Follow the dollars, not the percents

To follow their financial success, most businesses measure revenue, profits, and margins. But there are others. The most useful of these others is contribution dollars.

Contribution dollars are what's left over from a sale after paying any variable costs. Since we are operators and not accountants, we call them ¨ Throughput Dollars. The money leftover to pay bills and make a profit after sales.

Variable costs include the cost of raw materials, packaging, and any other costs yoou pay only when you get a sale. Can you think of what you pay?

Here are reasons why throughput earnings are more effective measures than margins:

1. Throughput Earnings focus on profitability, not just sales. Margins don't consider the volume of sales. Focusing on the amount of real money made, businesses can better keep an eye on profitability.
2. Encourages quality. Focusing on margins, leads to a cost-cutting mentality. You may be tempted to cut corners, or sacrifice quality to increase margin.
3. A Throughput Earnings report, and the IDW Throughput Earnings Dashboard™  help identify areas for improvement. Businesses can use it to identify which products or services are the most profitable, and which ones may contribute little. It helps to make informed decisions about product pricing, marketing, and production.
4. Enables better forecasting. Throughput earnings can be used to forecast future profitability. By estimating how much you need to cover fixed costs and generate a certain level of profit. This information is essential for businesses to make informed decisions.
5. Provides a clearer picture of financial health. Throughput earnings provide a more accurate reflection of a business's financial health than margins alone. A business with a high margin but low contribution dollars may be generating a lot of revenue, but only a little profit. On the other hand, a business with healthy contribution dollars may generate less revenue, but more profit.

In conclusion, whether you call them contribution dollars or throughput earnings, they provide a more accurate and useful measure of a business's financial health than margins. By focusing on contribution dollars, businesses can make informed decisions about pricing, production, and marketing, which can lead to a more sustainable and profitable business.