VI Profit and Loss

VI PROFIT AND LOSS THE first and by far the most important function of profit is.to balance loss. Every bu'siness, however sUc cessful, keeps what is known as a "profit-and-loss accoun t," and the profit which emerges at the end r of a year's trading is never anything but the balance between profits that have been made on some sections of the business and losses that have been incurred on others. In calculations with regard to profits, there fore, it is necessary to bear in mind that there are losses to be set against them. The income tax figures, the dividend figures, the reserves, the bonuses, and all the other items that are used by those who argue about profits, are all wrong if they fail to take into considera tion this matter of loss. The tax-collector, for inst~nce, makes no assessment upon the man who loses money, and to add together all the income tax assesSIl).entsand talk of them' as profits in the bulk is to looku pon one side only of the account, from which no accurate con clusions can be drawn.

" ... the number of those who succeed in business," says Professor Marshall, " is but a small percentage of the whole; and in their hands are concentrated the fortunes of others several times as numerous as them selves who have made savings of their own, or who have inherited the savings of others and lost them all, together with the fruits of their own efforts, in unsuc cessful busjness. In order, therefore, to find the average PROFIT AND LOSS 95 profits of a trade, we must not divide the aggregate profits made in it by the number of those who are reaping them, nor even by that number added· to the number who have failed; but from the aggregate pro fits of the successful we must subtract the aggregate losses of those who have failed and, perhaps, dis appeared from the trade; and we must then divide the remainder by the sum of the numbers of those who .have succeeded and those who have failed. It is prob able that the true gross earnings of management, that is, the. excess of profits over interest, is not on· the average. more than a half, and in some risky trades not more than a tenth part, of what it appears to be to persons who form their estimate of the profitableness of a trade by observation only of those who have secured its prizes." (Principlesof Economics.) It is not even possible to divide business men into those who make profits and those who make losses.

All of them make both. The most successful man may make the heaviest losses and, because of his suc cess, be able to bear them. The most unsuccessful may make big profits on occasions and, because of the number and size of his losses, they will be of little use to· him. In my own case, I have at one time or another owned or controlled twenty-five newspapers. Of these, sixteen have lost money, and there remain nine successes. I am probably more fortunate than most, and my pro portion of nine profits to sixteen losses would, in all probability, be foun"d to be above the average. The one big argument for the leaving of profits in the hands of private individuals is that losses must also be left in private hands. The problem, considered as a whole, is how to secure that there shall be more· profits than losses. Notwithstanding the immense power of the whole mass of private interests, struggling 96 THE CONFESSIONS OF A CAPITALIST with all the force that they possess to avoid loss, loss is always running a neck and neck race with profit, which has never yet been known to win by more than a short head.

Those who desire to supersede private enterprise would do well to leave for a mOITlent the fascinating discussion as to what they would do with these profits and gains when they had brought them under public ownership, and devote their thoughts to a much more difficult problem, the discovery of some device whereby losses· could either be avoided, or shared out, in place of the stupendous individual' effort which is now directed to that all-important end. The next introductory point that should be men tioned in the discussion of profits is the extraordinary fuss that is made about them. Generally speaking, the average standard of most things is low, and the public mind is no exception to this rule; jumping to careless conclusions on insufficient data, it magnifies and exaggerates profit out of all proportion to other and more important considerations' in the economic structure. Suppose, for instance, that by a stroke of genius and daring I were to succeed in producing bread at a penny a quartern loaf. To begin with I should' put everybody else in the bread business into bankruptcy. That operation would receive no public notice. The public does not get excited about bank ruptcies. Next, I should double the supply of bread and abolish hunger. That also would excite no com ment. Within a year the whole human race would have completely forgotten that such a thing as hunger ever existed.' Not a word of thanks, not a word 'of appreciation, would come my way. Bread in' plenty and to spare would in a twinkling be the right of every citizen. All these benefits would be overlooked, and everyone would seize upon my profit. Articles would PROFIT AND LOSS 97 be written, meetings would be held, policies would be framed, upon the horrible fact that I was a wealthy man. If, in the ordinary course of making and market ing bread, it became necessary, owing to a rise in rail way rates, to raise the price by a farthing, the world would howl at the " greed of the Bread Trust," and never a whisper would be heard of the 6d. which was the price before I started my operations. That is, in fact, exactly what happened with Rockefeller. His millions are as a drop in the ocean compared with the wealth that he has showered upon every cottage in the world in the shape of cheap light and heat.

