All freelancers dream of success, but few attain the heights reached by famous free agents such as Picasso. This Spanish painter and sculptor enjoyed so much financial success that he didn’t need to sell many of his paintings, instead choosing to keep possession of them himself. While few people will enjoy the worldwide popularity of Picasso, freelancers can learn a few things from the master. Here are a few tips that you can implement using his life as an example.  

Create, create, and create

Picasso had a body of work that is unsurpassed by any other artist, having produced over 13,000 paintings and designs along with many more thousands of engravings, illustrations and sculptures. Even if his work hadn’t commanded such a high price, he would have been able to pay the rent by virtue of the volume of his body of work.

Make a name for yourself

When Picasso sketched a drawing of a cabinet to demonstrate to a carpenter the style of furniture he wanted, the man reportedly refused payment, demanding only that Picasso sign the sketch. Add value to your own name by only attaching it to work that you are proud of. Never compromise the integrity of your name for a quick buck, as it may be to your detriment when you’re further along in your freelancing career.

Stick to what you’re best at

Picasso tried his hand at poetry and wasn’t altogether successful. Gertrude Stein, a trusted friend, read some of his poems and told Picasso he should “go home and paint.” Being a Renaissance man or woman isn’t for everyone. Honing your skills in one area can result in a higher quality of work that attracts more clients. Do you have a Gertrude Stein in your life? Ask a friend for feedback if you’re unsure if your work is up to par.

Don’t worry if you can’t please the odd exacting client

One collector once told Picasso that he couldn’t understand his painting of the dove. Picasso simply asked, “Do you understand Chinese?” When the collector replied that he did, Picasso said, “So do 600 million Chinese.” The artist wasn’t fazed by the idea that one person might not appreciate his work. You shouldn’t worry, either. It is impossible to please everybody.

You don’t have to be a Picasso to make your freelancing career a success. However, putting your nose to the grindstone and sticking to your own areas of expertise will take you a long way towards financial success. Don’t be discouraged if money doesn’t start rolling in immediately, however. Even Picasso had trouble paying the heat bill, as he had to burn paintings to stay warm early in his career! Just do what you do best, do it well and do it often.

Starting a home-based business is an attractive option for many people, particularly in tough economic times when a traditional job can be hard to find. The allure of being your own boss, setting your own hours, and deciding how you will go about your work is hard to beat. Getting that first home business off the ground can be daunting, however. Whether you are freelancing as a writer or computer programmer, or selling products on the Internet, starting a home business comes with a number of potential pitfalls. Below are five important considerations for any person venturing into the world of self-employment and home-based businesses.

1 Self-discipline

One of the best things about working from home is there is no one to tell you what to do and when to do it. One of the biggest problems for many first-timers in home businesses is there is no one to tell you what to do and when to do it. Before you start a home business, give careful thought to whether you have the self-discipline and motivation to do what it takes to succeed. Distractions are everywhere – television, radio, the internet, kids – if you cannot force yourself to focus on the job, you will have a hard time succeeding. Establish a schedule and stick to it, much like you would with a traditional job. Over time, you may be able to relax the schedule and run your home business by the seat of your pants, but at the outset it is crucial that you organize your day and treat work time as just that.

2 Tax implications

Being self-employed and running a home business is an effective way to get in trouble with the IRS in a hurry. It is critical that you understand your tax responsibilities. Keep records of all of your jobs, whether you received payment or not, and set aside a portion of the income you receive for tax payments. If you have the means, it is a good idea to spend a little time with a tax attorney who can tell you whether you should incorporate, what tax deductions you may be eligible for, what records you will need, and how often you must file. You should understand the tax implications before embarking on your home business idea. Working with the IRS to fix things after the fact is a headache you do not need, and can lead to penalties and other increased tax payments.

3 Liability

When starting a home-based business, many do not consder their liability if the home is damaged as a result of the business, or if someone is injured on the premises. Homeowner’s insurance policies may cover accidents and injuries when the home is being used solely as a residence, but many do not cover business uses of the residence. Check your insurance policy carefully and talk to your agent about what you will be doing within the scope of the your home business. If you lack the necessary coverage, it is best to get it before you “open your doors.”

