16 17 13 34 Present fa mily econo mic status above average 28 44 49 34 17 Perso nal annual inco me below $ 10,000 37 20 16 37 42 Perso nal annual in come $20 ,000 or higher 34 30 41 13 10 Under 40 years o ld 29 S3 41 49 4 8 Age 60 or o lder 24 1 S 21 19 20 Source: The spring 1977 and 1978 General Social Surveys co nducted by the National Opinion Research Center at the University of Chicago. Data are combined from the two surveys. TEXAS BUSINESS REVIEW percentage (exceeded only by that for salaried managers and administrators) with incomes of $20,000 or higher. In median income, the small businessmen ranked second be­low salaried managers and administrators ($1 S ,289 versus $18,133) but were almost matched by professionals ($15,284). Although the income data indicate that small business­men, as a whole, had a relatively high economic status, they apparently did not perceive their economic status to be as high as it was. In response to a question that asked if the economic status of the family was above average, aver­age, or below average, only the manual workers were more likely than the small businessmen to say "below average ," and all the rest of those surveyed exceeded the small busi­nessmen in the percentage who said "above average." Thus, on average, the self-perceived economic status of the small businessmen was consistent with their socioeconomic ori­gins and level of education, whereas their actual economic status was apparently higher than would be expected on the basis of their socioeconomic origins and education. Few of the other differences between small businessmen and the other male workers are great enough for one to make confident inferences to the general population. It appears, however, that a smaller percentage of small busi­ nessmen than of manual workers grew up Protestant and grew up in the South and that a larger percentage of small businessmen than of manual workers grew up Jewish. It also appears that a relatively high percentage of small businessmen grew up outside of the United Status. In addition, recent data collected by the Bureau of the Census corroborate the survey's finding that a smaller percentage of small businessmen than of professionals were black. This long-standing difference has been shown by every major study that has compared the occupations of blacks and whites in the United States. Attitudes about Politics and Work Although only a limited number of attitudes are covered by the data in table 2, the differences shown there accu­rately reflect the major ways in which small businessmen differ from other kinds of workers in their attitudes toward politics and work. The small businessmen in the sample tended toward political conservatism, but they were not as conservative, as a whole, as the salaried managers and ad­ministrators. An unusually large percentage of them were Republican, and yet more of them were Democrats than Republicans. An earlier study by Richard Hamilton went beyond party identification and self-description as liberal or conser­vative and dealt with the attitudes of small businessmen on a number of specific political issues.4 He found small busi­nessmen to be fairly conservative, as a whole, but not reac­tionary. For instance, they were neither more antilabor nor more opposed to the welfare state than were workers in other nonmanual occupations. Although the small business­men, as a whole, were not as liberal as manual workers on any issue, on a few issues they were more liberal than pro­fessionals, salaried managers and administrators, and cleri­cal and sales workers. To the extent that small businessmen are conservative, their conservatism can be attributed partly to their high average age. Although the popular belief that people tend to become more conservative as they grow older has re­cently been challenged by a number of social scientists, at Attitude or feeling Democrat Republican Politically liberal Politically conservative Believes luck more important than hard work in getting ahead Prefers high income over o ther job characteristics Would stop working if had enough money to live comfo rtably for rest of life Very satisfied with work Not at all satisfied with financial situation Table 2 Attitudes and Feelings of Small Businessmen and of Males in Four Other Occupational Categories, United States, 1977-1978 (Percentage response) Salaried and wage workers Professio nals Small (salaried and Managers and Clerical and Man ual businessmen self.employed) administrators sales workers workers 35 28 31 32 46 29 23 26 20 17 26 44 21 31 28 39 37 53 38 29 9 8 22 IS 25 8 I 5 28 27 18 20 26 31 27 64 58 59 40 43 21 16 10 18 27 Source: The spring 1977 and 1978 General Social Surveys conducted by the National Opinion Research Center at the University of Chicago. Data are combined from the two surveys. JULY-AUGUST 1979 any one time older people, as a whole, are more conserva­tive than young adults on most issues.s Small businessmen were generally less conservative and less likely to be Republican, relative to other workers, at specific age levels than they were in the total sample. For instance, clerical and sales workers edged out the small businessmen for the second highest ratio of conservatives to liberals among workers age 40 and older. Among