Have you ever heard of the Pareto Principle?
It’s the idea that 20% of your effort generates 80% of results.
So, for example, 20% of your salespeople are responsible for 80% of sales.
20% of your business’s branches bring in 80% of your revenue.
And 20% of customers generate 80% of your turnover, too.
Well, obviously it’s not always exactly 80/20. But there’s a scary and actually slightly depressing imbalance between the small areas of your business that create lots of value – and the majority of things you and your staff do every day, which matter a lot less.
Why is this important?
Last week I explained that in order for your business to really thrive, you need to work out which products and services you offer are most profitable. Then you can concentrate on the profit-making side of the business, and either optimise or drop the products and services which are dragging your business down.
But that’s actually only the beginning of the story. If you really want to understand where the profit lies in your business, you need to apply the same approach to every area.
Analyse which suppliers allow you to operate at the highest profit margins…. And which may actually be costing you money.
Examine which members of staff are generating the most value for you…. And which are sitting at their desks surfing the internet, doing nothing!
You even need to look at the way you spend your own time.
How much of your day are you spending on activities that are really pushing your business forward, for example formulating a business strategy, finding new business and – of course – ensuring that your cashflow is running smoothly? And how much time do you spend bogged down in £10/hour work that could be performed by your intern?
Once you’ve established underperforming areas, you can decide whether there’s room for improvement, or whether you should get rid of them altogether.
In reality, you could probably endlessly segment different areas of your business that way.
….And I suggest you do!
There are likely vast areas of your business which are not generating profits or advancing your company in any meaningful way.
Your goal should be to maximise what’s profitable and minimise what isn’t.
Therein lies the road to riches.
Garry Mumford is author of the free guide, The 5-Step Process To Get Your Customers to Pay on Time, Every Time. He is founder and Director of Insight Associates, which since 1992 has been providing owner managed businesses with the financial insight essential for development and growth.
