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THE
MUSIC
TRADE
REVIEW
SEPTEMBER 26, 1925
The Retail Music Merchant's Overhead and Its Relation to Volume—(Cont'd from page 3)
each case is approximately double as to Com-
panics A, B and C, and that the sales volume of
Company D approximates the average of Com-
panies A, B and C, making comparisons easier
of interpretation.
On exhibit B you will note that with the excep-
tion of the year 1922 the lower margin of gross
per cent is reflected. The year 1924, however,
reflects an upward trend, which is principally due
to greater buying power, this company having
opened a second store in 1923. It might be
remarked here that the business of the company
as reflected on Exhibit B is not that of a com-
pany dealing in musical instruments but one
dealing in furniture on the instalment basis and
is used for purposes of illustration due to its
remarkable success and effective management in
terms of profit.
Operating Profit
Operating profit, as previously stated, is the
margin between gross profit and commercial
expense or the cost of doing business and is the
final measure of the effectiveness of manage-
ment in its merchandising and operating trans-
actions. Executives should know the nature and
detail of the funds they expend for overhead
and they should further analyze same in rela-
tionship to or connection with the volume of
sales to determine the proper margin they
should realize in order to compensate capital
for its use and also to attain a better than nor-
mal result from trading operations if it be pos-
sible to do so. It is only by a study of- the
various elements making up commercial expense
as considered to volume that an executive can
Certain variables occur in the classes of ex-
penses making up the total commercial ex-
pense, some items increasing proportionately to
the increase in volume of sales, while other
items of cost will vary to a lesser degree. What-
ever difference there is in these variations as
between companies is attributable for the most
part to differences in effectiveness in manage-
ment.
As stated before, volume can be increased and
savings effected through improved merchandise
turnover, on insurance, taxes, executive salaries,
store and office expense, rent, etc., that is, a
greater volume of business can be accomplished
on approximately the same expenditures due
allowance being made for some increase, of
course. It will ordinarily be found, however,
that any increase in sales volume will actuate
a graduated increase in such items as advertis-
ing, sales salaries, delivery expense, etc., allow-
ing, of course, for the take up of idle expense
or lost time usually found in a business with
less than a normal inventory turnover.
In order that you may more fully visualize
the advantages gained in the increase of volume
your attention is directed to the exhibit as set
forth herewith, which treats of the increases in
terms of percentages of volume increase. The
ratio set forth are based on the increases as
set forth on Exhibit B using the figures fur the
years 1919, 1920 and 1921, and comparing the
volume of increases with the operations for the
year 1918 on Exhibit B:
SCHEDULE SHOWING PER CENT OF INCREASE
IN VOLUME
•
1919
hope to attain maximum results on a minimum
expense and get effectiveness in management.
The margin of operating profits on sales
necessarily varies as between different com-
panies. One principal factor which creates this
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variation is the difference in turnovers of the
following nature: Turnover of capital used,
turnover of inventories, turnover of accounts re-
ceivable, turnover of fixed property investment
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and t u r n o v e r of w o r k i n g capital.
Since we m u s t of necessity limit this discus-
sion only two of the preceding turnovers will
be discussed, namely, turnover of inventories
and accounts receivable. The former relates to
operating profits and the latter to net profits,
it being a financial problem.
Turnover of inventories is sometimes figured
erroneously, some computing it on the ratio of
average inventory to sales which is not a sound
measure of inventory turnover in as much as the
inventory covers only cost of goods and sales
includes cost of goods plus margin of profit.
The proper method to compute the inventory
turnover for a retail merchandising industry is
to take the ratio of the opening inventory to
cost of sales for the year or period covered,
being careful to reduce any ratios computed for
a period less than a year to a yearly basis.
Cost of Carrying Stocks
Only a comparatively small number of execu-
tives appreciate fully what it costs to carry
stocks and consider the advantages to be gained
in a more rapid inventory turnover. In any
line of merchandising we find that there is a
normal rate of turnover within which stocks
should be converted into receivables or cash.
Subnormal turnovers sacrifice profits and place
a busniess in a disadvantageous position with
competitors whose turnovers are normal or bet-
ter, thereby effecting savings through smaller
liabilities, eliminating necessity for borrowed
capital and paying interest, losses due to price
decline and changing styles and ideas, and sav-
ings effected in cost of carrying goods as in-
surance, taxes, rent, etc.
Inventory turnover is discussed at this point
as it affects more or less several or more of the
items making up the cost of doing business as
outlined in the preceding paragraph.
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Highest
Quality
gales
Gross Profit
Commercial Expense—Total ..
Increase
110.80
108.09
62.70
1920
1921
p c of P C of
Increase Increase
189.30
183.80
183.59
177.46
115.60
114.40
Commercial Expense—Detail:
Executive Salaries
office and Store Salaries
Rent
Advertising
Insurance
Delivery Expense
...
