Business Planning and Statistical Analysis

Author(s): Charles F. Roos

Source: Econometrica, Vol. 17, Supplement: Report of the Washington Meeting (Jul., 1949),
pp. 69-72
Published by: The Econometric Society
Stable URL: http://www.jstor.org/stable/1907293
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 BUSINESS PLANNING AND STATISTICAL
ANALYSIS'

by Charles F. Roos
P-resident, The Econometric Institute, Inc. (United States)

Many companies in the United States today use statistical analyses

and forecasts derived' from them to plan (1) sales and advertising,
(2) inventory and price policy, (3) wage and larbor policy, (4) salesmen's
compensation and bonuses, (5) capital investment, and (6)'financing
operations. The degree of use, of course, varies company by 'company.
In some instances the use of statistical analysis is limited to visual
comparison of time series. In other cases analyses are very compre-
hensive and employ the latest methods of statistics. The purpose of the
present paper is to sketch some of the more usual approaches.
Factors affecting sales. Sales are of primary importancee to every
management. The average merchant accepts without argument the
fact that his sales are affected by changes in consumers' purchasing
power. The demand for steel, on the other hand, is less closely related,
but still depends fundamentally on present and past income. Other
factors also importantly affect retail sales-for example, a change in
the birth rate, increase in income. received by women and other new
workers and by certain racial groups, wartime decrease in the produc-
tion of durable consumer goods, and increase in proportion of older
people in the population. Even though management takes into account
all regular factors, chance or unpredictable elements may partially
affect the forecasts. Some of these, however, can be taken into account.
For in5tance, failure to recognize the temporary nature of buying due
to the Soldiers' Bonus in 1936 led to overexpansion in 1937 and the
subsequent slump. In 1946, however, many merchants through the
help of statistics avoided making undue commitments.
Increasing numbers of companies are comparing their sales perform-
ance with disposable income (income payments -less personal taxes)
or purchasing power, and determining functional relationships. These
relationships serve as a basis for measuring performance and for fore-
casting, on the basis of r6liable forecasts of income. Comparisons with
industry sales and regional sales are also helpful.
* Concept of normal or standard inventory. Return on investment,
which is the ultimate measure of the success of a business enterprise, is

1 This paper appears -in detail in Charting Yotur Bu8iness, New York, Fiunk &
Wagnalls, 1948.

69

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70 INTERNATIONAL STATTSTICAL CONFERENCES: -ECONOMETRIC

probably influenced more by price and inventory policies than by any

other phase of a business. A standard inventory may be defined as the
amount that should be invested in inventory in order to provide ade-
quately for production or sales based on forecasted volume of business
for a given number of months in the future and at the same time lead
to a maximum return on investment if prices are unchanged. Whether
to hold more or less than the standard inventory, and so be subject to
the possibility of gain, or loss due to price changes, should be determined
by the outlook,for the industry and business in general. This will in-
volve studies of the market for the product and of prices, as influenced
byv a variety of factors.
Average hourly earnings and average weekly pay. Comparison of the
company's figures with industry and regional figures as reported by
the Bureau of Labor Statistics has been extremely helpful to manage-
ment, and has led in- some cases to installation of labor-saving ma-
chinery to counteract absolute or relative increases in labor costs.
Hours of work. The standard work week of 72 hours in 1860 has gra-
dually shrunk to 40 hours or less. The economic consequences of this
have been important; mass leisure has made possible mass markets for
products that once would have been luxuries for the few. The trends of
leisure both within an individual industry and in the country as a
whole are of importance to management.
Co8t of financing. A growing business is frequently in need of new
capital, and.must determine whether to obtain it by borrowing or by
stock issues. For intelligent decision on this point, various monetary
statistics must be studied.2
Profits and dividends. Profits are the net result of management
ability to make sales at prices that cover all costs of production at less
than capacity operating levels. In a well-managed company the ratio
of. cost of production or expenses to sales tends to decrease as sales
volume increases. Investigations of substantial deviations of expenses
from the line of average relationship to sales have-usually been fruitful.
Summary. Business profits thus depend upon management's ability
to do many things well: to budget operations correctly with respect to
future trend of business; to maintain satisfactory inventory position;
to schedule new plant construction wisely; to anticipate labor condi-
tions and meet them with suitable policies; and to learn the implication
of social trends and develop the policies necessary to meet them. Lead-
ing corporations in the United States are today carefully following all
these trends.
2 See C. F. Roos and Victor S. Von Szeliski, "The Determination of Interest
Rates," Journal of Political Economy, 1942. See also the business service, Economic
Measures, published by the Index Number Intitute, Inc., New Yorlr.