4 Making ends meet

Whether or not you can make ends meet with your home business depends on a number of factors. Is there a niche in the market you can exploit? Is your pricing competitive? Will there be enough consistent work to get you through, month in and month out? Many people starting a home business fail to do the necessary research in these areas. Some have a few clients with immediate needs, but do not ask themselves whether their workload will be enough to keep them going over the long run. Most do only cursory research into pricing their goods and services, and do little or no marketing apart from setting up a basic web page. If you do not have an existing client base that will keep you in the black financially, develop a proactive plan for bringing in new clients. Find out what competitors are charging for their goods and services. Set aside some of what you bring in for slow periods between projects. The failure to make enough money to meet your cost of living will quickly bring your home business to an end.

5 Separating life and business

Having a home business makes it hard to get away from the work environment. Just as working from home can cause too many distractions if you let your personal life encroach on work time, it can also lead to a reduced quality of your personal life if you do not know how to segregate work and non-work. Establish set times where you will not work outside of an emergency. Set up a post office box for your home business so that mail related to your business goes there and not to your home. Online services make it easy and cheap to get a separate phone number for your home business so that your personal time is not interrupted with business calls. The post office box and separate phone lines are also advisable for security reasons. Finally, keep your workspace separate from your living space. If you spend your free time in your work environment, thoughts of work will inevitably occupy your mind. The more effectively you segregate work and non-work in your home business, the more productive and happy you will be.

Working from home can be a rewarding adventure. You control your day, and you have the freedom to do things the way you want. Many people fail in their home businesses because they did not anticipate the more common pitfalls. The list above provides key considerations for any person venturing into the realm of the self-employed or starting their own home business. Awareness of these potential problems allows you to avoid them or at least minimize their impact, and that is the key to a successful and satisfying home business.

As a weak economy places financial strains on businesses and organizations, they must develop methods of reducing costs.  Interestingly, treating employees with fairness can save businesses considerable amounts of money.  Read on to learn more about these savings.

Fair Pay and Employee Theft 

It may seem counterintuitive that paying employees more can help businesses to save money, but research suggests that paying employees what they deserve can, in fact, reduce costs.  As explained by Jerald Greenberg, author of Managing Behaviour in Organizations, employees who feel that they are unfairly paid may attempt to “get even” by stealing from their companies.

Unfortunately, employee theft is far more detrimental than an office worker heading home with a ream of company-supplied paper. As Greenberg indicated, a recent study showed that employees who steal from their workplaces take, on average, $808.09 in either cash or merchandise, and the typical convenience store experiences loses of $20,000 per year because of employee theft.

Paying employees what they deserve can prevent this disastrous theft from occurring, and it can even make employees more productive.  In fact, a 2003 study published in the Journal of Organizational Behaviour found that employees who were paid less were not as productive as employees who were paid more fairly.  Therefore, not only can fair pay prevent theft, it can also encourage production and thereby increase profits.

Job Dissatisfaction and Employee Turnover Rates

Employees who are dissatisfied with the way they are treated at work may eventually quit their jobs, leaving their companies with the financial burden of training new workers. The cost of employee turnover can be significant; according to the authors of a 2011 study published in California Management Review, General Mills has asserted that the loss of a single quality marketing manager could set the company back millions of dollars, as such employees take with them knowledge of both marketing and client needs.

Furthermore, the American Management Association has predicted that the costs associated with hiring one new employee can range from one-quarter to five times the employee’s salary.  Clearly, it is imperative that businesses and organizations take steps to reduce employee turnover if they wish to save money.

How to Keep Employees Satisfied

There is more to keeping employees satisfied and reducing turnover than awarding fair pay. Businesses must treat their employees fairly in other ways as well.  This can be achieved by giving employees a voice in the decision-making process.  For example, if a local office of a business is considering moving its closing time from 5 pm to 8 pm two nights a week to increase productivity, management should first discuss this potential change with employees.  They should be given the opportunity to voice an opinion on the matter and to discuss whether they think the plan is feasible and worthwhile.  Employees should always be informed of changes, and even if they cannot be involved in the decision-making process, procedures should be clearly explained to them to ensure they believe that the decision-making process is fair.