The diseased condition of the public mind on this question is in no way better illustrated than by our views on Russia in 1925. Half the world is willing to witness, if not with approval, with silence which gives consent, the reduction of the Russian crops by half, the death by starvation of large numbers of the Russian people, and all the dangerous antics of the Russian bureaucracy, because, whatever else the Bol sheviks may have done, they have. made a bold attack upon this evil thing known as profit. Profit, if separated into its constituent elements, con sists of three parts: (I) the earnings of management; (2) the interest of capital; and (3) an insurance pre mium for the risk undertaken. I have never yet heard a word of criticism or objection levelled at anyone of these three essentials to our economic existence when considered separately. Everyone agrees that manage ment must be paid; nobody doubts that capital must earn interest; and it is not questioned that some margin must be allowed to cover the cost of risk. But as soon as .these three elements are put together and called profits, we are told that we must produce "for use and' not for profit"; that we shall never reach the ideal until we abolish the profit-making habit. These G 98 THE CONFESSIONS OF A CAPITALIsT critics should surely be rather more specific and tell us to which of the three parts of profit they most object, and which they would first abolish.

Profits are, in the main, as small as it is possible to make them. The largest profits, those which are re ported in the newspapers,are, as a rule, infinitesimal when considered in the only way in which a profit should be considered-as a percentage on price. The most superficial examination will show that this must be so. The first object of the serious business man is to make and keep a customer, to build up ,a trade, and it is an object which he can only achieve if he will give to the customer the maximum of satisfaction. If a shopkeeper can ensure a regular order by accepting a price which represents a very narrow margin of recurring profit, he is infinitely better off than if he has to be searching always for a new customer out of whom he can squeeze an unreasonable profit, well knowing that in doing so he is closing another account. The old adage, " small profits and quick returns," is as true to-day as ever it was and remains a guiding principle for every earnest trader. Profits, therefore, from their nature, will always be, in a free market, calculated on the lowest scale consistent with safety.

The publishing business is more speculative than most forms of manufacturing. There are, no doubt, others equally risky, but, as a publisher, I may be per mitted to entertain the notion that I run rather more risk than is usual. The manufacturer of'furniture who makes a number of chairs and fails to sell them at once may be in difficulties, but he has at least the chairs with which to console himself. The manufacturer of overcoats who finds, when his goods are ready for the market, that they will not sell, because the fashions have changed, can at worst cut them up and turn diem into caps or some other garment that wilL But the PROFIT AND toss 99 manufacturer of a newspaper must sell his whole out put the moment it is produced. If it is not so sold the loss is absolute and complete. It is quite imposs ible to turn a copy of The Daily Telegraph into an Ethel M. Dell novel, or to sell any quantity of last Saturday's issue in the following week. The outstand ing characteristic of the publishing business is, there fore, that the publisher must pay the whole expense of producing his maximum output whether he sells it or not, and that, in so far as he does not sell it, he is faced with complete and irretrievable loss. Another point about publishing, which is to some extent connected with the above, is that costs of production bear very little relation to selling prices. This will be made more clear by some of the figures which follow, but it is obvious that in arranging for the payment of £r,ooo to some correspondent to explore the position in China or to make a flight across the desert, tlle newspaper proprietor cannot add that figure to the price of his paper and announce that on Monday, Wednesday, and Friday next The Daily Telegraph, on account of special features, will be charged at 6d. The newspaper pro prietor, who is, of course;just as much a manufacturer as is a maker of bOQt1aces,has to consider the expenses of his enterprise as a whole and his revenues as a whole, and endeavour to make them balance.

