The Financial Indicators
April 15, 2020
Inspired on Goldratt’s indicators for the Theory of Constraints, the Financial Indicators are listed below. The simplicity of the equations is vital to their general acceptance and understanding. This is the basic financial information that companies of any type and size should maintain.
Financial Indicators
| Initials | Indicator | Description |
|---|---|---|
| RI | Return on Investment | Equals Net Profit divided by Investment. |
| I | Investment | It is all the money the system invests by buying Inventory that the system intends to sell. |
| NP | Net Profit | Product Sales Revenue minus Raw Material, Labor, and Overhead Costs. |
| PS | Product Sales | It is the cash flow received from the sale of products. |
| RM | Raw Material | It is the cash flow that remunerate suppliers. |
| G | Gain | This is the rate at which the system generates money through sales. Equals revenue from Product Sales minus Raw Material expenses. |
| WF | Workforce | Company expenses with Labor. |
| OH | Overhead | Other fixed costs of the Company. |
| OE | Operating Expense | It is all the money the system spends turning Inventory into Gain. It is the sum of the Workforce and Overhead. |
Formulas
\( \begin{aligned} RI&=\frac{NP}{I} \\ NP&=(PS-RM)-(WF+OH) \\ G&=PS-RM \\ OE&=WF+OH \\ NP&=G-OE \\ RI&=\frac{G-OE}{I} \end{aligned} \)
Published in Business Amplifier, also e-book and Amplificador de Negócios.