Custom Lumber, Inc. is a small, entrepreneurial venture that began in the summer of 1999 as a part time business. Its owner, Dave Stamin, is a warehouse manager for a furniture manufacturer in Spartanburg, South Carolina. Dave first began to produce lumber on a small scale one year prior to officially starting the business. In the beginning, it was just a hobby. Dave had heard of a brand of sawmill called a Wood Mizer, designed to be portable and efficient in terms of waste products. As a birthday treat when he turned 30, Dave purchased a sawmill for $i I ,898,.and some accessory equipment for another $2,390 with some savings he had accumulated over several years. He had purchased the mill partly because he enjoyed the idea of producing something useful out of renewable resources, and partly because he wanted to gradually work out of the warehouse business into lumber production as a full time venture. His salary as a warehouse manager was not very good, he thought, at $42,000 per year, especially since he had a college degree in engineering. At the same time., he did not care to take a desk job in engineering, and he sure loved the outdoors. He thought that the sawmill could be a solution. At this point in his life, he had no family to support and no debt to speak of. It seemed like an ideal time to start the venture full time. THE PART TIME BUSINESS At first, Dave had only cut lumber from his own trees. Dave owned a small tract of land outside of Spartanburg, worth approximately $150,000. He had done a surprisingly large volume of production just for his own use, iike fencing, log barns, and rough framing timbers. In June of 1999, however, he decided that he wanted to make a business out of it, so he applied for a business license and began custom cutting jobs for other people, charging by the hour for his labor and for use of the specialized equipment. The Wood Mizer used a cantilevered bandsaw that cut the length of the log, with litde waste because of the thin bandsaw blade. He pulled the mill behind his pickup truck, and found that the portability actually increased his business. Wherever he cut for a customer. the milling drew a big crowd and additional jobs. 167 or in blade, the customer paid for a new blade ($19 each). Dave's customers were very satisfied with this arrangement, because they could have custom timber cut from their sawlogs at about a fourth the price of purchasing the lumber at the lumberyard. Dave's monthly financial. records appear in Exhibit I. The results are based completely on cash basis, although Dave was able to reduce his tax burden by depreciating his sawmill and accessory equipment. His accountant had recommended using the Modified Accelerated Cost Recovery System (MACRS) depreciation method. Dave's 1999 depreciation expense is summarized in Exhibit 2. tn February 2000, Dave began wondering if the sawmill business was sufficient to support him financially if he did it fuli time. Dave lived by himself and had no family to support. The land he now owned had been left to him by his parents, both of whom had died three years ago. He already had a lot of the equipment he would need for the business. However, a loan fromthe bank would be necessary to expand the business. He figured the business would be organized as a subchapter S corporation. He needed the loan to provide for new equipment (Exhibit 3) and for cash ($3,000) and supplies ($2,000). Dave constructed a worksheet summarizing his equipment and its 'book' value based on the depreciation he had accumulated so far. This worksheet appears in Exhibit 2. He also figured out the additional equipment he needed to 'make a go of it' (Exhibit 3) and the additional expenses he expected to incur from having a workshop and hiring two full time helpers (Exhibit 4). Dave's accountant agreed that the numbers seemed reasonable and accurate. Dave had shopped around for loan rates, and decided that his current banker, Tom Landers, had given him the best quotes and seemed easy to work with. He nervously dialed Tom's number. Tom's secretary answered, and connected them. "Hello, Tom," Dave began. "I think I'm ready to go ahead with the loan we discussed." "Well, it's about time. I think the idea is a great one. You need to bring some cost and income estimates with you actually, there's a list of items," Tom replied. Dave waited as Landers rummaged through his