Music Trade Review

THE
VOL. LXXVn. No. 11. Published Every Sahlrday. Edward Lyman Bill, Inc., at 383 Madison Ave., New York, N.Y. Sept. 15. 1923
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"The Necessity of Accurately Knowing the Overhead
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AILOR who would take a ship to sea without a compass would be considered worse than rash-.-ordi­
nary men would consider him as being lacking in sense. \iVhat more can be thought about ' retail
merchant who conducts his business with but a sketchy idea of his overhead expense, with no de­
tailed knowledge of what it costs him to do business, and therefore no real knowledge of the net
profit he is making?
It may be said that the average retail music deal er has this knowledge. But those who claim this, per­
haps through a sheer inability to consider that business would be done without it , are more optimistic than
accurate. If they were to investigate, they would find that lack of knowledge in this direction is far wider
than they think.
The Review has recently concluded an investigation of overhead in the general retail music store. From
the figures it has gathered, and which are now in course of preparation for publication, it is conclusively shown
that ignorance of overhead expense is widespread in the trade. This ignorance falls in the main under two
heads .
. . .
The first of these is a failure to charge all to overhead that should be charged.
The second is a failure to departmentize overhead charges, so that each line of merchandise stands
on it s own feet.
When the merchant fails to charge his entire overhead he reduces the net margin of profit which he
makes on each sale. The ove rhead must come from some place, and there is only one place from which it can
come-the margin between th e wholesale cost of the goods and their retail selling price. Elemel1tary as this
may appear, it is something that a good many merchan ts seem to entirely forget in marking up the goods they
sell.
The merchant who fails to departmentize his overhead, and make each section of his store stand abso­
lutely independently from the rest, misses the best guide that he has to know exactly where he is making or
losing money. He has no way of gauging the ratio of overhead to his sales volume nor has he any exact
control over the amount of expense that each department entails. For instance, he may hnd that his overhead
is too high, but whether it is too high in his piano department) in his talking machine department, in his musical
merchandise or sheet music departments he has no way of knowing. If he lowers it, he must lower it equally
in all, v"ith the result, in a majority of cases, that the lower expense is reflected in a lower volume of business.
On the contrary, if he knows exactly what the overhead is in each individual department, he can at once
place his finger on the trouble and take the necessary measures to remedy it. In other words, he has complete
control of his business, something which he never has except when such an accounting system is used.
It will be invar iably found that the more successf ul a retail music house is the greater the accuracy with
which it knows its overhead expense and the more in detail this is figured . Such houses know the relation be­
tween rent and their sales, and are, therefore, able to judge the value of their location ; ~hey kn ow the ratio
between advertising expense and their sales, and are therefore able to judge the value of the publici ty they are
using; and so it is with every other itelJl that comes under the head of general overhead expense. Without this
knowledge they have no criterion by which to judge their expenditures and, as a result, they work in the dark
continually.
The retail musi c trade is one in which detailed figures of overhead, and figures that are thoroughly ac­
curate, are invaluabl e. It is a trade that is extremely complicated, far more so than the ordinary line of retail
selling. The instalment nature of much of the business leads invariably to false conceptions regardi ng- profit
margins, introducing, as it does, a low rate of turnover . The only counterweight to these conceptions is aCCLlratf'
accounting methods. The only safeguard is an accurate knowledge of every part of business.
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