Tax season and the 80/20 principle

 

 

It’s always good to do a post-hoc analysis soon after tax season.  Hallelujah!  You are almost there.

Most everyone has heard of the 80/20 principal, but fewer have heard it as the Pareto principle.  In most any business, the application of the 80/20 principal is extremely powerful and simple.  This definitely applies to Accounting firms.   (I wonder if only 20 % of accounting firms actually apply it?)

Understanding the Pareto Principle.

It was made famous in the early 1900’s by Vilfredo Pareto who was an Italian engineer, sociologist, economist, political scientist, and philosopher. He noticed that about 80% of Italy’s wealth belonged to only 20% of the population.

The interesting thing is that this is a very common pattern that applies to so many human activities.  Here are just a few examples:

  • 20% of home carpeting gets 80% of the wear.
  • 20% of clothes are worn 80% of the time.
  • 20% of the “bugs” cause 80% of the crashes.
  • And so on….

In essence, most things in life are not distributed evenly.

 

So how do you apply this to an accounting practice?

Keeping this principle in mind as you analyze your hours and results can produce an endless number of applications.  If you actually take the time to gather the data in light of 80/20, you will likely discover information that you won’t be able to ignore.  You fill in the blanks:

  • 20% of your customers create ______% of revenues.
  • 20% of your hours create ______% of your results.
  • 20% of your business development efforts create ______% of new business.
  • And so on….