If you don’t have a finance or accounting background, it may not always be clear why keeping detailed financial records can be so valuable. Of course, you need to track your finances for taxes, but there are plenty of good reasons to get more detailed and pay attention to every monthly update.
When doing a monthly review of my business finances, I noticed something that helped me triple my revenue in just a few months. Here’s an insight into what I found, how I found it, and how you may be able to find a similar opportunity for your business.
What is the 80/20 rule?
The 80/20 rule, also known as the Pareto Principle, is a concept that suggests 80% of your results come from 20% of your efforts. The remaining 80% of your work only leads to 20% of your results.
In “The Tipping Point,” Malcolm Gladwell pointed out examples in the real world. Roughly 20% of criminals commit 80% of crimes, 20% of drivers are responsible for 80% of accidents, and 20% of drinkers consume 80% of all beer. But what if you could use that same theory to improve your business?
Perhaps you’ll find that 20% of your work is really leading to 80% of your results. That could lead you to focus on a different part of your business than you expected. That’s exactly what happened to me on a fateful day when I noticed the 80/20 rule staring me in the face from a monthly accounting report.
Finding the 80/20 rule in my accounting records was a big wake-up call
In 2016, I quit my old day job as a senior financial analyst to take my freelancing side hustle full-time. At the same time, I uprooted my life in Portland, Oregon, and moved down the coast to sunny Ventura, California, where I live just a few miles from the beach.
The year before I quit my job, I brought in about $40,000 in revenue from my side business. That was split between freelance writing and WordPress website development projects. I figured if I could make $40,000 freelancing on evenings and weekends, I’d be sure to at least double that if I went full-time.
But I found myself frustrated with the results a few months in. I did see my income increase, but something wasn’t adding up. I went from spending 10–20 hours per week on my business to 40+, but my income didn’t go up at nearly the same rate.
A few months in, I was staring at a recently completed financial report showing my detailed income and expenses by month. Looking at the lines for my writing business and my website development business, it felt like the 80/20 rule jumped out of the screen and smacked me in the face.
I found I was making about 17% of my income from my website development business, which took up about 80% of my time, and about 76% of my income from freelance writing, which took about 20% of my time. The rest came from website advertising, making up a very small sliver of my overall business.
Clearly, I had to make a change. I made the difficult decision to stop all website support work and focus 100% of my effort on freelance writing. In July 2016, I earned $5,391.65 in revenue. In October, I made $14,809.29 and in November I made $16,131.02. I’ve only ever dipped below $10,000 a month a couple of times since.
Tips for finding important patterns in your books
- Update your books monthly. While you may only need to update your records quarterly or annually for taxes, updating your books every month gives you 12 opportunities every year to better understand and improve your business. If you only update your books occasionally, you could miss important, timely information about your revenue or expenses.
- Use detailed accounts. Don’t just use one account for revenue and one account for expenses. Break down your data into very detailed accounts. A long chart of accounts shouldn’t intimidate you. It unlocks a treasure trove of data about where your money comes from and where it goes.
- Look for patterns and trends. Big companies employ legions of financial analysts to comb through financial results every month. Small businesses usually don’t have the resources to hire entire financial planning and analysis (FP&A) teams. That means you, as the owner, are responsible for financial analysis and identifying opportunities for growth.
- Understand that you might not succeed where you expect. When I started my online business, I thought I would be a blogging celebrity who made six figures a month through my own website. That’s not where I landed, but following the numbers still led me to a strong six-figure business that is still humming along well today.
Putting on your financial analysis hat can help you grow your business
Every business is different. Your path to six-figure success (or seven- or eight-figure success) may not look the same as mine. As someone with an online service business, my revenue-and-expense breakdown looks a lot different from a restaurant, construction, or manufacturing business.
It’s important to keep updated books and spend a little time every month wearing your figurative financial planning and analysis hat. Taking just a half-hour every month to look at your bookkeeping results might lead to a lightbulb moment just like the one that led me over the $10,000 monthly revenue line.
There are few guarantees in business, but you are certainly in a better position to improve your business if you take the time to understand how your money works behind the scenes. You might even stumble on your own 80/20 opportunity.
Just imagine what you could do if you were able to double or triple your business results. For me, it all started with a look at my monthly bookkeeping results. If you do things right, you may follow the same path to improved business success.
