There was an interesting article in the New York Times about First Quality Music, which is owned by the Sullivan family and manufactures banjos, guitars, parts and accessories in Louisville, Kentucky. The company was having financial problems that had been intensified by the recent recession. One of the family members had read “Profits Aren’t Everything, They’re The Only Thing” by George Cloutier. Mr. Cloutier is the founder of American Management Services, a consulting firm that specializes in business turnarounds. After reading the book, the Sullivans decided to pay American Management Services $500 to give them a preliminary assessment.

The assessment found many areas of improvement but the consultant’s fee for continuing the work was $170,000. The Sullivans could either pay this fee and hire the consultant or they could use the preliminary assessment as a starting point and do the work themselves. The Sullivans decided to scrape together the money to hire the consultant. The consultant worked with them for 5 months during which he would visit them on site a few times a week. By the end of 2010, they were breaking even with a plan to reach profitability. This was in contrast to the large loss that had been projected at the start of 2010.

Matthew Stewart, a former consultant, was quoted in the article:

“If the long-term problem is that the family has exceeded its managerial capabilities, then getting a list of solutions from a management consultant — however accurate or perfect a list it is — won’t solve the problem. When the consultant leaves, they’ll still be faced with the task of getting the job done.”

I think Mr. Stewart makes a very good point that reflects on whether a business owner who hires a consultant to fix a problem like this gets his or her money’s worth. I’m not familiar with American Management Services and I haven’t read Mr. Cloutier’s book but from the information put forward in the article, it appears that the Sullivans got more that a quick fix. They received an education that improved their management abilities. The consultant spent significant time working with them and there was a transfer of knowledge.

This is how the the best consulting relationships should work. The company hiring the consultant should have a better level of knowledge regarding the problem at the end of the project than when it started. This requires a consultant who is willing to teach as things move along but it also requires a business owner who is willing to learn. A surprisingly large number of consulting engagements fail because either the client doesn’t take the advice or the client hasn’t learned enough to keep the momentum going on his or her own.

So, is a consultant worth $170,000? It depends. By the account given in the article, the Sullivans likely got a very good deal. In a different situation where the consultant carefully guards his expertise or a business owner can’t be bothered to learn, the price is much too high. The good news is that the business owner has a lot of control over the success of the project. Hire the right consultant and learn as much as you can and the dividends will repay the investment in the consultant’s fee many times over.

Are you sick and tired of dealing with disrespectful clients? Wouldn’t it be nice to have customers who value what you offer, pay on time, and do their part in the client/seller relationship? Well, according to John Jantsch, author of Duct Tape Marketing, “when you properly target your clients, you will discover that you no longer have to work with jerks.” This might sound unrealistic but I think its something that can be accomplished if done right. Here are some tips from Duct Tape Marketing, on finding your ideal client.

1. The first thing you need to do is to create a picture of your ideal prospect. If you don’t know whom you’re selling to, you decrease your chance of attracting your ideal client. A good way to start is to take a close look at the type of customers you’ve dealt with in the past. What are their similarities? What are their differences? Create a database of these customers and jot down detailed characteristics of each individual or company. You might notice that a group of your customers have a lot in common.
2. Understand how your customers make their buying decisions. This might be difficult to do, but if you’re able to learn a little bit more about buying habits, you’ll be able to better target your clients.
3. Try to find the most effective ways of communicating with your ideal prospects. What promotion methods have you used in the past? Did you reach them through radio ads, billboards, personal networking, etc? What worked? What didn’t? This information will help you uncover effective ways to reach your ideal client.
4. Get people to know you, like you and trust your business. Customers prefer to buy things they know, like and trust. That’s the power of branding. Try to build relationships with your customers and earn their trust with your products and services. Differentiate yourself from others by carrying your personality and values out through your employees. Be consistent and pay attention to what your customers want. If they know that you care, they will like and trust you better.

These techniques should help you get started in finding your ideal client and target market. At the end of the day, if you’re not able to reach your customers, you have no business. It’s time you started to get to know them better. Good luck in your search.

Expert advice is a huge industry. Today, there is an endless supply of experts that promise to solve your problems in the most modern, elegant way possible. Many experts have their clients best interests at heart and work to solve their problems as they appear. Unfortunately, there are experts out there that view their clients as experimental subjects, using them to conduct research. This research doesn’t necessarily align with their clients’ best interest. If you are unlucky enough to hire this type of expert, you are in for an expensive life lesson. On the other hand, the right expertise can be the best investment you ever make. How you can you get the most from your expert?

