UNITED STATES DEPARTMENT OF COMMERCE SUPPLEMENT TO COMMERCE Published by the BUREAU OF FOREIGN AND DOMESTIC COMMERCE TRADE INFORMATION BULLETIN-No. 266 Scientific management as applied to retail distribution is rapidly replacing the haphazard methods of yesterday, and the retailer is more truly playing his important rôle as purchasing agent for his community. Budgetary control is a vital and necessary step in this new procedure and its importance can not be overemphasized. While this study does not consider the use of forms or any accounting procedure, it does outline the importance of such guides. This bulletin presents information and data gathered from personal interviews with important merchants and various research sources under the direct supervision of Laurence A. Hansen, who was formerly affiliated with the Boston Retail Trade Board as assistant secretary, and who later became managing director of the Massachusetts Retail Merchants Association. Mr. Hansen's training in engineering and accounting, in addition to his wide contact and experience in retailing both in the United States and in foreign countries, particularly fit him for the dissemination of information in connection with the retail business. JULIUS KLEIN, Director. BUDGETARY CONTROL IN RETAIL STORE MANAGEMENT INTRODUCTION From a mere glance at the statistics of business failures-the mortality table of business endeavor-one becomes convinced that something is wrong with the operating policies of many business enterprises. Again, the fact that many which continue to operate fail to pay a fair rate of return tends to bring more forcibly to the attention of business men the necessity of more scientific management on the part of executives. Failures have been attributed to a lack of sufficient working capital, to a poor location, and are very often falsely laid at the door of economic changes. In summarizing these causes, however, poor management in some form appears to be the root of many such failures. The retail store is conspicuous in the field of business enterprise for the number of casualties. This fact tends to emphasize the necessity on the part of retailer of a more thorough understanding of his individual management problems. The object of this study is to help in the solution of one phase of the retail-store management problem-that of control. It is not intended that this text should serve as an absolute guide in any part of this phase of retail-store management; its sole purpose is the consideration of the principles of budgeting for control as applied to retailing. That is, it merely intends to be informative. Budget control is not an entirely new phase in business management. Heretofore, however, it has been practiced chiefly by governmental bodies. Only to a slight extent have the principles of scientific control been applied to industrial organizations, for only in the past three or four years has the merchant realized that his business, as well as that of the manufacturer, is a science and that he, too, can well afford to utilize many of the new methods which are being adopted in business management in the entire field of industry. Essential to the solution of any problem is the establishment of the end to be accomplished, and the principles or means by which the goal is to be reached. The technical processes and the minute details of installation and operation of any system should follow the establishment of a definite purpose and should be based on sound principles. Much advice has been given in the form of "install your system to fit the business and do not fit the business to the system." and particularly is this true with the system of budgetary control. That is to say, budgeting is not to be looked upon as a rule of thumb procedure. The specialty store, the department store, the general store, the chain store, and the mail-order house, obviously differ in the number of departments or of stores, and in the method of sales. These, how ever, are not fundamental differences. The technical installation and operation of the system are influenced primarily by these variations. The subdivision of the retail field upon the basis of ownership clearly has no effect. The division of the various types of stores into sizes of units within their own type suggests more technical differences in management. In some of the very small concerns, for example, all or most of the management functions are performed by a single individual, whereas, in the larger organizations each may be performed by a different individual. In like manner, the method of inventory, completeness of the accounting system, and statistical organization or lack of organization modify considerably the means which can be used to accomplish the end. These illustrations seem sufficient to show that only the quantity and quality of detail and not the principles vary with the different classes of retail stores. The budget part of budgetary control may be defined as a plan for the future based upon past experience and the present economic situation, together with anticipated changes. A budget sheet is to the manager what the blue print is to the engineer. It is recognized that the analogy is not quite true, for the engineer rarely has to change his plans; on the other hand, when the whole budget plan or guide is put into effect, it is more likely that situations will arise which will necessitate changes. But in the main. the plan is fairly closely followed, just as the engineer follows his blueprint. The success of both is dependent upon the foresight and ability of those responsible for the plan and upon the possibility of obtaining exact data. Some have considered a method of shortened accounting as budgeting. In the preparation of this type of budget the data are taken from more direct sources, and the usual auditing and accounting procedure, which is necessary to insure absolute accuracy, is eliminated. This type of budget, however, is not considered in the meaning of budget as used in this study. But even this method of estab lishing a budget is a plan on which to base future action. By budgetary control is meant the intelligent use of the budget in the control of the various sources of profit. Budgetary control is fundamentally an economic analysis and not mere routine procedure PURPOSE OF BUDGETARY CONTROL The first purpose of budgetary control should be to establish a may of future business. When a ship leaves port, the captain presumably has a goal-the port to which he is bound; the chart of the course and instruments, such as compass and sextant, to keep him on thi course. The captain of a business must take the same precaution in guiding his business ship over the rough seas of competition and alternating periods of prosperity and depression. The established quotas and limits are the ports toward which th business pilot is heading: the budget is the map; and the compariso of actual with estimated figures corresponds to the ship's compas and sextant, for by this the direction of movement and the location of the business is determined. Here the analogy ceases, for if th ship is off its course, the rudder is merely moved so as to correct th direction. In the case of business both the direction and goal are changed-that is, the budget quotas and limits are readjusted to fit the new situations. Nevertheless, the fact remains that if the management knows what is to be done it can take the most direct means of doing it. It is difficult enough to hew to a line when the line is distinct. Waste and inefficiency, if checked every period, can be stopped immediately, and the substitution of records for memory makes for exactness. COORDINATION OF THE ACTIVITIES OF A BUSINESS The second purpose of bugetary control is to coordinate the activities of the business. In a very small business the individual functions of management may be in the hands of one man, but even here lack of coordination is likely to result, for the functions are less well defined and may be even more difficult to coordinate than in the case of much larger establishments which have an individual manager for each. Therefore, it is seen that his discussion of functional coordination is not merely for the large firm which has an established organization. It is true that when there are several persons individually responsible for a different function each is likely to overemphasize the importance of his own field of activity. Selling is the "little idol" in many retail organizations. Small consideration is given to the cost of these sales and the margin which they should yield. The bringing together of the costs and possibilities of the constituent elements of the selling process enables the community purchasing agent, the retailer, to arrive at the approximately correct relation between sales volume and expense. Not only are the functions of purchasing, personnel, finance, and operation coordinated with selling, but the subdivisions of sellingthe selling departments-are purposefully coordinated by the proper functioning of budgetary control. Those responsible for accounting and statistics, the functions of record keeping, must cooperate in the actual operation of the budget plan. There is a very real peril awaiting the chief executive who has his eyes always on the internal performance of the business. The slowchanging as well as the rapidly fluctuating economic forces must be carefully watched. The tie-in of external and internal statistics is assured with a properly constructed and operated system of budgetary control. A consideration of the panics and crises of 1819, 1837, 1857, 1873, 1893, 1907, and the crises of 1914 and 1920, with the violent fluctuation of department-store sales as far back as statistics are available, shows the paramount importance of this function of the budget. CENTRALIZING EXECUTIVE CONTROL The third major purpose which the system of budgetary control performs is that of centralizing executive control. A consideration of this purpose is necessitated by the increase in size of stores and the increasing dangers of delegating authority to subordinates. The delegating of responsibility for the proper control of expenses to subordinates has been known to lead to dire results. The tremendous losses (caused by overpurchasing) which were taken during the last period of depression can be attributed, in part, to the lack of intelligent control of buyers' activities. ན། |