The 80/20 Rule For Small Businesses

The 80/20 rule, otherwise known as The Pareto principle is an observation and theory that says approximately 80% of the effects or outcomes of a situation come from 20% of the causes.

Put another way, when it comes to running a small business, 80% of your revenue is generated by 20% of your total customers.

The origins of the 80/20 rule

The theory was founded in 1906 by Vilfredo Pareto, an Italian economist, when observing his garden! Pareto observed that 20% of the pea pods in his garden were responsible for 80% of the peas.

Later, he applied this theory to more pressing matters like economics and observed that 80% of the wealth in Italy was owned by 20% of the population.

Why is the 80/20 rule important to your small business?

The 80/20 rule can help small business owners identify how to best allocate their efforts and resources. It´s that simple.

For example, you can focus your sales efforts on the 20% of customers who make up the bulk of your company´s revenue.

One interesting thing to note is that the 80/20 rule also applies to other parts of your business in addition to revenue. For example, 20% of your employees may be responsible for 80% of company production, sales, or output.

Therefore, how can you utilise and manage your team more effectively?

Managing Your Time

One more area that the 80/20 rule applies to for entrepreneurs and small business owners is time management.

Remember time is money. As an entrepreneur, it´s natural to try to do everything yourself – it is what you´ve been accustomed to. However, it´s important to use your time wisely and ask yourself what the best use of your time is.

Sometimes we find ourselves spending our time on tasks that could be delegated and handled more efficiently. Instead of spending half a day updating your computer software, or spending hours making phone calls for quotes, think about whether you can outsource these tasks to another employer or hire temporary help.

This also applies to responding to hundreds of emails or cleaning your premises. Is this the best use of your time and energy or can this be outsourced?

Perhaps your time could be better spent developing sales strategies, taking meetings, or expanding your product range, to name just a few things.

Don´t Forget To Relax

One important thing to note is that using your time wisely doesn´t mean working 24/7. We all have optimal hours that we work, and we can only operate at a high level or high tempo for X amount of hours per day. Not everything can be nor should be done in a day.

Downtime and relaxing are essential to running your business. It helps you refocus and recharge your batteries. You will be more effective and come up with better ideas when you are rested.

So, are you applying the 80/20 rule in your business?

If it´s working capital you need to help run your business smoother, contact Ferratum Business to see how we can make your life even easier!