files. !tAh, here it is. You will need to bring the information about the jobs you did as a part timer, so we can see how profitable it has been as a hobby business. You also need to bring in some profit and loss forecasts. Just list the revenues you expect to make and deduct aU your costs. Be sure to include your depreciation expenses. You can hold off on interest on the debt, since that depends on whether or not you borrow the money." !IT you a rate, set the up on an annual so you won't have Landers. "How many days per month do you think Dave thought for a moment. He would probably work six days a week, weather permitting. It rained about two days per week, normally, so he figured four days a week would be a conservative estimate. "Maybe twenty days a month," he replied. [MMEDIATE FUTURE OF THE BUSINESS Dave had at least twenty jobs lined up for the business, with an average of 3-4 days of work (at 8 hours per day) for each job, assuming he hired two assistants. He would likely be at least three times as productive if he hired the two assistants. The handling tasks, which they would be doing, were the most time consuming activity. The three of them could keep the min cutting lumber all the time, whereas before, he had to stop to do the handling tasks. These involved custom cutting work like he had been doing, at the same prices he had quoted before. He also perceived that, in case of financial need, he could cut his own black oak trees and sell the green lumber to a local lumberyard that had a lumber kiln drier. If he did this. be estimated that most of the proceeds would be profit, since he didn't have to pay for the sawlogs, and the gasoline and blade wear were relatively insignificant. Dave had about 240 large black oak trees he could cut and saw if he had to. The green lumber would bring about $300 per tree, after expenses, at the local kiln. He would only do this in the unlikely event he did not get any more custom cutting jobs after the initial ones. Dave was certain that he could continue to acquire business that would keep him busy continually, though. There appeared to be plenty of demand for the work. The first step, though, was to gather the information required by the bank for the loan. THE FORECAST )fl Dave decided to take a day off from work to assemble the required estimates. He got out some ledger paper that Landers had given him. "Let's see," he thought to himself. "Profit 'y }U and Loss statements, and how I can repay the loan ... " Dave paused for a moment, thinking }U about the business as a full time venture. He thought about the loan from the bank's le perspective. If he were in Landers' position, would he approve the loan? Why or why not? Did he reany have to pledge his acreage as collateral? Why did Landers not even consider Dave's head began that there would be a ""U'UH'lU involved with the to start with constructing a balance the assets he had now, plus what to buy. The only debt would be what he borrowed from the bank for the additional assets. The forecast of an income statement was also in order. Landers also wanted cashflow which had to take into account depreciation and its effect on taxes. Landers had him a cashflow worksheet to fill out (Exhibit 5) after he had done the forecasted income statement. Exhibit 1. Monthly Financial Records. June 1999 (21 hours) July 1999 (20 hours) August 1999 (IS hours) September 1999 (39 ho~rs) October 1999 (36 hours) November 1999 (32 hours) December 1999 (12 hours) January 2000 (44 hours) February 2000 (36 hours) TOTAL Exhibit 2. Book Values of Assets. L T -40G24 Portable Sawmill Blade Maintenance Pkg (sharpener) Cant Hooks (2@43.SO ea) Chain Saws (2@328 ea) LogCaniage Honda 4WD ATV TOTALS Fee Income $640 $680 $540 $1,080 $945 $920 $520 $1,250 $1,220 $7,795 Cost $13,890.00 $1,908.00 $87.00 $652.00 $849.00 $7,830.00 $25.216.00 Expenses $124 $102 $108 $209 SI87 $170 $92 $421 $262 $1,675 1999 De2rec. $1.984.88 $272.65 $29.00 $217.31 $121.32 $1,118.91 $3,744.07 Profit $516 $578 $432 $871 $758 $750 $428 $829 $958 $6,120 Book Value $11,905.12 $1.635.35 $58.00 $434.69 $727.68 $6,711.09 $21,471.93 Sharpening Bench (S-year MACRS) II' Work Stools (2@S4ea) (5-year MACRS) a i( Mill Upgrade (Hydraulic) (7-year MACRS) a1 Lumber Storage Racks (7-year MACRS) TOTAL

develop a proforma statement for the first month operation using the production, tee income, cost, expense information case.