Throughput Accounting is much more effective than traditional cost accounting at improving your organisations profits.  Throughput Accounting [TA] works by using powerful simple measures to monitor the speed of Throughput in terms of money over time.  Your organisations management and operating teams together easily make and take the right decisions from looking at pictures of the speed and flow of money in and out of the business.  A survey conducted in the 90’s by Eric Noreen of 21 companies who had implemented TOC found that these companies generally reported impressive gains in financial results and in key operating statistics such as cycle time and due date performance.  The site www.goldratt-toc.com has more supporting information on Throughput Accounting.

Using Throughput accounting you will have a much better way of judging and setting profitable prices that meet the perception of value of more of the market.  Compare with traditional cost accounting where most companies price their product or service according to a calculated number that has little to do with how the market perceives the value of the product or service.  When an organisation adopts Throughput Accounting practices, they find that profitable sales increase very quickly.  Also it is possible to judge that the sales are truly profitable.  So using Throughput Accounting performance measures gives a keen competitive edge.

Today, every company is aware of the need for a Process of Ongoing Improvement.  They usually are also attempting to convert to such a Process.  But they are not usually aware of the necessity of removing traditional performance measures based on cost accounting in order that the new Process really works well.  The traditional performance measures based on cost accounting are in conflict with the actions that they are implementing to drive the POOGI. TA performance measures replace the cost accounting performance measures that are in place now. 

One of the principle benefits that Throughput brings is to bring inventory down whereas Traditional accounting methods tend to drive inventory levels up.  There are huge gains to be made from inventory reduction.  Firstly, the release of all previously tied up capital.  Also, the reduction in work in progress allows lead time for orders come down.  So cycle time and due date performance show impressive gains.  Costs come down further as work in progress disappears in a cycle of ongoing improvement.  The inventory reduction brought on by TA affects positively the two principle factors affecting sales, that is firstly, orders which can be met more quickly.  Secondly, the price asked for can be kept competitive.  Furthermore, there are a number of knock on factors positively impacted due to TA, for instance staff morale improves as they feel more in control.

Further benefits roll out from adoption of Throughput Accounting.  Internal financial reports are much easier to understand, which affects the bottom line positively as Business decisions and strategies based on Throughput Accounting reports are sound, powerful and clear.  TA reports allow analyses such as much more accurately identifying the most profitable customers and or the most profitable products.  TA in conjunction with an understanding of your constraints allows you to determine such things as the most profitable product mixes.  All these benefits together increase net profit and investment returns.

Throughput Accounting works by taking the opposite standpoint to traditional absorption cost accounting.  It is businesses that are profitable, not individual products, not smaller units of the organisation such as shop floor machines, not even departments.  In other words, the organisation must be viewed as a whole. 

Unfortunately due to the legacy of the traditional accounting measures higher management insist on still measuring activity and performance with traditional measures. 

It is important when adopting TA and TOC as with any knowledge or technology that senior management remove old measures and support the new measures fully needed.

Throughput Accounting measures minimise TOTAL costs by synchronising production with demand.  It will put you in control by giving you an understanding of the relationship between Inventory lead time due date performance and manufacturing cost.  You will gain a huge competitive edge by being able to control costs and the flow of Throughput through your organisation.

Throughput Accounting is a natural spin off of the Theory of Constraints created by Eli Goldratt.  Elijah Goldratt first presented TOC in the text book novel The Goal. Through his astounding global success he became an international business guru.  Eli Goldratt worked with many companies extensively in the US converting them successfully to TOC and now mainly runs conferences on TOC.  John Tripp has been working with him since 1985 and has also supported many companies in a successful conversion to TOC practise.

By now you may be wondering the best way to move forward.  There are a number of good text books on the subject of Throughput Accounting in our book shop at our site www.goldratt-toc.com.  The Goal, and Its not luck by Eli Goldratt give an over view of how TOC works.  The Theory of Constraints and its Implications for Management Accounting get you started on Management Accounting.

A good next step is to take advantage of a free one day review held by John Tripp where we visit your site, identify the opportunities and show the exact way forward to reap the maximum benefits of Throughput Accounting.  To take the most advantage of Throughput accounting you need the support of someone experienced in the approach. You can find a list of further TOC practitioners in TOCICO and we provide workshops that convert knowledge into skills.

Throughput Accounting is much more effective than traditional cost accounting at improving your organisations profits. To get the benefits senior management must drop traditional measures that no longer make sense. We must move all organisation focus from cost to Throughput. The potential very large gains stem from the systems capacity to create and enhance throughput.

Throughput Accounting will lead to much faster growth and recovery from recession for you and your organisation