Continuing our cash velocity discussion …
Throughput (as defined in Goldratt’s Theory of Constraints Throughput Accounting) is sales revenue minus truly variable costs. Therefore we can increase your throughput by either 1) increasing sales, 2) increasing our selling prices, or 3) decreasing our truly variable costs.
Let’s start with the last one, first. To decrease our truly variable costs we can:
- Negotiate a lower price with raw material suppliers
- Negotiate a lower price with outside services, freight suppliers, or with any other truly variable cost vendors that we have
- Decrease the sales commission we pay to our sales people
There is a limit to how much we can reduce our costs. If our costs go to zero, then we are no longer in business. Therefore, we want these costs to be in line, but this is not where we want our focus.
… to be continued …
Here’s to maximizing YOUR profits!