Episode Transcript
[00:00:00] Welcome to another episode of Financial Snickens. I'm your host, Alisa McCabe. And today we're going to be talking about how to improve your profitability using the 80 20 rule. So we are going to look at what reports you can look at when thinking about this 80 20 rule. And if you've never heard of the 80 20 rule, I'm going to tell you about it.
So it's also known as the Pareto principle, and it suggests that roughly 80 percent of the effects come from 20 percent of the causes. So, How did this come about? In the early 1900s, Vilfredo Pareto identified this pattern while examining the distribution of wealth in Italy. He noted that just 20 percent of the population owned 80 percent of the land.
He also noticed this in this phenomenon of the 80 [00:01:00] 20 in other places of production like his pea plants in his garden. So, in the context of profit improvement plan, we can be, we can, this principle can be applied to identify and focus on the most significant factors that contribute to your profits. So, here we're going to talk about a profit plan improvement Based on this 80 20 rule.
So the first thing you can do is identify your high profit customers, analyze your customer base to identify that top 20 percent that generates 80 percent of your profit, and then develop strategies on how to retain or upsell these clients because they are. your most valuable clients, they're probably your best fit of clients too.
We always talk about having the right clients. The people that you're making the most money with are probably [00:02:00] the clients that fit your strategies. So what reports can you look at for this? You can list, look at profit and loss by client and identify the top 20 percent of the, what, who are the clients that you're making the most money on.
And we typically do it the top 10 clients. And then we track that revenue. And the profit and loss of that over months. So every month we can see, and then we see that we're maintaining that. And when we start not to, we know to investigate because there might be more that we're not looking at. Okay. The second thing that you can do with, to help with your improvement plan is to do a service analysis.
So identify the top performing 20 percent of your services that contribute the most to your profits. So. To do this, you would have to have a services list of
different services that [00:03:00] you provide and allocating income and expenses to those services. So once you have this report, you will Look at optimizing pricing, marketing, and sales strategies for these high performing offers.
So what, what it says is what you're looking for is to find out and isolate those services that are making you the most money. And make sure everything is focused on it. All your marketing strategies, all your services, even if you're talking with your team about becoming experts, you want to make sure it's in that area.
So what report can you look at to find this information? Profit and loss by services that will identify what services are most profitable in your company. The next way we're going to do a profit improvement using the 80 20 rule is we're going to look at cost [00:04:00] analysis. So what you're going to do is you're going to identify the top 20 percent of cost drivers that contribute to 80 percent of your expenses.
And then we're going to explore cost cutting measures to get new quotes or renegotiate contracts to reduce these high impact costs. So what report are you going to look at? You're going to start out by looking at your profit and loss by percent of income. This will show you what percentage of income all those expenses are and who's taking up the most and you have to decide how much You need to have those and how much they contribute to your profits.
And so there's also other areas in business where this 80 20 rule can be applied and where we should be thinking about it. So one of them. Is employee productivity. [00:05:00] So if you can identify the top performing 20 percent of your employees who contribute significantly to your business success, you can invest in additional training for them.
You can develop them to be high impact employees and. The reporting that you can go to to find this is time tracking by client or by service. This allows you to see how much time those high performing employees are spending on clients or services, and then you can allocate training and development based on that reporting.
Another area to look at. is task productivity. Look, we all have tasks to do in our businesses. By applying the 80 20 rule, we can maximize the productivity and efficiency by concentrating efforts on the activities that yield the greatest results and contribute most significantly to the success of the [00:06:00] business.
So, How can we do reporting on this? Track how long it takes to do tasks. Then assess which ones have the most impact on your goals. That will allow you to really focus on where your tasks that are making the most difference. We actually have done Um, some of this and we're working on it and it's a very interesting exercise because it allows you to see how much time it takes to do different tasks.
And there are certain tasks that we do that don't provide a lot of value to our clients, but are necessary. So we had to evaluate that and decide how much time is, is reasonable to be spent on this. When to move on to the next task. So, it's something that you can look at, and I would say that you should do this, um, assessment on this often.
Because things change, and it [00:07:00] actually will help you to find out. When there's been a change in services that you provide another place where the 80 20 rule you can apply and to help your profitability plan is sales and marketing strategies. So what you want to do is you want to analyze your sales pipelines and identify.
The most effective ones that bring you the majority of your revenue and then all and then allocate resources, marketing, push everything in that direction so that it will help increase that pipeline and then evaluate your marketing channels and the campaigns to identify the most effective ones and then shift resources towards those channels that bring in the highest return on investment.
So possible reporting on this. This is not a straight line. As it, as other, as the other reporting is. So one of the things that you can do is you can tag, um, or make a custom designation on [00:08:00] invoices to see what the source is of where these sales are coming from. So if you have a marketing campaign going on.
And you know that these clients came in from it, you can tag it in the invoice, and then you can run a report by that. And you can see how much revenue is coming in by that marketing campaign. You can find out if your If you have a pipeline, um, uh, you know, that, that you have, are pretty sure is bringing in the majority of your sales, you can start to track that too.
And that allows you to see where to allocate your resources and it is a customized report. It's not something that is readily available in most, um, accounting software, but it's a good one to have because where you're spending your money on your marketing, it's a great way to measure it. So. By concentrating all your efforts on the most impactful areas of your business as in
the 80 [00:09:00] 20 rule, you can achieve significant improvements in profitability.
Now keep in mind this, the numbers 80 percent and 20 percent are not precise statistics. They're just rough estimates that are used and they're just observations. So focus your efforts and activities on clients that promise the greatest returns. And by applying the Pareto principle to your business strategy, you're more likely to boost profits while reducing time and resources spent on less fruitful endeavors.
And sometimes that's the biggest problem. We don't realize that we're spending so much of our time and energy. and money on things that don't have a high return for us. And this is a good way to look at that because I don't think we review this enough. And of course, as a reminder, this is not set it and forget it.
If you set up these reports, you can review it regularly and then [00:10:00] update your profit improvement plan to adapt to changes in the market or your business environment. It's really important to set up these reports and make sure you take time to review them regularly so you can keep on top of being profitable.
If you want to talk more about the 80 20 rule. For being profitable, head over to my website, FirstStepsFinancial. com, and we can chat more about this and any of the reports that I mentioned. Talk soon.