workers younger than 40, the small businessmen had the second highest ratio (0 .75), but it was far lower than that for salaried managers and administrators ( l.3 3) and was not far above the ratios for the other three kinds of workers (0.65, 0.64, and 0.67). Among workers age 40 and older, the small businessmen had the highest ratio of Republicans to Demo­crats, but among workers younger than 40, their ratio was the second lowest, exceeding only that for manual workers. The work-related attitudes of small businessmen in the sample were unique in several respects. For instance, of all groups small businessmen made up the smallest percentage of those who believed luck to be more important than hard work for getting ahead. Small businessmen were also least likely to say they would stop working if they had enough money to live comfortably for the rest of their lives and were the most satisfied with their work. In these respects they resembled professionals and differed from manual workers and clerical and sales workers. On the other hand, they resembled manual workers and clerical and sales workers-and differed from professionals and salaried managers and administrators-in reporting low satisfaction with their financial situation and in placing relatively high value on income in assessing the desirability of jobs.6 Notes l. Richard Hamilton, Restraining Myths (New York: Wiley, 1975), chapter 2, "The Politics of Independent Business." 2. The surveys are the General Social Surveys conducted by the National Opinion Research Center at the University of Chicago. 3. The high average age of small businessmen apparently results partly from the changes in occupational opportunities in the past few decades; more members of the new labor force have been chan­neled into salary and wage work. It also results, however, partly from the fact that some persons who worked for salaries and wages as young adults became established as business owners by the time they reached middle age. 4. Hamilton, Restraining Myths. 5. See Norval D. Glenn, "Aging and Conservatism," Annals of the American Academy ofPolitical and Social Science, September 1974, pp. 176-86. The association of conservatism with advanced age ap­parently results primarily from differences in the formative experi­ences of persons who grew up at different times. 6. One might suspect that the older average age of the small busi­nessmen accounts for much of the uniqueness of their work-related attitudes, but data for specific age levels indicate otherwise. the onlyone: If you buy or sell in Texas: 1978-1979 Directory of Texas Manufacturers Over 14,000 plants listed: name, address, telephone, executive officer, and product descriptions. Volume 1• Volume 2• plants listed by firm name products listed by S.l.C. number and by city and by city within each S.l.C. group. includes complete addresses and an index. $50 plus tax Bureau of Business Research The University of Texas at Austin Box 7459 Austin , Texas 78712 Computers and Small Businesses, Part II An Interview with Harry A. Levine Kenneth W. Olm Helen R. Baca [The favorable response to Kenneth Roberts' interview with Roy Harris ("Computers and Small Businesses," TBR, July 1978) has led the Bureau to follow up with more specific information about small computer systems.) Review: It might be helpful to begin by differentiating be­tween the systems that are popularly known as "small computers." Levine: The gap between the lower-end offerings of the large computer makers and the top end of the up­graded smaller computers has recently narrowed, and in many cases there is now overlap. Larger manufacturers are now offering small computer systems that start in the $8,000 to $12,000 price range. On the average, a usable system for business applications will sell for $18,000. This price will include the operating system that makes the com­puter function and, perhaps, a higher-level pro­gramming language but no application software. Most microcomputers at this time have much less capacity and more limited memories than do mini­computers. In the number of channels available and processor speeds, however, the two types over­lap. At first distinguished from minicomputers by their size, price, and lack of software, microcomputers gained popularity as components in word proces­sors, data entry terminals, and data communica­tions equipment. Now microcomputers are proving both their versatility and ability to stand alone. Just as minicomputers are challenging the lower end of the mainframe market, microcomputers Harry A. Levine has assisted in setting up a small business to mar­ket microcomputer systems. He recently joined a Texas-based microcomputer manufacturing concern. Kenneth W. Olm is Asso­ciate Professor of Management and Helen R. Baca is Research Asso­ciate, Management Department, University of Texas at Austin. are challenging the lower end of the minicomputer market. Review: This market is primarily the small business mar­ket? Levine : Correct. Microcomputers are making their biggest market penetration in the small business market. Review: What factors have led to this marked change in the data-processing market? Levine: In the August 1978 issue of Datamation, the major trade journal of the computer industry, Richard