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Jdli 8, 1013. 



The Horists' Review 



COST AND OVERHEAD EXPENSE 



A DISCUSSION OF BUSINESS ARITHMETIC 



WHAT ABE COST AND EXPENSE? 



The Elements That Determine Price. 



The subject of cost and overhead ex- 

 pense is one which should interest every 

 man in this room. Generally these 

 terms . aj'e not clearly defined by the 

 business world. Too frequently the sell- 

 ing price is based on the invoice price, 

 without due consideration to the over- 

 head expense of operating the business. 



To my mind, cost means the invoice 

 price of an article, plus the expense 

 of doing business on a certain number 

 of dollars' worth of sales. If the in- 

 voice cost of the article is $1 and it 

 takes twenty per cent of the selling 

 price to cover the expense of doing 

 business, then the cost should be con- 

 sidered $1.25 instead of $1. It will 

 then be necessary to add the per cent 

 of profit which it is desired to earn. 



Manufacturers who change the form 

 of a commodity have solved the prob- 

 lem of the relation of overhead ex- 

 pense to cost. By adding the item of 

 overhead expense to the cost of their 

 raw material, they know the exact cost 

 of the manufactured article when it is 

 placed in a packing case to be for- 

 warded to a customer. 



Figuring, or Merely Quessing. 



We who are engaged in distributing 

 seeds and other merchandise are too 

 prone to feel that our expense items 

 may be estimated, or guessed at, in- 

 stead of being figiired down to a basis 

 which may be depended upon to indi- 

 cate the total cost of transacting the 

 business. 



If we are to be successful in our busi- 

 nesses, it will be necessary for us to 

 conduct them on a scientific basis, or 

 at least on a basis which will permit 

 our knowing the exact relation of the 

 expense items, when compared with the 

 sales, of the year, month or day. In 

 the general business world, only five 

 per cent, of merchants who begin busi- 

 ness on a certain date are still in busi- 

 ness twenty years from that date. Nine- 

 ty-two per cent usually fail within the 

 first four years after beginning their 

 business careers. 



In this day and age of talked-about 

 high prices and the high cost of living, 

 it seems to me as if it would be pos- 

 sible to reduce the price of many arti- 

 cles, if the true basis of overhead ex- 

 pense could be figured and definitely 

 applied to each line of business repre- 

 sented in our complex form of living. 



Problems in Economy. 



If the head of every business could 

 be made to feel the necessity of know- 

 ing exactly what it costs him to do 

 business, there would be fewer fail- 

 ures, and consequently less waste in 

 doing business, and in a short time it 

 would be practicable to lower the price 

 of many articles of merchandise which 

 are a daily necessity to the people of 

 the United States, and at the same time 

 to insure the merchant of making a fair 



This paper was prepared especially . for seeds- 

 men, but It contains so much that applies with 

 equal force to retail florists and, Indeed, to 

 nurserymen and growers that Its careful perusal 

 Is recommended to everyone In the trade. The 

 author is L. B. McCausland, of Ross Bros., 

 Wichita, Kan., who read It before the American 

 Seed Trade Association at Cleveland, June 25. 



profit on every dollar's worth of goods 

 sold. 



Waste is the one element in the 

 United States which is too plentiful. 

 We do not take care of the small things 

 as they do in older countries; perhapv 

 the necessity for greater economy has 

 not been so urgent in the past as it 

 is at the present time. It will only 

 be a matter of a few years until the 

 next generation will be compelled to 

 face problems of economy much more 

 complex and vexatious than those we 

 are facing today. Therefore, if we 

 are going to do our duty in making our 

 records clear for our successors, it is 

 certainly proper that we carefully con- 



Tlie Kdltor Is pleased 

 when a Reader 

 presents his Ideas 

 on any subject treated In 



j^iffjar 



As experience Is the best 

 teacher, so do we 

 learn fastest by an 

 exchanee of experiences. 

 Many valuable points 

 are brousht out 

 by discussion. 



Good pemnanahip, spellintr snd 

 Rrammar, thougli desirable, are not 

 necessarr. Write as you would talk 

 when doinisr your best. 



WS SHAIX BK GLAD 

 TO HKAR VROM TOU 



sider a plan which will eliminate guess- 

 work from our businesses. 



Getting Beyond One's Depth. 



To emphasize the necessity of elim- 

 inating waste in business, I Will repeat 

 the words of a prominent business man 

 in the wholesale grocery line: 



* * Every man who goes into business 

 should have a sufficient capital to con- 

 duct the business comfortably and safe- 

 ly, be it large or small. He should do 

 all the business possible to be done 

 with the means at hand, but should not 

 overreach or spread out to such a de- 

 gree as would make his business unsafe. 

 He should so watch every detail of his 

 business, and guard his purchases, his 



expenses and his sales so closely, that 

 he will not get beyond his depth. He 

 should so conduct his business that he 

 will be able to meet every obligation 

 promptly at maturity.. The man who 

 does tiis will be found to be successful, 

 while the one who allows his payments 

 to lag yrill be found to be the one who, 

 as a rule, trusts out his goods injudi- 

 ciously and whose business methods are 

 slipshod^ whose stock is ill-kept and 

 whose failure is only a question of time. 



Inventories and Insurance. 



' ' Every man in business should take a 

 careful inventory of his stock at least 

 once a year, and should formulate a 

 statement of his affairs for comparison 

 from year to year. From such state- 

 ment he can determine the elements of 

 weakness in his business, and when 

 these have been pointed out, they can, 

 with proper management, be remedied, 

 and thus the quicksands of commercial 

 dishonor can be avoided. 



"Yearly inventories are a prime ne- 

 cessity on another account, that of in- 

 surance. A business that will not pay 

 for insurance had best be abandoned. 



"No man has a right, unless he has 

 ample means outside of his business, to 

 jeopardize the claims of his creditors 

 by failure to properly insure his prop- 

 erty. He cannot afford to run the risk 

 incident to the failure to take an an- 

 nual inventory and to properly record 

 his purchases and his sales, which are 

 absolutely necessary to enable him to 

 get his just dues in case of loss by fire. 

 It is a source of great satisfaction to a 

 man to be able to sle^p nights with a 

 consciousness that his bills are paid 

 promptly and his property is fully in- 

 sured. ' ' 



Calculating the Cost. 



The first fundamental principle in 

 successful merchandising is to provide 

 in the sale price of any article, or in 

 the total of annual sales, a profit sufii- 

 ciently liberal to cover the direct 

 charges against the business, viz.: 

 Overhead or ascertainable expenses, in- 

 terest on capital invested, contingencies, 

 and a reasonable profit. Profit and suc- 

 cess are interdependent and success, 

 indeed, is more closely related to profit 

 than to any other incident of the mer- 

 chandising business. 



Surprise is natural that so few mer- 

 chants or even commercial students un- 

 derstand how to calculate profits, as 

 was demonstrated when the following 

 problem was announced in a public 

 print for solution: "Should a mer- 

 chant buy an article for $1 and above 

 the total operating expense of twenty- 

 two per cent desire to make a net profit 

 of ten per cent, at what price must the 

 article be sold?" 



A large proportion of the answers to 

 this problem ranged from $1.32 to $1.35, 

 which indicated that operating expense 

 and net profit were calculated upon the 

 cost of the article; yet it can be easily 

 demonstrated that, in successful mer- 



