Statistics in Business

Value of Business Statistics

Because of the complexity of modern business it is practically impossible for the management or an executive of a large organization to rely on personal observations and impressions when formulating plans and policies. To do so would lead to frequent errors and costly mistakes of judgment. The human mind cannot adequately grasp the significance of a multitude of facts in the variety of their occurrence. In consequence many problems of management are today being solved by the intelligent use of statistical records or tabulations of past and present operations. By this means the pertinent facts regarding a business are classified and summarized, and the analysis of complicated figures and large aggregates is made possible. The relation of the groups to each other and of each group to the past, the relation of the unit to the whole, and so on, is best shown by the tabulation of facts in the form of figures. By reducing the facts to figures comparisons can easily be made and the proportion of one thing to another is more accurately presented. By divesting facts from their aspect in daily life and the caprices of temperament, a truer estimate of tendencies can be made. Because statistics generally deal with large masses or great numbers, standards, ratios, and types can easily be established. The mortality statistics of insurance companies afford a good example of general averages or ratios that hold true when applied to such an uncertain proposition as the length of human life. Business statistics, however, cannot attain this accuracy because facts of a similar kind are not of such frequent occurrence and consequently the average is not so reliable. But the manager who is acquainted with the limitations of the statistical method and who intelligently understands the business forces with which he is dealing, finds it sufficiently accurate in the great majority of instances. The frequent and almost universal use of the sampling method of testing mailing lists, the use of figures as to the density of population in selling campaigns, and the increasing use of time studies in factories, show that statistics can be made to serve as a valuable guide in arriving at important decisions.

Railroad Statistics

Railroad companies have for a long time used statistics to aid them in interpreting the mass of detail involved in operating over a large area. The figures are generally grouped into two classes: (1) those showing results of operations, such as annual reports; and (2) tabulations of operating details. The latter are devised mainly for the purpose of checking and control. Another classification, more minute, is the grouping of railroad statistics according to their nature into:

By comparing the figures for each group the existing relationship leads to valuable conclusions.

The compilation of figures showing receipts per passenger, average journey per passenger, average haul of merchandise, receipts per ton of freight, relation of cars run to business done, proportion of loaded and empty car space, cross hauling of empty cars, percentage of empty to loaded cars, compilations showing cost per passenger mile or ton mile—these are all valuable and pertinent facts about railroad operation. The most significant way of stating some facts is by means of figures. This is especially true of such important and related phases of operation as, for example, the ratio of the pay-roll to operating revenue, a comparison of the pay-roll of engine men and trainmen with the engine and train mile, or a comparison of the business done with the pay-roll at each station.

Manufacturing Statistics

Statistics are being increasingly utilized for recording facts in connection with production, especially in factories where a system of cost-keeping is in vogue. Various forms and cards are frequently used to collect the required data which is then grouped or classified in various ways. The performance of each workman is recorded and the various records are combined into groups and compared. Statistics as to output, orders on hand and in process, figures showing idle time, capacity of machines and actual use, are examples.

Mercantile Statistics

The use of statistics in mercantile establishments is perhaps even more prevalent than in factories. This is chiefly because factories handle comparatively few lines, whereas mercantile houses generally carry or deal in a large number. The figures compiled are generally concerned with one or more of the following:

Each individual manager selects the particular set of facts which he thinks will best show the trend of the business. The complexity of the business usually determines the number of reports.

Use of Graphs in the Presentation of Statistics

Long experience or special aptitude may qualify a man to grasp readily the full significance of statistical compilations in a variety of forms without the use of charts or graphs. The quicker and surer method, however, in driving home the essential points of statistics is their graphic presentation. For the majority of business men the graphic method will accomplish what statistical tabulation fails to do. While facts are of prime importance, their method of presentation affects their usefulness and is therefore of greater importance. The great mass of figures that accountants and efficiency men only too often present in incomparable form, sometimes far in excess of requirements, is best classified by means of charts.

Advantages of the Use of Graphs

The arguments in favor of the use of charts are that the importance of written words or figures is apt to be judged from the amount of space used, or the time spent in writing or compiling them; whereas the graphic method shows the vital facts in a way which compels attention. The statistics are easily compared and when figures are visualized in graphic form relations are seen at once. One week is readily compared with another, one year with the previous year, one man’s performance with another’s, and so on.

Graphic methods are not only in many cases better but also cheaper. This is especially true if a number of copies have to be made. It requires more work to copy a mass of figures than to draw a few lines or figures by means of blue-print tracings. If many copies are needed, the photographic method of reproduction may be used. Then again, in statistical tabulations it is necessary to rearrange the figures in various orders so as to make different tabulations comparable.