G. Canning and Barbara McNurlin list four things that are changing conventional data processing. First, the economics are changing. It is becoming feasible to give small business owners and managers the responsibility for their own data-processing opera­tions. Minicomputers started this shift and micro­computers will accelerate it. Second, small business users want more control over when and how their work is done-not only over data entry and data-processing production but also over system development and special programming. They want to call in data-processing specialists only when needed . Third, some aspects of programming are getting easier. At least for some minicomputers, it is now quite feasible with new computer languages for users to perform data retrieval and reporting. Data­mation expects to see such languages for micro­computers soon. Application systems for both minicomputers and microcomputers will tend to be small and may well be easier to set up and easier to change than systems set up for central computers. Finally , computer operating needs are changing. The data entry function has moved toward the user. With minicomputers and microcomputers the operations function will also shift toward the user. Review: What is the small business owner or manager look­ing for in small computer systems? Levine : The types of microcomputer systems that will have the greatest impact on small businesses are those that come as fully assembled systems with sufficient sets of peripheral devices for serving business applications. Microcomputers will come from firms that can provide the many types of support and services that a small business needs. These include programming support, documenta­tion of the system, training, and hardware and software maintenance. Review: What should the small business owner or manager expect to pay for a microcomputer system? Levine: Currently, the microcomputer hardware picture is about as follows: a $600 system (with crt, key­board, and cassette recorder) has a very limited application for business. Even a system with l 6K of memory and a floppy disk, priced at about $1,500, would be more useful as a terminal. When a l 0 to 15 cps printing mechanism is added for printing reports, invoices, and so forth, the price goes to between $2,000 and $3,000, and the re­sulting system is just beginning to be useful for the data-processing functions of a small business. What, however, is a complete computer system for a small business? What may be a complete system for one application can be totally inadequate for another. The requirements for a complete comput­er are the basic components that are normally found in any computer system: a means for enter­ing data into the computer, a processor and inter­nal memory to manipulate the data, and a way for the information or answer to be displayed to the user. These basic components, along with an auxil­iary storage device, are advertised as complete computers and are those that usually sell for $600 to $ l ,000. To upgrade such a system for business applications, additional components are necessary . Memory must be increased to handle even the smallest practical application. A storage device, usually a floppy disk, other than the usual audio cassette recorder is necessary for business applica- Computer Terminology Hardware: The electrical and mechanical devices that make up a computer system; the tangible equip­ment. Software: Computer programs that control the processing of data in a computer system. Mainframe: The key unit of the hardware; the cen­tral processing unit where all control and processing work is based. Data entry terminal: The unit that feeds informa­tion into the central processing unit; entry at more than one point by more than one person (more or less simultaneously) is possible in some models. Package: A collection of programs that constitutes the software that controls the processing of the data and that would typically include such applications as general ledger, sales inventory, accounts receivable, accounts payable, and payroll. Channel: The line over which sets of data are transmitted in the central processing unit; more chan­nels, more throughput. Processor speed: The speed at which the central processing unit handles data, including such steps as going into the storage (memory) to retrieve data and updating data. High-level programming language: Language in which programs are written to control the movement and processing of data; must be translated into ex­ecutable machine language by compiler. System development: Improvement of the infor­mation system that is controlled by the computer, generally by adding more data or improving the throughput. Special program: Written computer-processing in­structions intended to control the movement and pro­cessing of data to achieve a specific result, such as a sales analysis by salesperson, customer, product sold, and time of sale to be used to evaluate the produc­tivity of salespeople and other aspects of sales man­agement. Peripheral device: A piece of equipment (such as a printer, a secondary storage device, or a supplemen­tary entry terminal) attached to the computer system to augment the central processing unit. crt: Cathode ray tube; a television screen used in data processing. 