Improving Profitability: The 80/20 Rule

Sometimes it’s hard for business owners to know how to take their businesses to the next level of growth and profitability. If you’ve been stuck at the same level of revenue or profit for a while, it could be because scaling your business is not a skill in your toolkit… yet. Enter a classic management book on scaling your business: High Output Management by Andrew Grove, ex-chairman and CEO of Intel. While the book was written in 1983, it has made a recent comeback in Silicon Valley, but it’s still not well-known outside of the Bay Area. Many people who have read it say it’s the best management book they’ve ever read—life-changing even. In the book, Grove applies the principles of engineering and manufacturing production to management. It’s all about process—developing processes and procedures so you can track what’s going on and measure the results or output every step of the way. Only then can you improve the process so it leads to higher output. Measurement is an important concept in the book. No matter what business you’re in, you can apply the ideas of developing processes, measuring them, and improving upon them in your business. Grove explains how managers can motivate their team members and improve production. He talks a lot about leverage, which enables scaling both positively and negatively, and how it can affect employees’ output. One example of positive leverage is when managers ‘nudge’ employees to enable their work. A negative example is when managers meddle and get in the way of progress. In the section on meetings, Grove breaks the topic down by purpose and lends his ideas on how to run each type of meeting better. He touches on other key topics such as decision-making, planning, motivation, performance reviews, and values. One significant highlight from the book: If you’re motivated to become a better manager and wish to improve the output of your organization, there’s nothing more important than training yourself. Reading this book is a wonderful way to spend time learning new business skills you can put into action immediately.

Creating a budget is one of the most critical steps for entrepreneurs looking to build a financially sustainable and successful business. A well-constructed budget not only helps manage day-to-day finances but also provides a roadmap for achieving long-term goals. To craft an effective budget, entrepreneurs must ask themselves the right questions. Here are some essential considerations: 1. What Are My Revenue Streams? 💰 Understanding where your money comes from is the foundation of any budget. Identify all revenue streams, whether it’s product sales, service fees, subscriptions, or other income sources. Ask: Are my revenue streams predictable, or do they vary seasonally? What are my most profitable products or services? How can I diversify my income to reduce risk? Knowing the answers to these questions allows you to forecast revenue realistically and prioritize high-margin opportunities. 2. What Are My Fixed and Variable Costs? 📊 Categorize your expenses into fixed (rent, utilities, salaries) and variable (materials, marketing campaigns, travel). For each expense, consider: Are my fixed costs sustainable as my business scales? Can I reduce variable costs without sacrificing quality? Am I accounting for inflation or rising costs in my projections? Breaking down expenses in this way ensures you have a clear picture of what it costs to operate your business. 3. What Are My Growth Goals? 🚀 Budgeting without growth goals is like navigating without a map. Ask yourself: Do I plan to expand into new markets, launch new products, or hire more staff? What investment is needed to achieve these goals, and when will I see returns? How can I balance reinvestment with profitability? Aligning your budget with your growth objectives helps ensure that every dollar spent supports your vision. 4. Do I Have a Contingency Plan? ⚠️ Even the best plans can face unexpected challenges. Ask: How much should I set aside for emergencies or unforeseen expenses? Are there risks (economic downturns, supply chain issues) that could impact my budget? How quickly can I access additional funds if needed? A contingency fund, typically 5-10% of your budget, can provide a financial safety net during turbulent times. 5. Am I Leveraging Technology? 💻 Modern budgeting tools can streamline your financial planning. Consider: Should I use software like QuickBooks, Xero, or specialized apps for forecasting? Can automation improve my accuracy and save time? What metrics or dashboards should I track regularly? Leveraging technology ensures you have real-time insights into your financial health. 6. How Will I Monitor and Adjust My Budget? 🔄 A budget isn’t static—it evolves as your business grows. Ask: How often will I review my financial performance (monthly, quarterly)? What key performance indicators (KPIs) will I track? Who on my team will be responsible for monitoring the budget? Regular reviews allow you to adapt to changing circumstances and seize new opportunities. 7. Should I Seek Professional Help? 🧑‍💼 Finally, recognize when it’s time to bring in experts. Ask: Do I need an accountant or CFO to guide my financial planning? Could outsourcing bookkeeping free up my time for strategic tasks? How can I ensure my budget aligns with tax requirements? Professional assistance can help you avoid costly mistakes and ensure your budget supports sustainable growth. Conclusion Building a business budget requires thoughtful planning and regular evaluation. By asking the right questions about revenue, expenses, growth goals, and risk management, entrepreneurs can create a budget that serves as a powerful tool for decision-making and long-term success. Start with these questions, and you’ll lay a strong financial foundation for your business.