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IBO Bookkeeping

101 - Canada

•  Business Forms

•  Meet Joe DePetris
•  Tax Tips
•  IBO Bookkeeping
    101 - U.S.
      PDF Version
      HTML Version
•  IBO Bookkeeping
    101 - Canada
      PDF Version

IBO Bookkeeping 101 offers simple yet top-notch advice on how to properly maintain your records while building your business.

The IBOAI is committed to protecting and improving the business-building opportunity for all IBOs powered by Quixtar.

Read the book below or view it in pdf format here.

Enjoy.

Preface — A Word From Your IBOA International Board
Our responsibility and passion as your representatives on the IBOA International Board are to protect and improve the business-building opportunity for all current and future Independent Business Owners (IBOs).

As with any person carrying on a trade or business, IBOs should conduct their activity in a businesslike manner in order to receive fair treatment of business income and expense deductions under the Income Tax Act. This includes starting out with your own personally defined business plan, budget, and breakeven projections, as well as making periodic adjustments to your business activity to meet your objectives. It also entails the discipline to distinguish with exactness business from personal income and expenses.

We’ve made the IBO Bookkeeping 101 guide available for all IBOs in order to share with you what we consider to be simple yet top-notch advice on how to properly maintain your records while building your business. Failure to keep adequate records can be a costly mistake that we hope all IBOs will avoid by following the steps in this guide and, when necessary, consulting a professional tax advisor, preferably a professional accountant, who understands this remarkable business that you’ve embarked upon.

The guide’s author, Joe DePetris, is a C.P.A. and professional advisor to the Board. He has worked diligently with thousands of IBOs, from those just getting started to those at the Diamond level and above. His efforts have saved IBOs time and money by pro-viding them the tools and knowledge to maintain proper records of their business activity, which satisfy the requirements of the Canada Customs and Revenue Agency (CCRA). In this guide, Joe shares with you the same insights he offers to his clients.

We hope this guide is helpful to you as you build your business. Please feel free to forward any questions you may have to the IBOA International at:

220 Lyon Street NW, Suite 850
Grand Rapids, MI 49503
Tel:  616.776.7714
Fax:  616.776.7737

Note:  This guide is prepared as an educational resource for your guidance, and is strictly informational. It does not constitute legal, accounting, or other professional counsel. Nothing included here implies a recommendation by the author, the IBOA International, or Quixtar, of any course or method of regulatory compliance. Readers and users who intend to take, or refrain from taking, any action based on information contained herein should first consult with their qualified tax advisor, preferably a professional accountant, or appropriate regulatory authorities.

While every effort is made to provide accurate and current information, the forms and reference materials provided here are given for the purpose of explanation only and should not be solely relied upon as the most recent material available. Subsequent changes in the federal tax law, such as legislative amendments or CCRA interpretations, may change some of the material covered. Accordingly, your own qualified tax advisor should be your final authority on these matters.
 

Welcome New IBOs

Bookkeeping: The Dos and Don'ts

Tips on Completing Your Form T2124: The Important Details

Automobile Expense

Travel, Meals and Entertainment Expense

Building Your Business As A Team

Business-Use-Of-Home Expense

Telephone Expense

Dream-building Expense

Babysitting Expense

Hiring Employees

Final Thoughts

Appendix A

Business Plan Table I―Example A

Business Plan Table I―Example B

Business Plan Table I―Example C

Business Plan Table II

Business Plan Table III

Mission

Objectives

Keys to Success

Instruction for Completing Your Budget and Breakeven Projections

Business Plan―Income Projections Worksheet

Business Plan―Going Platinum



Welcome New IBOS
Having become an entrepreneur and joined the ranks of the self-employed, there are some things you should know to make the most of your new opportunity. Even if you have previously owned or currently own another business in addition to being an IBO, please realize that there may be some things relative to this business that are different from others. This guide might seem over-simplified to some of you, but it is designed to be a teaching tool for even the most basic level of understanding.

