Accounting theory and practice, Volume 2 (of 3) : a textbook for colleges and…

BRANCH HOUSE ACCOUNTING Advantages of Branch and Agency System The branch and agency forms of increasing sales in large enterprises are an outgrowth of the policy of “service” combined with economy of management which dominates all present-day capitalistic enterprises. The tendency of a successful business is to absorb other businesses in the same line through combinations and amalgamations, and thus the policies of apparently independent units in a single district or throughout the entire country may be controlled by the central management at a head office. Where a business serves consumers direct by means of retail stores, as for instance, the chain tea stores, the chain cigar stores, the 5c and 10c stores, the system offers one of the best means of bringing the business into close personal touch with customers. It gives customers an opportunity to examine the wares at their convenience, and at the same time it gives the local branch manager an opportunity to build up good-will for the distant proprietor. By these means also, stocks of merchandise can be better selected for local needs, and the buying power of each territory and the quantities carried on hand can be better adjusted to secure the greatest possible turnover of stock during an operating year. There is no doubt that a campaign of education to introduce new goods or appliances can be more successfully conducted through local branches or by personal visits of local agents residing in the territory. Illustrations of this are the present methods of selling sewing machines, phonographs, pianos, electric and gas appliances, etc. When branches are given authority to sell on credit and collect their own accounts, credits can be more intelligently extended and collections can be more carefully watched by a local branch manager. Agency and Branch Differentiated There is a great deal of difference between the organization and management of agencies and of branch houses. An agency simply acts as a local salesman for a certain territory. It secures orders and forwards them to the head office. The head office passes on the credit of the purchaser and assumes the risk of refusing or accepting the order. If it accepts the order it also collects the account when it is due. Naturally it must keep a memorandum of sales, either to pay a commission to the agent, or to ascertain whether or not the agency is a paying venture, or for both reasons. A branch, on the other hand, has a much higher degree of self-management. It may receive at least the greater part of its stock of merchandise from the head office, but it usually makes its own sales. It may pass on its own credits and may collect its own accounts receivable; and sometimes it pays all its own expenses. There are many modifications of the self-management of branches, especially in the matter of financial control. Some branches deposit all their receipts to the credit of the head office and have no authority to withdraw money for any purpose. In such cases the branch is supplied with a separate petty cash fund kept at a fixed sum on the imprest cash system. Other branches receive and pay money and simply make periodic remittances of surplus amounts to the head office as if they were entirely independent units. Various policies of control have been formulated to suit the nature of the business and the degree of self-management granted to the local branches. Degree of Control Desired The question of the particular kind of branch or the size of the agency or branch which it is desired to establish depends entirely on the peculiar needs of the business under consideration, and the degree of head office control which is necessary to secure the maximum results with the minimum of expense. An agency by its very nature is completely under the control of the central office. The agent has no powers other than those granted by his principal. If the business is such that a large stock of merchandise is necessary, and a high degree of discretion and executive ability must be exercised, or if it is desirable to establish practically independent units with only central executive control over the entire purchasing and financial systems, branch stores may best serve the purpose. The same system, however, will not meet the needs of every business, or even of every branch in the same business. Changes must be made for diversified local conditions which are peculiar to each establishment. Factors of Successful Management Certain points must be watched in all systems and under all conditions. Since the total net profits or losses are determined largely by the average turnover of circulating capital invested in the merchandise, the control of the quantity of merchandise, as well as the price, is a question which must have very careful attention and intelligent supervision. The stock on hand must be that quantity which will insure a supply adequate at all times to meet the demands of the trade, and which at the same time will be the minimum necessary to accomplish such a result. Each article turns in accordance with certain fixed principles. Certain goods turn faster than others, but there is a general relation between the rate of turnover and the profit per turn which should be carefully watched. In the last analysis the success of every branch store system depends upon three things: