The Fallacy of Cost Based Accounting

Profit = Revenue – Expenses

Cost-based accounting focuses on the right-hand side of this equation.

It focuses on scalable efficiency and squeezing out costs –

especially labor costs.

This manifests itself as

detailed weekly timesheets broken by task,

downsizing, outsourcing, and other cost reducing measures.

This is short-term thinking.

It is much more powerful to affect the left-hand side of this equation.

Have you tried doubling your prices recently?

Instead of tracking your team’s tasks into micro-buckets,

have you communicated the macro goal of your business,

and current constraints holding it back?

Cost cutting has a theoretical limit – zero.

Revenue (or throughout) does not.

You can always add more value,

build more products, or expand the market.

Instead of focusing on costs,

focus on increasing throughput.

Throughput is the rate of output of your business model.