In addition to communicating with employees and giving them a voice whenever possible, management must work to keep employees’ jobs interesting.  As Greenberg has explained, this could involve job enlargement, in which employees are given more tasks that require the same amount of skill and responsibility as their usual tasks.  For example, a technical writer who typically writes user manuals for printers could be given the additional responsibility of writing articles regarding the efficacy of the company’s products for the company website. Changes such as these can keep employees interested in their jobs and committed to remaining with their organizations.

Ensuring that employees want to remain with their organizations is a key aspect of reducing costs. After all, replacing old employees is costly and must be avoided in a weak economy.

There are numerous homeowners that find themselves facing a financial quandary. They cannot get their home to sell on the market, yet they are in need or wanting to move to a new home. When this type of situation arises, the person has a choice of putting their home on the market for rent. In turn, the homeowners will become landlords. The reasons to go this route are:

• •         Allows the homeowners to move into a new home, knowing that the previous home’s mortgage will be paid through the rental income that is collected on the home
• •         There are more people interested in renting, thus the home is being put into a market where there is a higher demand.
• •         Under some circumstances, the rental income can be more than what the person needs to pay on their mortgage, thus earning them monthly revenue

Most homeowners are enthusiastic and ready to jump on the chance to get their home on the market in whatever way possible and to get into their new home. However, before becoming landlords, there are a few things to take into consideration:

• •         The amount of time that is invested into the preservation of property, obtaining tenants, and collecting payments.
• •         They are still accountable for the home even though they may live miles away in a new home meaning that travel to this location could be involved. One local real estate investor recommends not living more than one hour away from any rental property unless you hire a property manager.
• •         The responsibility of being a landlord is considered to be a level of high stress

Once the person has set their mind on becoming a landlord, and then there are a few steps to get this property up to rental standards that must be done for legal and renter appeal reasons. First things first, the home should be put on the standards of rental homes. Most renters are not looking for anything that is considered less than standard, and they are not willing to pay for something that is above average since renters do not intend to stay in the rental home for a long period of time. Plus, when considering the upkeep of this, the more standard the home is the easier it is to make this work for years to come. Some standard additions and changes to make in the home:

• •         Fire extinguisher in the kitchen
• •         Working smoke detectors in every room
• •         White paint on the walls throughout the home
• •         Remove any elaborate lighting and interchange this with simple and easy to replace lighting fixtures
• •         If a fireplace is present, have this cleaned and professional inspected. Be ready to supply this inspection to potential renters.
• •         Have the entire home cleaned and sanitized.
• •         Consider replacing showerheads, kitchen equipment and the like with low energy appliances and water heads.

Once these additions and changes have been made, it is now time to deal with paperwork. The mortgage company that holds the title of the home must be informed that you plan to use this home for rental income. If the situation is that the home is paid for, then this is a step that can be omitted. The mortgage holder will have to give the homeowner authorization in order to do this. However, in most cases, the mortgage holder is ready to comply with this decision. Once this is completed the person will need to head to their local courthouse and change the home to a rental home for tax purposes. This filing of paperwork may cost the person a small fee.

The insurance company through which the homeowner’s insurance is carried will need to be contacted because of the change of status in the home. The person must have Landlord Property Insurance. This is going to cover the home, however, nothing in the home as this is the responsibility of the tenants. As a landlord, you want a requirement written into the lease agreement that tenants have Renters Insurance. The person should be prepared for the cost of their insurance to increase when switching to a Landlord policy. Average increases are usually around twenty to thirty percent for a set period of months.

The next step in being a landlord is to decide if you are going to handle the home yourself, or are you going to hire a property management firm to do this for you. Some landlords hire a firm to take care of listing the property and finding tenants then deal with repairs and other aspects on their own. However, other people pay the firm to do everything for them then wait for the check at the end of the month. The person will have to pay the property management firm however, and should therefore shop around for the best rates and service to fit their budget and situation.