Either way, as a first-time business owner or a seasoned veteran, I hope the thought of building this business is exciting for you. As you progress on the road to success, you will have access to many tools to help you build your business. The subject of the following discussion begins with the use of two of the simplest tools: a pencil and a daily planner. From there, believe it or not, you’ll learn simple ways to manage your own personalized business plan, budget, and breakeven projections. If you don’t have a daily planner already, you can actually purchase one through your business at quixtar.com by visiting the Franklin Covey or Write On! Partner Stores.

I cannot teach you to be an accountant. However, I will teach you the types of records you need to keep for your business, and how to keep them. I will also give you some suggestions and tips to assist you should CCRA request to examine your records. If CCRA does contact you, and you’ve failed to keep good records, you might unnecessarily spend hundreds or even thousands of dollars that could have been used to build your business.

Keeping good records is not just important at tax time, it also provides you important insight to help monitor your business throughout the year and meet your objectives. This is especially true as your business grows and your organization of downline IBOs gets larger. Keeping complete and accurate records, although not the most exciting part of building your business, is very important.

Now that you’ve been introduced to the importance of good bookkeeping and the tools that will help you get the job done, I’ll give you some pointers to ensure that your records are in good shape, so that you can substantiate all items reported on your income tax return.

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Bookkeeping: The Dos And Don'ts
When it comes to bookkeeping, simple works better. Don’t get bogged down with complex accounting packages when there are simple solutions available for you. I strongly recommend that you use the materials that come with this guide, as well as the various tax organizers developed by your upline, to accomplish your necessary bookkeeping tasks. These items are specially designed for you and your business, which makes them an effective tool.

At a minimum, when starting any business it is important to prepare a business plan, budgets, and breakeven projections. These basic tools will help you set your course down the road to profitability. Included at the end of this guide are sample forms to help you prepare your own business plan, budgets, and breakeven projections. Consult your upline and qualified professional advisors for assistance with completing these items.

Don’t wait; use your bookkeeping tools regularly. The nature of your business requires daily tracking of things like mileage, travel, and other expenses, which is why it all starts with a pencil and your daily planner. If you wait until the end of the year, you’ll be challenged to recall a whole year’s worth of details at once. You should also consult your tax organizer materials, including your budget and breakeven projections, at least monthly to monitor your business activity and make adjustments where necessary. In addition to updating the current month’s information, look back also at prior months. This will help you stay connected to your business and your progress.  Regular bookkeeping habits are a critical factor considered by CCRA when distinguishing an actual trade or business from a mere hobby.

Accurately record all income and expenses relating to your business. Be sure to keep expenses by appropriate category, and refrain from overusing general categories such as “miscellaneous,” “office,” or “supplies.” When the time comes to report these items on your income tax return, it paints a clearer picture to separate out related expenses rather than combine everything together into a single category. It’s better if your examiner can quickly see what you’re actually spending money on. CCRA reviews returns for reasonableness before deciding whether to audit them, and large amounts of unexplained “miscellaneous” expenses will tend to raise an audit flag as to their reasonableness.

Some common categories to break out your typical office expenses might include: “postage and shipping;” “dues and subscriptions;” “equipment;” “supplies;” and “utilities.” Other broader expense categories would include: “advertising and promotion;” “automobile;” and “travel, meals and entertainment” (for attending seminars, rallies, and other functions).

Keep “original source documents” to substantiate your income and expenses. For income items you should keep invoices and monthly statements, order forms, and bank deposit slips. For expense items you should keep cancelled cheques, cash receipts, credit card records, and any other proof of payment. A simple system is to file them as you would report them, such as by income or expense category. Then, if you are called upon to justify an amount reported on your tax return, you’ll know exactly where to find your supporting documents.

Use separate accounts for business and personal needs. This is critical for building and maintaining your business in a “businesslike” manner. Separate accounts give your business its own identity. Having a separate bank account for your business will actually simplify your bookkeeping responsibilities, and it will also demonstrate to CCRA that you take your business activity seriously. If you use a credit card for your business, then you might also open a separate credit card account that you use only for business items. Interest expense paid on business charges is deductible, while interest on personal charges is not. Using one card for both personal and business charges can lead to lengthy calculations trying to separate that portion of the interest attributable to business expenditures. After you establish separate accounts, it is important to keep them separate and not co-mingle funds between them.

