Definition of Basic Terms associated with Theory of Constraints
There is a couple of concrete words that Mr. Goldratt uses in the explanation and illustration of the Theory of Constraints in the book “The Goal”. The primary terms applied a lot in the book are Throughput, Inventory and Operational Expenses. With respect to the fact that the Theory of Constraints is about money and constraints, there he also mentions Return on Investment and Bottlenecks a lot. Understand the meaning of the above definitions and comparing them to the meaning he gives them is essential for the optimal analysis of the Theory of Constraints in “The Goal”.
In the contemporary business world, throughput refers to the rate at which a business organization works actually to achieve various objectives. The above term stands out as the basic rate at which a business organization pulls out the production of services and products with respect to a particular period. According to the provisions of the above definition, business organizations with relatively high levels of throughput bear greater competitive forces compared to those with lower throughput levels. The rationale for the above finds its basis in the fact that they have the ability to produce various services and products with much efficiency.
According to the Mr. Goldratt in “The Goal,” throughput is an idea that features as an integral part of the business management with respect to the Theory of Constraints. He defines throughput from a monetary point of view. He defines it as the rate at which a business organization makes money as a result of making successful sales. According to Mr. Goldratt, throughput is the primary aspect that gives a business organization the guidelines for determining the weakest part of the chain with respect to the production of a business organization. According to the above book, the optimality of throughput surfaces as a ratio of all units of production and the time used to produce them.
The contemporary definition of inventory refers it as the work-in-progress goods, the raw materials, as well as the wholly finished goods that feature as part of a business organization’s assets. Inventory stands as one of the crucial business operation asset possessed by most business organizations. The rationale behind the importance of the inventory finds a basis in the fact that the turnover of inventory surfaces as one of the key revenue generation sources.
The definition of the term inventory by Mr. Goldratt in “The Goal” is not very different though. He once again defines this term with reference to money. According to him, Inventory is all the money a business organization uses to invest in the purchases of everything it plans to exchange for money at a profit at a later day. With respect to Mr. Goldratt’s definition, there is no problem in having massive amounts of inventory for long periods of time. He defines inventory as money and thus, contrary to the contemporary point of view, obsolescence, storage and spoilage are not problems. However, he confirms with the modern view of little inventory as a business risk since it creates a high probability of business organizations running out of money.
The general definition of operating expenses in the contemporary business world is the components of a certain category of business expenditure incurred by a business in the due course of running its day to day business operations. Operational expenses are a critical aspect in determining certain key business performance features such as profit and competitive advantage. As a result, the management teams of business organizations have the crucial responsibility of ensuring that the operational expenses remain as small as possible so as to act in favor of profits as well as competitive management.
In “The Goal”, Mr. Goldratt gives a definition of operational expenses from a monetary point of view once again. According to him, operational expenses refer to all the money spent by a business organization in the pursuit of transforming the entire inventory it holds into throughput. The money could relate to tangible resources applied to facilitate the transformation, or it could have been used to acquire some knowledge that is applied in the conversion process. In light of the above, the definition by Mr. Goldratt augurs with the contemporary interpretation in terms of the composition of the contributing factors of operational expenses. According to both, operational expenses include the payment of direct employee wages, research and product development funds. According to “The Goal”, market expansion operations thus do not feature since such money is not directly involved in the conversion of inventory to throughput.
Return on Investment
According to the definition, with reference to the contemporary business world, Return on Investment is a measure applied in the adequate evaluation of an investment’s efficiency. It is used in the comparison of various investments in terms of how each has turned out efficiently. The calculation of Return on Investment, the management has to get the difference between the gain on investment and the initial cost of that particular investment and divide it by the initial value of investment. Return on Investment is very famous as a result of its simplicity and versatility. A higher Return on Investment means a better investment opportunity.
Mr. Goldratt just defines return on investment as the basic comparison between the money invested and the money made. In “The Goal” he used ROI a lot alongside cash flow and net profit. However, he uses it in the perspective of comparing investments and returns, which is the basic definition in the contemporary world.
