I Overhead Expense I and I Percentage Methods A LECTURE ON Henry F. Baillet Overhead Expense AND Percentage Methods A Lecture on the Cost of Doing Business, explaining how to find it and what to do with it when found. With practical examples of its use taken from actual business experiences By Henry F. Baillet "If it helps you, tell the other fellow, That he also may be helped ' ' NEW YORK DAVID WILLIAMS COMPANY 231-241 WEST 39th STREET 1915 Copyrighted 1915, By DAVID WILLIAMS COMPANY PREFACE. This book owes its existence to the fact that almost every time the lecture has been delivered, some one deplored the fact that they had not the matter in book or pamphlet form for future study. On several occasions local Associations had en- gaged stenographers to take the lecture for the future benefit of their members. However, such attempts proved futile for the reason that without some study of the subject matter no stenographer could furnish an intelligent result. Feeling that these occurrences testified unmistakably to a need for such a treatise I have put it in book form, somewhat condensed, but sub- stantially as delivered, adding also a compilation of 'questions and answers and other data. The purpose that induced me to go a lecturing in the first place, was a desire to put the fundamental truths regarding Overhead Expense and Percentage Methods into such plain language that the ordinary everyday business man, who graduates from the ranks of the mechanic without any special business training, could easily understand them. Almost every time the lecture has been given some elderly or old man (who had spent practically his whole life in business without having achieved a modest competency for his old age) would come up and say: "I wish I had heard this thirty years ago, I would be better off now." 343628 .- 4 ..... .'.I. PEEFACE For the young' mair starting in business it fur- nishes the foundation for a liberal education in business arithmetic. I have been asked if, and told that, I was ex- ploiting the Burton Method or the Burrough's Method, etc., etc. For a matter of information would say that I find on investigation that the methods of proportioning the different factors forming parts of a sale which I use, are similar or the same as those used by the parties named, and other writers. It is also probable that I had un- wittingly absorbed some of their thoughts as I have for twenty odd years read every issue of some five or six trade publications. However, so far as the principles governing the loss ratio and replacement ratio inherent in per- centage are concerned, they are as old as numbers. My first acquaintance was made therewith in 1887. At that time I was employed in the Supreme Office of a Life and Health Insurance Association. In getting out the Annual Report for the New York State Insurance Department, I tried to verify my work by percentage methods. For instance, on roll at beginning of year age 36 ? New certificate written during year age 36 ? On roll end of year age 36 ? Died during year age 36? Passed to a higher age during year? Came from a lower age during year ? We are not discussing insurance matters here and I have simply given the foregoing as an illustration of what was required. Now, in attempting to prove my work by per- PREFACE 5 centage methods I found that having added a cer- tain percentage at age 36 to those already on hand and passing a certain percentage into a higher age, as well as bringing a certain percentage from a lower age up to age 36 and other ages, I could not make things come straight until I gave proper considera- tion to the loss and replacement ratios inherent in percentage methods. In the lecture it has been my aim to make this phase so plain that no one can misunderstand it. The facts and data submitted are all based on actual experiences in the plumbing and heating business. However, the principles treated are the same in any business, and the whole method of presentation, etc., is especially adapted to any branch of the building industries. Carpenters, painters, masons, electricians, etc., have about the same problems as we have, a little different in detail, but fundamentally the same. To all such this treatise can be especially recom- mended. In getting out the synopsis cards showing the different percentages there was nothing to guide me. I do not know of any publication on business mathe- matics that has a similar lay out. I found it neces- sary (in order to compare different business ex- periences) to work out this synopsis and may therefore claim it as an original proposition. Stu- dents of the subject will find it advantageous to go still further in this direction. I want to take this opportunity to thank those men who have so freely helped in this work by giving 6 .PKEFACE me a detailed statement of their business and who in some cases have thrown their books open for my investigation, appreciating very much their con- fidence in the honesty of my purpose and investiga- tion. I believe that this is the first time that detailed data has been gathered from actual experiences and collated in just this manner. It would have been impossible of accomplishment without the aid of these men. The entire trade and business world is indebted to them. If only somewhere, someone is benefitted by this great amount of detail investigation extending over a period of four years and not yet ended, I shall consider that all my endeavors have not been in vain. "If it Helps You, Tell the Other Fellow that He also may be Helped." There seems to be a difference of opinion among writers on business mathematics regarding technical terms, especially as to the meaning of the terms net and gross as applied to costs and to profit. In this book gross is taken to mean by large or in the rough, if you will. Gross cost meaning first or superficial cost, namely the actual cost of labor and material, those things which the proprietor buys direct to sell again. Net cost means the final or true cost namely labor, material and overhead expense. Gross profit likewise means the profit on the gross out of which expenses have still to be paid. Net profit means the final or neat PEEFACE 7 profit, after everything that is to be added has been added and everything that is to be subtracted has been subtracted. This explanation is necessary as many teachers and writers take gross cost or profit to mean always the larger amount and net to mean always the smaller amount. This confusion of terms has re- sulted at times in printed presentations making me say just the contrary of what I wished to convey. While a gross ton of coal is a larger amount than a net ton, it does not follow that a gross cost must be a larger amount than a net cost. If the reader will bear in mind that in this presentation of the subject the term GROSS always means the first cost; and the term NET always means the final or neat cost, there will be no confusion of thought. The same applying to gross profit and net profit. HENRY F. BAILLET. Irvington, N. J., March 1915. TABLE OF CONTENTS. CHAPTER I. PAGE Overhead Expense 9 CHAPTER II. Percentage Methods 27 CHAPTER III. Questions and Answers on Overhead Expense and Re- lated Subjects 49 CHAPTER IV. Proportioning Overhead Expense 76 CHAPTER V. Comparative Overhead Expense Statements of Ten Different Firms 82 CHAPTER VI. Comparison of Overhead Expense Statements of One Firm for Several Years 109 CHAPTER VII. Value of Annual Synopsis of Business 124 CHAPTER I. OVERHEAD EXPENSE AND PERCENTAGE. The purpose of this lecture is not to tell you what percentage must or should be figured as overhead or what profit you should make. It is to call your attention to the necessity of knowing what over- head expense is, and to try to explain how to find and apply that knowledge in your business life. In general business lines attention was first drawn to the divergence between school methods of per- centage and profits and the natural business methods about 1880. Scientific business management and cost ac- counting as such is a comparatively new study. The factory with its repetition of processes, its piece-work and its engross production where the clipping of one second on two or three operations of several hundred employees makes a difference of hundreds of dollars per week, of course, occupy a position in relation to cost account that never will or can be approached in our business. Neverthe- less, we also have our little problems along these lines that require our attention. Prior to about 1900 the essays and talks at our conventions and gatherings were almost entirely devoted to sanitary and purely technical matters. The mercantile questions were not thought of. Our members and the trade in general consisted