The Pareto Principle (80:20 Rule): How to Apply it to Your Finance Department
When your employees start their day, how do they prioritise their to-do list? Do they start with the smaller and more mindless tasks, such as checking emails? Or perhaps they spend a large chunk of their morning in meetings, catching up on the agenda for the week?
Without proper techniques in place to identify the most important duties, it’s understandable that your employees’ productivity and effectiveness will suffer. This is where methodologies such as the Pareto Principle, or 80:20 Rule, come into effect. The Pareto Principle can be applied to any type of business or discipline, including your company’s finance department.
In this guide, we’ll not only explain what the Pareto Principle is, but also reveal how it can be applied to your finance department to help boost their productivity, decision-making, and more to help your business thrive.
Table of Contents
- What is the Pareto Principle?
- How Can the Pareto Principle Be Used Within Your Finance Department?
- How Can ExpenseIn Help Your Finance Department Apply the Pareto Principle?
What is the Pareto Principle?
The Pareto Principle is popularly known as the 80:20 rule. It was named after Italian economist Vilfredo Pareto and states that for a large number of events, roughly 80% of the effects come from 20% of the causes.
In business, an aim of the 80:20 rule is to identify the most critical inputs that have the potential to be the most effective. Once managers determine the factors that are crucial to their organisation's growth, they should then prioritise those factors.
How Can the Pareto Principle Be Used Within Your Finance Department?
There are a number of beneficial ways that the Pareto Principle can be utilised within your company’s finance department to boost productivity, aid with decision-making, clarify their spending, and more. We look at each of these in more detail below.
Productivity
The Pareto Principle is a useful tool for helping your finance department prioritise their work and make sure they are getting the most out of their time. It encourages them to focus on the tasks that will have the biggest impact (rather than completing things on an as-needed basis), and allows them to delegate other tasks that may be less beneficial to the company's bigger picture. In this way, you can ensure that your team members are working as efficiently as possible.
So, what activities should your finance department be focusing on in order to boost their productivity? A finance team has several key roles within the company, including:
Cash flow management
Financial insights and reporting
Managing equity
Risk management
Tax management
While these responsibilities should all be highly prioritised by the department, it is likely that there are elements of these tasks that can be automated, outsourced, or at least placed further down in their list of priorities.
By using the 80-20 rule, finance departments can determine which aspects require the most of their attention, based on the results they yield for the company as a whole.
Decision-Making
The Pareto Principle can also be used to help your finance department with problem solving. If you have a problem, it's likely that there are several possible solutions. However, only one or two of those solutions will actually solve your problem and create real value for your business.
The Pareto Principle can be used to help you focus on the most important problems in your company by identifying which ones are worth solving first based on their impact on revenue generation or cost reduction.
In order to do this, finance workers should start by identifying a list of the current problems being experienced by the company. They should then determine the root cause of each problem. For example, why did the problem happen in the first place?
Each problem should then be assigned a number based on the negative effect it has on the business. This scoring methodology will vary depending on the kind of issue being addressed.
The final step involves grouping all related issues together and calculating their average scores. The problem with the highest score is therefore the one workers should attempt to solve first because it will yield the best results.
Pursuing Profitable Projects
The Pareto Principle can also help finance professionals make better decisions about what projects to take on, which will save their department (as well as the wider company) time and resources. It allows workers to budget their time effectively, so they can use those limited office hours to decide which tasks within those projects should be given more attention than others.
According to this principle, 20% of the projects a finance department take on should yield 80% of their results. With this in mind, finance workers should be encouraged to streamline their approach to projects.
Budgeting
Finally, the Pareto Principle also helps to ensure that when money is being spent by your department or company as a whole, it's being spent wisely.
The principle declares that 80% of results come from 20% of efforts, so it's important for finance departments to focus on the top 20% of their income streams.
By using this principle, you can make sure that your company isn't wasting money on projects, clients, or items that don't have any real value and won't help you achieve your long-term goals.
How Can ExpenseIn Help Your Finance Department Apply the Pareto Principle?
While the Pareto Principle can be used in many ways within your finance department, there is one major element that allows finance workers to use this methodology to the best of their abilities: real-time data.
The availability of accurate data allows finance departments to forecast future sales, predict customer and predict profitability, generate accurate cashflow statements, and perform value-driven analysis. By using live data, they’re also able to have the most recent information at their fingertips to make the best decisions for the business.
The Pareto Principle relies on this up-to-date data to determine exactly how and where the 80:20 rule should be applied.
Thankfully, ExpenseIn’s all-in-one expense management tool has a real-time reporting feature that allows finance departments to create strategies based on real-time expense information. This takes the guesswork out of applying the Pareto Principle, while additional features like automated receipt scanning allow them to outsource time-consuming tasks which don’t play a large role in the company’s ultimate financial goals.
