The 80/20 Rule, Time & Profit

I read a great post about overcoming procrastination at Ian Brodie’s blog last week.  Procrastination, in case you feel the need to look it up, is the urge to do other stuff instead of the important things that’ll make you more successful.

It got me thinking about one of the most common causes of procrastination for business owner/managers – too many options and ideas, with no plan or priorities to get them done.

Too Many Balls In The Air…

Entrepreneurs are a special kind of people.  We have tons of creative energy but if a child behaves like many of us do, they would be labelled as having Attention Deficit Hyperactivity Disorder (ADHD).

But this creativity is a great strength when properly harnessed.  If it’s left to run amok, it will be your undoing.

If you fail to focus on an idea until it comes to fruition, then you’ll run around in circles trying to keep lots of balls flying, until you wear yourself out and all of the balls land in a heap at your feet.

80/20, Mars Bars & Making More Profit

This brings us nicely to the 80/20 Rule, or Pareto’s Principle.  It’s named after Italian economist Alfredo Pareto who noted in 1906 that 20% of the population owned 80% of the land in Italy.

The wider point is that a small amount of influence or effort makes the big difference in our lives.

If you’re overweight it’s not the 2,000 normal calories per day that does it, it’s the extra Mars Bar or Dairy Milk every time you stop for petrol or buy a paper – that extra 300 calories of chocolate yum-yums wreaks havoc.

Your business follows the same principles.  If you were to look at all sorts of figures in your business, you’ll find this same kind of pattern will emerge.  Most of your sales will come from a few sources.  Your referrals will come from a small number of customers.  A few products will make the bulk of your profits.

Take the time to analyse what really works for your business and then think about all these balls you’ve got in the air.  Are they really helping your business to grow, or among the chaos are you kidding yourself that it’ll be better soon?

Concentrate your efforts where they will be best rewarded, stop trying to keep as many balls in the air, and you will soon see better results in the bank, too.

Use 80/20 To Set Priorities

Make a list of the projects or ideas you’ve got on the go and write down the number of hours each will take.

Next put a value against each project, so you have an estimate of how much each would bring in for your business.

After you’ve done this, you can just work through your list on the projects and ideas that will bring the most profit per hour for you.  Simple, eh?

As a quick example, let’s say that you’ve got a bunch of projects, like this:

Of course, you’ll probably have far more projects and ideas in your own list (mine goes over at least a sheet of A4).

But here’s the big secret – if you try to do all of them a bit at a time, you’ll only spend an hour or two a week on each one.  Which means that even the smallest project will take weeks or even months to complete.

Which means months without making any profit from them at all…

It’s a very common problem I get with clients who get lots of ideas from marketing clubs or listen to CDs from Chris Cardell – just too many ideas!

But stick to one project at a time and you’ll quickly start to rake in the benefits.  Real cash flowing in that brings a real return, quickly.

In this list, the total income from the projects will be around £49,000.  But £39,000 comes from just 2 projects – C and F – for just 90 hours effort.  That’s the 80/20 rule in play – in this case 40% of the effort gives almost 80% of the rewards.

Which reminds me – don’t get hung up on the 80/20 thing – it’s a ratio that often works out in practice, but not always.  So if 40% of the effort is needed for 80% of the results, it’s an 80/40 thing instead.

Sometimes it doesn’t even matter which you choose – there’s no profit from anything until it’s finished.  So pick one and put the rest on a list, in a drawer that doesn’t get opened again until you finish the one you’re working on.

When you finish that first project, it starts giving profit.  Forever.  It’s a really neat way to improve profit and it’s something practically everybody can benefit from.

The great thing with this kind of approach is that it’s really easy to see where the value is for all of your projects. Just be careful to be honest and realistic about the value of each project and then stick to it.  Your bank will thank you, and you’ll love your results.