12. Defective accounting is a matter of observation that many retail stores employ only the crudest and most inexact methods of keeping ac counts. Aside from the fact that under such circum stances many credit sales are sure to go uncharged, and thereby involve a direct loss to the business, the dealer who is without a proper accounting system never knows what his actual condition is ; never knows, therefore, with certainty whether he is making a profit. He may, in fact, be playing a losing game.
Failure to figure correctly the cost of doing busi ness has led many dealers to imagine that they were making a profit when in reality they were doing busi ness at a loss. Many, for example, do not think of including rental for their land and buildings, when the business premises are their own. Yet legitimate and necessary expenses cannot be left out of the cal culation without rendering it misleading. Again, many dealers overlook the obvious fact that if they devote their time and attention to their stores, they should charge the business with a salary for them selves, equal to that which they could earn if working for others in the same capacity.
Similarly, if a dealer's wife or children assist him in the store, their services become a proper item of ex pense. In many cases, however, these arc not so en tered at all. Accordingly, what the merchant may regard as a fair year's profit, may under such circum stances, disappear wholly and there may even be a deficit when these items of expense are properly charged.
Another important item of expense that is often ignored by the small dealer is depreciation on goods carried over. In certain lines, especially those af fected by fashion, such goods may be worth only a fraction of their original value, but even where de preciation is not so marked, it nevertheless must be taken into account if the inventory is to show ap proximately the present value of the stock. Many a merchandise account, if measured by present value, would shrink uncomfortably. Strange enough, many dealers who are guilty of this practice are aware of that fact, but fear to face the situation squarely. It is a species of self-deception that some day is likely to end disastrously for the business, especially if build ings, fixtures, wagons, etc., are treated in the same lenient manner.
Other items of expense that often fail to receive proper recognition are losses from bad debts, from theft and other causes; incidental expenses, such as hauling, postage, office supplies, etc. There are, moreover, certain fixed expenses—light, fuel, insur ance, taxes, etc.—which demand proper entry and distribution if the total cost of doing business is to be accurately known.
It might be objected by some that if a dealer's goods are sold at a profit and the money collected, it does not matter much whether all his book entries con form to the rules of scientific accounting. The an
swer to this, however, is that if the books present a false situation with regard to profits made, the with drawals of funds by the proprietor are likely to be in excess of the amounts justified by the true condition of his affairs. To the extent that this is done, the proprietor is necessarily appropriating to himself as profitS what has not actually been earned, hence he is constantly depleting his capital.
13. Figuring profits.—Many dealers deceive them selves into thinking that their selling prices permit substantial earnings to be made, when as a matter of fact, this is not the case. Some time ago the Bur roughs Adding Machine Company of Detroit ran an advertisement that called for the solution of a simple problem in figuring profits. More than four thousand retailers answered the advertisement and sent in their solutions, but it was found that only eight een out of every one hundred answers were correct. In other words, only about one dealer in six knew how to figure his profits correctly. This fact alone shows plainly enough that while even in the smaller towns there are many intelligent and thoroly capable retail merchants, there is a much larger number whose ignorance of the very elements of business success is such as to render their continuance in business over any considerable period of time extremely problemati cal.
14. A common error in calculation.—By way of illustrating the manner in which some retailers ar rive at the selling price of their goods, the following will suffice : Say that the cost of an article is $4, and that the dealer knows his expense of doing business to equal 25 per cent of his sales. He desires to make a profit of 10 per cent. He proceeds in this manner: Twenty-five per cent of $4 is $1; 10 per cent of $4 is $0.40; hence cost plus expense plus profit equals $5.40, which therefore becomes the selling price. Manifestly this is wrong, since both expense and profit are here figured on cost price, instead of on selling price. The merchant who prices his goods according to that formula, instead of making a profit of 10 per cent is actually losing money on every sale, as will be readily seen from the following simple algebraic equation, in which X is the selling price: The right selling price, therefore, instead of being $5.40 is actually $6.15—a difference of 75 cents. The dealer's expense (25 per cent of selling price) is not $1 but $1.54. Similarly, his profit (10 per cent of selling price) should not be 40 cents, but 61 cents. As will be seen, the wrong selling price, $5.40, is 15 cents less than the cost of the article, plus expense of doing business. Accordingly at $5.40 the mer chant would actually lose 15 cents on every sale! Thus it appears that the majority of failures among retail merchants are the direct results of ignorance and lax business methods.