16K: Sixteen thousand units of binary digits; a measurement of capacity. Floppy disk: Flexible plastic component to record information magnetically; similar to a standard music record in appearance. cps: Characters per second of printed letters and symbols. tions. A printer is needed for hard-copy produc­tion. This added equipment would bring the cost up to about $4,000. Even such a system as this would be hard pressed to store an inventory record of 500 items. Increasing storage would bring the cost of a minimum business system to between $6,000 and $8,000. Review: What about the software for microcomputer sys­tems? Levine: The system software for microcomputers is fairly limited now, but some application packages are beginning to appear. Designing software requires knowledge of the spe­cific application as well as knowing how to pro­gram the computer. When a small business owner tries to program a computer, the owner will usu­ally spend more time programming than running the business. The effects on profitability of the business can be disastrous. Review: What price range can the small business user ex­pect for software packages? Levine: Frequently, financial-application packages for small businesses can be purchased for $300 to $400 each. On the other hand, a certain set of business-application packages is priced at $1,000 to $2,000 for each package or $14,000 for the whole set. Obviously, the price of packages can vary widely. While a general ledger package can be bought for $500 to $5 ,000, the functional differences be­tween software programs is almost unbelievable. Some are so poor that they only provide an unre­liable method for storing data with the computer. Some software causes the computerized applica­tion to be more time consuming and troublesome than a manual operation would be. Many applica­tion packages exist only to sell hardware. The soft­ware is sold at a low price, and the buyer does not recognize the cost of inadequate software. Most low-priced "off the shelf" software is sold without the option of being modified by either the seller or the user. The user must then adapt the opera­tion of the business to the software package. Review: System support is also high priced. What can the small business user expect in this area? Levine: Datamation estimates that small businesses had better plan to spend at least $3,000 to $6,000 for programming services for the first applications they want to put on microcomputers. Of course, there are other types of support to be considered: system and program documentation, user training, and software maintenance for both fixing bugs and improving systems. Review: Can you identify some problems small businesses should guard against when purchasing microcom­puter systems? Levine: Yes, four frequent problems are encountered by small businesses. 1. Jumping too soon . Many purchasers buy in­adequate hardware and application packages be­fore they understand their own needs. Before buy­ing a computer the small business owner must know its processing capability. For example, most small computers available today cannot support more than one user at a time, but some small com­puters can run several applications concurrently. The buyer must consider the needs of the business before making a purchase. Other performance fac­tors that should be considered are printing time, storage capacity, maximum memory for applica­tion programs, and the skill level necessary for operation. 2. Wasting time . Microcomputers and some of their application packages may be inexpensive, but they represent a great potential waste of time. Al­most all purchased software packages need some modification to fit a particular user's needs. The user may spend a lot of time trying to fix up these packages and may end up only making matters worse . Most small businesses have several operations that are time consuming and very repetitive. Such repetitive operations as general bookkeeping or producing accounts-receivable statements are good applications for a small computer. The small business with ten or fifteen employees has no need for a computerized payroll , but a larger business with a main computer that is overloaded might benefit from using a small computer for the payroll. Attempting to perform too many applica­tions on a small computer can lead to difficulties. Too often an owner assumes that a computer will do a better job than can be done manually, but before a decision is made to automate any opera­tion the potential benefits must be investigated. 3. Violating policies. New privacy laws have caused many companies to search out all their personal data files. Many have found that first-line super­visors, against company policy, are keeping "desk drawer" files on their subordinates, and these files are being used in ways that top management does not approve of. With microcomputers this situa­tion is likely to get worse, not better, unless ade­quate policies are set up, publicized, and enforced. 