Break-Even Snapshot and Throughput Accounting
The Break-Even Snapshot
Throughput Accounting (TA) is a simplified accounting approach to help managers make financial decisions quickly. In contrast to Cost Accounting (CA, focuses on costs), Throughput Accounting focuses on increasing sales revenue, faster, while maintaining constant costs.
First, using Throughput as a net parameter, helps fast decisions, by leaving out expense allocation calculations. Also work in progress (WIP) and Inventory – are simply defined: raw or finished goods until sold.
Here are the main parameters:
- Throughput (T) – The rate at which a business generates net cash through sales – SR – COS; SR = Sales Revenue, COS = Cost of Sales.
- Investment/ Inventory (I) – The cash invested in items to sell. This does not include labor expenses, but includes raw materials, work-in-Process (WIP), and finished goods prior to sale.
- Operating Expense (OE) – The cash spent to turn Investment (Inventory) into Throughput – all labor expenses, utilities and maintenance, etc.
This is the equation for profit:
Throughput Net Profit = Throughput – Operating Expense