If your expert wears this button unironically, head for the door.

Here’s how I learned my lesson the hard way. Back in my days at the pulp mill, we had a change in personnel in the bleach plant (the bleach plant turns wood pulp from brown, like grocery bags, to white, like photocopy paper). The new people were technically capable, but new to this technology. Queue our expert from head office. This guy promised that we could save $5 per tonne of pulp (about $1.5 million per year) if we adopted his bleach recipe. He guaranteed the same brightness (degree of whiteness of the pulp) as what we were running. Saving money while keeping customers happy looked to be a great combination. This seemed like a no-brainer. After we took his advice, we found out it wasn’t that simple. First, the fact that this expert didn’t step foot in our mill for the previous five years should have been a red flag. Second, the bleach plant operators openly protested the new recipe. To defend the expert and our decision, we could rationalize that the old management and the operators were fearful of change. That wasn’t the case. So, how did we do?
The results of the change were mixed. We achieved the cost savings and the brightness targets. However, the change was a disaster. This was because the 10,000 tonnes of pulp we made was too dirty to be sold at any price. For those of you keeping score, the sales price of pulp was about $700 per tonne. When faced with this inconvenient fact, the expert told us that bleaching wasn’t the same thing as cleaning pulp. In other words, he was responsible for the savings but was not responsible for the unsaleable pulp. He walked away and declared victory. We changed back to our old recipe, a little wiser from our experience. We later found out that he tried this same project years earlier and was banned from our site.
This is a sad story, but not unique. How can you avoid an expensive, frustrating experience when you hire an expert? Here’s how:
Before you hire the expert, ask for his client list. If he is as valuable as he claims, he should be happy to provide this.

• Make him define your problem and a method to solve it. This makes him think about a customized solution instead of one off the shelf.
• When you hire him, clearly set out expectations and measures for success. If the cure kills the patient, it isn’t acceptable.
• Don’t let your expert pat you on the head and lecture you. You paid for the service. He is your advisor, not your teacher.
• Don’t let him define success. The bad experts will take credit for benefits while ignoring the defects. The true measure is whether or not you are better off from your decision.

This might seem like a strange blog post from a business consultant. I make my living by being an expert. The reason is bad experts make it harder for me to help my clients. More importantly, giving bad advice is bad business. I expect anybody hiring me to hold me to these standards. If you hold your expert to them, you can achieve the results you are paying for.

Last week, I read a few articles written by Paul Hunt on pricing strategies for companies. His view on pricing is interesting and I found some points that may be helpful for your business.

Most companies have yearly growth ambitions. Lets say your goal in 2011 is to increase profits by 12.5%. Now, where do you start? How will you achieve this goal? Most managers and business owners will begin by looking at cost cutting strategies and use it as a primary tactic to increase profits. But few look at increasing prices as a way to generate more profits. Hunt states that “if the average company captured 1% more in price, without any change in volume and costs, profit would climb by 12.5%.” But the question is, is there room to increase prices without negatively affecting sales? It can’t be that simple right?

Before you start tinkering with price increases take a look at your own pricing strategy, if you even have one. Most managers and business owners set prices at levels comparable to competitor prices. That may be the extent of your pricing strategy research. Think about it, why is your product/service priced where it is? How price sensitive are your consumers? Have you ever conducted any research on product pricing?

Many variables will factor into whether price changes benefit your company or not. And it’s understandable if you think your business has little control over prices. But there are more variables involved than you might be aware of. Research shows that once you reach certain pricing thresholds, slight increases in price will not lower sales. For example, a consumer-packaged-goods study showed that demand for a product was higher at $1.09 than it was at $1.05. Furthermore, demand remained the same when prices were increased to $1.19, and $1.29. These consumers were indifferent between paying $1.09 or $1.29 and actually purchased more goods when the price was increased from $1.05 to $1.09. So, it’s important to understand that pricing threshold levels exist because you might be missing out on extra cash. But there are two sides to this coin. What I didn’t mention first is that, in this study, when prices were initially increased above 99 cents demand plummeted by 300%. 99 cents was the first threshold level for consumers and a slight increase in price was detrimental to sales.

