How 80% and 20% Equal 110% Performance

No this isn’t new math, or even fuzzy math – I like to call it Optimization Math! The type of math every small business owner should do to get more bang for their buck. Two of the biggest challenges I hear from small business owners are 1) they wear too many hats, and 2) there is simply not enough time in the day to get everything done.

This dilemma often leads to frustration, anxiety, and despair. I’m sure all small business owners have felt that way at one point or another. And I’m sure that most of the time that feeling comes from trying to do 100% of everything, 100% of the time, and with 100% success. Now that’s what I call fuzzy math! I think you will agree when you look at that formula – it just doesn’t add up. Yet, as small business owners, we sure try to make it work every day anyway.

If you agree with Albert Einstein that, “the definition of insanity is doing the same thing over and over again and expecting different results”, and you are ready to try a new approach – let’s take a look at that Optimization Math.

The 80/20 Rule, also known as the Pareto Principle, posits that 20% of causes are responsible for 80% of effects. Put another way – 20% of your efforts are responsible for 80% of your results. Viflredo Pareto, an Italian economist in the 1800’s, observed that 80% of his country’s wealth was owned by 20% of the population. This observation has since been noted to apply in many aspects of our lives. For example, you wear 20% of your clothes 80% of the time and you hang out with 20% of your friends 80% of the time.

In your business you will find the following is often true:

• 20% of customers are responsible for 80% of sales
• 20% of products are responsible for 80% of sales
• 20% of sales are responsible for 80% of profits
• 20% of employees do 80% of the work
• 20% of employees are responsible for 80% of problems

I have personally done this analysis in many businesses from varied industries – and the principle always holds up. Not always exactly 80/20 – but an imbalanced ratio of input and output somewhere near there. In other words, you won’t see 100% of product responsible for 100% of sales, or 100% of employees contributing 100% of work. While we get that intuitively, somehow we still expect to be the exception to the rule! There’s that definition of insanity again.

So how do we use this principle to get to that elusive 110% performance?

First, you must identify what the 20% are. I do an exercise with my clients where I ask them to write down everything they do at work for a whole week. Normally they don’t complete the task – of course, because they are too busy doing everything to record the doing! So we sit and complete it together, and then I have them indicate the percentage of time they spend on each task.

We then sort each task into ABCC1 categories as follows: A) Duties only you can perform, B) Duties you need to review and approve, C) Duties you only need to be informed of results, and C1) Duties you only need to be informed of unacceptable performance. Would you be terribly surprised to learn that most of the small business owner’s time is spent on “B”, “C”, and even “C1” tasks? Meanwhile, the “A” tasks, which impact the company most, go largely unattended – if not entirely left off the list!

Those “A” tasks are the 20% of efforts that give the company 80% of results. So select and sport the vital 20% of hats in your collection and let others in your company wear the other 80%. This is called effective delegation. If no one in your company has the skill set or time then consider outsourcing.

By focusing on the 20% you can perform at 110%. It’s the difference between specialization and a “jack of all trades, and master of none”. Which one do you want to be? Which one benefits your business the most? Which would you enjoy more?

Mark A. Sandate is a speaker, author, and founder of MASSolutions, LLC – a business advisory firm specializing in small business growth. For more information, and to inquire about our workshops and/or a free business consultation please email MASSMyBiz@mas-solutions.biz.

Small Business Prosperity in a Down Economy

Three winning strategies!

Whether it’s declining sales, increasing costs, decreasing cash flow, or a combination thereof – small businesses are feeling the impact of a down economy. With limited access to capital, the small business will not make it, and the small business owner’s lifestyle will suffer as a result. That’s the bad news. The good news is that small businesses can be much more flexible and reactive than big business. You can adapt to a slowing economy much quicker, and improve your odds of not only surviving, but coming out stronger on the other end. Here are three winning strategies to beat a down economy and protect your lifestyle:

1. Tighten your belt, Plan for Profit, and Optimize Cash Flow.
Tighten your belt. You are likely already doing this at home – eating out less, delaying major purchases, etc. Do the same in your business, take a hard look at last year’s financials, and identify what can be cut this year. Start with “luxuries” (coffee service, etc.), then turn your attention to paying less for the same (shop insurances, cell phones, etc.). Finally, take a look at what you can make do with less of – supplies, vehicles, and yes – even employees. Remember, the survival of your business is at stake here, if the company fails, then everyone is out of a job – including you!

Plan for Profit. After reducing your costs and freezing them, make sure your revenue level covers overhead to ensure profitability. It’s never a good idea to just let profits happen to you – but especially so in a down economy. Set a realistic sale’s goal, perhaps based on last year’s level – then see what happens if you reduce it by 10%, and 15%. Will you still make a profit? If not – go back to the cutting board!

Optimize Cash Flow. If you are going through tough times – it’s likely your customers are too, and that will be reflected in your accounts receivable aging. Have a consistent credit and collections plan – your first call should be a customer service call before the invoice is due, and another immediately following the invoice due date. Remember the squeaky wheel gets the oil. And despite your desire to increase sales, be very careful extending credit – do your due diligence first. Also, take a look at inventory, liquidate dead items and unfreeze your cash!

2. Differentiate or Die! As the economy shrinks, so does your market, and so does your piece of the pie. It is more important than ever to make your offerings standout in a crowd of look alikes. Why should customers buy from you, instead of your competitors? If you don’t know – just ask them! Compile and sort by the most common answers, as they say – the cream will rise to the top. The top reasons they buy are indeed what make you different – now get out there and shout it from the mountain tops. Use monies saved from cost cutting and invest in a marketing campaign trumpeting your difference. Companies that do this very well actually experience growth in a down economy!

3. Improve productivity & efficiency by increasing morale. Hard to do when taking away their coffee service, but what’s even scarier to your employees is the insecurity of a struggling company. Share with them your efforts to improve the business, solicit ideas for savings and revenue opportunities. It’s easier to accept losing their cell phones when the idea comes from them as a group. More importantly, it gives them a sense of control over their own livelihoods. If they help the company survive, they survive too!

In summary, it’s up to you. You can go with the bad news or the good news. You have no control over the bad news (the economy), but you do have control over the good news (your business) – so the choice is obvious. Implement sound financial practices, differentiate your offerings in the market place, and get your employees to help. Before you know it the economy will be re-entering a boom cycle and you will be uniquely positioned to prosper from it!

Mark A. Sandate is a speaker, author, and founder of MASSolutions, LLC – a business advisory firm specializing in small business growth. For more information, and to inquire about our workshops and/or a free business consultation please email MASSMyBiz@mas-solutions.biz.