This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
A man who keeps all his property in the form of cash and government bonds has comparatively little to worry or think about; but, on the other hand, he is not using his resources productively. As the same man proceeds with the development of some business enterprise, he puts more and more of his capital into the various forms of tangible and intangible assets which are required for the upbuilding of the business. Presently, if he is not careful, he may find himself short of cash and unable to meet his obligations, although he may be earning good profits.
The same tendency is present everywhere. The executives who are managing the financial affairs of a company cannot assist in making the business profitable merely by piling up unnecessary cash resources. They must be prepared to venture out into the main current of business affairs along with their associates. And as they venture farther and farther, the danger increases that their financial craft may be swept out of their control. It requires constant watchfulness and sound knowledge to steer a middle course between excessive caution on the one side, and rashness in financial management on the other.
It would be far easier to keep to this middle course if the safe channels were more clearly marked out. A manufacturer, for example, takes on an enlarged volume of business with the result that his working capital is much reduced; he finds it difficult to determine with any accuracy whether this reduction is approaching the danger point or not; he has no definite rule or standard by which to guide his course.
Many such standards of operating and financial practice are established for particular industries by general consent. These standards are in many cases probably incorrect, but they serve to assist those who are forming and testing policies. For example, the percentage of cost of carrying on various lines of retail business, in comparison with the gross sales of the business, has been studied. It is generally said that the cost of conducting a retail book store is about 28% of the gross sales. Again, in many lines of manufacturing the percentages of prime cost, of overhead, and of selling cost, to the prices of the articles manufactured, are quite definitely agreed upon.
As yet no general standards of financial practice have been worked out in any detail or with any approach to accuracy. At this stage, it is not possible for any individual to collect and collate all the data that would be necessary to make a complete line of standards of financial practice. This work should be done by such associations as the American Institute of Accountants, the American Bankers' Association, the Investment Bankers' Association, and the United States Chamber of Commerce. If such a work were done the result would be of the highest value to business managers.