Have you ever heard of the Pareto principle? If not, this article is a definite must-read for you. The principle saves you valuable time, a resource a busy management accountant does not have in excess (see also our tips for busy management accountants). If you already know the Pareto phenomenon, keep reading to learn about its implications for management accountants.
The history of the Pareto principle
Before diving into the implications for business we should understand where the principle comes from. Its heritages go back to the nineteenth century. An Italian economist, Vilfredo Pareto, observed that 80 % of Milan’s wealth was owned by only 20 %.
The Pareto principle in business
The Pareto principle can be applied to many situations in business. For example, it can be often seen that 80 % of the revenue is produced by 20 % of customers or 80% of revenue is generated by 20% of products. Such a distribution would look like the following graph and data set:
80/20 does not need to be exact. Close approximations like 75/25 or 70/30 are often observed too. Whatever the exact figures are, the principle implies that “just some” are responsible for “a lot”.
How management accountants can utilize the 80/20 principle
For management accountants, the Pareto phenomenon is a great way to show distributions to the management and then provide recommendations. CIMA’s official study text uses the following explanation: “the management accountant can use it in several different circumstances to help direct management’s attention to the key control mechanisms or planning aspects.”
Say a product and revenue analysis returns the figures from the above example. A management accountant could now explain the great importance of the four products (A, B, C and D) that make for 80 % of the revenue. He or she could highlight that those products are so essential that a failure to deliver them seriously jeopardizes the company’s health. Thus, measures to secure the full supply chain are essential. A delivery bottleneck has to be avoided.
Furthermore, he or she may also point out a certain risk if customers do not buy those products anymore. This could happen because demand declines naturally, a competitor launches a similar product, bad publicity, and so on.
A thought for your own time management
Another area where the Pareto principle comes in handy is your own time management. If the 80/20% rule is applied to your time, you produce 80% of your outcome in 20% of the time. A scary thought… but well worth thinking about. Read more about effective and efficient work in our article about the EAD System.