Research also shows that prices ending in nine positively influence sales. According to Dr Vinay Kanetkar, “prices ending in nine make a positive difference to sales in many situations. In fact, in North America, research has found that prices ending in nine generate 12% more sales on average than a price that ends in either eight or zero.” However, there are notable exceptions. Walmart, widely known for its success with low cost products, often ends it prices with sevens. I would assume that Walmart has conducted thorough research on pricing strategies so seven may be a number to use. Keep in mind that cultural differences also play a role in pricing strategies. For example, in China, there is a preference for numbers ending in eight.

So where does this leave us? End your prices in nines or sevens and find your pricing threshold level? Easier said than done right. I think the first step is to research your market. Psychology plays a great role in consumer purchasing patterns so learn more about your clientele. Play with promotional pricing strategies with different client groups and see what works and what doesn’t. Research pricing strategies and see what the experts have to say. Your business may have room to increase prices and capture that extra revenue, but make your decision based on knowledge and solid reasoning. I hope this helps. Happy pricing!

Carrying on from last week’s blog “Finding Your Competitive Advantage,” this week we look at how WestJet found success by finding its niche in the airline industry.

WestJet is a unique case because it was able to position itself as a company that offered both lower prices and better service than its competitors. That’s something many businesses would like to accomplish but easier said than done. Back in 1996, West Jet took a look at its main competition, namely Air Canada, and found a segment in its market that wasn’t being served adequately by the airline industry. This reflects the importance of knowing your target market and understanding customer “pain” points. West Jet identified this segment as families that travelled with children by a vehicle. This segment was not prepared to pay more than $200 an individual to reduce travelling time. But given an option of flying for less than $100, WestJet realized that these travelers would choose to fly at these prices to reduce the “pain” of driving long distances. But it wasn’t as simple as saying that reducing prices would translate into business success. WestJet’s financial analysis indicated that they would be able to generate a profit at these prices but only if costs were controlled and the company would have to start small. In order to control costs, the company decided to invest in one type of aircraft to serve main cities in Canada instead of investing in different models of aircrafts needed to reach all cities and communities. Although this reduced the size of their target market, it reduced WestJet’s costs and, as a result, they were able to offer lower prices than their competitors. WestJet also decided to formulate a superior customer service plan. They had noticed that the competition did not have great customer service and this was an area that could be improved on. So, in short, that was the company’s plan. Reduce rates and increase customer satisfaction.

At that time WestJet didn’t know whether their business plan would translate into success. We all know WestJet succeeded in its venture but it doesn’t seem like they did anything special. They lowered prices and increased customer service. Sounds simple, right? But back in 1996 they were the only company to realize that the “family segment” was an unserved market in the airline industry. They realized an unmet need and developed a model to serve this need.  They studied their competition and realized that there was room for customer service improvement. They found a niche position in the airline industry and developed a model that would allow sufficient margin for profits. There was a lot of planning involved before the venture began and, as a result, WestJet uncovered a great opportunity. So before you go out and declare lower prices and promise to increase customer satisfaction, remember, take the time to research and understand your target market and competition. It will help you decide how to position yourself in the marketplace and develop the right business model. Good luck in finding your edge!

Before investing in a business, one of the most important things to identify is your competitive advantage. Answer the question “why would customers choose your product/service over competitor offerings?” What makes you stand out from the competition? I’ve found that not enough thought goes into what a company’s real competitive advantage is and many companies are actually operating without one.

Think about your business. What is your competitive advantage? To determine the answer you first need to identify your target market, your competition and yourself.  The following provides a list of questions to help get you started.

Target Market: Its important to understand your market and how you plan to approach customers. Ask yourself the following.

• What market segment are you targeting and why?
• Who are your customers and why would they choose your product/service?
• What are your customer demographics?
• Where are your customers located?
• What are your customer purchasing habits and buying trends?
• What customer needs are being fulfilled by your business? What are your customer needs?
• How often do customers purchase your product/service (daily, weekly, monthly, etc.)?
• What marketing tools will you need to advertise to these customers?

Competition: Understanding your competition is key. Learn from their mistakes, what they do well and how you can differentiate yourself from them. List companies trying to do the same things as you and identify the following about your competitors.

• What is their business model?
• Who are their customers?
• What are their strengths and weaknesses?
• How strong is their brand?
• How well are they performing? (profit margins, revenues, expenses, etc.)
• Would you purchase their product/service? Why or why not?
• What is their competitive advantage?
• What competitor would you model yourself after and why?

Yourself: You need to understand your own business offerings and the things that make your company unique. Answer the following.