I ought, perhaps, to apologise to the general reader for inflicting upon him a: series of figures which would appear to possess a minimum of ordinary interest, but the task which I have set myself in writing this book makes it essential. I thereforep ubIish on pages roo and 101 three specimens of actual newspaper accounts. I do not ask the reader to waste much time over them. Figures can never mean very much except to those who have an intimate knowledge of all the circum stances out of which they come. But politicians and Six Weeks' Trading Accounts of a Prosperous Trade Paper Weeks Ending Oct. 4th, Oct. 11th, Oct. 18th, Oct. 25th, Nov. 1St, Nov. 8th, 1924. 1924. 1924. 1924. 1924. 1924. ------------- ----~- ------ ------ ------------ -----REVENUE: £ s. d. £ s. d. £ s. d. £ s. d. £ s. d. £ s. d. Advertisements .... 892 o 10 ' 673 14 6 812 3 7 827 2 4 810 15 4 626 o 10 Sales and Subscriptions "' ••O' 47 0 3 64 17 10 53 12. 8 46 0 0 38 I 6 35 15 I ------ ------ ------ ------------ -----£939 I I £738 12 4 £865 16 3 £873 2 4 £848 16 IQ £661 15 II EXPENDITURE: .... £ s. d. £ s. d. £ s. d. £ s. d. £ s. d. £ s. d.

Printing and Paper .... .... 529 4 7 414 0 4 436 4 0 475 15 7 442 I 5 400 16 9Blocks .... .... .... 10 9 7 16 12 II 13 12. 8 II 5 5 10 12 II 10 3 5Contributions .... ..... 14 17 3 .23 19 4 1.2 8 10 17 19 7 17 3 6 12 2 3Commissions .... ..... 9 9 9 II 4 6 II 1.2 5 14 9 0 13 3 0 9 15 5Salaries .... .... 68 10 6 69 17 3 68 12 3 70 12 9 68 10 6 71 0 9 Trade Expenses .... .... 1.2 10 0 12' 10 0 18 10 0 18 10 0 18 10 0 18 10 0 Petty Cash .... .... 10 0 0 10 0 0 10 0 0 10 0 0 10 0 0 10 0 0 Legal Expens~s ..... .2 5 0 3 5 0 5 5 0 5 5 0 5 5 0 5 5 0 Bad Debts and Discounts .... 14 15 0 4 15 0 14 15 0 14 15 0 19 15 0 19 15 0 Carriage .... .... .... I 6 0 1 8 0 I 3 0 I 3 0 I 7 0 I 7 0 Interest on Capital at 5 per cent. .""," .... ..... 8 0 0 8 0 0 8 0 0 8 0 0 8 0 0 8 0 0 ------ ------ ------ ------ ------ -----£681 7 8 £575 12 4 £600 3 2 £647 15 4 £ 614 8 4 £5 66 15 7 £ s. d. £ s. d. £ s. d. £ s. d. £ s. d. £ s. d.

Revenue .... .... .... 939 I I 738 12 4 865 16 3 873 2 4 848 16 10 661 15 II Expenditure ...... .... ..... 681 7 8 575 12 4 600 3 2 647 15 4 614 8 4 566 15 7 ------ ------ ------ ------ ------ -----Profit .... .... .... £257 13 5 £ 163 0 0 £ 265 13 I £.225 7 0 £234 8 6 £95 0 4 8 ~' ~' ,t'Ij (J oZ ~1 t'Ij enen 5' Zen' o ~\ > (J ~ '"'d' ~' t'"'" ~. en ~: Six Weeks' Trading Accounts of an Unsuccessful Trade Paper Weeks Ending Oct. 4th, Oct. 11th, I Oct. 18th, Oct. 25th, Nov. 1St, Nov. 8th, 1924. 1924. 1924. 1924. 1924. 1924. -------------- ------ ------ ------------ ------ -----REVENUE: £ s. d. £ s. d. £ s. d. £ s. d. £ s. d. £ s. d. Advertisements ...... 127 7 0 209 3 3 157 II 6 173 15 3 200 0 3 161 15 0 Sales and Subscriptions .... 57 14 8 63 8 1 70 15 6 76 12 9 122 3 6 95 10 2 ------ ------ ------ ------ ------ -----£ 185 I 8 £272 II 4 £228 7 0 £25 0 8 0 £3 22 3 9 £257 5 2 EXPENDITURE: £ s. d. £ s. d. £ s. d. £ s. d. £ s. d. £ s. d.