In the contemporary business world, a bottleneck refers to a point at which at which a system gets a congestion as a result of workload arriving at a given point in the process faster than that point can handle. A bottleneck creates some efficiency as a result of the presence of queues and long service time cycles.
Mr. Goldratt mentions the above term quite a number of times in the course of his illustration of the Theory of Constraints in “The Goal”. He defines a bottleneck with from a point of view of resources. In his words, a bottleneck refers to a resource whose operating capacity is less than or equal to its current demand. According to his explanation, bottlenecks are not necessarily negative or positive aspects of business operations – they are simply indicators of operational reality.
Efficiency in Accounting and Financial Departments
In accounting and finance, efficiency refers to a given level of performance that describes various processes that yield to massive outputs after applying the lowest inputs possible. Ideally, efficiency relates to how inputs produce different intended outputs. In business organizations, efficiency features as a very crucial operations attribute since most of the business related attributes are very scarce. As a result, efficiency becomes vital in every department, function, and objective of a business entity – including in finance and accounting.
From the provisions of the content discussed by Mr. Goldratt in “The Goal”, the accounting and finance departments in a business organization can achieve a lot with less. The above means that staff addition is not always the option for business performance – but efficiency in the less staff. In light of the above, it is possible to define efficiency in finance and accounting in various perspectives.
Conducting frequent procedural walk-through is one way to identify and enhance the accounts department in a given business organization. The above involves meeting with all core stakeholders in the pursuit of understanding how they carry out their duties and responsibilities relating to accounting. In so doing, it becomes easy to understand all the crucial processes involving accounting and finance from end to end and thus easy to make strategic decisions aimed at promoting efficiency. Frequent procedural walkthrough enable one to stand a good chance of challenging every input, every step, as well as every output thus, identifying and eliminating any scene that would result in inefficiency.
However, the use of frequent procedural walkthroughs would not be enough by itself. It is necessary to have set the best accounting and finance standards upon which the walkthroughs find their basis for determining conformity. The implantation of best accounting standards helps in significantly reducing any chances of departmental workload. As a result, the personal accuracy of the employees remains high. Additionally, the presence of standards improves the individual response time, the cycle time, the quality of both raw and processed data, as well as the overall morale of the employees.
Technological advancement features a lot in the business world as much as it does in other industrial sectors. In light of the above, embracing the technological progress works to the advantage of the accounting and finance personnel. Ideally, machines do not have the ability to come up with strategic decisions. However, they have the ability to implement any activities they are assigned with the highest level of efficiency. With respect to the above, efficiency in accounting and finance can be defined in terms of embracing the integration of accounting software for use in the day to day activities in the accounting and finance departments. Apparently, the primary characteristic of a big percentage of the duties of accountants and finance personnel is calculations. As highlighted above, computers are good in numbers. Therefore, the application of software in the duties of staff working in the finance and accounting department saves time and resources thus helps in defining efficiency.
Opinion on a Management Accounting Point of View
Reading “The Goal” provides invaluable insight with respect to managerial accounting. The book helps the reader to embrace the Theory of Constraints and how the application of the theory’s provisions is helpful for an organization in establishing profit management focus. The information on the constraints helps one in understanding that the essential object of every company is profit, and anything that does not help in achieving that goal is a constraint. As defined in the book, the Theory of Constraints helps in determining the specific tools and techniques necessary for profit maximization and constraint control. Mr. Goldratt proves that almost all business organizations have very few real operation and profit constraints. As a result, by understanding all the provisions on limitations as addressed in the book, managerial accounting professionals can quickly implement the concepts from the book and realize significant improvements in their various business organizations.
Goldratt, Eliyahu, and Jeff Cox. The Goal: A Process of Ongoing Improvement. 3rd ed. Barrington, MA: North River Press, 2004. Print.
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