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The Pamphlet Collection of Sir Robert Stout: Volume 30

Figures to Prove Facts

Figures to Prove Facts.

Let us see what are the advantages of paying cash for everything one consumes, or buys for sale again.

Interest is saved. This is an item that seldom figures in the calculations of the average man in a small business. Strange as it may seem to say so, yet it is true that fully one half of the small traders do not take into consideration the annual value of the money that is locked up in their concerns. They pay interest for every bit of the accommodation which they receive either from the merchant, or from the bank, yet they are willing to give unlimited credit to their own customers and charge nothing for that accommodation whatever. Perhaps the following may be taken as a fair sample of a country storekeeper's transactions, on the scale of £100:—He will buy £100 worth of goods from a merchant. Three months credit are allowed and he gives a bill payable at the end of that time for £100, together with the bank rate of discount, say 9 per cent. In marking the goods for sale, he uses the invoice which came with them, and adds his profits to the prices stated in it. For the sake of convenience, we will suppose that the average profit on all the goods amounts to 20 per cent. Then our typical friend will argue thus:—I paid £100 for the goods, and since I sell them at an advance af 20 per cent, my profit is £20, which is very fair. And as I turn over £2000 worth of stock every year, therefore my income is £400. But let me state this gentleman's affairs for him, and then we will see if there is anything in the short-credit system which I want to see introduced in the colony of New Zealand:—

page 4

Statement of account 'with reference to business of A.B., a country storekeeper, per £100 of turn-over.

Dr. £ s. d.
To cost of goods from merchant 100 0 0
Interest on Bill at 3mos. at 9 p.c. 2 5 0
Interest on purchase money lying locked up in business, supposing that an average credit of 12 mos. be given to customers viz. 9 p.c. on £100 for 9-mos 7 15 0
Allowance for bad debts &c., 10 p.c. on £120 12 0 0
Total 122 0 0
Cr. £ s. d.
By Profit on Sales 20 0 0
Capital Recouped 100 0 0
Actual Loss 2 0 0
Total 122 0 0
Balance of Loss 2 0 0
So that, instead of our friend making an actual profit of £20 on his outlay of £100, under the circumstances above slated he really loses £2, and this without making the slightest allowance for such charges as rent for buildings, salaries, his own time, and such smaller items as freight, an occasional bankruptcy, deterioration of stock through becoming out of fashion or going bad &c &c. It may be said that 12 months is a long time to allow for accounts to be paid in, but I doubt whether it is longer than many, or perhaps 'most business men have to give. Neither do I think that 10 per cent is too much to allow for money not collectable. No doubt in some businesses the profits will exceed 20 per cent, but the figures given above will none the less show the difference which interest on capital really makes to the concern. Now, if the Statute of Limitations were reduced to 6 months, business men would see that their money was coming in pretty well at the end of the first quarter, and no debt would, excepting in exceptional cases, be allowed to run for longer than six months at the most. The majority of purchases too, would be paid for in cash, and thus the allowance for bad debts would be largely reduced, in fact it would hardly be necessary to make any allowance at all. Let us examine A. B's business under a cash system, and see what his profits are under those more favorable conditions:—
Dr. £ s. d.
To Cost of goods from merchant 100 0 0
To Interest on capital lying idle for 4 months, 9 p.c. on £100 3 0 0
To Balance profit 17 0 0
Total 120 0 0
Cr. £. s. d.
By capital recouped 100 0 0
By Profit on sales 20 0 0
Total 120 0 0

These figures may be taken as sufficiently accurate to show the difference that the item of "interest" makes in the business of the world. And it must be added that this item can never be eliminated, for whether the trader works on his own or on borrowed money, that money is still worthy of its hire, just as much as the laborer who does his eight hours work every day.