Printing and Paper .... .... 398 19 4 505 3 6 409 19 8 423 9 3 584 17 5 489 19 9Travelling Expenses and Commissions ..... .... 147 18 2 152 4 7 157 1 3 165 5 7 173 2 I 175 18 2 Contributions .... .... 46 4 9 49 5 7 45 19 5 45 15 3 44 8 9 45 4 7Salaries, Postages and Sundries 41 0 0 41 0 0 41 0 0 41 0 0 42 0 0 42, 10 0 Trade E~penses, Blocks, Stationery, etc. .... .... 35 18 5 58 16 10 37 10 0 69 II 6 39 II 2 34 15 6 Bad Debts and Discounts ..... 3 0 0 3 0 0 3 0 0 3 0 0 3 0 0 3 0 0 Interest on Capital at 5 per cent. .... .... .... 4 0 0 4 0 0 4 0 0 4 0 0 4 ° ° 4 0 °------ ------ ------ -_--..11_-- ------ -----£677 ° 8 £813 10 6 £698 10 4 £75 2 I 7 £89 0 19 5 £795 8 0 £ s. d. £ s. d. £ s. d. £ s. d. £ s. d. £ s. d. Expenditure .... ..... .... 677 0 8 813 10 6 698 10 4 75 2 1 7 890 19 5 795 8 0 Revenue .... .... .... 185 1 8 272 II 4 228 7 0 250 8 0 322 3 9 257 5 2 ------ ------------ ------ ------ -----Loss .... .... .... £49 1 19 0 £540 19 2 £470 3 4 £5 01 13 7 £5 68 15 8 £53 8 2 10 '"'d ~ o t"7:j ~ ~ t""1 oenen o 1-1 102 THE CONFESSIONS OF A CAPITALIST bureaucrats and committees love figures, and the best way to make them understand how little they can ever know is to supply them with more and more figures.

I begin, on page 100, with the trading accounts for six weeks of a very prosperous trade paper. This· is a paper with which I was at one time con nected and is a rare case of a valuable advertising medium involving very small expenses and producing very large profits. These profits arise from the fact that the industry with which the paper is conn.ected discovered that it suits its purpose to make full use of the advertisment pages, although the circulation is small and the editorial expenses almost negligible. On page 101 is given a similar set of figures of an unsuccessful trade paper which came into my hands a few yeats. ago. . Here it will be noticed that the losses are even bigger than the profits in the previous case. This was a paper that had enjoyed a successful career for twenty or thirty years before Lord Northcliffe began his net sales cam paign. The paper then came into the hands of an energetic young man, full of theories and good inten tions and confident of his complete knowledge of the principles and practice of publishing. He decided that he could beat Lord Northcliffe at his own game and launched a big circulation campaign. How far he suc ceeded may be judged from the figures which appear in .. the account.

My third illustration. (page 103) is put in a more regular form. The earlier examples are weekly returns such as are produced for the benefit of the newspaper proprietor. These figures show the profit and loss account for a period-of eight months of another trade paper. This, again, is an old-established and well known journal which in its time prospered greatly.

PROFIT AND LOSS 1°3 Profit and Loss Account, March I st to October 3 lSI To Printing and Paper; ..• Illustrations and Blocks; ... Contributions Postages ..• Salaries Advertising Wages . Rent, etc. . Rates ... Gas and Electric Light Telephone... ... Printing and Stationery Insurance ..• •.• ..• Bank Charges and Sundry' Expenses ..• Auditor's Fee Bank Intere~t Loan Interest Legal Expenses Commission [. s. d.; 3,341 2 3 32 9 6 5 170 13 10 215 19 6 1,078 ° ° 17 8 6 469 19 3 137 6 8 28 8 3 22 ° 10 22 I 3 60 3 6 3 3 II 8I 19 5 17 6 8 16 5 6 130 16 3 9 18 6 361 4 2 By Advertisements... ... Subscriptions and Sales•.• Balancc-N,ET Loss [. s. d. %,732 19 8 1,83% 10 5 1,947 14 7 My diagnosis of the disease which killed it is excessive economy. It came under management very different from that of the young man who tried to imitate Northcliffe, managenlent whose one idea of business wisdom was summed up in the word "economy."

