If making money is your goal, throughput is your obsession

In a for-profit organization making money is the goal and the limitation to making more money is called a constraint.

Conversely, a constraint is a limiting factor to get more out of the system. There is only one constraint which is the most limiting factor restricting the Throughput.

Throughput is the rate at which the organization is making money.

If the constraint is limiting Throughput, it means the constraint controls all the money-making.

From this point, making the maximum money given the constraint, there are two (cumulative) options:

  • Elevate the constraint, which means get over the limitation of the constraint to allow more Throughput.
  • Keep Throughput at its maximum by avoiding anything limiting it more.

Elevating the constraint might be difficult or even impossible to do, simply because if it wouldn’t, chances are it would already have been done. More seriously a constraint can be something very difficult to get or to change, like a very expensive equipment, something very rare or something very difficult to influence/change like regulation or policy.

Keeping Throughput at maximum in the given conditions is called exploiting the constraint. It requires constant attention to prevent anything to choke the Throughput.

That’s why once the constraint is identified, it becomes the center of all attention. If the constraint is a resource, like a machine, an equipment, a department or some talented person, this resource deserves a special treatment to protect it against anything limiting its Throughput further.

As the constraint controls all the money-making, it is a good spot where to literally sit and constantly monitor the Throughput. Every decision should be made with regards to its influence to the Throughput:

  • if it is reducing the Throughput, it must be challenged
  • If it is increasing or a least securing the Throughput without adding more Operational Expenses (Net Profit = Throughput – Operational Expenses), it must be considered.

Therefore, if making money is your goal, Throughput is your obsession.


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What is Throughput Accounting?

Throughput Accounting (TA) can be understood as a simplified accounting system based on Theory of Constraints (ToC) principles. TA makes growth-driven management and decision making simpler and understandable even for people not familiar with traditional accounting.

Beyond simplifying, TA has a different approach compared to traditional accounting. The latter will focus on cost control (cost of goods sold) and minimizing the unit cost while TA strives to maximize profit.

Throughput Accounting sets the base for Throughput Analysis, helping to make decisions in the ToC way.

Simplifying accounting

Throughput Accounting will probably not replace GAAP in short nor medium term, but provides a limited set of simple KPIs, sufficient to:

  • Manage and make decisions in a growth-oriented and ToC way
  • Allow faster reporting and near to real-time figure-based management
  • Help people in operations to understand the basics of accounting
  • Set a common base for controllers and operations to discuss decisions, investments, etc.

Throughput Accounting uses 3 KPIs and 2 ratios:

Throughput (T)

Throughput, defined as the rate of producing goal units (usually money) and translates as revenue or sales minus totally variable expenses in accounting terms.

Totally variable expenses can be simplified to the cost of direct materials because labor is nowadays paid on a (relatively) fixed amount per time period, hence a constant expense to be considered as part of Operating Expenses.

Operating Expenses (OE)

Operating Expenses are all expenses, except the totally variable expenses previously mentioned in the calculation of throughput, required to run and maintain the system of production. Operating Expenses are considered fixed costs, even so they may have some variable cost characteristics.

Investments (I)

Investments, formerly call Inventories, is the amount of cash invested (formerly “tied”) into the system in order to turn as much of the Investments into Throughput as possible. This encompasses the stored raw material waiting to be transformed into sellable products as well as investments in capacities / capabilities to produce more units.

Net Profit (NP)

Net Profit is defined as Throughput minus Operating Expenses, or Sales – Total Variable Costs – Operating Expenses.

Return On Investment (ROI)

Return On Investment is the Net Profit compared to Investments (ROI = NP/I).

Drivers for achieving the Goal

Throughput Accounting offers a simplified way to identify and use the drivers to achieve the Goal, assuming the Goal is to make money now and in the future.

In a very simple way this can be summarized by the following picture which means strive to maximize Throughput while minimize the Operating Expenses and Investments.

ToC practitioners recognize that Throughput has no limit while Operating Expenses and Investments have limits beyond which no safe operations can be further envisioned.

The priority focus on improving T (focusing on the constraint exploitation) rather to go for all-out cost cutting explains the (usually) superior results when going the ToC way compared to unfocused improvements.

Throughput Accounting KPIs can be presented in a Dupont-inspired model in order to make the levers and consequences clear. (graphics to come)

Throughput Analysis

Beyond the simplification compared to traditional accounting, Throughput Accounting sets the base for Throughput Analysis, helping to make decisions in the ToC way.

Reminder: in a system with a capacity constraint, the Throughput is limited and controlled by the sole constraint. As the capacity is fully used and no spare is available to exploit, what goes through the constraint must be chosen wisely in order to make the best use of this very precious resource.

It becomes obvious then that utmost attention must be paid to maximize the passing of the highest profit generating products through the constraint. The decision making is then based on the Throughput per constraint minute rate. The higher the T/mn, the better.

Other decisions Throughput Analysis helps to make are about anything likely to alter the Throughput, Operating Expenses or investments. Basically, any incremental increase of OE and/or I should lead to an incremental increase of T.

Conversely any decrease of OE and/or I should NOT lead to an incremental decrease of T.


This post is partly inspired by the work of Steven Bragg. I recommend his blog and post about Troughput analysis http://www.accountingtools.com/throughput-analysis


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TOC-based decision for best product mix

Theory of Constraints (TOC) provides a framework to identify, exploit, set pace and elevate* the constraint, or put in simpler words: identify the bottleneck in the process and make the best with it.

*Identify, exploit, subordinate, elevate and prevent inertia are known as the “five focusing steps” of Theory of Constraints.

In this constraint or bottleneck-centered approach, the aim is to give this peculiar resource a privileged treatment as it controls directly the whole system Throughput, hence the profit.

But working on the constraint capacity is not enough to maximize Throughput, the product mix is also very important.

Theory of Constraints therefore developed Throughput Accounting in order to cope with issues when making decisions based on traditional accounting and a new way to make decisions regarding product mix.

This video is a 49mn course about TOC-based decision for best product mix by Prof G. Srinivasan, IIT Madras


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What is Little’s law? What is it good for?

Little’s law is a simple equation explaining how Waiting Time, Throughput and Inventory are related.

Wait Time = Inventory (or WIP) / Throughput

Here is a video about Little’s law:

Fine, what is Little’s law good for?

Well, if a process lead time is too long, chances are that work-in-progress (WIP) is too high. For a given processing rate (Throughput), the lead time will be equal to WIP/Throughput. To reduce the lead time the process Throughput must be increased or the WIP reduced.

Throughput is usually limited by some constraint: machining speed, resources available and so on. It may not be easy to increase Throughput.

WIP on the other hand can generally be controlled by limiting the inventory or the work to be done entering the system upfront.

In this video, Philip Marris explains how to reduce WIP by controlling the flow of work entering the system. Even he does not mention Little’s law, it is indeed used to reduce Inventory.


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Introduction to Throughput Accounting

Throughput accounting comes early for all studying Theory of Constraints.  The simplest is about the 3 KPIs: Throughput (T), Operating Expenses (OE) and Inventory (I) – later changed to Investment – and their relationship for higher profits.

Later, Throughput accounting is used to make sound decisions to maximize profit despite limited means, favoring the products with highest “octane”, which is the Throughput per time unit of the constraint.

Here is a 18 minute ‘essentials’ about Throughput Accounting provided by the London School of Business and Finance (LSBF).


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