Principles of Graph Construction

The following principles should be observed in making graphs:

1. Graphs should be simple so that the full significance is readily seen. If a chart requires a great deal of study its very purpose is defeated. As a general rule, only two lines should be used. This is especially true if the lines are apt to intersect one or more times. If there are a number of interrelated figures to be presented, it is better to make separate charts on one sheet or to place them together in some other way.

2. Most statistics can be presented by one or more curves where the quantity is expressed by the distance of the curve from the base line, and the time is represented by the horizontal movement of the curve.

3. For a curve the vertical scale should be so selected that the zero line will appear on the diagram. This may require a break in the graph, as shown on page 585.

4. When the scale represents percentages the 100% line should be emphasized in some distinctive way.

5. The curves should be sharply distinguished from the ruling of the paper.

6. The lettering and the figures should be so placed as to be read as easily from the base as the bottom, or from the right-hand edge of the diagram as the bottom.

7. The titles should be clear and complete and, if necessary, subtitles and descriptions should be used.

The illustrations on pages 585-588 show how data lend themselves to graphic presentation.

Private Books

Purpose and Content

Private books are sometimes kept when it is not desirable for employees to know certain important data relative to the business. Secrecy then is the main purpose in their use in a great many businesses. The general knowledge of certain facts about the business or certain processes or methods of procedure which belong peculiarly to the business might be harmful. Where competition is particularly keen between two or more concerns, instances have been known of the employees of one concern being the paid agents of the other, thus securing information essential to underbidding on contracts. It is desirable at times to keep the employees of a partnership or a corporation in ignorance of the earning capacity of the business or of any secret contracts covering price agreements that may be in effect according to which larger rebates are to be allowed one concern than another. Other items about which it may be necessary to maintain secrecy are: the valuations at which patents, franchises, and other intangible assets are carried; partner’s capitals, drawings, and salaries; manufacturing costs; the method and rate at which the overhead expense is apportioned over the product; the policy as to the creation of reserves of various sorts; the profit and loss account; the methods of financing as indicated by notes payable; and so on.

Operation of Private Books

No particular difficulty is experienced in the keeping of private books. A full set of records composed of journal, cash book, and ledger, may be maintained, though there is often no need for a cash book. These records, while containing essential information about the business, are usually spoken of as being subsidiary to the general books in the sense that the general books are operated by an employee who maintains a controlling account for the private books. In order to gather the material for the controlling account the books of original entry of the general records must be provided with additional columns for the private ledger. Any item about which it is desirable to keep employees in ignorance is simply charged or credited to private ledger with no explanation on the general books as to its ultimate disposition. The same item as taken into the private books is, by means of a journal entry, given its proper disposition, with the offset as a charge or credit, as the case may be, to a general ledger controlling account which is carried on the private ledger. These two controlling accounts—the one on the general ledger with the private ledger, and the one on the private ledger with the general ledger—are complementary to each other, thus making both ledgers self-balancing. A consolidation of the two trial balances, the one from the general ledger and the other from the private ledger, with both controlling accounts eliminated or treated as canceled items, is necessary in order to present the full statement of the business.

To illustrate the way in which secrecy covering certain types of transactions may be maintained, it may be well to trace a few transactions through the books. Suppose it is desired to make a cash rebate to a favored customer. The check is drawn payable to private ledger account and run through the cash book as a charge in the private ledger column, to be posted ultimately to the private ledger controlling account on the general ledger. The check is entered as a cash receipt on the private cash book with the credit to general ledger. A check is then drawn on the private ledger cash payable to the favored customer, with the proper charge to Sales Rebates and Allowances or other similarly named account, and posted to that account on the private ledger. In a similar way checks for dividends, salaries, etc., can be drawn to the order of private ledger and their proper distribution be shown only on the private books.

At the time of closing the books, if some temporary proprietorship accounts are carried on the general ledger and some on the private ledger, those carried on the general ledger are closed off by transfer to the Private Ledger Controlling account instead of, as usually, to the summary Profit and Loss account. The adjustment of the books is usually made both on the general ledger and on the private ledger. If certain fixed assets subject to depreciation are carried on the general ledger, the adjustment of their values will have to be made by debit as usual to Depreciation account, with a credit to the suitable Depreciation Reserve account. This Depreciation account, of course, is in closing charged to Private Ledger instead of to Profit and Loss. If the Merchandise Inventory account and the Sales and Purchases accounts are carried on the general ledger, the cost of goods sold will be developed as usual on the general ledger and then transferred to the Private Ledger account. More often, however, most of these adjustments on account of depreciation reserves and reserve for doubtful accounts and the merchandise inventories are handled only on the private ledger. The Profit and Loss account as carried on the private ledger shows the net profit and usually all appropriations of that profit. The result is that the dividend accounts, the various reservations of profits, and Surplus account are handled only on the private books.