The rent should be the last aspect that the person decides on. And depending on which route they go with the property management firm, they could have some assistance in setting the amount. Setting this amount on your own will require research and judgment on just how much the house is worth every month. A good figure is the neighboring homes that may be on the rental market and base your home on what they are charging. Remember, you want this amount to cover your mortgage payment at the very least, as well as your housing insurance. Making a profit is not necessarily the goal, as you simply want to get out from the financial strain of one home and into another home.

According to a poll conducted by Start-Up-A-Small-Business.com, 46.84% of respondents feel overwhelmed by the process of starting up a business because of financial concerns. Lack of capital is one of the key reasons for small business failure according to Patricia Schaefer of BusinessKnowHow.com. Before you dive into the process of starting a new business it is important to start planning out finances first.

Keep Your Job!

One of the biggest mistakes many prospective business owners make when they start a new business is to stop working at the current job. You become so excited about your new business idea that you want to spend all of your waking moments working on it and decide to give notice at your job.

That is not a wise move—especially if you don’t yet have enough money to start the business properly. Keep your job for the time being, cut your expenses, save up money and budget your time more wisely. Discipline yourself at your current job now so that you can transition into owning your own business full-time one day in the future.

Figure out How Much You Need First

Before you spend one dime on your new business venture you need to know exactly how much you need total in order to launch the idea and sustain it for at least one to two years. As you’re learning more and more about how to start and advertise your business the temptation is there to jump right in and get started right away. But before you make a move, create a business plan (at the very least a short business plan) that outlines a complete budget and financial projections.

If you rush to start spending money now without having a view of the bigger picture, you put yourself at risk of throwing money into a black hole. For instance, say you spend money on advertising the product today then learn later that you need a special license that costs thousands of dollars and requires a long wait. You not only lost the money on rushed advertising, but may have to put the entire business on hold.

Sources of Startup Cash

There are a number of sources you can look to for start-up cash when launching a new business. Consult with your financial advisor before making any decision involving your personal finances. Here are a few options:

• Savings. If you’ve been putting money away for a rainy day, starting a viable business just might be the reason to put that cash to good use. Though it is extremely risky, some people choose to borrow from a 401K or other retirement account to get things rolling.
• Home equity. If you have equity (value) in your home, you can ask your bank about a home equity loan to help fund your business start-up.
• Loans. The other possibility is to seek a loan from a bank. If you’re denied a small business loan from a bank you can then apply for a Small Business Association (SBA) backed loan.
• Credit cards. Though it is against a very risky proposition (and comes with a very expensive interest rate), some people choose to use credit cards to fund a new business.
• Micro-loans. Some community organizations offer special microloan programs that lend low income people or people with collateral issues cash to start a business. Ask your local chamber of commerce or Small Business Development Center about Community Development Financial Institutions (CDFIs).
• Family and friends. If you have supportive family and friends, ask them for assistance. Approach them like you would an investment club—present them with your business plan, the proposed amount you’re asking from each of them for an investment (even if it is just $100) and the benefits they can look forward to if the business is successful. Give them a deadline to make a decision and be open to questions and concerns.

Avoiding Potential Pitfalls

Every dollar you will spend to fund your new business idea should be mapped out well in advance. Do not make rushed purchases, especially if the purchase is out of your budget. When considering a purchase for your new business, sleep on it for at least one or two nights before spending the money. Consult with one or two financially responsible trusted friends before you make any large purchase that could make or break your business. Bounce your ideas off of a business mentor whenever possible—SCORE.org offers a database of business veterans who are willing to act as mentors to newbie entrepreneurs.

Many people lead lives that are at least partially enhanced by digital technology. They obtain information digitally, to varying degrees, and they spread information digitally, too. What does this trend mean for your business? Do you need a marketing strategy for the digital world?