Identify all deposits to your business account. You might include a brief description on each deposit slip indicating the nature of the funds being deposited. You might also file each deposit slip along with photocopies of the deposited cheques. If you get audited years later, it’s tough to remember where every deposit came from. Without documentation, CCRA may likely view any deposit as business income.

Identify transfers of funds between bank accounts. If you transfer funds from your personal account to your business account, or vice versa, then your deposit slip should note the account number from which the funds originated. This allows you to identify later the source of the transfer if necessary.

Keep separate bank accounts for multiple businesses. If you operate more than one business, it’s helpful to manage the financial activity of each business by assigning separate bank accounts. Generally, it’s also best to report each business activity on a separate form T2124 with your individual income tax return.

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Tips on Completing Your Schedule C: The Important Details
When it comes to reporting your business activity to CCRA, the secret’s in the details. Accurate and detailed reporting begins with a general understanding of the various tax provisions affecting your business. I will outline some of the important points below, but don’t be afraid to seek professional assistance if anything remains unclear to you. Tax return preparation fees may be deducted, if incurred primarily for the purpose of completing your return.

As a sole proprietor or partnership, your business activity will be reported on your annual personal T1 tax return using form T2124. Form T2124, ‘Statement of Business Activities’ is available through CCRA and is included in CCRA’s Business and Professional Income Guide (T4002). Although both you and your spouse may be registered with Quixtar, a partnership for tax purposes will depend on the parties’ intent, which is determined by looking at all the facts and circumstances of the business relation. The allocation of partnership income should be reasonable under the circumstances and also preferably be based on a written agreement.

In the identification section of form T2124, you are asked for an Industry Code, a Business Number, a Tax Shelter number and Partnership filer identification number. The industry code for direct sales is 454390. If you have registered with CCRA and obtained your own business number, indicate your number in the Business Number field otherwise leave this field empty. Quixtar is not a tax shelter, therefore you must leave the tax shelter number empty.  If your partnership consists of more than 5 individuals, list your partnership filer identification number otherwise leave this field empty.

Explain your “sales” and “cost of goods sold.” When reporting income, be sure to report as “sales” all receipts for sales of products and business support materials to other IBOs, Members, Clients, or other customers. Then report as “cost of goods sold” your cost for all such products and materials. Explaining these items on your T2124, rather than just reporting the end result (i.e., net income), helps demonstrate the level of activity in your business.

Exclude Personal use and promotional items from your “sales” and “cost of goods sold.” Treating products taken out of inventory for your own personal use as a “sale” to yourself, while including their value in computing cost of goods sold, has a tendency to create a negative gross profit, which is an audit flag. Alternatively, you might remove personal use items from the cost of goods purchased during the year before you determine your cost of goods sold. Similarly, products and business support materials given to others to interest them in the product or encourage them to build a business should be deducted as an “advertising” expense.

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Automobile Expense:
The nature of your business may result in a significant amount of automobile travel, particularly in the early stages of building your business. This is an expense that requires very detailed documentation and substantiation in order to obtain the deductions that you are allowed.

When you use your vehicle for both business and personal use, you must apportion your expenses between such personal use and business use. Remember that you cannot deduct the portion of your auto expenses resulting from personal use or commuting to and from work. You should begin then by regularly recording the miles you drive on daily business trips. The simplest and most logical place for you to do this, once again, is in your daily planner.

Enter each business trip in your daily planner and record the number of kilometers you drive per trip. Next to each mileage entry, note the 4 Ws: who, where, when and why. The “why” will always include the business purpose of your trip. For simplicity, you might use codes or symbols for the more common purposes. Examples could include “STP” for showing the Plan, “R” for rallies, “B” for trips to the bank, “D” for customer deliveries, and so on. The “who” would be the name and address of whomever you’re calling on. If you are going to an open opportunity business meeting, record the name and address of the person hosting the meeting, the name of the speaker, and the name(s) of any prospects you take with you. Record the names of all the people that you show the Plan to, even if they do not end up coming into the business. It’s also a very good idea to record the names, if you know them, even of the people you prospect as well as your method for prospecting. Finally, keep copies of your upline newsletters to substantiate any open meetings, rallies, training sessions, and other business functions for which you’ve traveled to attend.