of a bunch of good mechanics of more or less earnest 9 10 OVEEHEAD EXPENSE and more or less honest sanitarians but, as a rule, of poor business men. We had spent our spare time and money to ad- vance our technical skill but had paid little or no attention to methods of obtaining a profit com- mensurate with our endeavors. In New Jersey the matter was first publicly broached in a paper on system in the ' plumbing business read at the 1904 State Convention. Mr. Aldous, of Passaic, N. J., in 1908, took up the O. H. X. question with a blackboard talk which was freely published in the trade papers. Mr. Morgan of Detroit, Mich., did the same thing at the Michigan State Convention of 1909. This presentation was repeated at the National Convention at Galveston, Texas, in 1911, and others throughout the country have done similar good work during the past ten years. In other lines of business these questions have been taken up more or less thoroughly until at the present time almost every retail trade or merchant's association is studying the proposition very earnestly. Our various trade publications have been full of these different problems now for several years. Still in spite of all this publicity, out of forty master plumbers to whom I had put a point blank question a few years ago, only three had gone into the matter in detail in their own business; ten had made a stab at it in a halt hearted manner; a number of the remainder made a guess and twenty never had taken up the matter at all. PERCENTAGE METHODS 11 One of our local younger members, to whom I had put the questiontold me that after a man had done contract work for a little while he would come pretty d near knowing whether he was making anything out of it or not. " Gentlemen, that is about as near as the most of us get to it." The truth is the most of us don't know, some of us don't want to know. We are jogging along fairly comfortably and are afraid to know what we are really doing. Now why this apathy regarding so important a matter? It is mostly carelessness, largely lack of knowledge as to how to go about it and foolish fear of our inability to handle the matter. One frequent excuse is lack of time which is purely imaginary but mostly it is a lack of tem- peramental inclination. We are like a little boy who coming home the evening of the first day of school was asked by his father what he had learned. He said, "Well, pop, I have learned one thing, and that is that I need a thicker pair of pants." The first thing that strikes us when we look this question squarely in the face is that we also figura- tively speaking need a thicker pair of pants. My purpose is to try and show you how easy it is to ascertain and apply these apparently intricate mathematical calculations. Now, please don't make the mistake of thinking of me as a mathematical sharp or anything of that kind. I am just an ordinary plumber like yourselves who has the temperamental inclination to dig into things and desire to help 12 OVEEHEAD EXPENSE himself by helping others in the trade to understand these problems. We have had at various times talks on these sub- jects by professional bookkeepers and mathematical experts but we do not seem to understand their language. It is a great deal like the lady who went to a fashionable physician complaining of her health. The physician, after examing her said, "My dear madam, what you need is oxygen; come every afternoon at 3 o'clock and take an inhalation. It will cost you five dollars per visit/' The lady seemed highly pleased and said, "There, I knew that other doctor didn't understand his business; he told me all I needed was a little more fresh air/ 7 What we need is not superfine theoretical ex- positions but a little fresh air treatment of the underlying principles regarding 0. H. X. and per- centage methods. Now, in the course of this lecture if there is any- thing said or pat on the blackboard that you do not thoroughly understand, I wish you would please arise and ask questions, because so long as there is one man in the room who does not understand, just so long will the results be unsatisfactory to you and to me. The illustrations that will be placed on the blackboard are only for the purpose of showing you how; they are not to be taken as figures applying to your own individual business, although they do represent an average result as existing under average business conditions at this time. PEECENTAGE METHODS 13 Basis of Presentation. The illustrations are based on a $15,000 annual business. Now, why? The total amount of business reported from 102 shops in New Jersey from a period of one year, from July 4, 1911, to July 4, 1912, was $2,784,725.00, giving an average of $27,301.00 per shop. How- ever, out of these 1 02 shops, 60 reported doing be- tween $9,000.00- $21, 000.00, therefore, $15,000.00 being the mean, seems to be the average amount of business done by the general run of shops in New Jersey, and I believe, from subsequent reports that it is about the general average of more than one- half the shops in the Eastern States. Western and especially far western shops seem to average some- what higher. I want to ask your indulgence for going minutely into details which is necessary in order that we may understand one another. Someone has figured out that the average life of a $10.00 bill is ten months but we do not want to jump at the conclusion that a $1.00 bill will last us one month. Figures and averages are dangerous things unless we understand just exactly what we mean, why and how we use them. What is Yearly Business. In looking at a $15,000.00 business we should have a clear understanding of what we mean by a $15,000.00 business. We must have a clear con- ception of what constitutes annual amount of business done. In this and other definitions I pro- 14 OVEEHEAD EXPENSE pose to give you the natural definition rather than academic ones, in other words, use plumber's English. As both receipts and charges will overlap each other from year to year, in as much as receipts of one year may be for charges of the preceding year, and as charges of one year will not become receipts until the following year, so we can not take either our receipts or our charges as a year's business. We would take all work done and material handled in your business, whether finished or unfinished, each year bearing its own burdens, regardless whether the work has been charged, paid for or not charged or never to be paid for, as the amount of business done for that year; in other words the amount of a year's business is all material and labor used in your shops during that year. If not chargeable to a customer, to a sale or to a job, it must be charged to yourself or to profit or loss. It should appear in the total amount of business you are doing if you want to provide a thick enough pair of pants. What Constitutes Overhead Expense. The next question is, what constitutes or is chargeable to O. H. X.? Broadly speaking, 0. H. X. is all expense or money paid out which is not di- rectly charged or chargeable to a customer or pro- vided for in an estimate for contract work. There are a number of lists of items that have been published during the past few years and which are used by men in our trade who are talking on PERCENTAGE METHODS 15 this subject, some of which you unquestionably have already seen and gone over. I may, however, be able to show you more of the why and wherefore. For that reason we will go over the items of a similar list at this time. EXAMPLE No. 1. Salary $1375.00 Rent 240.00 Light 12.00 Heat 24.00 Telephone 48.00 Horse and wagon 360 . 00 Bookkeeper 520.00 Insurance 10 . 00 Taxes, license 10.00 Carting, freight 26 .00 Carfares 24 .00 Tools 104.00 Collections 50.00 Bad accounts 75 . 00 Driver 520.00 Waste material 70.00 Replacing defective goods 35 . 00 Labor lost 206.00 Allowances and discounts 75 .00 Interest on capital 90 . 00 Postage 20.00 Stationary and printing 20 . 00 Association dues . . 18 . 00 $3932.00 Salary. The first item on our list is salary. Many men say why salary? The proprietor gets all the profit there is, where does he come in for salary. The fact, however, is that salary is not profit and for this reason, " We can not speak of profit until a job has been finished, charged and paid for"; until an operation has been completed profit as such does not come into existence. 