To answer this question, it is first important to evaluate your customer base. While technological advances have made it possible for more people than ever to be plugged in, not everyone is. Some people still do not use the Internet, or they use it very minimally. It may be tempting to leap into digital marketing for the sake of it, but it might not be imperative for your particular business. After some research, you may conclude that traditional advertising practices could very well be sufficient.

Most companies have customers who are at least somewhat digitally connected, though. If your company falls into this category then, yes, a digital marketing strategy could be very useful. To create a marketing strategy, you need to think about your business goals and how marketing can help you achieve them. This is an especially important step for digital marketing.

Unlike traditional marketing, which tends to reach larger audiences based on factors like region, digital marketing can be very specific. Many web users customize their web experience, as well as the online profiles they use to present themselves to the world. The personalization that comes with the digital world enables you, in part, to reach customers with unparalleled levels of specificity.

That same personalization is the reason having a digital marketing strategy is so important. It is very easy for a disengaged customer to close a web page, delete an e-mail, or stop a video clip. They often abandon an undesired part of the web within seconds.

In order to harness the full potential of your digital presence, it is crucial to have a robust marketing strategy. You need to understand your market, your customers, and how your customers use technology. All of these elements should help to inform a thorough marketing strategy.

Having a good strategy makes it more likely that your marketing activity is being targeted to the right people in the right way. That is absolutely essential for digital activity since customers are prone to veering away from unwanted marketing messages that they encounter online. It also ensures your efforts are well suited for your overall business goals.

Ultimately, the decision to develop a digital marketing strategy depends on the habits of the customers you hope to reach. If the people you are trying to communicate with are not online, then there is little need to implement marketing activity outside of traditional methods. However, for most customers, digital technology plays at least some role in their lives and you will need a digital marketing strategy to successfully reach them.

Overview

Business conferences offer great benefits to the professionals who attend them. Although it means physically being away from the office for a few days, today’s technology enables you to stay closely connected and continue to make important decisions. These 5 ways to get more from business conferences will benefit your career and your business.

Knowledge

You will learn the latest developments and sales trends in your field. This knowledge can help your company to increase its profit, as the developments might make it easier or cheaper to produce or sell your merchandise. New ideas can inspire new inventions, or possibly additions or adaptations in your current product line. The latest knowledge gives you an edge over your competitors.

Networking

Networking is another benefit of attending trade shows or business conferences. You will meet people in your own niche or a related field. To network effectively, obtain the official guide for the business conference and memorize the who’s who in your field. Showing some knowledge about the other person’s business will make an impression upon him.

Cultivate some of these contacts into new clients or suppliers. Others might become friends and occasionally pass business your way. Take an ample supply of business cards with you. When you meet new colleagues, tell them how your company can benefit their business. Offer to exchange business cards, and at the first opportunity, jot key things that the colleague said on the back of his card. This will help you after the conference when you cultivate the relationship.

Branding 

Branding identifies you and your company as experts in your niche. Participation in business conferences puts you in front of a targeted audience that already has an interest in your business. Try to get the role of speaker to demonstrate your latest product line. However, branding also occurs outside of the official activities of a business conference. Take advantage of opportunities to go out to lunch or sightseeing with other attendees. Attend these colleagues’ talks, and discuss their presentation afterwards.

Arrive early every day to take advantage of the conversation that happens over breakfast or a few minutes before the first presentation. Answer questions in a manner that shows you as knowledgeable and pleasant. Stay until the last presentation finishes as an impromptu get-together might happen at this time, such as going out for drinks.

Reflection

Reflection is a natural result of attending a business conference or trade show. Exposure to new ideas, methods and products helps you to gauge where your company is in relation to its peers. You might decide to adjust your company’s goals and objectives to incorporate some of this new information. These changes might help your company to achieve the status of leader in your niche.

Continuing Education Units

Business conferences that are academic in nature might offer continuing education units (CEUs) to their participants. If you are an employee or manager, rather than a business owner or corporate partner, then these CEUs can help to propel your career to management status. Submit the paperwork to personnel to be included in your employment file. Additionally, mention them when networking with senior management for that hard-earned promotion.