True economy, especially in newspaper work, consists of knowing how and when to spend money. The cutting out of expenses may be a most fallacious policy. This paper, under the blight of parsimony, managed - to hold its own until the War came, and with it the increase in printers' charges. The loss of nearly £2,000 is accounted for to some extent by the increase in the printers' account. It is only one of many hundreds of cases of minor publishing efforts driven off the market by the policy that has guided the printing industry for the last ten years. The figures bring out one or two other points that are worth making in passing. It will be noticed that the block-makers took, in· the eight months under review, almost twice as much money out of this little enterprise as did the men and women who wrote for it. Contributions amounted to £17° as 104 THE CONFESSIONS OF A CAPITALIST against £329 for illustrations and block.s, another example of the price we are paying for the organisa tion of labour into trade unions, and, still more, of.

employers into trade associations. The business of photo-engraving ,has been so completely organised and so misdirected that masters and men together have been able to raise their prices to four times the pre War figure, with results sufficiently obvious in this case. Similarly, the Postmaster-General took from this business nearly half as much as all the weekly clerical wages spent upon it. That is to say, that for every £I paid to the office staff, clerks, typists, and messengers, the postman, whose work was to carry the finished product to the subscriber, cost Ios.-a further instance of what organised pr trustified or nationalised industry can do. I have already given in another chapter the figures of The Hardware Trade Journal. It was one of my successes, and I now add a' couple of my failures. In these cases I .am able to give the names of the papers involved, because I 'am completely responsible for each one of the three, and, unlike the accounts to which I have just referred, I have not to consider the intere~ts of other individuals.

In the following table of-losses, month by month, incurred during its life by the weekly journal, Ways and Means, we have an illustration of the folly of attempting to mix up propaganda with business. This . is the fundamental trouble with The Daily Hera/d.W ays and Means, a journal of commerce and economics, was published by me during 1919 and 1920 with an object very similar to that of this book. I was foolish enough to imagine that the public might be interested ilJ, econ omicproblems looked at from a business point ofview. For two years, week by week, I devoted myself to this effort. A section of the public responded bravely. It PROFIT AND LOSS 105 was willing, Friday by Friday, to pay 6d for a paper that cost 25. or 35. We are thoroughly spoiled in, this matter of periodical literature. The Piess is really a present to the public from the advertisers. It is ob viously impossible to ask people to pay half-a-crown for a two-and-sixpenny journal. They have never done anything of the kind. Ways and Means had to be offered for 6d. in the vain hope that the advertiser might be willing to make up the 2S. loss. But the advertiser knows better. He will support only a paper published to supply the public with what it demands.

That is, after all, a logical attitude for him to adopt. The newspaper or journal existing to educate the public makes no appeal to him. Ways and J.rleans.therefore had to come to a,n end. " Ways and Means" Losses - 1919 1920 £ s. d. £ s. d. anijary ... ... ... 20 10 2 328 13 10 ebruary ... ... ... 173 7 3 25 2 12 2 arch ... ... ... 324-13 II 235 9 8 pril ... ... ... 64-4- 9 10 14-5 8 7 ay ... ... ... 625 6 8 34-1 8 10 une ... ... ... 34-3 13 II 299 IS 2 uly ... ... ... 278 17 3 377 7 0 ugust ... ... ... 160 5 II 577 14-2 eptember ... ... ... 267 3 I 4-1 3 14-6 ctober ... ... ... 139 10 3 556 18 0 ovember ... ... ... 34-7 2 0 4-1,6 9 6 ecember ... ... ... 572 8 4-J F M A M JJ A S o N D My last example is of another kind. It serves to bring out the many-sided nature of this difficult ques106 THE CONFESSIONS OF A CAPITALIST tion of profit and loss in newspaper and publishing work. · I give the figures from October, 1 920,~ to Nov ember, 1922, of a weekly called Farm and Home, Qwned and published by me during that ·period. This was a good little paper, as is shown by the fact that at one time no less than 40,000 people thought it worth buying. That is not a big circulation for a farming paper, but Farm and Home served its purpose in that its matter and policy appealed to small farmers who found in it something they were willing to pay for and to read. On a 40,000 circulation, there is a definite limit to the charges that can be made to advertisers, but the paper from about 1880 to 1920 managed to balance its accounts and produce a satisfactory income for its proprietors. I made two mistakes in .acquiring Farm and Home. In the first place, like the young man with the ideas about circulation mentioned above, I was vain enough to think that I ~ould do rather better with it than its previous somewhat old-fashioned owners, and that, with those up-to-date methods I am supposed to understand, circulation and advertise ments might both be improved and a great paper developed. I proved wrong in these calculations.

