Intro
Business strategies never fail to impress, with ideas that keep getting out of the box more and more. But, how many of these ideas are worth incorporating into your business strategy, especially if you consider the financial implications you have to face the moment any of those “out of the box” ideas fail to work out?
Today’s rule has seen the sun decades ago, but for some reason seems to be keeping up with all the trendiest rules. Business enthusiasts love it, and even normal human beings just like you and us are taking an interest in making it part of the way they manage their daily lives.
Our pick for today is called the 80/20 Rule, have you heard about it? If you did, good for you, and if not, good for us as we’re about to let you dive right into it.
Let’s storm some knowledge together!
What is The 80/20 Rule?
Simply put, the 80/20 rule or The Pareto Principle is a principle coined by the Italian economist Vilfredo Pareto. According to some interesting observations Pareto made in the early 20th century, he noticed that 80% of the wealth of land in Italy was owned by 20% of the population only. In other words, a minority contributed to the majority of the economy’s outcomes.
As a result of these interesting insights, Pareto investigated the possibility of making this a rule of thumb for business, finance, and pretty much everything in life. It basically states that 80% of the effects or outcomes are the results of 20% of the causes or inputs, in other words, 20% causes the results of the remaining 80%.
To help you get it better, let’s use an example.
The 80/20 rule refers to using an entity’s best assets efficiently so that maximum value can be created. However, the key takeaways lie in how you do it, as it aims to teach you how to achieve more by doing less, and working smarter instead of harder. Cool, let’s take an example now.
– Let’s say you’re trying to clean up your room after a long week of mess piling up. What you’ll do first is try to identify which parts of the room you should take care of first to speed up the cleaning process and get the room as clean as possible. No matter how you start, you’ll end up with a clean room, however, if you choose a wise start you may end up getting the task faster and maybe cleaner.
And this is what the 80/20 rule is all about. The goal is to figure out which 20% of input will give you 80% of the outputs you need. In business language, identify the 20% of your company’s clients that contribute 80% of its revenue.
The 80/20 Rule Fallacies
The 80/20 rule is a very effective tactic to implement in business, but it is often advertised in ways that don’t serve it well. While it’s beneficial indeed, it’s not the secret weapon that’ll take your business from where it is now to 10 levels higher just like that. In fact, this rule works best after you have established a solid base for your business, and have enough data about your clients, numbers, and next steps.
Once you have established this, applying the 80/20 rule is super helpful. Why? Because it’ll give you insights into how you’re doing and keep your eyes wide open for your top clients that cause the highest revenue, or maybe your top consuming resources that contribute to most of your expenses.
This rule can be extended to help you make a list of your daily goals or even the company’s finances. It has no restrictions making it a rule set for everyone and can be used by anyone.
Using it to Manage Your Finances Better
There are many aspects of life where The Pareto Principle can be applied. In today’s article, we discuss how applying the Pareto Principle can help you make better financial decisions.
1- Know Where Revenue Lies
Giving your customers the treatment they deserve determines if they remain just customers or lifetime clients. But, not knowing who gives you the highest results will make it difficult for you to offer them the extra privileges you have in the bag, and you’re sure not going to offer that just to anyone, right?
In such cases, applying the 80/20 rule is highly recommended, and tools that allow you to know such data make it even better. A good example would be the analytical features we empower clients with through InvoiceQ. With these features, you can analyze invoices, numbers, client data, vendor data, and more. Hence, implement the Pareto Principle accurately.
2- Streamline Invoice Collection
Invoice collection isn’t only about collecting paid invoices and watching revenue increase. You’re wrong if you think this is all it is about, there is more to it. With the 80/20 rule, you can discover more interesting insights and metrics such as the most outstanding invoices, and which clients stand behind them. Of course, having systems that give you these insights is the first step to go. Fortunately, InvoiceQ has that!
Knowing this enables you to tailor special plans, offers, promotions, and more to these clients so they feel more rewarded while using the service. Furthermore, it enables you to know which services or products bring you the most revenue and optimize them as needed. This can be easily done on the InvoiceQ system as we enable you to track invoices for all items sold with detailed reports and real-time status updates.
3- Improve Cost Control & Expense Management
Something that comes hand in hand with tracking your top source of revenue is determining your top source of cost. Discerning your top costs enables you to manage expenses significantly better, and establish better cost control strategies to save more on expenses. In simple English, focus on the 20% top expenses that contribute to 80% of the company’s cost plan. As a result, you’ll end up with better risk management and smart allocation of resources.
Let’s Close the Book on This
The 80/20 rule, like any other rule out there, plays a vital role and continues to be so. However, while using the rule in your business, make sure you realize the importance of what precedes and follows it.
Furthermore, adopting this rule only teaches you where to shift focus but it does not by any means tell you to ignore other things just because they don’t fall into the 20% input contributing to the 80% output.
Life is all about balance, so make wise decisions if your goal is to get smart results. However, remember not to forget that it’s too short not to have your dessert first as you try to save the best solutions for last. Enjoy your cake and start with that cherry on top first!