Taxes—County and State....
Store and Office Expense
^ u t ^ e v a r i a n c e can > t o t n e extent of taxes on
merchandise, be controlled by a favorable in-
ventory turnover. In the main, however, it is
partly without the control of managing execu-
tiyes w h a t
this expense
w i l l bC( b e m g
deter .
, ,
74.05
118.64
3.37
122.22
130.00
27 50
33.33
34.66
161.07
260.20
7.17
318.51
20.00
90.00
111.11
116.66
161.07
241.36
9.28
337.04
240.00
70.00
200.00
101.33
Operating Profit
694.03 1,028.36 974.70
From this schedule it is easy to follow the
trend of expense in volume increase. You will
note that the per cent of increase in the volume
of gross profit is in each case slightly under
that of the sales for the corresponding year.
At the same time commercial expense shows
an increase, but one that does not correspond
in volume to that of sales.
Variables to Expense
We shall now discuss the item of variables
that occur in the makeup of commercial expense,
treating same in the light of the volume in-
creases as to per cent as set forth on the
schedule.
Executive salaries here show an abnormal
increase in volume, but this company, whose
operations are analyzed here, is a close corpora-
tion and this in a measure accounts for the con-
siderable increase in executive salaries.
Of
course, any company should show a proportion-
ate increase in this class of expenditure propor-
tionate to the sales volume increase, providing,
of course, that operating and net profits also
increase in volume commensurate to the other
increases. It must be considered that capable
executives are judged by results and in terms
of profit and should be so compensated.
Office and store salaries in this case show a
very abnormal increase and a search of our
records on the data of this company did not
reveal any light on the abnormalcy of this in-
crease. Suffice it to say that the same volume
of sales could probably have been accomplished
on an increase in volume of this class of ex-
pense somewhat under that shown.
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Rent is the one cost that is not subject to so
great a variation in the increase in volume as
the other costs. In the case at hand this item
of cost has decreased instead of increased. This
is undoubtedly due to overlapping of charges,
that is, the charging of expenditures to one
year that are either in part or as a whole ap-
plicable to a subsequent period. Rapid merchan-
dise turnover furnishes opportunity to increase
volume without increasing this item of expense
in proportion to the increase in sales volume,
Advertising will, of course, increase in volume
and to a great extent proportionate in a meas-
ure to the increase in sales as it is productive
What that increase should be, how-
o f sales.
ever, is dependent on the kind of advertising
being done and just what channels of advertis-
ing to use is a local problem with each indi-
vidual company and should be determined in
the light of past experiences.
Insurance costs vary in per cent to increase
compared to sales volume, dependent more or
less on the inventory turnover as previously
discussed. While it is not the intent here to
advise how to manage your business it is well
to point out that insurance experts should be
consulted as to the proper amount and class of
insurance to carry in order to obtain a maximum
Our ex-
o f protection at a minimum of cost.
perience in auditing reveals a none too careful
analysis made of this problem,
Delivery expense or cost will, of course, in-
crease proportionately to increase in sales vol-
umes, which is a self-evident fact.
Taxes, county and State, vary to some extent,
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mined by outside sources.
Store and office expense will, of course, in-
crease as the volume of sales increase, but the
increase should not approximate the ratio of
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" i c r e a s e m sales volume.
Ratio of Costs to Sales
Your attention is called to Exhibit B, the
lower set of figures which set forth the ratio
of the various costs to sales
I n t h i s scne dule
; t should be noted that five of the eight classes
o f expense shown show a favorable decrease in
r a t i o to sales. On Exhibit A, however, the same
favorable decreases are not revealed, undoubt-
d u e to the fact that this comparison con-
e ^\ y
siders the operations of four distinct companies
} n which the effectiveness of management differ,
From this it is seen how difficult it would be
to chart the course of a business successfully
based on average operating percentages of a
small group of representative companies. Only
when figures for a large number of representa-
tive companies are available can a reliable coni-
parison be made and then only as a standard
to be guided by.
Net profit as previously stated is residue of
profit after considering financial losses and
credits as interest, discount, etc. Net other
income is affected by two turnovers, both apply-
ing to one specific financial expense, namely, in-
terest and to one financial income which is pur-
chase discount. The two turnovers referred to
are turnover of inventory and turnover of re-
ceivables. The former has been discussed in its
relationship to operating profits and we will now
discuss same on its effect to net other income,
Since a rapid inventory turnover avoids tying
up capital in inventories or a large amount of
slow-moving stock it releases capital available
for prompt payment of invoices, thereby realiz-
ing a greater volume of purchase discounts. It
also creates capital to reduce the liability on
borrowed money, thereby reducing interest
charges,
(Continued on page 28)
Highest
Quality
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