The private books are usually kept by the general auditor, the secretary, or general manager of a corporation, and by one of the partners or a trusted employee in the case of a partnership.

Journal Vouchers

Need for the Journal Voucher

Since the introduction of special journals to take care of cash, sales, and purchases, the present-day journal is used principally as a record for adjusting entries between accounts, the opening and closing entries of the ledger, and any other unusual transactions for which no other specialized form of book has been provided. For this reason it is very important that all the evidence which may be necessary to explain or to prove the correctness of an entry, together with the authority for making it, shall be instantly available in some convenient form. This not only saves much time and irritation in hunting up scattered data to explain an unusual entry, but it relieves the bookkeeper of any personal responsibility which might attach to him for making entries not strictly in accordance with correct accounting principles. It has been seen in an earlier chapter that the authorization of cash disbursements by means of the formal voucher gives a valuable control over cash and the bookkeeping record of it. In like manner, for entries appearing in the journal, the use of the journal voucher accomplishes these purposes.

The forms in which journal vouchers are made out vary with the requirements of each business, but in general they are very simple and follow the same general principles. Two features are essential: (1) the voucher must show clearly the purpose for which it is drawn; and (2) it should provide proper authority, with full explanation of the reasons for making the entry. The usual form is illustrated below:

The entries at the top of the back of the voucher give information for filing purposes only. Where the original vouchers are kept in a loose-leaf binder (thus constituting the journal), only the duplicates, folded lengthwise and filed in an upright binder, need have the notations made on the back.

Method of Use

The same form of voucher may be used in two ways. A regular journal may serve as the posting medium to the various ledger accounts affected. In this case each entry is given a number which corresponds with the number on the voucher. All the original data and the explanations which are necessary to authorize the entry are attached to the vouchers which are filed away by months in numerical order.

The second method is to make out vouchers in duplicate. The original, with the approval of the proper officials and a brief explanation, is filed in a loose-leaf binder which constitutes the journal. The duplicate, numbered like the original, has attached to it all bulky papers, correspondence or other evidence, and is filed away by months in numerical or alphabetical order, whichever best serves the purpose of the accountant. This method saves the time of recopying the debits and credits in a bound book, and also makes it possible to separate journal entries for use in different posting departments.

There is still some objection to loose-leaf general journals, however, though it is gradually disappearing with the use of proper safeguards.

Index to Journal Vouchers

If vouchers are filed numerically and it is found advisable to keep an alphabetical list for the purpose of bringing together all journal vouchers on one subject or from one firm, a supplementary card index giving year, month, and voucher number, may be kept which will serve for several years—as shown below:

If it is desirable to keep a record of the amounts also, this simple form may be extended to include voucher numbers and amounts as follows:

Content of Voucher

Vouchers for the different journal entries should comprise the following information: in general, correspondence or memoranda approved by proper authority, which should explain the reason for the entry and refer to the original charge or item against which the entry applies. Vouchers for returned purchases should have the following information attached: the shipment record, the stock record, the credit memorandum from the vendor, and correspondence or signed memoranda explaining why requirements were not up to standard.

Monthly depreciation charges should have attached a list of the capital accounts, the percentage of depreciation charged to each, and the one-twelfth which applies to the present month.

Adjustments for allowances on contracts should have the reference or copy of the contract agreement, all correspondence which finally disposes of the settlement, and references to any other legal or official authority which was instrumental in effecting the present settlement.

In making unusual deductions or reserves at the time the books are closed, all the data bearing on the subject should be gathered, or, if this is not possible, very clear references should be made to the places where such material may be found. This is important, because investigations may be made at any time either to readjust or to confirm the entries, or to locate the responsibility for making them.

Little time is needed to gather all the facts bearing on a transaction at the time it is entered on the books, but if the present officials are promoted or leave, it may at a later date take days or weeks to collect the information necessary to explain the reason for the entries made.