16 OVERHEAD EXPENSE The necessity of salary or cost of management, however, comes into existence the minute you open your door for business and sometimes even before that. Therefore, salary is justly chargeable to O. H. X. and cannot be considered profit. The next question then arises, "How much is a man entitled to charge for salary in his 0. H. X. account?" The professional accountant tells us just as much as he can earn somewhere else, or just as much as he would be obliged to pay some one else for doing that work. We, in the plumbing business, how- ever, have taken a more definite criterion. We say, a master plumber is entitled to draw for salary at least as much as he pays a journeyman plumber, because if he was not engaged as a master plumber, he could earn that amount as a journeyman plumber, therefore, we put the item at $1,375.00 per year, which in my home city is what we pay a journey- man plumber; $5.00 per day 44 hours in a week and 50 weeks in a year. In other words it means that it will pay your salary and you can go home Saturday afternoons and take two weeks' vacation in the summer without pay. This, we feel, is the lowest sum a self-respecting master plumber should allow for in his 0, H. X. account. If a master plumber works with the tools part of the time, that part of the time, which is charged to a customer or provided for in an estimate, is not 0. H. X. For example: A man working half of the time with the tools would charge half of his time as productive labor and half as 0. H. X. PEKCENTAGE METHODS 17 Rent. The next item is rent which we put down at $20.00 per month or $240.00 per year. This is about the lowest rate which, in my home city, one could hire a place for, fit to do a $15,000.00 business. Often men will say, "Why, I don't pay any rent. I own the place"! If a man owns the place in which he does business he is entitled to charge his 0. H. X. account with just as much rent as he could obtain by hiring the place to some one else. Using it himself debars him from letting it thereby depriving him of that revenue, therefore the business is justly chargeable with that item. If you want to be exact, you can take the valua- tion at 5%, add thereto the expenses of upkeep, taxes, insurance, etc. This will give you the actual cost to you as a rental. Rent in some form or other you do pay whether you rent from another owner or own and rent from yourself. Light. Light we put down at $1.00 per month or $12.00 per year. Of course, some of my friends have said, "We do not keep open at night, we use hardly any light. " But they forget the many evenings they sit at home figuring estimates on work or making out bills. Therefore, considering that as an expense to the business, $12.00 a year is very light for light. Heat. Heat we put down at $24.00 which would buy four tons of coal at $6.00 a ton. 18 OVERHEAD EXPENSE Telephone. Telephone at $48.00 per year. That is the lowest rate, we in my home city, can hire a telephone for business. Horse and Wagon. Horse and wagon we put down at $30.00 per month or $360.00 for the year. That represents the cost of board for a horse, horse shoeing and light repairs to vehicle. It does not provide for replacements. Bookkeeper. A bookkeeper we will put down at $10.00 per week or $520.00 per year. I do not mean that you should not pay more than $10.00, nor do I mean $10.00 a week is a sufficient sum for a first-class accountant. I do know, however, that a majority of our people do their own bookkeeping, have their wives or families do their bookkeeping, or hire lads or misses at $5.00 or $6.00 a week. Therefore, I am putting it down at $10.00 a week as an average pay. Now, there is one phase of this bookkeeping question that I want to call your attention to, because I feel keenly on the subject. Many of us take our children into the business and expect them to help us without remuneration. Sometime ago when speaking on this subject in a small town, one of the gentlemen objected to the list of items. He said, "I do not have all those expenses. My boy who goes to school keeps my books, that's good enough for a plumbing shop." PEECENTAGE METHODS 19 I asked him what he paid the boy, and his answer was, "Pay him nothing. He gets all he wants to eat and plenty of clothes and a dollar to spend once in a while." Another one of the members of the local Associa- tion who heard this conversation wrote me a few weeks afterward, saying that his boy, who chummed with the son of the member spoken of previously, had asked him about the bookkeeping proposition for his father, and the answer was, " Yes, I take care of the old man's books and I take care of the old man's business and you can bet your boots I take care of myself." Now, here is a man who is making a thief of his own son because he did not have gumption enough to obtain a price for his work which would enable him to hire the bookkeeping done. If you gentle- men want to make thieves of your sons and some- thing worse of your daughters, just ask them to help you in your business for the clothes on their back and the food that goes into their stomach, and if in after years they break your hearts and your bank accounts, you have nobody to blame but yourselves. If you need the help of your families well and good, but pay them at least what you would have to pay someone else. It is enough to sacrifice your own life; don't sacrifice your family as well. Insurance. The next item is insurance. We do not include liability insurance which under the present em- 20 OVERHEAD EXPENSE ployees 7 compensation act is vitally necessary; simply cover a little fire and vehicle insurance which we figure at $10.00 per year. Taxes and License Fees. Taxes and license fees we will put down at $10.00 a year. It has been said to me often, "Why taxes are personal matters. 77 True, but if you are a working man, you will have to pay perhaps $1.00 poll tax. As soon as you have a business your per- sonal tax is raised according to what they think your business is worth; in other words, being in business occasions the tax, therefore, the tax is chargeable as an O. H. X. of the business. Freight and Cartage. The next item is freight and cartage which we put down at $26.00 per year which is simply what it would cost to hire an extra horse one-half day each week. Carfare. Carfare we put down at $24.00 a year. Often men have said to me, "That is too much/ 7 but when they have investigated a little more closely it is too little. It is one of those small things; we put our hands in our pockets and pass out the nickels and the dimes not thinking of the amounts. But if you will place a certain amount of money in a separate envelope and pay only carfares from this sum, you will soon find that $24.00 a year is a very low esti- mate for carfares on a $15,000.00 business. PERCENTAGE METHODS 21 Tools. Tools, loss, wear and tear we put down at $2.00 per week or $104.00 per year. Collections. This means such moneys as you can not collect personally or easily, which you will have to give to a collector or a lawyer, and we are figuring this at 3/100 of 1% which amounts to $50.00 per year. Bad Accounts. Bad accounts which means those that you do not collect at all, we put down at Hi% or $75.00 per year. You remember well the lady who came to your place in an automobile and told you that she was tired of having Sam Jones and Dick Brown do her work because their work was entirely unsatisfactory, that she was recommended to you as being a first- class mechanic, and that she was going to give you all her work. This sounded very good to you and you thought you were going to get a good customer. You did about $300.00 of work for her and you haven't been paid yet and probably never will be. You have those kind and so do I, and every other man in this room. Those are bad accounts. Driver. We will give the driver as much as the bookkeeper which is $520.00 per year. I am well aware of the fact that a majority of our people do not employ a driver. They drive their own horse or have a boy drive. But you must re- 22 OVERHEAD EXPENSE member that when you get up at 5 o'clock in the morning, do your own hostler work, drive your horse, put him in the stable, you certainly should figure more than a 44-hour week on the first or salary item, because you are working nearly 70 hours. You are simply using a $5.00 per day man to do a $10.00 per week man's work. Waste Material. This means odds and ends, split pipe, broken fittings, etc., which we put down at 1% of $7000.00 or $70.00. The summer before last as I was looking after some work a distance away from our shop, running along in our machine, I saw a new building in the course of erection and some men came out of the cellar and started to throw things at a couple of dogs across the street. One of these things struck the machine and I found that it was a %-inch gal- vanized fitting. The men on the job did not have to pay for them but it was an expensive luxury to the boss, to throw money at fighting dogs. This is one way of wasting material. Replacing Defective Goods. Replacing defective goods is one