Accounting Solver

ACCOUNTING FOR THE PARETO PRINCIPLE 6: Which 20% of a Small Business is Critical

by ren on May 24th, 2008

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?

Customer Relations
It is superfluous to say that you have to take care of your customers. But, there are many ways of treating your customers. The best advice I have ever received on how to treat customers is in a previous b5media post in Home Biz Notes (of Mary Emma Allen & Yvonne Russel). The post (http://www.homebiznotes.com/my-mother-the-country-grocersuccess-isnt-always-what-you-think/) was written by Mary Allen and cited in http://www.accountingsolver.com/the-one-must-read-post/.

Supplier Relations
It would be a great advantage if you were able to establish relationships with your suppliers where you can delay payments (say, 30 or even 60 days) with only a minimal increase in price or, better still, without any additional cost. In this kind of arrangement, you can actually pay for your supplies from the proceeds of your sales or collections –thus, lessening the pressure on your Working Capital requirements.

The Relationship between your Accounts Receivable & Accounts Payable
In order to avoid undue pressure on your cash, you have to make sure that your accounts receivable & accounts payable are synchronized. You have to make sure that the number of days in which you collect your accounts receivable (i.e., credit sales) is always less than the number of days in which you have to pay your suppliers (i.e., cost of goods).

images from Microsoft Clipart

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POSTED IN: Accounting Concepts, Accounting for NonAccountants, Accounts Payable, Accounts Receivable, Best Business Practices, Equity / Capital, Small Business Finance