Stability and Profits

The FINANCIAL COUNSELOR

by MARSH K. POWERS

THE past eighteen months have made it disconcertingly evident that American business is so organized that, for the most part, its profits are derived from the ‘final 20 per cent’ of sales.

It might seem logical to assume that a business concern which can make $.50,000 on $500,000 of volume will produce $40,000 profit when its sales slide down to $400,000 and $30,000 on $300,000 volume. Few business concerns, however, prove able to approximate such a ratio. When that topmost 20 per cent of sales disappears, so do the bulk of their profits.

Is such a condition a necessity? In order to make generous profits in good years must a concern be ill equipped for lean years? Or is the condition merely the normal outcome of the American business philosophy which teaches that ‘ when you stop growing, you start backward’ — a philosophy which selects bulk as the measure of success? Is n’t it time that proprietors, managers, and stockholders paused to question such maxims?

After all, is growth of volume the ultimate goal of business and commerce? Is n’t distributable, spendable income the basic justification of labor and the primary incentive to investment? Is it as fine an accomplishment to earn $100,000 seven years in ten on a milliondollar volume, only to show $100,000 losses in the other three, as it is to net a consistent $50,000 every year on a consistent hali-mdlion volume?

The merit in the less spectacular procedure was graphically set forth in the remarks of a young European cutlery manufacturer who visited the United States in 1916 to study our production methods. At lunch with two American manufacturers, the European casually mentioned that production in his factory, in peace time, was, on the average, six months behind orders. Simultaneously both Americans launched the question. ‘Then why in heaven’s name don’t you enlarge your factory?’

The Continental laughed mildly. ‘Oh, you Americans!’ he said. ‘ If it were n’t a patriotic duty, I should n’t to-day be interested in increasing my output. My great-grandfather founded this business. By the time he was sixty it had made him a fortune, so he gave the factory to his son. At fifty the son had accumulated his fortune and retired. The business came to my father. He retired at forty-eight with his fortune. Now the factory is mine. Why should I change the procedure? Why gamble my present generous income on a speculative future that will depend on doubling my sales and then maintaining the increase? Why take the risk? You Americans, I know, won’t applaud my policy, but to me it seems the only wholly sane course.

The young European gave a complete expression to the principle that assured profits, rather than maximum growth, are the test of business success. Less romantic? Yes. Less adventurous? Yes. Less appealing to ambition as we in business America accept the word ? Most certainly. Nevertheless it rests on blunt, level-headed logic.

The ‘Assurance First ’ theory boils down to this: ’To live as I wish to live necessitates an income. To secure that income I must work. If my work does not bring me an adequate and uninterrupted income, then, obviously. I fail in my purpose. The first goal of my labor is to assure myself an income. I will therefore eliminate every avoidable risk and uncertainty. It is my business to make my business make money all the time.’

The young European merely carried this reasoning through into logical action. He did not feel that it discredited his manhood not to enlarge his factory. He did not worry as to whether or not his policy was ‘progressive.’ He did not begrudge competition its volume. His eye was focused on dividends, not on illusory potential profits.

It would be almost unheard of for an American to ‘play it safe’ in this Continental manner. It goes against our American habit of mind to ignore opportunities for expansion, to remain complacent when competitors expand. Nevertheless it would be interesting to know how many heads of American businesses, large and small, wish to-day that they had been less avid for increased volume and less insistent on increased production facilities. Some of them must look with chill in their hearts at the laborious road which now needs to be traveled before the losses of 1931 have all been re-earned and restored to working capital.

There have quite probably been American counterparts of those Continental and British manufacturers who resolutely refuse to risk the quality of their production by meeting the entire potential demand their quality inspires. Their names, however, have not been held up to praise, except by their loyal, never-failing patrons.

Is there any basic reason why the ‘waiting list’ principle should not have its commercial application? Private schools and clubs have long demonstrated its efficacy. Physicians and dentists, limited as to capacity, reflect their popularity in the size of their fees. The ticket speculator subsists on the trait of human nature to want the thing which, because of limited supply, is not available to everyone.

Is n’t there opportunity for business executives who will capitalize this trait to the consistent profit of themselves and their stockholders?

To balance, competitively, the real or theoretical economies of larger production, these men would have the economy of a level flow of production the year round. To balance the heavier advertising programmes their larger rivals can and must finance, they would have that most productive of advertising — advertising signed by a name known for out-

standing. unvarying quality. Their advertising would never need to be blatant, strident, or all-embracing; it could be accurately geared to their production facilities and be productively, yet economically, accelerated at any hint of recession of demand. To balance the economies of mass management and supervision, they would have disproportionately smaller sales forces, disproportionately lower traveling expenses. In some lines, sales costs might ultimately consist of the advertising budget, and little more. There is precedent for that, too.

It will not be easy, to be sure, for the individual who elects such a course to hold himself to it. Inevitably he will encounter associates who thirst for larger totals and new fields, for aggressiveness and acceleration. The arguments they present will be hard to rebut. Only if he keeps firmly in front of him the goal of assured volume and profit will he be able to hew to his chosen line.

Nevertheless, should a considerable number of concerns be operated on this principle of ’assurance first,’would n’t they constitute a nationally valuable asset as a counter-influence to recurring depressions?