The beginning of the year is a great time to review your business finances and set some goals for this new year. One part of that process should be looking at “Big Rocks.” Here’s what I mean:
Over the holidays, I spent some time with a friend discussing her business finances. She said she wanted to “clean things up,” which we decided meant looking at her business using the Frugal Business Secrets principles.
As we worked, I was reminded of a principle that needs to be included; I call it the “Big Rocks” method. This principle comes from Stephen Covey’s book The Seven Habits of Highly Successful People, the source of many excellent ideas for your business and your life.
Covey tells the story of placing a pile of rocks in water with the goal to include all the rocks – big and little – in the container of water. If you begin with the little rocks, there will be no place for the big rocks. But if you start with the big rocks, the little rocks will fit into the small spaces in between. It’s a wonderful metaphor for working on any project, including your business finances.
The Big Rocks and the 80/20 Principle
Another way to look at the “Big Rocks” method for evaluating your business finances is to consider the 80/20 principle. Simply stated, the 80/20 principle says that 20% of anything accounts for 80% of the effect.
80% of your revenue comes from 20% of your customers or 20% of your products.
80% of the employee or customer issues comes from 20% of the employees or customers.
And, in reverse, 80% of your financial expenses come from the biggest 20% of these expenses.
The 20% are the big rocks.
If you are reviewing your business finances, look at the 20% (the biggest “rocks”) first, because these are the pieces that will have the most effect.
What About Keeping Track of Little Things?
Absolutely, you shouldn’t neglect the little expenses. They can add up quickly. In my business, I spend a lot of money on images for blog posts, books, and logos. If I’m not careful, I can end up spending a lot of money on all the little dollars spent on all of these images every month. But images are truly a little rock, not a big rock.
Evaluating Your Business Expenses Using Big Rocks Tactics
Let’s start with a typical small business and sort out the big rocks and the little rocks. What are the big rocks? It’s easy to do when you look at your financials.
Work your way down the list of expenses, from largest to smallest. Consider the potential savings from each change.
For most small businesses, the three largest expenses are (1) people (employees, contract workers, and freelancers) and (2) rent or mortgage on a business location, and (3) debt payment.
Questions to Ask About Expenses
Start with these large expenses. Ask yourself:
- Can this expense be reduced or eliminated without jeopardizing quality or services to customers?
- Is there a cheaper, yet still quality, alternative? (Read more about the trade off between quality, cost, and time)
- If it relates to a service from another person, ask: Can I do this myself? Is it something I should be doing?
- Can I renegotiate? You might be able to get a better lease rate, for example, if you agree to a longer lease term.
- Can I refinance? A start-up loan is usually at higher interest. After the business has been running successfully a while, it might be time to ask for a lower interest rate.
A Couple of Warnings
Drill down into those miscellaneous categories, like “Miscellaneous” and “Office Expenses.” You may find items that can be eliminated.
Also, check fixed expenses – the ones you must pay every month to someone, even though you don’t have any income. Which ones can you eliminate?
Get Opinions from Others
A great way to make this analytical process better is to get help.
We are all somewhat blind when it comes to our own faults. Doing this kind of objective analysis helps overcome our blinders. It’s even better to get another opinion and have a discussion with a knowledgeable friend who isn’t afraid to say, “You’re spending too much on this. You can save money by ….”
That’s what friends are for.
Here’s to the Success of Your Frugal Business!