they have no objection to securing some of the other returns that naturally follow from successful promotion.

See also 133. Functions of the Stock Exchange.

135. Life Insurance Companies as Investment Institu

tions.

295-96. Control of Money and Credit.

E. Science in Management

332. A TECHNICAL EXPERT-THE ACCOUNTANT1

Science in management is largely a matter of control-control and direction of the various factors involved in the conduct of a business enterprise. The basis of control is information. In fact, control and hence scientific management may be said to consist of the proper application of information correctly interpreted.

Business methods and practices are changing so rapidly, new problems are arising so frequently, and conditions vary so widely in different localities and different lines of business that set rules cannot be established. It is true that there are certain general principles which may be regarded as more or less universally applicable, but their particular application in each specific case must be influenced by current information in regard to the factors involved. It is, of course, untrue to assume that the business executive is not influenced by precedent or that his acts are governed entirely by present expediency, but it is important to realize that he is continually revising his past conclusions and policies in the light of present information-information in regard to the past and information in regard to the probable future.

When business organization was simple and the business enterprise small and its activities local, the owner, who was also the manager, was able to obtain without assistance the necessary information upon which to base the conduct of his business. This is still true in some cases for instance, the village storekeeper. He may keep his accounting records, plan his sales campaigns, determine the extent and nature of the advertising to be done, select the goods to be purchased, secure the necessary funds from sources which he chooses, and actively direct if not actually perform all the executive operations of the business. He is able to do this because the information upon which he bases his actions is usually obtained in the daily routine of

Taken from an unpublished manuscript by J. O. McKinsey.

business or if not is obtained without material effort since the factors concerned are few in number, simple in nature, and local in extent. Moreover the information involved is sufficiently simple that the owner is able to interpret and correlate it without difficulty.

Since business organization has become more complex, it is impossible for the executive manager of the business enterprise of material size to perform all the functions suggested in the case of the village storekeeper. It is impossible for the manager of a large department store, for instance, actively to direct, much less actually perform the work necessary to obtain all the information which it is necessary to have in order to conduct the numerous activities of such a business properly. Moreover, after such information has been obtained, it is impossible for any one man or group of men, without special training, to interpret such a mass of detailed statistics so as to use it as a basis of rational administration until it has been rearranged, classified, and presented in simplified form. As a consequence, in such a business the management must rely upon various specially trained individuals -technical experts we call them-to provide and interpret the information upon which they base their decisions as to the policies to be followed.

To illustrate the tendency toward the employment of the technical expert and his function in a modern business enterprise, let us take a manufacturing concern owned and operated by a corporation. The authority for the conduct and control of such a business is vested in the stockholders, but they will find it expedient to delegate this authority to a board of directors, who by training and experience are more expert in deciding on the policies to be followed. The directors, although they may be skilled in the administration of certain types of business, will find it wise to delegate their authority in part at least to certain officials who are expert in the conduct of the particular line of industry concerned. The officers in turn will find that though they are competent to decide upon the general policies to be followed it is necessary for them to employ various specially trained men, who are technical experts in specific phases of the firm's activities, who will provide and interpret and assist in the application of information. For instance, they will employ a purchasing agent to secure the raw materials needed, a sales manager to supervise and control the sales, a production manager to direct the manufacturing operations, an accountant or auditor or comptroller to supervise the accounting records, a credit manager to guard the credits of the firm, a collection

manager to handle the collection of accounts due the firm, and as many more experts as the circumstances demand. If they desire to consolidate with another firm they will seek the advice of a lawyer; if they desire to enlarge their factory they may consult an architect and an engineer; if they are engaged in certain lines of manufacturing operations they will employ a chemist; if they wish to borrow money they will consult a banker; if they wish to market their bonds they will consult a broker; if they wish to secure insurance they will consult a representative of the insurance company.

In some cases the technical expert whose services are required is a member of the firm's organization, in other cases the professional expert-that is one not connected with any particular firm―is consulted. The function of the expert in each case, however, is the same -to provide information which will serve as a basis of action. In some cases the expert acts in an executive capacity but this is not his prime function. It is for his knowledge of what should be done rather than for its execution that he is chiefly valued.

