ACCOUNTING FOR THE PARETO PRINCIPLE 5: Which 20% of a Small Business is Critical
The Pareto Priniciple (also called the 80% - 20% Rule) has been applied in a variety of fields & disciplines; e.g., business management, time management, management of sales people, project management, development economics, etc. Basically, the Pareto Principle states: in any endeavor, a 20% segment can explain the status of almost anything and can influence what can or will happen to the undertaking. The Pareto Principle has also been called the Rule of the Vital Few and the Trivial Many.
For small businesses, it is best if you consider the 20% as critical and the 80% as important (and not trivial items which can be handled haphazardly or, worse, ignored).
Which 20% of a small business should be considered critical?
Working Capital
Working Capital funds the cost of the labor & materials that go into the goods you sell or the services you render (i.e., your Cost of Goods Sold or Cost of Sales) and what you use to pay for salaries, rent, office supplies, etc (i.e., your operating expenses). Since these expenditures are a permanent feature of your business, Equity is the preferable source of funding for Working Capital. If it is funded from debt, the more management attention it should be given.
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Tags: business growth, business management, critical 20%, economics, equity, Pareto Principle, poverty threshold, project management, sales management, small businesses, time management, working capitalRelated Stories
POSTED IN: Accounting Concepts, Accounting for NonAccountants, Best Business Practices, Equity / Capital, Small Business Finance
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