item that always makes us hot under the collar. Why in the name of good common sense a master plumber should pay for the defects and shortcomings of not only himself and his own employees but also for the manu- PEECENTAGE METHODS 23 facturer, the supply dealer and the jobber all the way up and down the line, seems almost unex- plainable. However, the conditions of the present day make it so that we have to shoulder the re- sponsibility. Even if the supply man does make good the fixture, the cost of putting in, let alone the ill will of your customer, you have to suffer. When we place this item at J^ of 1% of $7000.00 which is $35.00 per year we make it a low estimate on a $15,000.00 business. Labor Loss. You send a man out in the morning with three or four small jobbing slips. He comes back at noon and he has done perhaps one job out of the four. In one of the other places there was nobody home; in the other, the lady was washing and would not have the fire dumped and at the third the lady did not know whether he was a peddler or tramp and would not let him in. You have those things and so do 1. Then again in contract work you spend a day or more getting the material ready for the job. You send a man on the job and he decides that he can not or will not use a fitting you have sent and he sits down to read the paper until the boy goes back to the shop to change the fitting MORE LABOR LOST. Then again your supply house sends goods direct on the job, they tell you that they have shipped them; you send your man on the job to find that they have not sent the material. They sit down 24 OVERHEAD EXPENSE to wait for material or orders MORE LABOR LOST. So if we figure 5% on 3 inens' wages per year it will make $206.00 a year for LOST LABOR. Allowances and Discounts. You all know what that means. The lady where you put in the last bath-tub saw a scratch on it but she said nothing until you presented the bill and then she politely told you that she would not pay the price of a first-class tub, but if you would deduct $5.00 from the price, she would pay the bill. Of course, you do not wish to take this to court and you take the bill less $5.00. Or, that tank valve which you put in for your neighbor started leaking from a lead chip. He, of course, told you nothing of that until his bill had been presented. The time for your man going there to make it good is an allowance which you feel you must give. Those are a few of the many things for which you make allowances and allow discounts on your bills. For this we estimate one-half of 1% of a year's business or $75.00. Interest on Capital. The next question that arises is: "What is capital"? Capital invested in your business is the value of your stock of merchandise, your tools, fixtures, horse, wagon and equipment, plus the amount of your outstanding accounts due and payable to you plus the amount of cash on hand and PERCENTAGE METHODS 25, in the bank; minus what you owe for supplies or other things connected with the business. On this you surely should be able to figure a 3% interest, because, if this were not invested in your business, you could put it in a savings bank and re- ceive at least 3% on f it. By having it tied up in your business you can not invest it elsewhere, there- fore your business should bear the interest charges. If, as sometimes happens to many of us, you are obliged to put a note in the bank for which you pay a discount fee or interest, this is also chargeable to the interest account as it simply means capital beyond your means which you had to borrow for your business. We put this down at 3% on $3000.00 or $90.00 in Ihis case. Postage, Stationery and Association Dues. Postage at $20.00 and stationery at $20.00 re- quire no explanation. Association dues we put down at $18.00 per year. In some associations they pay as low as $12.00 and some in my home state as high as $36.00 per year. So we will strike an average of $18.00 and I will say that this is the cheapest tool that you find in a plumbing shop. Considering your association membership as part of your business equipment you will find nothing that gives you so large a financial return if you will properly use it as your membership in Master Plumbers' Association. 26 OVERHEAD EXPENSE Now, there are other items, such as advertising, charity, replacement of horse and wagon and ma- chinery; soft soap and other incidentals which we will not include in this list simply because we do not wish to swell the total unnecessarily. These items you must add as you find them in your busi- ness. The list as it stands foots up $3,932.00. CHAPTER II. PERCENTAGE METHODS AND THEIR APPLICATION. We find, therefore, that $3,932.00 is a conservative O. H. X. on a $15,000.00 business. How to Find Percentage of O. H. X. What percentage does this represent? In finding percentage it always gives us a clearer view of what we want if we put it in the shape of a fraction. For instance: $3,932.00 is what per- centage of $15,000.00? We put it in the shape of a fraction and divide the upper figure by the lower. EXAMPLE No. 2. 3932 21 15000) 3932. 0000(. 2621 or 26 100% 30000 93200 90000 32000 30000 20000 15000 5000 21 We find that this represents 26 % of a year's 100 business. 27 28 OVERHEAD EXPENSE The first two places to the right of the decimal place in the answer are or signify per cent, the next two, hundredth of per cent. If a quotients runs to the left of a decimal point, the figures to the left are 100%. For instance: 2.621 This would read 262%. 10 The answer is not dollars or cents, but it is per cent. In this discussion we want to be absolutely con- servative, so we will make still another cut and assume that a $15,000.00 business operates under a 21 25% 0. H. X., instead of 26% as our lesson 100 shows, and I believe that 25% is about the mean average of a business of that size. Please remember it may not be your individual percentage. Your percentage may be higher or it may be lower. However, if you do about $15,000.00 business and find that your O. H. X. runs con- siderably below 25%, I would advise you to go over your figures carefully to see what you have forgotten. If on the other hand you run quite some over 25%, I would advise that you use your pruning shear, as you are under a bigger expense than your business will bear. Assuming that 25% is the 0. H. X. on the business under scrutiny, of what use is this knowledge to us? PEECENTAGE METHODS 29 How can we apply it or how can we apply the knowledge of our own individual expense? Let it be what it may. Its value is its use in estimating what our work is worth, and as a help to avoid doing business for less than cost. On the Nature of Percentage. In using percentage as a tool to work with, we should have a plain understanding of what per- centage is, a plain conception of the nature of the tool we are handling. Percentage is here used as a standard of com- parison for amounts, as a thermometer is a standard of comparison for temperatures and a 2-foot rule a standard of comparison for lengths. As we compare lengths by inches and temperatures by degrees, so we can compare amounts by percent or hundredths. Percentum means 100 parts or lOOths. One amount compares with another amount ac- cordingly, as each contains a less or a greater num- ber of lOOths, just as one temperature compares with another temperature according as it contains a greater or less number of degrees, or as one length compares .with another length, as it contains a greater or less number of inches. Percentage in itself is not a wonderful wizard that does things. It is simply used as a yard stick for figures. It is, however, a double barrelled weapon. If you use the wrong barrel, it kicks. Now what is it that tangles up so many of us in attempting to handle percentage? 30 OVEEHEAD EXPENSE Is it not due to the fact that we mix up discount with percentage and apparently a further fact that percentage can be and is estimated on and off just as well as percentage of. EXAMPLE No. 3. $100.00 at 50% off gives us $50.00. $ 50.00 at 50% on gives us $75.00. It takes 100% on to bring the $50.00 back to the original $100.00, although it takes only 50% off to reduce the original $100.00 to $50.00. Taking up the matter of figuring price-list cost we must remember that discount is not percentage although percentage is used in figuring discount. This is not absolutely necessary. In some lines of trade, flat discounts of $1.00 per dozen or $3.00 per case are in vogue. To illustrate the replacement ratios of per- centage: An article is listed at $18.00 40% off. We figure $18.00 minus 40% equals $10.80. Now if we should attempt to make our selling price by adding 40%, we obtain $10.80 plus 40% equals $15.12 and not $18.00. Neither do we obtain the original figure by adding 60%, as $10.80 plus 60% on equals $17.28 and not $18.00. It will take 66% to replace the 40% impairment because $10.80 A7 plus 66% equals $18.00. 