Mileage incurred commuting to and from work generally is not deductible, while mileage incurred in pursuit of your business is deductible. CCRA rules also provide generally that for auto expenses to be deductible you must embark from your primary place of business, which is the home for most IBOs. Now, this presents some interesting scenarios if you’re like many successful IBOs, who periodically conduct business at lunchtime or when traveling to and from work.

What if you drive to work in the morning (non-deductible commuting mileage), then you drive to meet a prospect with whom you share the Plan at lunch? The mileage from your work to your lunch meeting and back is deductible, since it was solely for business reasons. What if you meet with your downline on your way home from work? Your mileage from your work to your after-work meeting is deductible. But your mileage from your after-work meeting to your home is not; that’s considered part of your commute. The next morning, on the way to work, what if you stop to counsel with your upline about your business? The kilometers from your home to your first stop are deductible since you left your primary place of business to go on a business trip. Yet the mileage from the business stop to your work again is part of your commute. Sound detailed? Yes, but every legitimate, deductible kilometer counts, so it’s a worthwhile task.

To make a proper automobile expense deduction, you will first separate your personal and commuting mileage from your documented business kilometers. Take the odometer readings from your vehicle at the beginning and end of the year to determine total annual kilometers driven. Total kilometers driven per year, less the number of documented business kilometers, should leave you with your total personal and commuting mileage. Next, to separate your commuting and personal mileage, determine the round trip kilometers to and from your work and multiply that by the estimated number of days you worked during the year.

Business Kilometers

+ Commuting Kilometers

+ Personal Kilometers

=====================

= Total Kilometers for Year

Business, commuting, and personal mileage totals will assist you in completing the ‘Motor Vehicle Expenses’ section of form T2124. Once you have determined your business mileage, you are allowed a deduction for expenses such as gasoline, insurance, maintenance, license, auto-club membership, depreciation, leasing costs and interest on money borrowed to purchase the car in the same proportion as business to total kilometers driven during the year. Note that parking and tolls incurred on business trips are a separately deductible business expense, and should not be included with your automobile expenses.

You should seek assistance with calculating depreciation expense. The depreciation allowance is limited, complicated, and changes on an annual basis.

It’s a good idea to keep all your automobile gas and repair receipts for the year. You must be able to substantiate that you actually drove the kilometers claimed. Receipts for gas, oil changes, and repairs are generally the best evidence.

Recording automobile expenses is tedious work, but don’t get tired of using that pencil and daily planner! Believe me, it will be well worth every minute of time spent properly documenting your automobile’s use. Besides, it’s just good business practice to do so. Records well kept, especially pertaining to automobile and travel expenses, could save you hundreds or even thousands of dollars in the event of an audit. So use your tools to keep track of your expenses just as eagerly as if someone were standing beside you now, offering you that money to record the information.

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Travel, Meals and Entertainment Expense:
Other travel expenses such as hotels, meals and entertainment, auto rental, taxi cab fares, parking and tolls, tips, etc., must be substantiated by receipts and proof of payment. They should also be documented in your daily planner with—you guessed it—the 4Ws (who, where, when and why).

Meal and entertainment expenses are only 50% deductible, and therefore must be accounted for separately from other travel expenses. Additionally, local meals are deductible when you’re conducting business, but only if you pay for your meal and the meal of the person you’re entertaining. This too is subject to the 50% limitation.

One final caveat regarding travel expenses is to refrain from deducting the cost of trips to see the family for the holidays. Although relatives may also be in the business and this provides a good opportunity to conduct business with them, expensing these trips gives a bad impression and invites scrutiny. These usually amount to small dollars, so it’s not worth it, even if it’s otherwise legitimate.

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Building Your Business as a Team:
If your spouse is your business partner and actually works with you in the business, then you should advise your tax return preparer of this fact. This is important because the tax laws prohibit business trip deductions for spouses whose purpose for going on the trip is not business-related. But if your spouse is a partner in the business and has business reasons for traveling with you, then you should be allowed their travel, meals, and entertainment expenses as well.

