(Picture: The Goal, Eliyahu Goldratt)
Strategy 4 Saturday Blog (<4 minute read)
Accounting’s 3 Principles
In The Goal, Eliyahu Goldratt doesn’t just teach us about bottlenecks—he challenges us to rethink accounting itself. Traditional metrics often obscure what really matters: profitability. Financial reporting can bury key insights under layers of complexity, making it hard to see the true drivers of success. Goldratt simplifies accounting into three principles: throughput (revenue minus total variable costs), operational expenses (all fixed and indirect costs), and inventory (changes in stock balances). This approach offers clarity, enabling leaders to focus on what directly impacts their bottom line.
This simplicity allows businesses to evaluate decisions with a laser focus. Goldratt warns against investing in systems that don’t improve throughput or reduce operational expenses. Back in the 1980s, companies often bought expensive robotics for manufacturing without addressing bottlenecks. This added costs without improving output or reducing delays. The lesson remains just as relevant today. If an investment doesn’t contribute directly to profitability, it may be doing more harm than good—no matter how innovative or trendy it seems.
Take a modern example: companies investing heavily in generative AI. While AI offers transformative potential, implementing it without improving throughput or cutting expenses often adds unnecessary costs. It’s like companies in the 1980s buying robotics that didn’t address manufacturing bottlenecks—inventory piled up, operational expenses rose, and profitability stagnated. Today, businesses are spending millions on AI tools, but if those tools don’t increase revenue or decrease operational costs, the results can mirror those earlier mistakes.
Continuous Improvement
Goldratt’s second major insight was about continuous improvement. He urged businesses not to stop with the first bottleneck they solve. Every process improvement creates a new constraint somewhere else, and the cycle of identifying and addressing these constraints is what drives sustained growth. The principles of The Goal don’t just apply to manufacturing—they apply to marketing, customer service, product development, and beyond. By constantly reevaluating where bottlenecks arise, businesses can create a culture of adaptability and success.
With today’s tools, including AI, we can pinpoint bottlenecks more effectively than ever. However, common sense and the principles of The Goal remain critical. Every investment should pass a simple test: will this make us more money? If it doesn’t improve throughput or cut costs, it may be time to reconsider. As businesses navigate complex decisions, The Goal serves as a timeless guide. It reminds us that profitability, not complexity, is the ultimate measure of success.
Podcast Sponsor: Oswego Private Wealth Management
- Mon, 12/9 – John and Mark X. Cronin
- Tues, 12/10 – Glenn Gow
- Weds, 12/11 – Glenn Gow
- Thurs, 12/12 – Glenn Gow
- Fri, 12/13 – Carl J Cox – The Goal 2
- Tues, 12/10 – Don Lindsey
- Thurs, 12/12 – Carl J Cox , re-release
