The Readjustment of Operating Expenses

Abstract

LOOKING at the business cycle broadly, one of its prominent features is the revision and readjustment of operating expenses that it necessitates. In a period of prosperity, when selling prices are rising and the volume of sales increasing, wages, rents, and other items of expense almost inevitably tend to rise. In any one business some items of expense usually rise faster than selling prices, while other expenses lag behind. The normal relationship between industries and trades, which are buying each other's products or competing for raw materials, transportation space, labor, and credit, also is upset. The result is that eventually the balance between and prices is gravely disturbed. After the peak of prosperity is passed, sales slump, and a rapid drop in prices occurs in most industries. The falling off in revenue necessitates downward readjustment of operating expenses through curtailment of production, through the increased efficiency of employees, through the introduction of more economical methods of operation, or perhaps through actual reductions in wage rates, rents and other items of expense. Pending the outcome of such readjustments, the profits of the business are jeopardized; the degree of jeopardy is reflected, in the case of a large corporation, in the reluctance of investors to buy its securities. During the readjustments of the summer of I92I, for example, it is probable that the depression in security prices has been intensified, not only by foreign influences and by a lack of funds in the hands of investors, but also by the hesitation of investors to buy securities before there is evidence that operating expenses have been successfully brought into line with reduced income. During a period of recovery of business prosperity, such as we now seem to be facing, the normal balance between costs, prices, and profits tends to be gradually restored. The adjustments and readjustments of operating expenses suggested in this rough sketch are part and parcel of the business cycle. Data are not available to permit a close analysis of the processes by which the adjustments work out. Such data as have been collected, however, indicate that a thoroughgoingstudy of operating expenses with reference to the business cycle probably would reveal where maladjustments tend to occur and indicate the points that are most symptomatic of future conditions. The scattered data of this sort that are now available include those given in the Federal Trade Commission Report on the Leather and Shoe Indusstries, August 21, 1919, the report on the retail clothing trade 1 by the Bureau of Business Research, Northwestern University, and the bulletins on operating expenses in the retail shoe, grocery, hardware, and jewelry trades and in the wholesale grocery business by the Bureau of Business Research, Harvard University. In the report of the Federal Trade Commission, cost figures per pair are given for the 5 years i9i4-i8 for 76 grades and styles of shoes, including 25 of men's shoes, 40 of women's shoes, 4 of misses' shoes, and 7 of children's shoes. The cost figures, obtained from I3 factories, are classified into leather, materials other than leather, labor, and overhead. A brief examination of the figures for overhead indicates wide variations that probably were due to differences in accounting methods; consequently, overhead and total are not included in the following summary prepared from the report. For the purposes of this summary, the actual figures for each of the three items of cost and the selling price per pair have been converted into figures. The I9I4 figure in each case was used as the base; percentages were computed; and simple arithmetic averages of the percentages were taken as the relative costs for 76 styles in each year.