Plan like at home
The Pareto principle, often known as the 80/20 rule, says that “roughly 80 per cent of the effects come from 20% of the causes”.
It is of course not an exact rule, but it means that in many cases 20% of customers account for 80% of net sales, 20% of cost centres account for 80% of costs, and so on. So shouldn’t I instead put at least 80% of my focus on the 20% of causes that account for 80% of effects?
The most important budget you produce should be your private one. Most people plan their finances in accordance with the 80/20 rule without even thinking about it. They focus on the expenses that have the biggest impact on their finances and keep an eye on the rest. They often group their biggest expense items such as home, transport, food, clothing, borrowing and saving. The major expense items usually account for at least 80% of expenses, often even more. If you keep track of your biggest expenses, most people are happy to bundle together any remaining expenses as “Other”.
If the “Other” item is too big or starts to grow, you analyse that item. If there are separate items that stand out, you can single them out and monitor them separately, such as exercise or tobacco, depending on your lifestyle. Some items are maybe not crucial for your overall finances, but by identifying them and measuring them, you also drive a behaviour.
The expenses grouped together, such as “Home”, “Food” and “Car” also serve as KPIs (Key Performance Indicators) or key figures. Most people have a reasonable perception of their “key figures” and have a fairly good idea of how much they are spending a month on “Home”, “Food” and “Car”. Based on these key figures, you can then create activities to increase income or reduce expenses, e.g. reduce food costs by taking a packed lunch instead of eating in a restaurant, or reduce transport costs by cycling to work instead of driving.
As the most important budget you have is managed according to the 80/20 rule at grouped level, it is amazing that most companies and organisations still plan at a detailed level. More companies should adopt the budget model they use at home, i.e. set aside the detailed level and focus mainly on the 20% that has the biggest effect on their results.
/Jonas Stierna, Solution Architect, Effectplan