Is your business following the 80-20 Rule? Many newer business owners may not know the 80-20 Rule and how it can help solve some cash flow and other financial problems. If you have a business and you’re looking for ways to improve cash flow or profits in general, Mark Dicus & Company will share more about the 80-20 Rule and how it applies to your business.
Pareto Principle in Customer Profitability
When it comes to running a business it is important to know your customers. There are two major aspects of your customers that you need to know. One is knowing which customers take up most of your time and second the most profitable customers. When determining your customers and seeing which one fits in these two categories, you will want to apply the 80-20 Rule. The 80-20 Rule is rather simple. Put simply, it means that 80% of your profits come from 20% of your customers.
How to Calculate 80/20 Rule
You will need to first identify that top 20% of customers that brings in the most profits. Once you have identified this group, you as the business owner will want to make sure they remain the most satisfied. Next, you will want to look closer at this group of customers and see why they are more profitable. By knowing why this 20% customer base brings in more profits, you can seek ways to bring other customers to this same category. However, satisfaction is key as only loyal customers will continue to bring in profits. Look for ways to keep them happy and seek their opinions on your business services and where you can improve. Many businesses will find ways to do this. One common example is online surveys. However, some businesses will even contact their customers and talk with them.
Terms of Payment in Trade
However, profit isn’t the only attribute to focus on. There are other aspects of a good customer to consider. There are many factors to ponder such as the total amount of time between orders, the volume of each order, and the terms of payments. When you hear the term orders, this can mean products as well as services provided. The terms of payment can also vary. Some customers may pay as soon as services or products are ordered or requested. Other customers may have a payment holding period which can be as long as 90 days. To better know your customers, conduct a survey among your client services staff, your sales team, and the production team. They can help better determine who your top 20% customers are.
Sales Analysis Report
Another way to look at the 80-20 Rule is to review and analyze your revenue by customer reports. You may want to determine if the 80-20 Rule can apply to your business. If you find that the 80-20 Rule does apply or can be applied to your business, consider providing special customer privileges to that 20% and find ways to encourage others to join that category.
Accounting, Financial Reporting & More in Summerlin, North LV, Henderson, Lone Mountain Village & Greater Las Vegas, Nevada
The 80-20 Rule can greatly help business cash flow or profit problems. If you find you need help analyzing your business profits and need help, contact Mark Dicus & Company and schedule an accounting consultation today.