Accounting theory and practice, Volume 2 (of 3)

by Roy B. Kester

Statistics in Business

Value of Business Statistics

Because of the complexity of modern business it is practically impossible for the management or an executive of a large organization to rely on personal observations and impressions when formulating plans and policies. To do so would lead to frequent errors and costly mistakes of judgment. The human mind cannot adequately grasp the significance of a multitude of facts in the variety of their occurrence. In consequence many problems of management are today being solved by the intelligent use of statistical records or tabulations of past and present operations. By this means the pertinent facts regarding a business are classified and summarized, and the analysis of complicated figures and large aggregates is made possible. The relation of the groups to each other and of each group to the past, the relation of the unit to the whole, and so on, is best shown by the tabulation of facts in the form of figures. By reducing the facts to figures comparisons can easily be made and the proportion of one thing to another is more accurately presented. By divesting facts from their aspect in daily life and the caprices of temperament, a truer estimate of tendencies can be made. Because statistics generally deal with large masses or great numbers, standards, ratios, and types can easily be established. The mortality statistics of insurance companies afford a good example of general averages or ratios that hold true when applied to such an uncertain proposition as the length of human life. Business statistics, however, cannot attain this accuracy because facts of a similar kind are not of such frequent occurrence and consequently the average is not so reliable. But the manager who is acquainted with the limitations of the statistical method and who intelligently understands the business forces with which he is dealing, finds it sufficiently accurate in the great majority of instances. The frequent and almost universal use of the sampling method of testing mailing lists, the use of figures as to the density of population in selling campaigns, and the increasing use of time studies in factories, show that statistics can be made to serve as a valuable guide in arriving at important decisions.

Railroad Statistics

Railroad companies have for a long time used statistics to aid them in interpreting the mass of detail involved in operating over a large area. The figures are generally grouped into two classes: (1) those showing results of operations, such as annual reports; and (2) tabulations of operating details. The latter are devised mainly for the purpose of checking and control. Another classification, more minute, is the grouping of railroad statistics according to their nature into:

1. Statistics pertaining to maintenance of roadbed, track, buildings, signals, etc.

2. Cost of maintaining locomotives, cars, and rolling stock in general in good condition.

3. Expenses connected with the movement of trains.

4. Expenses in connection with the securing of new business.

5. Administrative expenses.

By comparing the figures for each group the existing relationship leads to valuable conclusions.

The compilation of figures showing receipts per passenger, average journey per passenger, average haul of merchandise, receipts per ton of freight, relation of cars run to business done, proportion of loaded and empty car space, cross hauling of empty cars, percentage of empty to loaded cars, compilations showing cost per passenger mile or ton mile—these are all valuable and pertinent facts about railroad operation. The most significant way of stating some facts is by means of figures. This is especially true of such important and related phases of operation as, for example, the ratio of the pay-roll to operating revenue, a comparison of the pay-roll of engine men and trainmen with the engine and train mile, or a comparison of the business done with the pay-roll at each station.

Manufacturing Statistics

Statistics are being increasingly utilized for recording facts in connection with production, especially in factories where a system of cost-keeping is in vogue. Various forms and cards are frequently used to collect the required data which is then grouped or classified in various ways. The performance of each workman is recorded and the various records are combined into groups and compared. Statistics as to output, orders on hand and in process, figures showing idle time, capacity of machines and actual use, are examples.

Mercantile Statistics

The use of statistics in mercantile establishments is perhaps even more prevalent than in factories. This is chiefly because factories handle comparatively few lines, whereas mercantile houses generally carry or deal in a large number. The figures compiled are generally concerned with one or more of the following:

1. Sales. The comparison here is by totals, departments, cash and charge sales, salesmen, territories, lines, percentages to total, new business, etc.

2. Profits. The same classification is applied as for sales. Generally discounts and profits are compared.

3. Inventory of stock. Comparison made by cost or selling price, purchases, quantities sold, used, balance, percentages of sales, departments, lines, etc.

4. Cost of conducting the business. Comparison made by classes of expense, departments, percentage of sales, etc.

5. Collection. Comparison made by percentage of sales, territory, etc.

6. Notes, etc., due. Comparisons made with sales, territories, lines.

7. Goods returned. Comparisons made with lines, territories, percentage of sales.

8. Efficiency of employees. Tabulations made showing profits, percentage on standard of work performed, comparisons between departments.

9. Advertising. Compilations by departments, mediums, results, etc.

10. Turnover. Compilations showing total business and rate of turnover, compared by departments, lines, number of sales, etc.

11. Cash. Statistics giving receipts and disbursements in convenient groups.

12. Mark-ups and mark-downs. Statistics by departments, percentages, etc.

13. Summaries of operation. These are generally compiled periodically but are carried on continuously as long as is desirable.

14. Production. Statistics showing amount, completed work, work in process, orders on hand, time lost, total costs, unit cost, labor cost, material cost, overhead. All are classified into groups or further subdivided for comparison.

Each individual manager selects the particular set of facts which he thinks will best show the trend of the business. The complexity of the business usually determines the number of reports.

Use of Graphs in the Presentation of Statistics

Chart Showing Comparison of Sales
with Cost of Advertising

Long experience or special aptitude may qualify a man to grasp readily the full significance of statistical compilations in a variety of forms without the use of charts or graphs. The quicker and surer method, however, in driving home the essential points of statistics is their graphic presentation. For the majority of business men the graphic method will accomplish what statistical tabulation fails to do. While facts are of prime importance, their method of presentation affects their usefulness and is therefore of greater importance. The great mass of figures that accountants and efficiency men only too often present in incomparable form, sometimes far in excess of requirements, is best classified by means of charts.

Advantages of the Use of Graphs

Chart Showing Comparison of Sales
with Gross Profits

The arguments in favor of the use of charts are that the importance of written words or figures is apt to be judged from the amount of space used, or the time spent in writing or compiling them; whereas the graphic method shows the vital facts in a way which compels attention. The statistics are easily compared and when figures are visualized in graphic form relations are seen at once. One week is readily compared with another, one year with the previous year, one man’s performance with another’s, and so on.

Graphic methods are not only in many cases better but also cheaper. This is especially true if a number of copies have to be made. It requires more work to copy a mass of figures than to draw a few lines or figures by means of blue-print tracings. If many copies are needed, the photographic method of reproduction may be used. Then again, in statistical tabulations it is necessary to rearrange the figures in various orders so as to make different tabulations comparable.

Chart Showing Comparison of Sales, Purchases,
and Sales Salaries

Chart Showing Comparison of Sales
with Cost of Sales

Principles of Graph Construction

The following principles should be observed in making graphs:

1. Graphs should be simple so that the full significance is readily seen. If a chart requires a great deal of study its very purpose is defeated. As a general rule, only two lines should be used. This is especially true if the lines are apt to intersect one or more times. If there are a number of interrelated figures to be presented, it is better to make separate charts on one sheet or to place them together in some other way.

2. Most statistics can be presented by one or more curves where the quantity is expressed by the distance of the curve from the base line, and the time is represented by the horizontal movement of the curve.

3. For a curve the vertical scale should be so selected that the zero line will appear on the diagram. This may require a break in the graph, as shown on page 585.

4. When the scale represents percentages the 100% line should be emphasized in some distinctive way.

5. The curves should be sharply distinguished from the ruling of the paper.

6. The lettering and the figures should be so placed as to be read as easily from the base as the bottom, or from the right-hand edge of the diagram as the bottom.

7. The titles should be clear and complete and, if necessary, subtitles and descriptions should be used.

The illustrations on pages 585-588 show how data lend themselves to graphic presentation.