100 Probably the clearest illustration of this proposi- tion is offered by the experience of one of our members. PEECENTAGE METHODS 31 A real estate agent for whom Jack did considerable work demands 10% discount. Jack soon found that he could not afford to pay this out of his own pocket as some of the work was pretty close. He, therefore, adds 10% here and there on the bills. One month the bills just happened to foot up $100.00 even; Jack adds the usual 10% and sends in a statement of $110.00. The real estate man happened to be in funds and in the next mail Jack re- ceives a check for $99.00. He could not under- stand where the other $1.00 had gone to. He brought his problem to the association meeting and when put on the blackboard it looked something like this : EXAMPLE No. 4. $100.00+10% =$110.00 $110.0010%=$ 99.00 There was nothing wrong with the mathematics. The trouble was that Jack did not make any provi- sion for the percentage impairment. Jack now adds 12% and the blackboard illustra- tion looks like this : EXAMPLE No. 5. $100.00+12% =$112.00 $112.00 10% =$100.80 To be mathematically exact it would be necessary to add 11%. For 32 OVERHEAD EXPENSE EXAMPLE No. 6. 11 $100.00+11 % =$111.11 100 $111.11 10% =$100.00 There are tables published showing these re- placement ratios in full. I simply went into this matter to show you the underlying facts upon which such tables are based and to impress upon you the why and wherefore of the method of fixing a selling price which I am going to explain; also to show you the snare we must always look out for in figuring percentages; in measuring by percent. Discount is percentage off, something taken away. Expense is percentage of or a part of. Profit is percentage of or a part of a sale or business transaction. Is this entirely clear? The Application of this Information. A fixture is bought for $18.00 net, at what price should this article be sold to yield a living profit, assuming that 15% is a living profit. Now mind you I am not saying that you should or ought to make 15% profit. That depends entirely upon the character and amount of your business and your personal valuation of your services. We simply use 15% as an illustration because the average of a business life is according to a recent magazine article, twenty-four (24) years. That is, taking 1000 busi- PERCENTAGE METHODS 33 ness men as they go, 990 are either dead or out of business in twenty-four years. Fifteen per cent on a $15,000.00 annual business for 24 years will yield $54,000.00, which at 3% saving bank interest will bring $1620.00 per year. This one can consider a competency for old age with its infirmities and curtailed earning powers. We will simply use 15% as an example because 15% net during our productive period will yield a competency when our powers wane. Popular Errors in Figuring. We will first illustrate the method of a man who knows nothing about his 0. H. X. and probably cares less. He figures 15% profit because he thinks that is what others are asking or just because he thinks 15% is about right. He will figure something like this: EXAMPLE No. 7. Cost of fixture $18.00 Labor and material . , 15 .00 First cost or gross cost $33 . 00 Add 15% of $33.00 4.95 Total $37.95 Sale price $40.00 He will probably say, I will make it $40.00 even and think he has cleared 15% and a little something besides for a good smoke. Now let us see what has really happened ; 34 OVERHEAD EXPENSE EXAMPLE No. 8. Cost of fixture. $18.00 Labor and material 15 .00 O. H. X. 25% of $40.00 10.00 Net cost ....................... $43.00 Sale price ...................... 40.00 Net loss ....................... $3 .00 or of the sale And the Larger the Job the Greater the Loss. Now let us take the case of a man who knows that he has an 0. H. X. to pay but does not know how to apply that knowledge correctly. He estimates : EXAMPLE No. 9. Cost of fixture .................. $18.00 Labor and material ............. 15 .00 O. H. X. 25% of $33.00 ......... 8.25 Profit 15% of $33.00 ............ 4.95 Total $46.20 Sale price $48.00 He will probably say make it $48.00 even and feel sure, absolutely sure he cleared at least 15%. Now let us see what has happened in this case: EXAMPLE No. 10. Cost of fixture $18.00 Labor and material 15 . 00 O. H. X. 25% of $48.00 12.00 Net cost $45.00 Sale price 48.00 Net profit $3.00 which is 6% of the sale and not 15%. PEECENTAGE METHODS 35 Now the question is how should this job have been figured to yield a net profit of 15% on the operation, assuming 25% O. H. X. I am here reminded of a little incident I wit- nessed some time ago while waiting for a car at the D. L. & W. Railroad Station in Newark. A train came in from a suburban town; a fashion- able lady, well dressed, came down the steps from the depot; passed an Italian candy and fruit store where an old Italian lady was sweeping the side walk. It was a wet and very mushy morning and the spattering from the broom ornamented the lady's silk dress. She became quite vexed and started to berate the sweeper. The old Italian woman putting her entire weight on the broom and looking up at the lady said, "Why you go in front of the broom, why you no go back of the broom, you fool"? It is up to us in this proposition to get behind the broom. We have been ornamented by the spatters long enough. The first thing we must get hold of and tie fast to is that The sale price represents 100%. A Correct Method. To figure by percent intelligently we must have somewhere something that represents 100% and that is the whole or the finished article. In this case the SALE PRICE. 36 OVEEHEAD EXPENSE When you attempt to figure any part thereof as the whole, as 100%, you get into deep water, you lose your footing and soon are hopelessly flounder- ing. Of course, it is possible to sub-divide the sale price and add percentages on parts thereof, uniting them again and then estimating the profit on the re- united entity. This I say is possible, but it is not practical for the average small business man nor is it practical for the average master plumber. Even then, the whole, the result is the only thing in the entire equation that represents 100%. All component parts are measured as lOOths of this 100%. Is this Entirely Clear? EXAMPLE No 11. O. H. X. representing 25% Profit representing 15% We account for 40% The other factor or gross cost represents .... 60% Total or sale price 100% The gross cost or first cost $33.00 being 60% of the sale price which sale price is entire amount or 100%. The rule is: Divide the amount of gross cost by the percentage it represents. The answer will be the sale price. Divide the Amount of the Gross Cost by the Percentage it Represents. PEECENTAGE METHODS 37 EXAMPLE No. 12. $33.00-7- 60% =$55.00 .60)$33.00($55. is the selling price of the job 300 300 300 Now how do we know that this is correct? A method to be a value must be susceptible of mathematical proof. Now we will prove this proposition. EXAMPLE No. 13. Gross cost 60% of $55.00. . . . $33.00 O. H. X. 25% of $35.00 13 . 75 Profit 15% of $55.00 8 . 25 Total 100% $55.00 sale price This selling price provides a profit ol 15% and an O. H. X. of 25%. This method is absolutely correct, whether it is a $1.50 job or whether it is a million dollar job, although we might be satisfied with less than 15% on the million dollar job. In delivering this lecture I have asked for original figures from the audience and have worked them out on the blackboard, so they could see how this method worked out in their cases. Twenty-four inches makes 2 feet. Taking a 2 foot rule as the whole, as 100%, if we turn down 50% of that rule we have 12 inches left. If we add 50% of the 12 inches by turning up the next section of 6 inches, we have 18 inches and not the 2 feet we started with. We will have to turn up 38 OVERHEAD EXPENSE both 6-inch sections thus adding 100% before we get our original 24 inches. When a physician asks for a 10% triturate of morphine he does not mean 10% of morphine added to 100% of vehicle, but he does mean 10% of mor- phine and 90% of vehicle. The scientists do not make any mistake in esti- mating or designating an amount by percentage. The ultimate result, in our case the selling price, is 100% or the whole. All component parts thereof are represented by lOOths, by percentages of the whole. There is nothing in the entire equation that represents 100% excepting the selling price. There- fore, all percentage computations are correctly based on the selling price. There are other correct methods besides the one we are recommending but there is no other so simple and there is no other simple method so correct as the one we are explaining. Basis of Examples Given. The job we have been illustrating is one that is taken from an early period of my business life when I thought that my O. H. X. was about 13 to 15%, figuring as I did at that time, that getting a profit, I was not entitled to any salary. It was a day work job and as entered on my old day book looks like this: PERCENTAGE METHODS 39 EXAMPLE No. 14. Cost Charged One I. E. lavatory $18.00 $27.00 Time and help 5.25 8.10 Material.. 