Good-Will. Good-will is an intangible asset depending for its value upon the ability of a business to make more than normal profits. It is not usual for a business to show an asset of good-will unless it has purchased another business and has paid for the latter’s good-will. In other words, good-will is not brought on to the books until a purchase determines its market value. Where good-will is purchased, it is customary to carry it at its cost value. Depreciation is not taken into account. Because of the intangible nature of good-will and its more or less speculative value, some businesses prefer not to show it. In such cases it may be written off against surplus at any time and in any amount until it has all disappeared from the books. While, therefore, good-will is not subject to depreciation, it is subject to this writing off process, which usually bears little or no relationship to time. It should not be charged against the profit of any period or several periods, but when written off should be charged direct against surplus.

Liabilities.—The problem of valuation of liabilities is simple. From the standpoint of a going concern, its liabilities decrease only when they are paid off, and increase only because of services or assets purchased and not paid for. The main problem in connection with balance sheet liabilities is the determination of the fact that all liabilities are shown on the balance sheet. This oftentimes involves the consideration of contingent liabilities. The amount of a liability may sometimes be in dispute, in which case a careful and conservative estimate of the probable amount must be made and shown.

Proprietorship.—Since proprietorship is always the difference between assets and liabilities, the problems of valuation of proprietorship are solved almost automatically if the valuation of assets and liabilities have been handled properly. There may sometimes be problems in connection with the various items in the proprietorship group. These concern surplus, undivided profits, and various reserves. The problems here are largely those of determining whether a company has lived up to its contract or other agreements in the maintenance of the proper values in the various proprietorship accounts.

Conclusion.—The problems of valuation are vital to any business and intimately concern its financial integrity. In order to maintain at least the original capital investment in a business, it is necessary to make provision for the decrease in asset values due to different causes. The financial management of the business must watch this feature closely, else capital will be dissipated and the business rendered incapable of performing the functions for which it was organized.

CHAPTER XLVI
BUYING AND STOCK CONTROL

Importance of Buying.—Buying as a major function in a mercantile concern is intimately related to, and dependent on, the other functions of the business. Buying must always have regard to the sales activities. To buy without reference to the ability to sell is suicidal. Both overbuying—buying more than can be disposed of at a profit—and underbuying—buying less than is needed to meet the sales demand—are conditions to be avoided. Underbuying means a loss of sales. Unless their needs are met promptly in accordance with their orders, customers will go elsewhere. Overbuying means the unnecessary tying up of capital in a stock of goods which increases the possibilities of loss resulting from changes in fashions and the level of prices. The relation of the rate of turnover to profits in merchandising was discussed in [Chapter VII]. Manifestly the ideal situation, so far as the amount of stock carried is concerned, is one in which the least amount of capital is used to provide an adequate stock for meeting the requirements of customers and in which the loss from unsalable stock is reduced to the lowest level.

Many business houses fail to realize the wastes resulting from slow turnovers. The Chamber of Commerce of the United States has called attention to these losses and has analyzed them under the following heads:

1. The unnecessary use of capital in merchandise that could be more profitably employed in other productive sources.

2. The increased cost of borrowed capital, the carrying of larger stocks and their slow turnover, necessitating the borrowing of larger amounts of capital for longer periods.