This article is adapted from a presentation I made to the Georgia Chapter of the National Speakers Association on May 19, 2012
Today I am going to show you a basic financial analysis tool that you can use to dramatically change the way you do business.
But first, let me tell you a story about two things that are I hope are very close to your hearts – baseball…and Brad Pitt. Put them both together and you get last year’s hit film, Moneyball. It’s a story about how the manager of the Oakland A’s, Billy Beane, limited by one of the lowest 
budgets in Major League Baseball, turned a losing team around by using statistics to acquire undervalued players to build a winning team. The A’s had a winning season that included a record breaking 20 game winning streak. Billy Beane is credited with bringing a game-changing strategy, to the world of baseball.
Now that we’ve had a chance to warm up with some baseball and movie trivia, let’s get back to you and your business.
A basic statistical tool for business analysis is called the Pareto Analysis, and it can help you grow your business by figuring out where you are your really earning money. I’m going to tell you some background about the Pareto Principle, show you how to implement it in your business and what results you can expect from it.
The Pareto Analysis is a simple statistical technique that is also known as the “80/20 Rule”. It is named after Italian economist Vilfredo Pareto, who, at the beginning of the 20th century, observed that 80% of income in Italy went to 20% of the population. Pareto later carried out surveys on a number of other countries and found to his surprise that a similar distribution applied.
In the 1950s management consulting gurus found that the principle held true when applied to a various aspects of a business.
The basic way for you to do a Pareto Analysis is in an Excel spreadsheet. List each of your customer’s names (or each product) and put the total amount you have sold for the year (or longer if applicable).
Once your list of customers or products and corresponding revenue is in the spreadsheet, use the sorting feature to sort the list in descending order of the revenue column. Add a third column for cumulative (or total) revenue which will add each successive row of revenue to a Total Revenue Column. Adding a fourth column that shows your increasing percentage of total revenue will reveal your 80% point and which of your customers are in your top tier.
Quote for Today:
Managing by exception is like managing the needles in a haystack. What’s the best…way to find the needles? Shrink the haystack and use a magnet. ~ Bill Whiteside, Principal, Demand Solutions Northeast
You can have easy access to dramatic improvements in profitability by focusing on your most profitable customers and making sure they receive the treatment they deserve.
If you spend a couple of hours implementing the Pareto Analysis and make it part of your regular, basic financial review you will be empowered to make better decisions about which clients or kind of work opportunities are the kind you truly want. You can also use it to analyze any segment of your business and begin concentrating on what really works and eliminate valuable time spent on non producing strategies. You may not be surprised by who your top customers are or which of your products are the best sellers, the shock comes from just how dramatically your revenue is concentrated.
Since time is a finite resource, why not spend most of it on the activities or customers that generate you the most income? This shift in your focus can be the game changer in your business.
And that is how you will not only make more money, but you will also achieve greater satisfaction from your work. Now that’s a grand slam in any business.
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