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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:

  • Increase Throughput (T)

  • Decrease Investment (I)

  • Decrease Operating Expense (OE)

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