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Back to Basics
Simple Rules to Thriving in Tough Times
comes to tighten belts and make tough decisions.
I hope this newsletter finds you and your family safe and healthy amidst this current public health crisis. It certainly has been a turbulent couple of months, especially for small businesses. But at times like this, it’s vital not to panic. As past hardships have taught us, the key to weathering an economic storm like this one is having a steady hand and a firm grasp of business fundamentals. First and foremost, business owners would do well to brush up on the 80/20 rule. Also known as the Pareto principle, the 80/20 rule is the golden ratio of economics. It’s a numerical relationship that shows up again and again across industries. For example, 20% of the people in a country own 80% of the land, 80% of sales are due to 20% of a company’s marketing, 20% of a textbook contains 80% of the relevant information. While the ratio isn’t always so clean-cut, the core of the principle remains the same: The majority of results usually come from a minority of the effort put in to produce them. This becomes a business owner’s guiding light when the time “The key is to identify where you can afford to make cuts and where you need to make a long-term investment.”
Put simply, you can do more with less, so focus on the essentials. Find the 20% of your marketing dollars that’s pulling the most weight, and cut the rest. Home in on the 20% of your products or services that generate the majority of your profits, and make them your team’s focus. Take a look at your standard operating procedures and find the minority of tasks that generate the most productivity, and trim the fat. However, it’s important not to go overboard and try to apply the 80/20 rule to every single aspect of your business—it can come back to bite you in the long run. In 2010, Harvard Business Review published a study of companies emerging out of the Great Recession, with an eye toward those that thrive and those that merely survive during these economic slowdowns. Their findings were stark. As the authors observed, “Firms that cut costs faster and deeper than rivals don’t necessarily flourish. […] Companies that master the delicate balance between cutting costs to survive today and investing to grow tomorrow do well after a recession.” Essentially, the key is to identify where you can afford to make cuts and where you need to make a long- term investment. For example, laying off 80% of your staff may offer you
short-term relief, but when the market begins to turn around, you’ll be shorthanded or, at best, tangled up in training efforts to bring new hires up to speed. Furthermore, avoiding layoffs preserves employee morale— an invaluable resource not easily recouped. What you cut and what you invest in will vary depending on your industry, but in general, both should be done with an eye trained toward efficiency rather than savings. Chances are I’m not telling you anything you didn’t already know. But under the pressures of an uncertain future, it’s easy to forget the fundamentals and make rash decisions to protect your bottom line. This is a reminder to take a deep breath and look toward the future. The threat of COVID-19 will pass, and when it does, those who have made smart decisions during the outbreak will reap the rewards.
Here’s to brighter days ahead,
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