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 CHARLLES F. ROOS 71

Resume

Les entreprises aux Etats-Unis ont recours & la technique moderne

de la statistique pour la direction de leurs affaires. C'est suivant cette
m'thode que les entrepreneurs etablissent - aujourd'hui les directives
relatives aux stocks et aux prix, au controle de la qualite des produits,
aux ventes et a la publicite, a la remuneration et aux primes des ven-
deurs, aux salaires et aux heures de travail, aux investissements de capi-
taux et aux operations de financement. Certains commerces de de-
tail ont recours a la technique moderne du calcul de correlation pour
determiner les effets probables sur les ventes, du pouvoir d'achat local,
des. variations du taux de natalite, du nombre des grossesses, des reve-
nus des femmes, du rapport du nombre des ouvriers de moins de vingt
ans et des ouvriers 'ages A l'ensemble de la population, etc.
Alors que les revenus personnels de la client6le sont probablement
l'index statistique le plus profondement etudie par les entreprises, plu-
sieurs autres index servent egalement AL determiner les previsions de
vents. Par exemple, dans l'industrie automobile, le nombre de voitures
en circulation, leur age et leur etat; dans l'industrie de l'acier, l'etat des
voies ferrees, du materiel roulant et des machines, etc.
On peut, & bon droit, esperer reduire l'amplitude des fluctuations
dans les affaires en recourant plus largement a la technique statistique
moderne. Dans le passe, a diverses reprises, le commergant moyen a
vraiment mal prejuge de son potentiel de vente.
En 1936, par exemple, le paiement de primes aux soldats pendant
urne courte periode a cause un accroissement des revenus personnels et,
pendant quelques mois, une tr6s forte augmentation des ventes au de-
tail. Mais le commergant moyen n'a pas reconnu le caractere temporair
de ce facteur et a passe des commandes en quantitb excessive pour l'au-
tomne et pour l'hiver. De leur cote, les fabricants ont 6et6 trompes par
l'afflux soudain des commandes passees par les commergants et se sont
lances dans des programmes d'extension exageree. Commer9ants et
fabricants se sont alors inquietes de leurs stocks excessifs et ont modi-
fie leurs programmes a l'extreme en sens contraire.
Par contre, en juin 1946, des commer9ants de premier plan, recon-
naissant, grace aux statistiques, que leurs engagements etaient excessifs
par rapport aux perspectives de vente et "a l'augmentation de leurs stocks,
ont reduit leurs ordres de fagon draconienne et ont evit6 des surplus e
quantit6 excessive apres la guerre; ceci a permis de maintenir la produc-
tion dans le voisinage de la capacite des ateliers d'occuper totalement
la main-d'oeuvre disponible, et de liberer des marchandises pour 1'expor-
tation a un moment oi le besoin s'en faisait sentir d'ecxtreme urgence.

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72 INTERNATIONAL STATISTICAL CONFERENCES: ECONOMETRIC

Les engagements des commrergants de detail par rapport aux ventes

etant actuiellement inf6rieurs & la normale, on peut compter sur une
augmentation de leurs nouvelles commandes, situation qui limitera les
disponibilites de marchbanndises pour 1'exportation, 1'automne et 1'hiver
prochains.

Mr. Roos's' paper was discussed by Messrs. Michel J. J. Verhulst,

Kalle T. Jutila, Jacques Dumontier, and the speaker.

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