• What are your strengths and weaknesses?
• What is your business model?
• What are your company goals and objectives?
• What product/service are you offering and why?
• What makes your product/service different?
• Why do you think you can compete successfully?

These questions will help you determine your competitive advantage or whether you need to rethink your business model. Often, you realize that the things you thought were unique to your company are not really unique. The most common things we hear are “my company offers the best service, our prices are the lowest, or our quality is superior.” But how can every company truly claim this? A lot of businesses think they have a competitive advantage but can’t support it after some research. Take a closer look at your business and answer the questions above. You might just be competing head-to-head with your competition without a real strategy.

Next week we’ll take a look at how West Jet established a competitive advantage in the airline industry.

While working with a client recently, an interesting issue arose. While generating reports, I was given specific instructions on what information was to be shared. More to the point, I was told what was not to be shared. The concern was the information would cast some people in a poor light. In other words, the reputations of these individuals were put before their performance. This dynamic is the enemy of real progress and can be fatal. It harkens back to a bygone era where information was scarce and those who controlled its flow wielded great power. It comes from the wrong belief that the way to become successful is to be infallible. This means always being right and never changing viewpoints. We hold our politicians to this standard, and as a result, we get governance by ideology instead of common sense.

Not a typical mission statement, is it?

This infallibility myth is borne of the era of confrontational work environments, where any mistake or mishap is perceived as a result of weakness of intellect or character. Large companies dealing with organized labour provide many examples of this. When unexpected things occur, the standard reaction is to find and punish the guilty party. This kills innovation because the pain of failure outweighs the good feelings of breakthroughs. A former coworker of mine aptly described this as “A kick in the ass is worth the same as 10 pats on the back.”
When we look at the world of science and technology, we see improvements faster than most of us can keep up with. Scientific discovery doesn’t seem to be impeded by information hoarding or protecting reputations. Why is that? Why does science succeed where many organizations stagnate and fail?

Want progress? Act like these guys.

I could go into a dissertation on the wonders of Six Sigma, Lean and Theory of Constraints, but instead I will point to one of the best shows on TV, Mythbusters. Each week, Adam, Jamie and the build crew test myths from movies, TV, the Internet and popular culture. When they take on a myth, they always state beforehand what they think the result will be. They then build experiments to test the myth. The interesting thing here is they are only right about 50% of the time. Even more telling is how genuinely happy they are when proven wrong. As Adam often says “We have a result.” To me, this shows where science succeeds where many organizations fail.

Without scientific discovery, we wouldn't have computers as nice as this.

So how can you make use of this great advantage? First, check how susceptible your organization is to the infallibility myth.

• When an unexpected event occurs, is the first reaction of your people one of covering their tracks?
• Is your workplace unofficial motto “Nobody moves, nobody get’s hurt?”
• Is your product or service offering essentially unchanged over several years?
• Does your customer service scorecard measure only complaints and defects?
• Are new ideas treated with skepticism or derision?

If you answer yes to one or more of these questions, you may have an infallibility myth problem. This is a deep-seated cultural problem and won’t change overnight. The best way to crack the ice is to stop acting infallible. If one of your ideas blows up in your face, admit to it. More importantly, try to find the lesson in the failure. In addition, deal with mishaps with your employees as failures of the system, instead of personal failures. Finally, look for the upside in these events. You may stumble upon the next big thing for your organization.

When looking at ways to improve businesses, managers have resorted to many methodologies over the years. People around long enough remember Total Quality, Just In Time, Manufacturing Resource Planning and their modern counterparts: Six Sigma, Lean and Enterprise Resource Planning. While we have heard of the companies that have benefited greatly from these efforts, it’s more common to hear about firms implementing them with disappointing results. Why would these powerful techniques work for some but not others?
In addition, people debate whether Theory of Constraints (TOC) or Lean is the way to improve their business. The answer you get depends on whom you ask. Lean practitioners will tell you that Lean is the best system and will give a great list of successful implementations. TOC professionals will tell you that much of the effort expended on Lean is wasted because it never impacts the bottom line.
Velocity is a book by TOC professionals Dee Jacob and Suzan Bergland, along with the original co-author of The Goal, Jeff Cox. Velocity tackles the question of TOC versus Lean combined with Six Sigma in the form of a business novel. It describes Hi-T Composites Company, already using TOC being bought out by Winner Inc., a company using Lean/Six Sigma.
The authors describe how the Winner Lean/Six Sigma team began to implement their programs in Hi-T. They saw the extra capacity around the constraint and the extra workers in the constraint area as waste and began reducing this waste. When results were disappointing, the implementers said that results would come when the implementation was complete. After a year of floundering, the President of Hi-T found herself in jeopardy of losing her job. When she was given three months to turn the company around, she assembled a team that used current reality trees and the five focusing steps to reestablish protecting the constraints. Once they did this, they saw the benefits of the Lean/Six Sigma efforts – the non-constraints now had more surge capacity and they were able to solve a chronic product quality problem that led to increased sales. The title of the book, Velocity, is what the new system was called. In physics, velocity is defined as speed with direction. The Lean/Six Sigma was the speed component while TOC determined the direction.
Below is a table describing some of the key differences between the two methodologies.

