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This chapter is from the book

Summary

This chapter has shown that very few financial metrics are needed in order to run a software business: Investment, Throughput, Operating Expense, Net Profit, and Return on Investment.

The business must be capable of measuring the cost of acquiring requirements. This cost should be treated as Investment for the purpose of evaluating the effectiveness of the software production system. Ideas for products, captured as requirements, are considered assets in Throughput Accounting for software development.

All costs for operating the system of software production should be treated as Operating Expense, including labor, amortization, cost of financing investments, taxes, and write-downs on perishable assets such as requirements that become obsolete.

In order to calculate Throughput, the direct costs should be deducted from the sales figure. Direct costs include only costs that are strictly variable in relation to the sale. These would include the costs of salesmen's commissions, costs of deployment or installation, and costs of any hardware or software components such as database licenses or application server middleware.

The order of importance of Throughput Accounting metrics T is first, then I, and last OE. The order is selected to focus management attention on outward facing matters and customer value. Focusing on Throughput encourages the development of a learning organization with an unbounded ever-increasing objective.

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