4. Designing poorly. Inadequate design practices may occur in both system design and program de­sign and in purchased application packages and custom programmed applications. Inadequate backup and recovery procedures may make opera­tions difficult, and poor data security may lead to serious disclosure problems. Often the buyer will assume the small computer is capable of performing all tasks normally associated with computers. Such factors as programming, maintenance, security, and responsibility for the overall application and operation of the computer will probably be overlooked or inadequately dealt with. Without proper planning and coordination of the activities of those involved, these small com­puters can cause problems greater than would have been imagined. Review: It would, therefore, be advantageous for the small business to set up company policies directed at each of these problem areas? Levine: Yes. For example, the small business can develop and implement the following types of policies and procedures: 1. The owner should obtain expert assistance to help identify data-processing needs and then should request microcomputer sales representa­tives to detail how their systems can fill these needs and at what costs. 2. Standards and policies regarding good practice should be drawn up and implemented for each element of the microcomputer system. 3. One company policy might deal with the types of data that must not be stored in microcomputer systems unless approved for specific purposes. These types could include personal and company proprietary data. Further, the policy should state that data are owned by the business and are not to be removed from company premises except under stated conditions. 4. Company policy should require expert assis­tance in the selection, implementation, and main­tenance of hardware and software. The business person must be very cautious before purchasing any small computer. The cost of com­puter hardware has declined to the extent that the purchase price of the computer may be only a fraction of the total cost involved. While many advantages and efficiencies can be obtained through the proper application of computers in small business, reaching these efficiencies depends upon a thorough evaluation of the feasibility of the application. Not all small businesses need computers. In many cases a computer will cause more problems than it will solve. The small com­puter is not a problem solver but a tool, and with­out proper implementation and operation the com­puter will not bring about the benefits hoped for. Research Report Series 1978-3. Major Trends in Population Growth in Texas John A. Burghardt. ISBN 87755-232-0. $4.00. 1978-4. Intercensal State and Local Population Estimates: Methods, Performance, and Texas Applications John A. Burghardt and Vincent J. Geraci. ISBN 87755-230-4. $4.00. Bureau of Business Research • The University of Texas at Austin Austin, Texas 78712 Retail Adjustment to Rural Industrialization After declining for most of this century, populations of nonmetropolitan towns within the United States have in­creased since 1970. At the same time, populations of many large metropolitan centers have declined. The population growth in rural towns may be the result of increased em­ployment opportunities as well as of the desire to escape from the metropolitan environment. Increased employment in more remote areas often results from the location of manufacturing and service industries in rural towns, rather than from an increase in agricultural activities. Manufacturing and Population Growth on the High Plains A triangular-shaped region on the Texas High Plains, de­fined by corners at the cities of Lubbock and Amarillo in Texas and Clovis, New Mexico, contains towns that have increased in both manufacturing activity and population in recent years. The triangle is a clearly defined populated region surrounded by areas of relatively few inhabitants. An evaluation of manufacturing activity and population levels in the eleven Texas counties located in or near the region (excluding the cities of Lubbock, Amarillo, and Clovis because they are metropolitan centers) produces the following conclusions: • Within the area, no basis can be determined for pre­dicting the relation of the population to the number of business establishments or types of businesses for towns smaller than 250 in population. Oaud M. Davidson is Associate Professor ofGeography, Texas Tech University. Claud M. Davidson • Intraregional variations exist in the level of manufac­turing employment. In the northern half of the region a higher percentage of populations tend to be em­ployed in manufacturing than are so employed in the southern portion. The line dividing these smaller regions extends approximately from Plainview to Muleshoe. • The types of retail offerings available vary between the most industrialized towns and the least industri­alized towns of the same population level. Towns with manufacturing employment that is above the average for the region as a whole tend to have the lowest threshold population requirements for retail businesses that offer goods and services pertaining to the arts, recreation, and the use of leisure time. Perhaps this phenomenon is the result of chang- Manufacturing Employment on the High Plains Po pulation Percentage employed in manufacturing Co unty 1960 1976 1960 1976 Bailey 9,090 8 ,369 8.1 3.3 Castro 8,923 10, 18 1 Cochran 6,4 17 5,00 4 7.2 Deaf Smith 13,187 19,229 8.6 28.0 Hale 36,798 35 ,732 14 .5 2 1. 