So what is my answer to the question Lean or TOC? Why not both? TOC on its own is great at setting priorities for the firm but can fall down in the implementation stage. Lean/Six Sigma are great tools, but lack the focus to find the best projects. If you use TOC to determine the constraints and use Lean/Six Sigma to improve them, you can get the best of both worlds.

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Organizations use benchmarking to try to achieve a number of goals. Lots seem to make sense. It seems sensible to find out how you are performing against competitors. You will find out where you are outperforming your competitors and will find where they have the jump on you. A number of companies provide this service and do a great job of collecting and presenting data. The trouble is managers, lacking a coherent strategy, will use benchmarking as their strategy.
This is prevalent in commodity industries where the strategy for many companies is to be the low-cost supplier in their industry. Others, when they see who the top performing companies are, will try to emulate them. In some cases, they will try to poach key managers in the hope that the new talent will transfer the success of the front-runners to the company. The best this strategy will accomplish is to slow down the demise of a company. It won’t turn around a struggling company and it surely won’t propel a company to the top. Why do companies use benchmarking? Mainly because benchmarking:

• Is simple. Benchmarking reports give the impression of companies as being neat, easily quantified players in a game with established rules.

• Feels safe. With the rules laid out, managers believe that they can improve their business by improving on the measures in the report.

• Looks like strategic planning. When people are gathering data, doing analyses and presenting findings, it looks like they are developing a strategy. If it walks like a duck and quacks like a duck….

Here’s the problem. Benchmarking can shed some light on how you measured up against your competition in the past, but it can’t guide you to success. Some reasons are:

• Business isn’t as simple as benchmarking implies. Companies constantly change and are improving all the time. By the time you match the best in class, they have already passed that point. 
• Benchmarking strategy assumes that improving the parts will improve the whole. This is almost never the case.
• Benchmarking concentrates on easy to measure variables. Most of the time, that means cost. Just like cost accounting, it gets managers to concentrate on the least important variable for success: expenses.
• Benchmarking strategy really means trying to copy the best. If you can copy the best, what’s to say that your competitors couldn’t copy you? Any competitive advantages will dry up almost as quickly as they appear.
• Benchmarking can allow managers not smart or brave enough to implement bold new directions to buy time. This hurts the company in two ways: it delays real progress and muddies the situation.
• Benchmarking distracts from the important strategic issues. Things like finding new markets and building products or services to meet them. Also, finding out how increase throughput through assets. How about unlocking the potential of employees through pay and retention systems.
• If you outsource benchmarking and use it as your strategy, you are essentially outsourcing your strategy. This is the kiss of death for any business.

Would you let these guys set your strategy?

I could go on and on about the evils of benchmarking as strategy, but Tom Peters sums it up quite nicely in this youtube clip.

Finally, I’m not saying that benchmarking is bad.  It can be useful if you are comparing companies you wish to buy and not manage.  Just don’t let it be your basis for strategy.

This quote comes from Thomas Corbett’s book “Throughput Accounting.” Corbett quoted this from the godfather of Theory of Constraints (TOC), Dr. Eliyahu M. Goldratt. This is a bold statement but is true. Cost accountants and business managers are not stupid, so how can this be? This blog explores these questions and proposes a solution.

Why use cost accounting?
Ever since people have owned businesses, there have always been a need to measure how they were doing. As businesses have become more complex, it became more difficult to see if the business is doing well or in serious distress. An ideal cost accounting system would:

• show how the business is performing
• where to make true improvements
• make things clearer, rather than make them murkier.