9.75 20.90 Total $33.00 $56.00 I suppose I thought I made a profit of $23.00 or 73% gross which I concluded ample to cover my 0. H. X. and leave about 60% net. Now let us see what really happened : EXAMPLE No. 15. Gross or first cost $33.00 O. H. X. 25% of $56.00 14.00 Net cost $47.00 Sale price 56 .00 Net profit $9.00 or 16 4/5% of sale and not 60% So that instead of having a 60% net profit the entire net profit was a little over 16%. If I had charged my customer 100% on the gross cost, the price would have been $66.00. I would have cleared $16.55 or 25% net on the operation. Now we will prove this proposition: EXAMPLE No. 16. Gross cost 50% of $66.00 $33 .00 O. H. X. 25% of $66.00 16.50 Profit 25% of $66.00 16.50 Total. . . .100% $66.00 So if your customer accuses you of high-way rob- bery, extortion and all the crimes in the decalogue 40 OVERHEAD EXPENSE because you charged him double what you pay for a %-inch gas fitting, you can honestly and truth- fully tell him or her that they do not know what they are talking about, because EXAMPLE No. 17. WhenO. H. X.=25% 100% added to gross cost will yield 25% net profit or If you want to obtain 25% net profit, you must add 100% to gross cost. It is about time we wake up and get on the job and do our figuring in the proper manner. Value of Knowledge of O. H. X. My object, as stated in the beginning, was to show you how to handle this proposition of O. H. X. and profit percentage, not telling you what your O. H. X. is nor what profit you should get or estimate to obtain. Those are things each man must find out and decide for himself. The underlying thoughts are: First, that we should know what proportion our 0. H. X. is of the business we do, so we can provide for sufficient expense loading to cover this item. Second, that we should use such methods of estimating contract work as will reasonably assure us of the percentage of profit we estimate or expect to obtain therefrom, be it 2% or 20%. Third, that we should know how much and what percentage of profit we are really receiving from our business, in justice to ourselves, our families, our customers and our supply dealers. In short, to use PEECENTAGE METHODS 41 every means that will help us to know instead of guessing. Since beginning this educational work I have re- ceived a number of men's figures of their last year's business. I would be glad to receive such figures from any of you. Just send me the information: Total amount of business. Amount expended for 0. H. X. Amount expended for productive labor. Amount expended for merchandise. I will work out the percentages and give you a clean statement. It is yours for the asking, al- though it would be better for you if you worked this out yourself. Some Actual Experiences Compared. The comparison I am now going to put on the blackboard is that of three actual business ex- periences. It is a very interesting comparison as it shows what different results are arrived at using practi- cally the same tools to work with. It also shows the principal that we have been studying to-night, as applied in finding out what a year of endeavor has been brought forth. I have on file a large number of such cases. I selected these three because they are practically identical in general surroundings and because I personally know the men whose business they repre- sent and know that these are absolutely true state- ments of straight plumbing business. 42 OVERHEAD EXPENSE 888888 8 ' CO 00 00 I-H 05 i|0 ^10 t- 5 g /- 5 "s 1 1 i 5 D^ 1 5 5 1 1 t $ Tj fr H C* ? b 5 H 1 fc ^ - & S5 ^ X e 1 s 8 pH 05 c O5 < 1 1 T 5 i ^- 5 H - tf H i 5 0- 5 (> > I ^! c H o| i i i i i 5 8 i 3 5 i i i ir a u C i i ? 1 l I ^ c C 5 >c ir ^ b * TJ cv ' li i f H & n 5 H" H a V j *y s ^ C C 1 X -4- 9 pC -^ -I -^ s s Jl 00 c a M PL( C 1 1 ! 5 1 46 OVERHEAD EXPENSE 83 3 888 feS eis 88 'lI*Bl 838 8 ^ CO (N (NOT :| 8| OS -* 00 88 8 w ' ^ -II 8| i2 It) O5 Tf* ?O CO Special expense. . . 2,420 . 00 Carryforward $15,756. 00 106 OVEEHEAD EXPENSE Brought forward $15,756.00 Bad accounts (profit and loss charge) . . . 240 . 00 Waste material estimated 250.00 Labor lost estimated 100.00 Interest on capital (3 per cent, on $5,000.00) 150.00 Depreciation (profit and loss charge) 500.00 Total $16,966.00 Synopsis of Business. Amount of business done $98,560.00 Amount of overhead expense 16,996 . 00 Percentage of overhead expense on busi- ness done 17 . 24 Amount paid out for productive labor. . 38,465.00 Percentage of overhead expense on pro- ductive labor 44 . 18 Merchandise 41,300.00 First cost 79,765 .00 Percentage of overhead expense on first cost 21.30 Amount of business 98,560 . 00 Net cost 96,761 .00 Net profit $1,799.00 Percentage of net profit on business done . 1 . 82 Case No. 10 shows the best net results of this series. It is the record of a large jobbing and overhauling business, absolutely no new construc- tion work having been done during the year re- ported on, which was 1912. The schedule is as follows: PERCENTAGE METHODS 107 Details of Cost Accounts. Salaries of management $1,820.00 Rent 1,200.00 Light 14.60 Heat 52.00 Telephone. . 100.00 Horse, wagon and auto 859 . 82 Bookkeepers 919.50 Insurance (including liability) 345 . 83 Taxes (City, State and Federal) Ill .40 Cartage 2.00 Carfares 250.00 Tools (replacement and depreciation) . . . 413 . 57 Collections .... Bad accounts 178.30 Driver 728.00 Waste material (estimated) 150.00 Replacing defective goods 50 . 00 Labor lost (estimated) 200.00 Allowances and discounts 502 . 99 Interest on capital, 3 per cent, on $5,000.00 estimated 150.00 Postage 144.95 Stationery and printing 94 . 82 Association dues 24 . 00 Advertising, charities, license fees and petty repairs to vehicles 298 . 55 Total $8,610.33 Synopsis of Business for 1912. Amount of business done $54,037 .47 Amount of overhead expense 8,610.33 Percentage of overhead expense on busi- ness done 15 . 93 Amount of productive labor 17,494.26 Percentage of overhead expense on pro- ductive labor 49 .22 First cost 36,113.44 Percentage of overhead expense on first cost 23.84 Merchandise 18,619 . 18 Amount of business done 54,037 . 47 Net cost 44,723.77 Net profit 9,313.70 Percentage of profit on business done. . . 17 .23 108 OVEEHEAD EXPENSE This case No. 10 proves up like this: Overhead expense 15.93% $8,610.33 Merchandise 34.45% 18,619. 18 Labor 32.37% 17,494.26 Profit 17.23% 9,313.70 Year's business 99 . 98% $54,033 . 47 The apparent loss of 0.02 of 1% in the proof comes through not having carried the calculations of percentage beyond two decimal points. Had they been carried to their ultimate conclusion the 0.02 of 1% would have been made up. The man- aging proprietor in this case is one of those abso- lutely honest, hard-working individuals of which the craft has so many. That his results are quite above the average, both as regards amount of business and financial returns, is entirely due to individual competency, and to the fact that he knows how to do business as well as how to do plumbing work. In the next and final installment will be shown a comparative table of the different businesses dis- cussed. CHAPTER VI. COMPARATIVE OVERHEAD EXPENSE STATEMENTS. In tabulating the experiences that have been used for these articles cases No. 1 to 8 and No. 10 are presented inclusive and No. 9 separately, as having 6 years' experience to hand on the last case, affords opportunity for information of a character not disclosed in the other cases. The first thing that attracts attention is the fact that there does not seem to be any co-relation between overhead expense percentage and profit percentage. Case No. 1 with 25.4% overhead expense shows 4.09% profit, No. 6 with 25.52% overhead expense shows 5.96% loss and case No. 7 with 25.83% overhead expense shows 13.73% profit. Case No. 2 with 17.65% overhead expense shows 2.77% loss, and No. 8 with 17.24% overhead ex- pense shows 4.24% profit. It appears from this that the influence of overhead expense on profit is not empirical. The next proposition appearing is the apparent fact that overhead expense varies considerably in accordance with the character of business and that the dominating factor influencing overhead expense and all other percentages, in fact, governing even the total amount of business done, is designated in line No. 10, viz., percentage added to first cost, first cost being merchandise cost plus productive labor. 