Rational Business and Costs

Dominion, Volume 24, Issue 148, 19 March 1931, Page 11

Rational Business and Costs

Sir, —Whether a reduction in nominal ■wages will. or will not, help us on the road to normal business conditions is not the purpose of these comments. I agree with those who take the negative view. Wages should be based on the productivity of labour (in the broad and true sense), and this depends almost entirely on majaagement. Ninety per cent, of the obstacles hindering production will be found to be problems for the management to solve—problems over which employers have no control. Some of these are: Lack of orders; lack of instructions; lack of material; lack of repairs; lack of power; lack of tools, etc. —these all tend to increase production costs. To-day greater attention must be directed to the indirect costs (on cost or overhead). Previously costs and wages were almost synonymous terms. Then business was very small; but conditions Tiara changed to-day, and management has lagged behind. The greatest asset possessed by any business—the personality of the management—is not recorded in the books; but it is certainly reflected in the financial statements. An exhaustive analysis of these records will reveal the facts from which correct inferences can be drawn. Among the elements which enter into satisfactory and profitable business conditions are such as (1) good merchandising—buying and selling—yielding favourable margins of gross profits on sales; competitive conditions in any line of business set a limit to the amount of gross profit that can be earned, and out , of which must be paid wages, expenses of operations, interest and dividend requirements. . (2) Efficient and economical operations resulting in favourable expense ratios. (3) Satisfactory turnover of total capital employed: This summarises the turnover of (a) book debts, which, when unsatisfactory, means added interest costs, heavier collection charges, and greater risk from loss from bad debts; (b) stocks, a poor turnover of which signifies that excess stock is being carried. This means excess capital tied up therein with interest costs thereon; added insurance, handling costs; additional space; and among other things the . greater risk of loss through falling price levels; (c) plant or fixed property investment. Over-expansion is reflected in this relationship. There must be sufficient volume of business done in relation to the plant investment to yield satisfactory unit overhead costs. Over-expansion will result in burdensome property expenses, such as insurance, depreciation, repairs and taxes, and also heavier financial burdens. All these are steadily, but surely, reducing the gross profit. During, the years of abnormal business conditions, management (directors principally) was mesmerised by the rapid expansion in the money volume of sales, due to inflation, but the much smaller increase in physical volume of sales was unheeded. Expansion should be effected to cope with the increased (real or anticipated) physical volume, and only when such increase is likely to be permanent. (4) Sufficient working capital with favourable ratio of current assets to current liabili- ■ ties. This will be affected by excessive ' plant investment, etc. (unless provided for by permanent financing), and also excessive dividend disbursements. Normal business conditions will be achieved only by greater efficiency in management. Money alone will not do ' so; but the possession of same has frequently placed a premium on incompetence, and delayed our progress toward rational methods in business ad- . ministration. Marcus Aurelius said the term rational was intended to signify a discriminating attention to every several thing, and a freedom from negligence. Hume also said that the public becomes powerful in proportion to the opulence and extensive commerce of private men. Such “opulence and extensive commerce is the result of individual efficiency—it is , the manifestation thereof. If the above comments develop con- ■ rfructive ideas in the minds of business men, I have then’ achieved tny aim.—l am. ©be.. N. J. BARTHOLOMEW. Feilding, March 6.