M. C. Conick, C. P. A.
Pittsburgh, Pa.
First, let us determine whom we designate by the term executive. The executive of any business is the person or persons upon whom the success of the venture or enterprise depends. In most businesses it is usually found that there is one person who really deserves such title. There may be others who are classed as executives, who perhaps perform some one function of the executive but the real executive is the one who does the “brain-sweating”, and whose duty it is to apply the fundamental principles of economics in business if he expects to succeed.
Secondly, let us consider the presentation of accounting data. We need not concern ourselves very much as to who presents the accounting data, whether it be the bookkeeper, the company auditor, the professional auditor, the engineer, the attorney, or any other person holding similar office, but the important thing is the kind of data presented, the use to which it is put and its value.
Now, consider for a moment briefly, the evolution of business in America. Take for example, the distribution of an output nationally. This was practically unknown a century ago, for we had not yet entered the industrial era. Business generally was done in a simple way with narrow range, small production and usually supplied consumers locally. The owners of the business knew their customers personally, and supervised every detail, because the market was small and easily visualized. Business was more in the nature of a personal venture involving practically no administrative duties. Instead of corporations we had partnerships and each partner was a craftsman rather than an organizer. Gradually, but only since 1870, the corporation and limited partnership idea was conceived and the old business was gradually converted into a more complex method of organization. With the coming of the corporation we had for the first time a limited liability for the investor. In the old days no conservative business man would become a partner and risk his own fortune in a business over which he exercised no personal supervision. The limited liability enabled corporations to command large capital and with large capital grew the complex organizations. New machinery was invented, facilities of communication became more numerous, quantity production by the use of modern tools was coming into play, which made it absolutely compulsory for the expansion of the tools of selling and distribution of the products on a broader scale. The purchasing power and the habits of people changed gradually with the change of earning capacity and by the altered relationship towards other world-powers which our country underwent from year to year.
Our methods of living as compared with other countries had a very decided effect upon individual demand, so that business, once the measure of a man, became the measure of an organization, to which there is no limit in size and growth except the power for greater organization.
I had an interesting conversation with a comparatively young man, who only ten or fifteen years ago, occupied quite a meagre position, but through an intensive study of business economics has under his control the management and supervision of several hundred individual units of business, which more or less look to him for advice and depend a great deal upon his ability for steering them through their financial difficulties. I was so much impressed by this individual referred to because from his conversation I deduced that he was able to do this through his ingenious methods of profitably using accounting data presented to him at different times throughout the year. It is common knowledge that the average executive is confronted with problems that are not of the nature solved through the use of accounting data; as for example, the psychology of the customer and of each employee, the relation of political measures towards his particular industry, the effect of possible strikes and railroad tie-ups, and general strategy.
There are, however, many other problems confronting the executive involving accounting so that if this training comprehended an ability to read accounting data effectively, his success would be just that much greater and his worries considerably lessened. There may be sufficient reason and cause why accounting data have not been used by successful executives in the past and we all know of a good many businesses which have succeeded in a very large way without the intensive use of accounting data. But, in most of such cases, the executives did apply in each case, very effectively, the economics of business without the use of more modern statements of production, sales, expenses, or graphic charts. Such executives knew from past experience what their approximate costs were, where their markets were located, what their probable sales would be, and upon such knowledge based their plant output.
Perhaps another fault of figures lies in their limited meaning in that some represent quantitative measures instead of qualitative measures and further because any numerical presentation of facts which is not based upon uniformity in the things counted is misleading. Take for example, the United States census, which is a very ambitious count of our people but which says nothing regarding the multiplex richness, the variety of characters and the temperament of the people counted.
As a general rule, a successful business must, first, conserve the capital entrusted to it; second, administer its affairs so that its owners may be fairly compensated for the use to which the capital is put. Many books have been written on the subject of accounting, industrial engineering, business economics and the value of logic. Time does not permit touching upon any but the more general principles, which relate to the following elements: Labor; material; sales; unused capacity. The old way was to examine the status of a business, as a rule at the end of the year when all is over, – a post mortem, so to speak. The new way is to plan for a year or for a season in advance.
LABOR
It is pretty well established now that the rate of wage is more or less controlled by organized labor. It is unnecessary in this connection to discuss the merits or demerits of trade unions, but there is one thing that can be said in their favor and that is, that they control for the benefit of their members the wage rate. One disadvantage that the wage-payer has in this respect is the fact that all labor is grouped into classes regardless of individual efficiency. One possible remedy for this condition is a proper analysis of the individual efforts of every employee as compared with his fellow-workers and in comparison with the cost of each operator. This would not necessitate an elaborate, detailed and expensive system of time studies and payroll analyses, but only such reasonable methods as would enable an executive to determine the inequality of his wage rates.
Wages are more definitely settled in the matter of department stores; in fact, they are almost entirely controlled through accounting data. The sales of each salesperson are collected daily, compared with the compensation paid therefor and then compared with the sales of other periods and the causes for the increases or decreases determined; so that in this class of business, individual effort as compared to compensation paid therefor counts in a greater degree, so far as it is possible, than in any other line of business.
MATERIAL
Again taking the department store as an example, the matter of inventory to be carried at any particular time is dependent upon a budget plan, which in turn is coupled with accounting data. By estimating the expected sales and assigning a reasonable time for turnovers, it is possible mathematically to calculate the average inventory necessary during a particular season, in order that excess capital may not be tied up; this is somewhat in the nature of a barometer, for the amount of goods to be purchased within a given period.
Inventories in excess of the reasonable requirements, due to lack of proper forecast and accounting data, have been one reason for the financial difficulties of some companies.
SALES
A proper analysis of sales supported with accounting data will sometimes disclose information of inestimable value. Such analyses may be (1) of a commodity sold, (2) of the classes of customers sold, (3) of the territories covered. Such an analysis will sometimes serve the purpose of forecasting, by using data on which to base the further successful continuance of the business.
It may show that a patented or a specialty article sold heretofore should be curtailed by a superseding commodity. It may bring to the attention of the executive the weakened condition of his customers’ market, and it may also disclose the disappearance of certain territories
heretofore supplied or the expectant disappearance of such territories.
There is one distinct policy followed by some companies which has cost a great deal of money and perhaps was an indirect reason of their failure. I am referring to instances of the creation of
new markets, the acquisition of new customers, while at the same time they neglected to obtain refill orders from their old customers. A glance through the Saturday Evening Post discloses the
extensive advertising campaigns of some of our large concerns, continuously spending money for new business. It is entirely possible that money would be profitably spent if some of it were diverted to the restoration of business previously acquired by determining the reason why it was lost and making more solid, if possible, the former standing with the old customers, upon whom considerable advertising undoubtedly was spent in acquiring them in the first instance.
UNUSED CAPACITY
There is nothing more pitiful than a business having the capacity, but using only from fifty to sixty per cent of it productively. This has been the cause of a great many losses, because there are certain expenses of an organization which cannot be cut down even if production be nil. Through unused capacity, the capital account is very easily depleted by reason of the cost of such unused capacity. Proper accounting data will disclose from day to day, from week to week or from month to month, whether this condition exists and how it compares with other periods.