Farm and Home had lived, so it proved, upon its Vic torian character. The people who read it did so because they preferred old-fashioned to modern ideas. My proprietorship was unwelcome to them. In the second place, I overlooked (and I confess I should have known better) the question of printers' charges. The paper was one of those which managed nicely on pre-War figures. It was, however, incapable of ex pansion, and the figures in the printers' bill, four times the size of those before the War, turned a small profit into a heavy loss, with the result that publica tion had to cease, PROFIT AND LOSS " Farm and Home" Losses 1°7 1920 1921 1922 £ s. d. £ s. d. £ s. d. January ... ... - 152 10 8 99 IS 4February ... ... - 24 3 3 51 8 °March ... ... - 4-6 13 3 117 2 I April ... ... - 169 8 I 4-4- 5 3 May ... ... - 4-7° 16 10 74-7 5 June ... ... - 1,14-0 I 10 9 16 9 July ... ... - 5°2 14 8 347 6 9 August ... ... - 168 2 5 59 ° II September ... - 412 9 9 26 12 10 October ... ... 41 12 9 1°9 2 7 86 16 II November ... 97 4-I 95 17 II 58 5 7 December ... 4-21 7 4-171 4-2 The manufacture and publication of a book presents a problem differing in many ways from that connected with the publication of a newspaper. Two examples are sufficient to make this clear. In October, 1924, I had written and put into type a pamphlet which I called Prosperity and Politics, with the sub-title: "The Business Implications of Socialism." When the General Election was precipitated in the middle of that month, it was thought advisable to rush this pamphlet on to the market, and it was given the unhappy title, " Why Not to Vote Labour." We had then to consider what .would be the probable sale of the pamphlet; how many we should print; at what price it should be marketed.

Two thousand copies could be produced at a total cost of gd. a copy. Ten thousand copies, on the other hand, were quoted at figureswhich worked out at 6d. a copy. The figure 9d. would have involved a selling price to the public of IS. 6d., and 6d. a selling price of IS. It should be explained that the selling or published price 108 THE CONFESSIONS OF A CAPITALIST is subject to a reduction of one-third to the bookseller or newsagent. A selling price of IS. 6d. would there fore produce to the publisher a net return of IS., and a selling price of IS. a net return of 8d. If, therefore, we had. printed 2,000 copies at a cost of 9d. and sold them all at IS. apiece, there would have been a profit of £25. If, on the other hand, we had produced an edition of 10,000 at 6d. and sold them all at 8d., there would have been a profit of £83 6s.8d. It is, of course, impossible in considering the problem of a book at this early stage to gauge with any exactitude how many copies, it is wise to print or how many may be sold.

Publishing is in this respect like producing a play. Even the greatest experts, have never been able to judge beforehand whether a play would run for a week, or whether it would last, like" Charley's Aunt," for-years. We might have printed 10,000 copies of our pamphlet at6d., spent £250, sold I,500 at 8d., received £50, and involved ourselves in a loss of £200. On the other .hand, we might have printed 2,0.00 copies, costing £75, and sold 1,500 at IS., exactly balancing the account and leaving ourselves with 500 copies as waste-paper. At the moment of writing, this trans action is not complete, and exact figures are not avail able., but, on the present showing, I expect to be faced with a loss of £I 00 on this little speculation. I now turn to a good book, good not only as a book but as a piece of business, a weighty, technical work, typical of the kind of thing for which my firm has a reputation. The book is in its third year. It was published at the end of 1922, one thousand copies being produced at a cost of £1. 4S. per copy. The published price of the book is £2 8s., and the net return to us from the wholesale book trade £I I 6s.