Murcb 20, lUlO 



f-iMaiiax^ 



f^^. The Lumberman s Round Table 'Ji^ 



Fighting the Overhead 



It in a Irilion nf (iii>iiii'm> tlmt im iiiaticr )ii>w ■innJI tlio roiiccrii 

 mnv Im>, it • nwnv fruin hm rlu-iul i-X|>('U»o. 



Tlint IK J I t wny of wnxiiit; lliiit it i« never pumiiblv to 



rbarK'* aJl of the oitomtiui; pX|H>iiit<>s ncaiiixt a piirticulnr tranHor- 

 tiod. Tlioro iir«> rrrtaiii ppncrnl coKtit wliirli niuitt bo taken cjiro of 

 out of the groM {irofitit, and the man who overlooks thorn is going 

 to Bnd that the net inn't nearlv whiit hu tlioiijjht it wna going to be. 



The voung concern will »ucre«>i| or fail liir;»ely lu'coriling to tlio 

 way in which it coulroln thin factor. Ovcrliond is' a matter of 

 |icrcentago», and a runuinc ex|>en!<e which would bo all right with 

 a big volume of butiineiui is all wrong when the volume is much 

 smaller, as it is necessarily in a new business. 



A certain young hardwood man who has just gone into business 

 for himself looks like a good proBpect, because of the care with 

 which he has watched these things. .Although ho is planning to 

 ship most of his lumber direct, and might have token a handsome 

 ofliee in a downtown building, he found that he could rent a small 

 yard, on a railway switch, at about the cost of ofliee rent. He 

 therefore arranged to have a modest little ofliee put on the yard, 

 and abandoned the idea of 'more luxurious quarters downtown. 

 Instead of buying teams, he arranged with an adjoining con- 

 tracting concern to have his wagons hauled with its teams at a 

 stated expense. All of the way through he trimmed down and 

 pared at his running expenses, and the result is that he is going 

 to have an overhea^l which will be in keeping with the volume 

 of his business. 



Later on, when the trade grows, ho will be in a position to 

 assume additional operating expenses without a qualm. 



Overhead in the Sawmill 



One reason why a sawmill proposition always looks so good — 

 on paper — is because one can set down the actual cost of stumpage, 

 plus the factors of logging, putting the stuflf through the mill and 

 putting on sticks, and have such a wide margin between that 

 result and selling prices that the obvious conclusion is that it 

 ought to be easy to make money. 



The trouble is that overhead expenses pile up very rapidly in 

 this as in other manufacturing enterprises. The amount of super- 

 vision necessary is considerable; there is always something to be 

 bought for the power plant or the mill proper; and the number of 

 items which somehow get on the books each month, without figur- 

 ing in any direct way in the manufacture of the lumber, is 

 astounding, especially to the man who has not anticipated them. 



As a matter of fact, a rough-and-ready way to figure overhead 

 in the sawmill business, which comes pretty close to tho truth, 

 is to assume that it is going to equal the cost of the actual pro- 

 ductive labor. In other words, 50 per cent of the total cost of 

 making the lumber is visible, and the other 50 per cent is in- 

 visible expense. 



The lumberman who is not always careful in figuring prices 

 can take this as a guide, and add this proportion to the direct 

 expense which applies to turning out his product. If he does so, 

 he is less likely to sell his lumber for less than the cost of manu- 

 facture, a condition which sometimes is due to a failure to take 

 into account the overhead expenses of the business. 

 Interest on the Investment 



One of the debatable questions in cost rucounting is whether 

 interest should be charged on the investment in the business. 

 There are many arguments in favor of this method, and on the 

 other hand some authorities are firmly opposed to it. 



The writer clings to the belief that an investment charge is a 

 legitimate and necessary item, if the results are to represent 

 what they appear to. It is certainly true that a depreciation 

 charge should be made to take care of the loss of value of the 

 equipment and buildings. This is to take care of the principal 

 of the investment. It is just as logical to charge interest on this 

 investment, because this is the sum which would be earned 

 —26— 



normully without any ellurt on tin' part of llie owmr and with- 

 out any risk. If it is necessary to protect the integrity of tho 

 capital with a dejirecialion charge, it is also necessary to protect 

 its normal earning power. 



Another feature is that a great deal of the money used in an 

 active business is borrowed. It may be a direct loan from tho 

 bank, tho use of paper, or credit with supply bouses, etc. In many 

 cases tho money used in this way may be three or four times the 

 amount of the cn|>ital. 



Interest payments are charged as a matter of courne to over- 

 head expense. If they arc included in this account, and thus made 

 to apply to all of the operations of the business, and made a 

 factor in the fixing of prices, there is no good reason why interest 

 on tho remainder of the capital used, that which is invested by the 

 stockholders, should not be taken cnro of in the same way. 



The other argument, of course, is that the profits of the busi- 

 ness represent the interest, ami that earnings declared on tho 

 stock are the interest on the capital invested. In order to secure 

 these earnings, it is suggeste^l, the stockholder waives interest 

 of the usual kind. The point is, however, that they should not bo 

 considered as profits until the interest has been taken care of. 



The question is largely one of bookkeeping, but it is interest- 

 ing from the standpoint of impressing on the man who is running 

 a business that he has not really accomplished anything unless 

 he can make more than tho ordinary return on the money would 

 have been. 



Put an Expert on the Books 



It is a good idea to have an export accountant go over tho 

 books of tho lumber company now and then, merely for the pur- 

 pose of making sure that everything is being handled properly. 

 The modern accountant is not merely a bookkeeper, elevated above 

 the rest of the class, but he is a cost expert as well. And his 

 services are usually worth getting, from all standpoints. 



In the average office a good deal of work is handled in a round- 

 about and circuitous fashion. The expert will show how a simpler 

 arrangement can be made, which will save time and labor, and 

 will be better from all standpoints. And tho office bookkeeper will 

 likewise profit from getting the angle of the outsider on the 

 methods which are used. 



Before declaring dividends or cutting a melon, it is always ad- 

 visable to have the books examined, so that nothing will be 

 forgotten that should have been charged up, and so that stock- 

 holders will really bo getting dividends, and not a return of 

 part of the capital which they have invested, as is sometimes 

 tho case. 



Taking Care of Mixed Cars 



The mixed-carload buyer is an important factor in the hard- 

 wood field. His purchases may not be important individually, but 

 in the aggregate they account for a big percentage of the total 

 footage of hardwoods used up. 



It is therefore a good idea to go after the business of this 

 factor in the trade whenever possible. It should be remembered, 

 however, that loading mixed cars is special service, and hence 

 should be paid for on the basis of its value to the customer and 

 its cost to the concern which is furnishing it. 



From the latter standpoint, it is not always easy to select just 

 tho material which is needed to apply on an order of this kind, 

 and considerable handling is required to get the carload together. 

 In addition, the customer may have called for one or two items 

 which are scarce, and may not be in the stock of the seller, and 

 it is necessary to do a lot of shopping around to locate them. In 

 fact, it frequently happens that the concern which is handling the 

 business buys full carlots of lumber on the outside, merely to get 

 the particular stock that its customer wants. This is undoubtedly 

 a high grade of service, and the hardwood company which is 

 rendering it ought to be able to make mixed-car buyers appre- 

 ciate it. 



