Posted by Kirsten Gibbs Last updated 6th August 2019 reading time
As we all know, profit is what's left of revenue after you've taken out all the cost.
Revenue is easy to measure. Cost is a little harder.
Ideally, you would directly attribute every cost incurred by a business (including what would normally be called 'overhead') to the end-to-end process of acquiring and serving a single client with their chosen product or service.
This is a time-consuming thing to do, which is why many small businesses work on a rule of thumb of some kind, such as the 'one third wages, one third overhead, one third profits' approximation used by many accountants.
It turns out though*, that 'time spent' is a pretty accurate proxy for all costs, so a relatively easy way to get an accurate picture of how much a process is costing to run, is to measure how much time is spent on running it.
This means that the efficiency of a business as a system can be measured in a straightforward way - by simple observation.
I like simple and straightforward systems, so this makes me extremely happy.
*"Duration-Based Costing: Utilizing Time in Assigning Costs" Anne-Marie Lelkes, Ph.D., CPA, Management Accounting Quarterly, Summer 2017.