In order to illustrate more specifically the function of the technical expert, a particular expert, the accountant, may be taken. The accountant may well be taken for the purpose of illustration, because of the almost universal necessity for his services. The services of many of the technical experts mentioned above may be dispensed with by certain firms, but every firm of appreciable size in every line of industrial activity must have accounting records, and some one must be responsible for them. In fact the services of the accountant are in large part a prerequisite to the services of most of the technical experts mentioned above.

Accounting records, classifies, and presents financial facts. Its function is to provide information in usable form in regard to the financial condition and operations of a business. As a result of the activities of the other technical experts mentioned above certain operations take place. Accounting records the results of these operations and presents these results to those who desire to know them by means of reports. By a study and interpretation of these reports, technical experts obtain certain information which, taken in connection with other information which is not reflected in the data secured through accounting, forms the basis of their conclusions as to the policy to be pursued.

To illustrate specifically we may take the manufacturing concern mentioned above. The production manager before he can plan his

program of manufacturing for the coming fiscal period must know the estimated amount of sales for this period and the probable seasonal variation of those sales. He will expect such an estimate from the sales manager. The latter in order to furnish such an estimate must consult the accounting record to determine what the sales have been during the past period. With this information as a basis, he takes into consideration such factors as he thinks will affect the sales during the following period and makes up his estimate. It will be seen by this illustration that the sales manager is acting in the capacity of a technical expert as defined above; he is furnishing information which acts as a basis of control-in this case the control of production. When the production manager receives the estimated sales for the following period, he must decide as to the quantity of finished stock which he must keep on hand in order to satisfy the demands of such a sales program. He will be materially assisted in doing this by consulting the accounting records so as to see the ratio between the finished goods on hand and sales during the past period. After the quantity of production has been decided upon, the purchasing department must be notified so the purchasing agent can plan for the purchases of raw materials to be made. He will find from the records the length of time necessary to obtain each kind of material and will govern his actions accordingly. Of course, the stores department may be delegated the authority of initiating orders, but the principle is the same-the volume of sales govern the volume of production and the latter governs the purchasing of raw materials, and past experience as reflected in the accounting records is a decisive factor in controlling these operations. When the quantity of production for the next period has been determined, the treasurer must be notified so he can provide the necessary funds to finance such a program. He again will consult the accounting records to see the ratio between the funds required and the quantity of production and will be governed in his ́ plans for the future by the experience of the past as reflected in the accounting record.

After the goods are produced and ready for sale a large credit order is received. The credit manager is asked to pass upon the applicant's request for credit. If the prospective purchaser is one to whom the firm has previously sold, the credit manager will immediately consult the accounting records to see if he has paid his bills satisfactorily. If he is a new customer he may seek information through certain credit associations or credit agencies, and the

information which he thus obtains will be that shown by the accounting records of the member firms of these associations. Thus again the information afforded by the accounting record is of prime importance in arriving at a basis of action.

To give more obvious illustrations of the value of the information provided by accounting, the collection department is dependent upon the accounting record in collecting the debts due the firm, those in charge of disbursements are dependent on it in the payment of the debts of the firm, it is from this record that the efficiency of different employees and the profitableness of different lines of goods is determined. The cost of goods produced, a controlling factor in arriving at the proper prices of sales, is determined from the cost records, and finally the financial condition of the firm and its profitableness or unprofitableness as reported at the end of the fiscal period to the stockholders is determined from the accounting records. The control of the future policies of the enterprise as determined by the directors and the chief officials is based upon the information which they obtain by means of the reports submitted by the various technical experts mentioned above, and these reports are largely made from the accounting records.

Many more illustrations might be given of the service of accounting, hence of the accountant, in the scientific administration of a business enterprise, but the above should be sufficient to indicate the function of accounting as an instrument of control. By analogy the value of the technical expert in general as a factor in scientific management can be easily seen.

See also 66. Calculation and Capitalism.

198. Knowledge and Information in Relation to RiskTaking.

333. STAGES IN MANAGEMENT

A1

Scientific Management is said to be a third stage in the development of organization. The first stage was represented by the nonsystematized business, of which there are to be found survivals among older and smaller plants. In this stage the management grew up with the plant, was inbred, and was bound by traditions handed down from Taken by permission from H. S. Person, "Scientific Management," Tuck School Conference, pp. 4-5. (Dartmouth College, 1912.)