How to measure the hidden cost in your business

 “How are we tracking compared to budget?”

This is the most common approach to measuring financial performance in operations.

The focus is on measuring the cost of doing something.

“Do we have the budget for this?”

“How much is left?” (as you get closer to the end of the year).

And, it can lead to inaction.

Not only is there a cost of doing something, there is also a cost of not doing something.

How do we measure this hidden cost of inaction?

Dr Alan Barnard, an expert in the Theory of Constraints, recommends calculating the cost of a days delay.

I recommend you keep it simple. Total your fixed costs for the last 12 months and then divide them by the number of operating days.

This hidden cost will surprise you.

 PS: I refer to the cost of inaction as a hidden cost because it is rarely discussed or used in making decisions on resource allocation.