Other Methods of Authorizing Entries

A method sometimes used of authorizing journal entries requires the use of a loose-leaf journal for its easy operation. Every entry made by the bookkeeper is sent for approval to the auditor, manager, or other responsible person. Approval is evidenced by signature or initialing. Where the use of the formal journal voucher is found to be cumbersome, this method gives satisfactory results.

Similar to the journal voucher as authority for entry is the debit and credit slip used for authorizing inter-ledger postings. In a large establishment where the sales ledger, for instance, is divided alphabetically among a number of ledger clerks, adjustments as between the different ledgers are usually made by means of these debit and credit slips, which when properly signed by the head bookkeeper give the authority for making the necessary ledger entry.

Building Expenses and Income

Allocation of Building Expense

It is purposed here to draw attention to two problems in connection with the bookkeeping records of buildings owned by the business. The one problem has to do with the proper allocation of the various building expenses as between the different departments of a business such as manufacturing, selling, general administration, etc., and even the subdepartments within these general classifications. It frequently happens that the same building is used partially for manufacturing and partially as a warehouse and sales room, while it may also contain the administrative offices. Within each of these groups there may be various subdepartments. A large store may be departmentalized and it may be desirable to show the results of operation by departments. If cost accounting by departments is determined upon, it becomes necessary to carry the departmental analysis beyond the gross profit stage, in which case building expense must be taken account of and spread equitably over the various departments. Likewise, within the factory it may be desirable to allocate the item of building expense over the various departments of storeskeeping, costing, and production proper, and even a further analysis may be necessary depending somewhat on the detailed information desired. Where building expense has to be spread over these various departments and subdepartments, an equitable basis of distribution must be found. A common basis is the amount of floor space used by the various departments. This method is not always fair inasmuch as some portions of the building are subject to heavier wear and tear, and therefore to heavier maintenance and depreciation charges, than other portions. Consideration must be taken of all the physical factors involved in order to secure an equitable distribution of the expense.

Ownership versus Renting

The second problem has to do with the gathering of information as to the relative advantages of owning or renting a building. The chief elements of expense which must be met in connection with the ownership of buildings are maintenance, depreciation, taxes, and insurance. In determining the relative advantages of ownership or leasing, the item of interest on investment in buildings must also be taken into consideration. It is doubtful, however, whether this last item should be brought onto the books as a cost of ownership. As in the case of a manufactured product, the item of interest is best handled by means of a statistical record rather than as an entry upon the financial records of the business.

Methods of Bookkeeping

Two methods of presenting the information on the books are met with. In the one case, an account is kept with Building Expense and Income to which are charged all expenses in connection with the building and to which are credited any items of income, as from subleasing, etc. Instead of having the one account, separate accounts may be kept and cleared at the end of the fiscal period through Building Expense and Income account before transfer to Profit and Loss. The difference between the net cost of building ownership, as indicated by Building Expense and Income account, and the market rental value of similar space and accommodations elsewhere will represent the net advantage or disadvantage of ownership as compared with leasing. At this point, before making the comparison, it will be necessary to take into consideration the item of interest on the money invested.

The second method is simply a variation of the first so far as securing the information desired is concerned. Under it the Building Maintenance account is charged with all expenses as above and credited with a fair rental value as determined by market conditions for similar space elsewhere. The difference between the charges and credits to the Building Maintenance account will be an indication of the profit or loss on the policy of the ownership. A theoretical objection to this last method is that the crediting of a fair rental to the account makes necessary a charge to a rent account, which will have to be shown as a charge to some department or phase of business activity, such as the factory, sales department, etc. As in the case of interest, the best authority inclines towards treating rent as an item of financial management rather than as a burden to the other departments of the business. Practically, however, where the expense of rent is actually incurred through the use of a building belonging to outside parties, the prevailing practice at the present time is to charge rent expense to the departments using the accommodations. Consistency seems to demand that both interest and rent be treated in the same way, and handled as financial management items.

Workmen’s Dwellings and Social Betterment Work

To maintain a fairly constant supply of labor, a corporation frequently finds it necessary to provide housing accommodations for its employees. This may be because the concern is located far from a settled community and outside capital cannot be induced to provide the needed accommodations. Accordingly, corporations oftentimes spend large sums in so-called social betterment work, and it is customary for the corporation to charge a fair rental on workmen’s dwellings. The expense in connection with such work is to be treated rather as an item of extraordinary expense just as the income from the corporation’s investment in workmen’s dwellings must be treated as income outside the regular operations of the business. The problem here is simply the determination of the proper place to show the items of expense and income in the profit and loss summary for the period.