3 Hockley 22,340 21,052 3.9 4.8 Lamb 2 1,896 16,992 5.3 6.0 Lubbock 156,271 197 ,24 8 Metro area Parmer 9,583 10,302 19 .0 29 .5 Randall 33,913 63,542 Metro area Swisher 10,607 10,339 3.5 12 .4 Source: Compiled from data published in the Texas Almanac, vari­ ous editions, 1960-197 8. ing purchasing habits and preferences of the estab­lished residents as a town becomes more of an indus­trial center, or perhaps it results from the needs and demands of inmigrants from metropolitan areas who have moved into a rural town because of employment opportunities in manufacturing industries. Manufacturing employment within the entire region is not uniform, ranging in 1976 from 29.5 percent of the total employed labor force in Parmer County to no manufac­turing element reported in Castro and Cochran counties. 1 Industrial development of the region since 1960 and the variation in degree in industrial activity within this limited and well-defined area provide a good laboratory for investi­gating changes in the retail structures of rural towns where manufacturing activity and employment are increasing. Degrees of Manufacturing Activity Area towns can be divided into three categories based on the percentage of employment in manufacturing: towns sized center. It is the largest urban center within the study area and contains many types of manufacturing activities. Manufacturing employment exceeds 5 percent of a town's population in eight of the fifty-three towns in the entire area. Five (62.5 percent) of the places with above­average employment in manufacturing are located in the northern portion of the region. Of the twenty-four towns containing no manufacturing employment, 75 percent are to the south, while only 25 percent are located north of the line from Plainview to Muleshoe. Relation of Population to Number of Establishments and Functions One approach to understanding the retail business struc­ture of a group of towns is to investigate the relation be­tween town population and the number of business estab­lishments and functions, or types of businesses, within each town. (If a small hamlet contains three gasoline service sta­tions and one food store, it has two functions and four Manufacturing employment exceeds 5 percent of a town's population in eight of the fifty-three toivns in the Texas High Plains. with no manufacturing, towns with Jess than 5 percent of the population employed in manufacturing, and towns with more than 5 percent of the inhabitants employed in manu­facturing. 2 South of the line from Plainview to Muleshoe, only Hurl­wood and Sundown have more than 5 percent of their population employed in manufacturing. Hurlwood, with a population of 115 people, contains a fertilizer plant that employs more than 5 percent of the population. Sundown is located in an area of considerable petroleum and natural gas production, and employment in industries involved in the manufacture of petroleum products and equipment account for the town's higher-than-average employment in manufacturing. North of the line, the towns of Spring Lake, Farwell, Friona, Hereford, and Tulia each have more than 5 percent of their population employed in manufacturing. Farwell's industries manufacture livestock feed and agricultural chemicals; Friona contains meat packers as well as feed and fertilizer producers; Tulia contains several irrigation and agricultural equipment manufacturers; and Spring Lake has a grain-processing plant. Hereford has a wide variety of manufacturing, including meat packing, vegetable process­ing, flour milling, sugar production, feed and fertilizer manufacturing, machine works, and fabrication of agri­cultural and irrigation equipment. Located between Lub­bock and Amarillo, Plainview serves as an intermediate-establishments.) Data for the area came from the white pages of telephone directories and field surveys. In both the industrialized and nonindustrialized towns in the area, there tended to be a direct relation between popu­lation and the number of functions and establishments. The only exceptions were the specialized towns of Hurlwood, which serves as a retail base for Reese Air Force Base, and Slaton, which is a residential suburb of Lubbock. The analysis does, however, indicate that the number of estab­lishments and functions in towns smaller than 250 in popu­lation is not as predictable as it is in larger places. Threshold Populations Although the number of establishments and functions relative to population are predictable for towns throughout the area, differences may occur in the types of existing businesses in towns with different levels of industrial devel­opment. Analysis of threshold levels may be used in deter­mining such differences. The threshold level for a function is the lowest population (or smallest market) necessary to support the successful operation of a business. For this arti­cle, the threshold level of a particular function is the small­est town in which a business of that type is located. Since the towns have been divided into three categories based on the percentage of population employed in manu- Percentage of Population Employed in Manufacturing r------------------r----1 I I I I I I I I I I I I I I I I I I I I .. (.in) Oil I i /'•"i Umbarger ~ : : Hcrclurd./ : l :_ ____ 1~~2~1.r.;_/--\-___LR~!