The Extraordinary Power of 80/20

I’ve been working with a new client for the last month.

Using 80/20 techniques, I have been blown away with what we found.

I think we will more than double their net profit this year, even with the same level of sales.

If their profit is 100 now, I think it will be 239 by the end of this year.

I will also be helping them grow their sales which will increase profits further but I’m going to leave that to one side for now and focus on the first part – more than doubling their profits on their current level of sales.

How is that possible?

In short, 80/20 is the answer.

What did we do to identify this massive increase?

And what lessons are here for your business?

What we did was break down their profit and loss, so it does take some number crunching but not a huge amount.

There are 2 main aspects to this business and the best way to think about it is that they make photocopiers and toners. Overall the business is quite profitable but the owners feel the toners are more profitable than the photocopiers.

We took the sales and costs and split them across the 2 parts of the business. With some of these like wages, it’s not too difficult as they have reps and other staff allocated to specific parts of the business. Admin staff which work on both were split 50:50.

When we finished the exercise, the numbers were an eye opener for everybody. While the toners made a profit of €224,000, the photocopiers lost €124,000.

How is this possible?

This loss happens for a number of reasons. Last year when working out the selling price of the photocopiers, not all their related costs were included like admin staff, diesel etc.

Another reason is that some jobs took longer than quoted initially, so a job that should take 100 hours, took 130 and the price had already been given out to the customers.

Plus there are some internal wastages, which are being addressed.

In the next few weeks, we will make some additional tweaks which will get the company on track to more than double their profits this year.

This confirms to me how I have always described 80/20

“It is the single most powerful principle that you can ever apply to your business”.

Are there lessons here for you?

What might you discover if you split out your profit and loss?

Or you start comparing your accounts to your costing method (this one always throws up things to tweak to improve profits).