Understanding Throughput: A Key Metric for Business Efficiency

Throughput (also known as the flow rate) is a measure of a business process flow rate. Essentially, it measures the movements of inputs and outputs within the production processOperating CycleAn Operating Cycle (OC) refers to the days required for a business to receive inventory, sell the inventory, and collect cash from the sale. It is an important metric in the operations management of a company.

This variable primarily indicates the efficiency of operations that are vital to the overall success of a business. The maximization of throughput levels can be the key driver in maximizing a company’s revenueSales RevenueSales revenue is the income received by a company from its sales of goods or the provision of services. In accounting, the terms "sales" and.

The concept of throughput is essential to companies in various industries, even if they are not involved in the production of goods. For example, it can be applied to assess how fast the company provides services to its customers.

Throughput Formula

The formula can be derived from the following equation of calculating inventory:

Where:

I – the inventoryInventoryInventory is a current asset account found on the balance sheet, consisting of all raw materials, work-in-progress, and finished goods that a. This is the number of units that are currently contained in a business process. Inventory is measured in number of units. Note that the concept of inventory in operations management is different from the accounting definition of inventory. In accountingFinancial Accounting TheoryFinancial Accounting Theory explains the why behind accounting - the reasons why transactions are reported in certain ways. This guide will, inventory includes products that are waiting to be sold. In operations management, inventory comes with a broader meaning and it includes all the units of the products within the operations system.

R – the flow rate (throughput). It is the rate at which the number of units goes through the process per unit time. The rate is measured in units/per time (e.g., units/minute).

T – the flow time. This is the time that the units spend in the business process from the beginning to the end.

If we rearrange the formula above, we can find throughput using the following equation:

R = I / T

Example of Throughput

Consider a company called ABC Corp. that manufactures chairs. The company’s management wants to increase its profits by improving the operations process. Therefore, the management decides to find out the company’s current throughput.

Currently, the company holds 100 chairs in inventory. The average time that a chair is contained in the business process from its production to selling is ten days. Using the above information, we can find the throughput:

R = 100 chairs / 10 days

R = 10 chairs/day

The company’s throughput is 10 chairs per day. Alternatively, you could state that the daily throughput is 10 chairs.

Related Readings

Thank you for reading CFI’s explanation of throughput. CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™Become a Certified Financial Modeling & Valuation Analyst (FMVA)®CFI's Financial Modeling and Valuation Analyst (FMVA)® certification will help you gain the confidence you need in your finance career. Enroll today! certification program, designed to transform anyone into a world-class financial analyst. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below:

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