~.-°-A:fL-_____ J ___ I PARMtR ~·Summcrlicld\ CASTRO! Happy~ SWISHER 1 I e1ackr1 I ~ I I I fr.Friona l : : I I I I i I ~...., I \~~ L. Fan•cll I I 1•, I I I " Larial I Han•~I .Krc» I ~---: _____ T_L ____ ----T-1 I B A I L E Y I 1 I I Earth·-Spring Lale I i ""'"""'/"t:/.'--·+· Sudan I f I • Hale Center I Fickltonl • f Need more 1 • I ( I I 1• •circfle Back • Am~hcN I • IICollon Center I I f u111ene1ct I I f Bula•I Spade• I I I •Goodland •Enoch f I Pctcr,burg• I ~--~'~c.:.__t---f'"'-'"----,..,oo~_,...'"'--.-~':'.'. ___~ r------...""""" I ••,,...... ~ L.. '"' ! : ~: ( ShLo•:Hcr• ldalou.--J Blcd,,.c I I I I • I I IV •---·-Smicr Whuc Face I Lnclland I -•--J..• I I Hurl•O\>d I L I f Wol/lorlh. I :, :Sundo•n• Ro~·-"llc vi , •\:cy : ,... .•/i s1a1-JI __ on!_ u_o_L!:!~~ _____J':!...o.s...~ur.. ___J..::._Ll-~8..!!.0.S...'S...._ ~ • No manufacturing reported o~~....o.~-1·0~~~-20 Miles e Less than 5 percent • More than 5 percent facturing, those categories provide a standard for comparing threshold levels. With the exception of an ambulance service in Whiteface, an antique store in Posey, and a physi­cian in Amherst, functions with the lowest threshold in towns with no manufacturing employment tended to be the kind that fulfill only basic requirements or, alternatively , to be the kind that serve an agricultural market. The ambu­lance service exists in Whiteface because of the distance to the nearest medical service ; the antique store in Posey serves the Lubbock market since Posey is a suburban com­munity. There is a physician in Amherst because the town is the largest among the towns with no manufacturing em­ployment and can support his services. In almost one-half of the towns studied, less than 5 per­cent of the town's population is employed in manufactur­ing. Sixty functions occur in these towns at a lower pop­ulation than they do in towns in the other two categories. Many of these functions would be expected in rural towns of the population range included in the category; but sev­eral of the functions pertain to art, recreation, and leisure time and are not common in most nonindustrial rural towns. These exceptional functions include an art gallery, bookstore, cable TV, craft store, movie theater, newspaper, pet store, radio station, record shop, recreation center, and sporting goods store. This trend toward the existence of functions that are directed toward the arts, recreation, and the use of leisure time continues in towns in the third category, in which more than 5 percent of the population is employed in manufacturing. This category does, however, contain two exceptional towns. One is Hurlwood; the other is Plainview (population: 23,330), which is much larger than any other town in the study area and contains a number of businesses that the smaller centers cannot support. Other towns within this category offer such art and recreational functions as an art store, community action hall, golf course, library, music shop, and youth center. In addition, this group of towns offers the lowest threshold levels for several busi­nesses that appear to serve an industrial market and popu­lation, such as an apartment house, resident engineer, ma­chine shop, and public accountant. These results indicate that the small towns that have received industry and employment in the population shifts of the 1970s are likely locations for leisure and recreation­ally oriented retail stores, as well as stores serving the industrial market and population. Notes 1. Computed from data published in various editions of Texas Al· manac (Dallas: A. H. Belo, 1960-1978). 2. Data on manufacturing employment in each town were compiled from Directory of Texas Manufacturers (Austin: Bureau of Business Research, the University of Texas at Austin, 1976). ATLAS OF CENTRAL AMERICA $18 plus tax Atlas of Mexico $20 plus tax Bureau of Business Research Box 7459, University Station Austin, Texas 78712 Barometers of Texas Business (All figures are for Texas unless otherwise indicated.) All graphs except the one for nonagricultural employment are adjusted for seasonal variation. Data were compiled from the following sources: U.S. Department of Labor, Texas Employment Commission, Texas Railroad Commission, and Federal Reserve Bank. All data are current through April 1979. Consumer Prices (Index 1967=100) Percentage Unemployed t 200 150 100 ~---.-19_7_1~-~1-9_7_3..--~1-9_7_5..--~1-9-77--r---..-1~97=-19 Oil Production and Refining (Index 1967=100) 180--..-------------------, 160 140 120 ..._'\, Crude oil production v-,, ,; ... ~ 'i ao-J---.---...---r:-19~7~3T-"-T1~9~7~5.--r.1~9~7~7r--r.1~9~79~ 1971 7.5 5.0 2·5 ~---19_7_1~-~1_9_7_3..--~1-9-75-r---..-1-97=-7-r---r-19-7--19 Industrial Activity (Index 1967= 100) 275~----------------------. 250 225 200 175 150 125 Total industrial production BUREAU OF BUSINESS RESEARCH SECOND-CLASS POSTAGE PAID AT AUSTIN, TEXAS THE UNIVERSITY OF TEXAS AT AUSTIN AUSTIN, TEXAS 78712 5,500 -~--------------------------. Nonagricultural Employment in (In thousands of employees) 5,250 5,000 4,750 4,500 4,250 4,000 3,750 3,500 1,250 1,000 750 500 250 Total (5,431) Trade (1,321) Manufacturing (986) Government (973) Service (922) Construction (390) Transportation (344) Finance (304) Mining (191)