You will want to indicate on your tax return that both you and your spouse are partners in the business. Technically, then, each of you should file a separate form T2124, reflecting your share of the total income and expenses based upon your respective interest in the partnership’s business.

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Business-use-of-Home Expense:
Business-use-of-home expenses generally include mortgage interest paid on your home loan, property taxes, as well as certain other “operating expenses” such as insurance, utilities, maintenance, and depreciation. All of these are apportioned according to the percentage of your home being used as an office.

Do not assume that because your business is based out of your home that you are automatically entitled to take this deduction. In order to qualify for business-use-of-home deductions, your home office must meet these requirements:

(a) That part of your home that you designate as your office must be used exclusively and on a regular basis for business, and

 

(b) Your home office must be your “principal place of business,” which means that it is the principal fixed location where you conduct substantial administrative or management activities of the business.

 

Such administrative or management activities would include: calling on IBOs or potential IBOs for business purposes, scheduling meetings or making appointments, keeping product or business support materials, hosting functions, and performing business bookkeeping and bill paying activities.

The business-use-of-home deduction is calculated by dividing the number of square feet of your home office by the total number of square feet in your home to arrive at a percentage, which is then applied to the expenses mentioned above.

Business-use-of-home expenses are deductible only to the extent that your business is profitable. If you’re not profitable in a given year it’s still worthwhile to compute and report these amounts because amounts disallowed due to lack of profitability are carried over to a future year when you do become profitable. The section of form T2124 titled ‘Calculation of business-use-of-home’ is used to determine the allowable claim for business-use-of-home expenses.

You should seek assistance with respect to the implications and calculations surrounding claiming depreciation expenses (capital cost allowance) on the business-use portion of your home. The capital cost allowance calculation is prorated to the business-use portion, is complicated, changes on an annual basis and could cause you significant tax liability in the future.

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Telephone Expense:
If you have only one telephone line in your home that is used for personal calls, then you may not deduct any portion of the standard monthly charge for your telephone. In such case, you may only deduct expenses for business-related long distance charges. If you install a second line strictly for business purposes, then you may deduct the base charge for that line. Voice mail communication services are deductible. Business use of mobile phones is also deductible, but you should keep track of business usage (name, number, minutes used) by the statements received from your cellular service provider. It is never a good idea to deduct 100% of cell phone charges, as everyone inevitably uses their phone to some extent for personal calls.

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Dream-Building Expense:
While dream-building is important for business motivation, it’s generally not in your best interest to deduct dream-building expenses. Such expenses might include admission to R.V. or boat shows, or mileage spent driving around looking at luxury homes, even if you bring your downline with you. In the end, these too are small dollars and do not justify the scrutiny that you may receive. Don’t stop dream-building, just refrain from deducting such expenses on your tax return.

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Babysitting Expense:
While childcare may be necessary for some to conduct their business activity, don’t mistake this as a deductible business expense. CCRA considers babysitting to fall within the childcare deductions, which is reported separately. You will need each childcare provider’s name, address, social insurance number, and the amount paid for the year.

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Hiring Employees:
When your business reaches a size that you might begin to employ others, it’s time to seek personalized counsel from a professional. There are several federal and provincial requirements that can prove very costly to your business if not handled correctly. These vary from province to province, and there’s quite a bit of detail involved that goes beyond the scope of this guide. Suffice it to say that you will not like the penalties and interest that might apply if you fail to get it right.

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Final Thoughts:
To determine whether or not you are truly operating a business for purposes of allowing business deductions, CCRA will look to your records and bookkeeping practices, as well as whether you prepared a business plan, budgets, and breakeven projections when you started your business. They will then examine how you’ve used these tools to adjust your business practices in pursuit of profitability. Because to be allowed business deductions, you must demonstrate that you are actively engaged in a trade or business, that your deductions are ordinary and necessary in your trade or business, and that your intent is to make a profit from your business activity.

In general, you should aim to conduct your business activity in a professional, businesslike manner. Begin by separating your business activity from personal activity, and keep accurate records to evidence the difference. Set goals and periodically review your method of operation to see that you’re effectively meeting your objectives. Always look for ways to improve productivity and profitability. Seek expert help from your upline advisors, and really work the business.