Unfortunately, traditional cost accounting falls down on all three requirements. Here’s why.

Problems with cost accounting
There are a number of problems with typical cost accounting. Here are a few of the worst problems.

Based on 100 year old assumptions
When we look at the financial statements of companies, things like labour and utilities are included in cost of goods sold and inventory. This was a good assumption in the industrial revolution, where these were truly variable costs. Now manufacturing is more dependent on machine uptime and speed than the number of people working. We don’t send people home when the factory has downtime, but cost accounting assumes that is exactly what we do.
Back in the industrial revolution, managers didn’t have access to information to the extent we have today. They might know a little bit about what was happening upstream and downstream, but nothing else. The strategy of being as productive as possible in each step of the process therefore was the best one available.

Arbitrary allocation of overhead
Instead of explaining this, let’s look at an example. A company has three divisions and a head office. The following table shows the year’s results.

If looking from a purely cost accounting standpoint, division A is losing money and is a candidate for closure. If we close the division but keep the same overhead, the following would result.

So by shutting down the money losing division, we have decreased the profit from $17 to -$3. But wait, it gets worse. Now division B is not profitable. What happens if we shut this division down?

Although this example is very simple, it shows how cost allocation can lead to wrong decisions.

Encourages local optimization
Managers for a department or a facility inside a large organization will normally be measured and paid based on their individual department performance. This will lead to the manager to decrease costs inside their department. The one way all managers will try to decrease costs is to produce more. This makes sense because you can spread your fixed cost over more production, making your costs look lower. The obvious problem with this logic is if the extra production is not sold, it goes into inventory as work in process (WIP). In fact, the only place that this strategy works is in the constraint of the business. That is usually only one step in the process. If the constraint is sales, this is an especially disastrous strategy.

Encourages building inventory
In addition to the local optimization problem, cost accounting gives the wrong impression that more inventory is better. The reason for this is how inventory is measured and counted in financial statements. If inventory is not sold during a reporting period, the cost of the raw material along with the other costs are reported as WIP on the balance sheet. Inventory is an asset and a higher asset base is usually associated with a healthier balance sheet. If costs were unusually high during that period, this WIP value is higher. Some managers may not want to sell this inventory out of fear of the balance sheet and income statement implications. Talk about bizarro strategy.

Is this your cost accountant?

Obscures the real picture
Perhaps the biggest problem with cost accounting is it does the opposite of what it sets out to do – make decisions easier. The allocation of overhead, local optimization and the over-valuation of inventory make it difficult to see what is really happening in a company. Worse, it hides how to make improvements.

There is a much better way
Fortunately there is a simpler and much better way to measure company performance. It is called Throughput Accounting.

Throughput accounting
The first notable thing about this method is how simple it is. Instead of learning the rules of cost allocation, WIP and internal scorecards, there are only three measurements.

Throughput
Throughput is by far the most important measurement of throughput accounting. It is defined as sales minus true variable costs at the constraint of the business. True variable costs are things such as raw materials, freight, packaging etc. It does not include labour and other expenses that don’t track with throughput. The important part of the definition is throughput through the constraint of the business. This means if you increase throughput, the business will improve. There is nothing simpler than that.

Expenses
Expenses are all other costs to the company. Overhead, interest, depreciation, labour are all expenses. Throughput accounting doesn’t waste effort on finding little boxes to allocate costs. This isn’t nearly as important as throughput because there is a definite top level of cost performance – zero costs. If you meet this goal, it means you are out of business.

Investment
Investment represents how much cash the firm has tied up to operate. This is inventory, equipment and other fixed assets. It is treated as something necessary to support the business, not something with its own inherent value. The main advantage to this is it leads business managers to keep enough inventory to support throughput, but eliminate everything else. This way they avoid problems like shrinkage, obsolescence and problems when high cost WIP is finally sold.

Based on real world
The real beauty of throughput accounting is it takes advantage of the information available today to provide real guidance. If a manager makes an improvement in any of the three categories, the results will be apparent on the income statement, balance sheet and cash flow statement. The results are real and unambiguous. If you use this system properly, decisions will become easier and your success rate will increase dramatically.

I have only introduced the concept here. For more information there are two excellent books. Throughput Accounting by Thomas Corbett and Throughput Accounting – a guide to constraint management by Steven M. Bragg explain the concept and prove effectiveness with lots of examples. If you are struggling with your cost accounting system or want to improve your processes, these are must-reads.