109 110 OVEEHEAD EXPENSE For instance, case No. 4 shows: Amount of business $14,500.00 First cost 12,100.00 Percentage overhead expense on business. 20 . 65 Percentage loss on business 4.1 Percentage added to first cost 19 . 83 Now if 36% had been added to first cost, the re- sult would have been as follows: First cost $12,100.00 36 per cent 4,356.00 Amount of business $16,456 .00 Total 15,095.00 Profit $1,361 .00 Amount business $16,456.00 First cost 12,100.00 Percentage overhead expense on business. 18.2 Percentage profit on business 8.27 Percentage added to first cost 36 . 00 On the other hand, case No. 5 now shows: Amount business $17,000 . 00 First cost 12,500.00 Percentage overhead expense on business. 21.17 Percentage profit on business 5 . 30 . Percentage added to first cost 36 . 00 Had the owner added only 20% to first cost the result would have been as follows: First cost $12,500. 00 20 per cent 2,500. 00 Amount business $15,000 . 00 Total cost 16,099.00 Loss. . $1,099.00 Amount business $15,000.00 First cost 12,500.00 Percentage overhead expense on business . 23 . 99 Percentage loss on business 7 . 32 Percentage added to gross cost 20 . 00 PEECENTAGE METHODS 111 The percentage as per lines No. 12 and 13 would change accordingly. Those of lines No. 1.6, 17 and 18 would remain as they are. I have used cases No. 4 and 5 for this compari- son because the stable or least variable factors (merchandise and productive labor comprising the first cost) are practically the same, being $12,100.00 in case No. 4 and $12,500.00 in case No. 5. The variant or more controllable factor, namely, per- centage added to gross cost, is the one factor that turns profit into loss or loss into profit. The amount (not percentage) of overhead expense is governed by local circumstances, by character of business, by the personality of the proprietor and by firmly established business conditions. We find in these cases that, for instance in case No. 4, $12,100.00 worth of labor and material carried $2995.00 of overhead expense, while in case No. 5, $12,500.00 worth of labor and material carried $3599.00 of overhead expense, a difference of $400.00 in first cost carrying a difference of $604.00 of overhead expense. All this shows us that it is not safe for any man to estimate on any computed average of overhead expense. It is absolutely necessary that we find out each year what our actual overhead expense is and govern ourselves accordingly. For those who have no experience to guide them, we can only say that for businesses below $10,000.00 the average expense shows upward of 25%. Between $10,000.00 and $25,000.00 the averages run between 20 and 25%, while above $25,000 they run from 13 to 20%. 112 OVERHEAD EXPENSE 0>' 8 8 8 8 8 88 8 8 Jo' CO OS o CO l>. CO 3 os 9 * I oo" 1-1 od rf 3f t? $ 8 o o 8 8 8 99 8 g cd ^ O z CO TM 8 1 t> CO ', ^ 01 N. S CO (N i oT co" cO "3 8 8 8 8 8 99 8 s Jo w o t-i os ; CO *O $ 8 _ 00 rj^ CO^ os o ; OS 2 CO" ^ TJH" oi" of of 10" CO 8 8 8 8 8 o 8 8 CO J^ 00 o S c^ O ' OS CO Ol N ^r m 00 CO *t q oo ; oo os 2 co" ^ 2 12 of 8 8 8 8 8 88 8 8 n g> g g ' g : g 8 ) iO_ o 10 OS | iO_ T 1 $ co" * oo" 2 co" ^ H 8 8 8 8 8 9 9 8 00 - PQ 1 6 OS 8 g os 5 tO OS CO *o o ' *o ^f H 8 S | 3 ^ PEECENTAGE METHODS 113 CO CO oo oo O l> O 1C * CO *l S 2g r'J ! & Si ! 33 - I | S ' "w s a a S S -3 fl ' PH PH o I 2 f l 114 OVEEHEAD EXPENSE Lines No. 3 and 4 also show a wide discrepancy, no hard and fast rules being deducible therefrom further than this general fact, that according as job work or new construction work dominate in any shop, so will labor or merchandise be the larger factor. Lines No. 11, 16, 17 and 18 show the different percentages that must be provided for accordingly as one wishes to load his overhead expense on any one or another item composing the total business or on the total business itself. To take up the ad- vantages or disadvantages of these various methods would need a separate treatise. So long as the overhead expense is provided for, that is the im- portant matter. The governing facts as to loading the 0. H. X. on different items are fairly covered in the question and answer section of this book. Look now at case No. 9 covering four years of business experience. All that has been said of the tabulation is empha- sized in this showing. The domination of line No. 10 is even more accentuated as the influence of personality remains the same. It shows plainly the fluctuating results of an attempt at business expansion. It might be noted in passing that the desire on the part of the firm to gobble a very large share of the work in that town resulted in a con- traction in business on the part of the other five firms in the town. In order to get their share of the work they also started to cut. The result is PERCENTAGE METHODS 115 88 8 8888 8 8 q 3 2 ^00 00 C^ b- OS i- I*- -t - '-' ^* CM OS ig> CO O5 i-< ** ' S S 888888 8 Oi-I -I-Hd CO OO^t*'-^ cfo os ioiooof OO ^H (N CO CO 00 oo eo o 1-1 Tj< CO o I 1 53 O I-H COOS' CO O t^ 1-1 ggggggg 8 "3 ! '3 li; 23^ jj I a -P X3 " hii II II' Hi I iril "Z 2 I O 5 1 || S f I I S 1 x 1 1 j> s PH H -a ' 03 -( 0) 8 - " t ill 1 51 s O 08 -9 S M ^ a 2 5 ^|1 ill 120 OVEEHBAD EXPENSE These figures when compared with the business analysis covering the same term tend to show the reason for the fluctuation of amount of O. H. X. with the changing amount of business. That although the overhead percentage usually lowers as business increases, the actual amount of over- head rises, although not in the same ratio. The various items grouped under the heading of rent, require some explanation. The property is owned by the firm. Part thereof is rented out so their rent charges consist of interest on valuation plus taxes and upkeep, minus rents received. In 1913 they decided that they could get along with less room and let out additional store space, thus bringing down their own rent. The progressive rise from 1909 to 1912 was partly due to rise in valuation which of course made the in- terest charges progressively higher. The general expense item does not show the decline in 1913 and 1914 that it should because the insurance item which in 1909 to 1912 had been reported separately was in the later years included in general expense. The special expense account shows fluctuations in unison with the rise and fall of total amount of business. When the firm's attention was called to this fact they laid the cause on two items prin- cipally; namely, replacements and the cost of carry- ing commercial paper. When the fact was pointed out that it is usual, that the maker pays the interest on commercial paper; the answer was, "Yes, but how is it when you have to issue the paper yourself to carry the volume of business"? The profit and PERCENTAGE METHODS 121 loss line looks very erratic. It follows a course all its own without any reference to any other factor. Bad accounts were unusually high during the be- ginning of the term. Evidently the management learned to be cautious by this experience as the later years show only about Ji of 1% which is quite low. Waste material and labor lost were estimated excepting in 1914 during which year close watch was kept on the latter item. The manager informs me that as a result he is quite sure that this item had been under estimated in former years. In- terest on capital invested was on an estimated in- vestment. This does not fluctuate for the reason that interest on commercial paper to carry an expanded credit was charged under special expense. Depreciation is estimated also on an estimated in- vestment. In this method of accounting it evidently is meant to balance in a way the appreciation due to renewals and additions to tools, vehicles, fixtures and furnishings. The special advertising was done in the daily paper of the town and in the weekly of the neighbor- ing county seat, a good size advertisement for quality work being run at intervals of two or three issues. The gentlemen claim good results although not up to expectations. This is of course problematic as it is not an easy matter to trace results directly to advertising. I would caution the reader that his personal experience may differ considerably from that pre- 122 OVEEHEAD EXPENSE sented. But present it, as an actual experience which for that reason has great value as showing us what may be expected under similar circum- stances. Very interesting, however, is the application of the information deduced from the various fore- going tables when applied to general business conditions. Of 122 