80/20 Rule For Managing Business Expenses

Running a business can, at times, feel overwhelming - especially when it comes to managing money. Many business owners struggle to figure out where to spend and where to save. That's where the 80/20 Rule (also known as the Pareto Principle) can help.

This simple idea can make managing business expenses easier and more effective. Here’s everything you need to know about how it works and how to use it to grow your business.

What Is The 80/20 Rule?

The 80/20 Rule states that 80% of your results come from 20% of your efforts. In business, this means that a small portion of your spending creates most of your success. The key is identifying which expenses are driving the most value so that you can focus on them accordingly.

For example:

• 80% of your revenue might come from 20% of your customers.
• 80% of your profits might come from 20% of your products or services.
• 80% of your marketing results might come from 20% of your campaigns.

By understanding this pattern, you can stop wasting money on things that don't matter as much and focus on what will works best and provide greater return and opportunity.

Analyze Your Spending

Start by reviewing all your expenses. Record every dollar that your business spends and categorize it accordingly. You can use online accounting software such as QuickBooks, or you can use Microsoft Excel or Google Spreadsheets. For example:

• Rent or office space
• Salaries and wages
• Marketing and advertising
• Inventory or supplies
• Utilities and internet
• Web hosting, software, technology

Identify High-Impact Expenses

Once you have a clear picture of your spending, you can:

• Determine which expenses help you to make money and grow th business
• Which expenses bring little to no value to the business

For example, you may determine that your spending money on software subscriptions that your business does not use, where you can redirect those funds to increse your online advertising.

The goal is to clearly identify the 20% of your expenses that benefit your business the most, and determine if the other 80% are really needed.

Reduce or Eliminate Wasteful Spending

Cut back on expenses that do not directly contribute to the growth or success of your business. This could include:

• Canceling unused software or memberships.
• Finding cheaper alternatives for services or supplies.
• Avoiding unnecessary upgrades or luxury items.
• Downgrade your office space to a coworking space or work-from-home.

Reinvest in What is Working

Reallocate your money you save to areas that drive results.

• Spend more on marketing and social media.
• Diversify your products and services.
• Invest in equipment that will help make your business more efficient.

Monitor and Adjust Regularly

The 80/20 Rule is not a one-time fix. Your business and environment are constantly changing, so it's important to review your expenses every few months.

I recommend you review your finances quarterly, looking for new ways to save money and increase efficiency.

Common Mistakes to Avoid

1. Ignoring Small Expenses: Small costs add up over time. Pay attention to every dollar you spend.
2. Cutting the Wrong Costs: Don’t cut expenses that directly contribute to your success, like customer service or quality materials.
3. Overlooking Hidden Costs: Some expenses, like maintenance or training, might not seem important now but can save money in the long run.

Following the 80/20 rule can help your businesses eliminate unnecessary expenses, drive higher profits, eliminate unwanted stress, and help you make better decisions for your business in the short and long term.

By focusing on the 20% of costs that deliver the most value and reducing wasteful spending, you can run a more profitable and efficient business. Start small, review your expenses regularly, and remember - smarter spending leads to bigger success.