Be mindful of your level of activity in the business. Folks, if you are not showing the Plan very often and not doing much besides going to functions, then you will not only have a hard time demonstrating an intent to make a profit, you’ll have a hard time making a profit. So work hard, SHOW THE PLAN often (at least five to ten times per month), and generate sales to your Members, Clients, and other customers. Follow this advice, and your business activity will speak for itself.

As your business grows and your profitability increases, you may be required to make quarterly tax payments to CCRA to cover income and self-employment taxes. Even though the payments are due quarterly, it is a good idea to set aside money in advance for those payments on a monthly or weekly basis. Seek some help on this, because interest and penalties may accrue if this is not handled correctly.

Finally, but perhaps most importantly, be honest when doing your bookkeeping and preparing your income tax return. Refrain from engaging in abusive tax practices, or from advising others to do so. Such behavior hurts not only yourself, but also everyone else in the business because of the image and reputation that you portray.

The information and tools in this guide, although not glamorous or exciting, are designed for your benefit. Bookkeeping is an important part of building your business. So keep detailed and accurate records, update and review your records each month, and be diligent in preparing your tax returns.

I wish you much success with your business!

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Appendix A

G O I N G    P L A T I N U M

THE ROAD TO PROFITABILITY―

for Your Business Powered by Quixtar

The following examples of a business plan, including budgets and breakeven projections, are offered as a guide to help you prepare the same for your own business powered by Quixtar.

Preparation of these materials at the start of your business is not only prudent business practice, but also an important factor considered by the CCRA in distinguishing your business activity from a mere hobby.

Please note that all numbers presented here are estimates based on averages and other historical data. Gross incomes may vary between businesses because of differences in group selling and sponsorship activities.

The Independent Business Ownership Plan (the “Plan”) enables IBOs to earn income selling exceptional products and services plus bonuses based on the overall sales volume generated through the customers they serve and through the business organizations they have developed by sponsoring others who decide they too want to own their own business. Each IBO’s individual success depends on his or her own efforts and the efforts of those he or she sponsors. An IBO’s people skills, past professional training and experience, motivation, and work ethic may vary somewhat compared to others, such that the road to profitability also varies from one IBO to another.

For this reason, the sample materials offer several scenarios for achieving the Platinum level in your business. Plot your own course using the sample forms as a working model. After you have completed your own business plan, including budgets and breakeven projections, you should consult them at least monthly to monitor your business activity and make adjustments where necessary, and you may revise them annually to help manage your business growth.

To begin, determine your desired growth plan using Examples A, B, and C in Table I. This table reflects estimated growth in group size and structure necessary to achieve 7500 PV in 18 months (Example A), 36 months (Example B), and 60 months (Example C).

Then, depending on your desired growth plan, estimate your monthly performance bonus income by using Table II. This table reflects the average monthly bonus income at various PV levels. Note that these amounts will vary depending on the depth and width of your sponsored group. Note also that these income projections reflect only performance bonus amounts, and do not include gross profit from sales to Members, Clients, or other customers.

Next, estimate your monthly business expenses by using Table III. This table defines common expenses incurred in building your business powered by Quixtar. If you are new to the business, your upline can be very helpful in estimating the expense levels you should anticipate in the various expense categories.

Finally, using the information derived above, you can complete your budget and breakeven projections by following the instructions for the forms provided. After you have finished these items, you now have some performance-based criteria against which you can measure your business progress. With these criteria in mind, you can solidify your mission statement, objectives, and keys to success. Combine all of these pieces together under your cover page, and you’ve completed your business plan.

CONGRATULATIONS . . . You’re on the Road to Profitability!

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FOR EXISTING IBO USE ONLY

DO NOT USE WITH PROSPECTS

BUSINESS PLAN
TABLE I—EXAMPLE A
GOING PLATINUM IN 18 MONTHS

(Estimated Growth in Group Size)
________________________________________________________________

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FOR EXISTING IBO USE ONLY

DO NOT USE WITH PROSPECTS

BUSINESS PLAN
TABLE I—EXAMPLE B
GOING PLATINUM IN 36 MONTHS

(Estimated Growth in Group Size)
________________________________________________________________