shops reporting for the term July 4, 1911, to July 4, 1912: Four report between $2000.00 and $5000.00 worth of business. Sixteen report between $6000.00 and $10,000.00 worth of business. Thirty-seven report between $10,000.00 and $20,000.00 worth of business. Twenty report between $20,000.00 and $30,000.00 worth of business. Fourteen report between $30,000.00 and $40,000.00 worth of business. Four report between $40,000.00 and $50,000.00 worth of business. Ten report between $50,000.00 and $75,000.00 worth of business. Eleven report between $75,000.00 and $100,000.00 worth of business. Six report over $100,000.00 worth of business. If this average holds good throughout the trade (and we have no reason to think otherwise) the large majority of plumbing businesses are about $18,000.00 in size. The average overhead expense, according to the cases reported, in a business of this size is PEECENTAGE METHODS 123 from 20 to 25% and as of these the numerical pre- ponderance is between $10,000.00 and $20,000.00, the average overhead expense can safely be stated as being nearer 25 than 20%. For businesses below $10,000.00 all indications point to an average of about 23 to 30%. So we estimate that 75% or three-quarters of the plumbers are carrying an overhead expense of about 25%. The other 25%, or one-quarter, run down from 20 to 13% overhead expense, according to the amount and character of the business done. Nowhere do we find any justification for adding 10% or 15% to first cost (labor and material) with the expectation of showing a net profit. It just can't be done. CHAPTER VII. THE VALUE OF ANNUAL SYNOPSIS OF BUSINESS. A few days after lecturing in a certain city I received by mail a statement with the request to work out a synopsis for the proprietor. SYNOPSIS FOR 1913. Amount of business $24,760 . 00 Amount overhead expense 4,201 .00 Amount productive labor 5,851.00 Amount merchandise 10,683 . 00 Gross or first cost 16,534.00 Net or final cost 20,735.00 Net profit 4,025.00 Amount business less gross cost 8,226 . 00 Percentage added to gross cost 49 . 69 Percentage O. H. X. of business 16.96 Percentage merchandise of business .... 43 . 14 Percentage labor of business 23 . 63 Percentage profit of business 16.21 Percentage O. H. X. estimated on labor. 71 .83 Percentage O. H. X. estimated on mer- chandise 39.32 Percentage O. H. X. estimated on gross cost 25.40 THE PROOF. O. H. X. =16.96%= $4,199.296 Labor =23.63%= 5,850.788 Merchandise =43.14%= 10,681.464 Profit =16.21%= 4,013.596 Total = 99 . 94% = $24,745 . 144 Mathematical loss = .06%= 14.856 100% = $24,760 . 000 amt. business 1913 124 PERCENTAGE METHODS 125 This year I received the following letter. Feb. 1st, 1915. MR. H. F. BAILLET, Irvington, N. J. DEAR SIR: Have enclosed a statement of my last year's 1914 business. Thought you might be glad to compare it with last statement you figured up for me. Am sorry to have to send you such a bum statement, which does not compare at all favorably with last statement. Yours very truly, 1914. SYNOPSIS. Amount of business $18,789 . 74 Amount O. H. X 4,296.95 Amount paid productive labor 5,542 .32 Amount paid merchandise 8,181 .09 Gross cost labor and merchandise .... 13,723 . 41 Net cost labor, merchandise and O. H. X 18,020.36 Net profit 769 .38 Amount business less gross cost 5,066 . 33 Percentage added to gross cost 36 18/100% Percentage O. H. X. of business 22 87/100% Percentage merchandise of business. . . 43 54/100% Percentage labor of business 29 49/100% Percentage profit of business 5 60/100% Percentage O. H. X. on productive labor 77 53/100% Percentage O. H. X. on merchandise. . 52 52/100% Percentage O. H. X. on gross cost 31 31/100% To which the following reply was forwarded: Feb. 5, 1915. MY DEAR FRIEND J. : Your statement for 1914 to hand. Thanks for the con- fidence shown. It is a very interesting document compared with that of 1913. It shows first that your opportunities were probably not as good as the previous year because the gross cost namely labor and merchandise amounting to $16,534.00 in 1913 only amounted to $13,723.00 in 1914. However, that in itself would not have been so much of a slump had you managed to stick to the gross loading of the former year. The per- centage added to gross cost in 1913 was 49.69% whereas in 1914 it was only 36.18%. 126 OVEEHEAD EXPENSE While the amount of O. H. X. did not vary materially the percentage did jump from 19.96 to 22.87 due to the fact of less business, a smaller loading and no paring of expenses. Nor do I think that any paring was called for, as you are still under the average. I presume that owing to the general business depression you were in a measure obliged to take work at a lower margin than had been the case in the previous year. However, it is interesting to see what would have happened had you re- ceived the higher margin. Gross cost 1914 was $13,723 .00 Percentage added to gross cost 1913 was 50% =would be 6,861 .00 Total amount business would have been . $20,584.00 Net cost 1914 18,020.00 Profit would have been $2,564.00 Percentage O. H. X. of business would have been 20.87 Instead of 22.87 Percentage profit would have been 12 . 45 Instead of 5.60 You can readily see that the crux of the situation is: The percentage added to gross cost! The evident fact is that you have received less business and carried on that less business at lower prices in 1914 than in 1913 without any reduction in your overhead expense. However, by using the percentage method of synopsis you know just exactly what you have done; how and why it hap- pened and can govern yourself accordingly. The business man who does not use this or as true a method of synopsis and analysis, while he may know that something has hit him; does not, cannot know how or why and therefore will not know what to do to safeguard his business. He blames it to hard luck and does the same thing over again. How does this strike you? Sincerely, H. F. B. Feb. 8, 1915. MY DEAK MR. BAILLET: Your favor of 5th inst. at hand and carefully read. Much obliged to you for the exhaustive study made, for which I am surely indebted to you. My own theory of conditions last year was that I did con- siderably less work, with the same overhead and practically the same labor. I knew that I was wrong on my labor, as I had an expensive crowd on. Had very few helpers and PEECENTAGE METHODS 127 practically no apprentices. Kept my pay roll up. Work was harder to get last year and is going to be harder still this year, so having been duly "foe-warned," if caught again by the same hook, the fault will be my own, hey? Very much obliged to you. Will be glad to send you data a year hence, so that you can get an outline on just how bum the competition has been here! Yours very truly, This correspondence needs no further elucidation. It graphically explains the absolute necessity of knowing what it costs you to do business and the need of giving yourself a synopsis of your business at least yearly, so you may know what you are doing instead of guessing. SYNOPSIS CARDS USED IN THE INVESTIGATION AND RECOM- MENDED FOR FILING. SYNOPSIS OF BUSINESS FOR ONE YEAR FROM TO Amount of business $ Amount (O. H. X.) overhead expense Amount paid out productive labor Amount paid for merchandise. | Labor . Labor } I Merchandise ) [O.H.X J Gross 1 Merchandise Net cost Net profit . Net loss Amount business, less gross cost Percentage added to gross cost O. H. X. of business Merchandise of business Labor of business Profit of business Loss of business O. H. X. estimated on productive labor O. H. X. estimated on merchandise O. H. X. estimated on gross cost When you add 15% to labor and material you are losing money. Figure it out for yourself and know what you are doing. 128 OVERHEAD EXPENSE OVERHEAD EXPENSE CARDS USED IN THIS INVESTIGATION AND RECOMMENDED POR FILING. COMPLIMENTS OF MASTER PLUMBERS' ASSOCIATION. Fill this out from your own books and know what it costs you to do business. OVERHEAD EXPENSES. Salary $ Rent Light Heat Telephone Horse and wagon : Bookkeeper Insurance Taxes Cartage Carfares Tools Collections Bad accounts Driver Waste materials Replacing defective goods Labor lost Allowances Interest on capital, 3 per cent, on Postage Stationery and printing Association dues Total, $. THIS BOOK IS DUE ON THE LAST DATE STAMPED BELOW AN INITIAL TINE OF 25 CENTS WILL BE ASSESSED FOR FAILURE TO RETURN THIS BOOK ON THE DATE DUE. THE PENALTY WILL INCREASE TO SO CENTS ON THE FOURTH DAY AND TO $1.OO ON THE SEVENTH DAY OVERDUE. _ fm OCT"2 1( !6Nov60TD 39 ij ' . MOV , ofTi OCr^l fQWfl '49HJ ' ro , t 2 ^ ar ' 64 24' ay ^ 5 'b4 -H AM I j 1*1 M , ... v oQw&j ~ i ' i ... . i i REC'D LD APR 26 1959 LD 21-20ro-5,'39 (9269s) YA 06440 3 4 36? 8 UNIVERSITY OF CAUFORNIA LIBRARY