- A General System
- Detail Complexity Versus Systems Complexity
- Throughput Accounting for General Systems
- A System of Software Development
- A More Complex Software Development System
- The System Goal
- Financial Metrics for General Business Systems
- Financial Metrics for Software Development Systems
- Predicting the Future
- Framing the Problem
- Understanding Software Production in the Value Chain
- Throughput Accounting Versus Cost Accounting
- Summary
This chapter is from the book
This chapter is from the book
This chapter is from the book
Financial Metrics for General Business Systems
Profit and Return on Investment
Having defined the basic units of measure (metrics) for Throughput Accounting of general business systems, it is possible to define the calculations for Net Profit and Return on Investment.
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It is obvious from these two simple equations that in order to make more profit, Throughput must be increased and/or Operating Expense decreased. In order to improve ROI, Investment must be decreased or Net Profit increased. Investment includes the amount of money sunk in Inventory. Hence, reducing Inventory levels will reduce Investment levels.
To put this in the language of Lean Production, more value must be delivered and/or waste must be eliminated, and Inventory levels must be reduced.
To summarize, all businesses must focus management attention on three things to make greater profits and have higher ROI:
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Increase Throughput (T)
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Decrease Investment (I)
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Decrease Operating Expense (OE)