5 Warning  Signs of a Financial Bubble

If your portfolio combusted when the stock market imploded or if you purchased a house during the real estate boom and presently find yourself smack dab in an underwater mortgage, you can bear witness to the destructive consequences of popped financial bubbles. However, the trick is learning how to pinpoint the warnings signs of bubbles before they burst, so that you do not lose your assets next time around.

What is an asset class bubble?

Asset class bubbles withstand user-friendly explanation. There is no delineating marker foretelling sparkling financial conditions, just as there is no oracle to predict the inevitable bubble burst. Even so, just about all-financial bubbles share five common features.

Sign No. 1: Inflated Prices

The most conspicuous characteristic of an expanding fiscal bubble comes in the form of rapid changes in the costs of goods and services. When prices inflate overnight, a bubble is born.

In marketplaces where supply and demand determines the monetary values of assets, prices tend to be more stable. Costs are determined by what somebody is inclined to pay for something and the price somebody else is willing sell it. Yet in a marketplace where a financial bubble is gaining ground, magnified costs give rise to amplified demand, ultimately catapulting prices far above an asset’s true value. Suddenly, a house worth $300,000 one day is worth $725,000 the next, but without hard currency to back up that valuation.

Sign No. 2: Lenient Credit Rates and Offers

One distinguishing lineament of nearly every kind of fiscal bubble is the broad consumption of credit, and that consumption is broken up into three smaller parts.

Fiscal invention: Financial organizations develop with the contemporary world. When financial conditions are contributory to lenient credit rates and overweening offers, banks create new ways for people to borrow money. The extended product line contributes to the bubble. For instance, interest-only mortgages, reverse mortgages or adjustable rate mortgages are first-class illustrations of bubble building credit lines.

Bargain-priced money: Devalued rates of interest on loans and credit cards depreciate currency. With lower rates comes less risk to the consumer, irrespective of how much he borrows. And even though the asset he is buying with his bargain-basement credit prices increases rapidly, his credit habits contribute to the rise of the bubble.

Moral hazard: When individuals and corporations are fortified from risk, they behave less responsibly; they risk more and more frequently. Suddenly, there is a surplus of borrowed money circulating in the economy, and rates of default begin sharply increasing.

Sign No. 3: Believing that This Time is Different

Hubris and financial bubbles go together like peanut butter and jelly. Technological creations impel investors to believe this time is different, that humankind has changed and that tried and true financial rules do not apply. Essentially, investors, bankers, CEO’s and corporate fat cats look the other way, as the bubble gets ever larger, all in the name of pride.

Sign No. 4: Governmental Interference and Manipulation

Another feature of bubbles gone by is the sudden and heavy hand of government authorities unexpectedly imposing regulations and dipping into the realm of price manipulation in the private market. Usually, they will claim they are helping, but the truth is they are exacerbating the eventual burst by interfering with the conditions of the free market.

Sign No. 5: Crowd Mentality

Following the investing crew can lead to calamity, but this is another common denominator of a bubble. Suddenly, “all of the cool kids” are buying Enron, and everyone knows what happened to those cool kids.

The lamentable truth is that by the time you recognize that you have followed everyone else off the cliff it is too late to climb to safety. Add to that hard truth, the fact that bubbles oftentimes come with compelling narratives that can obscure reality, and you have a crowd of prideful lemmings. Regardless, following investment trends is not always the right path.

Fending off Bubbles

Keeping a broadened portfolio and investing in accordance with a thoughtful plan will mitigate your risk. Although nothing is guaranteed when it comes to investing, a broad asset allocation strategy coupled with regular rebalancing can keep you level headed.

If nothing else, the primary lesson that all investors to take from financial bubbles of the past is that you ought never get gluttonous, or else you be the one left holding the bag when the bubble pops. However, if you heed these warning signs and strategize your portfolio to work for you without contributing to bubble building hazards you are less likely to be caught off guard when the next bubble goes boom.

Manufacturers know that the best way to reduce costs lies in their ability to continually lower their production cycle times. Lowering cycle times leads to an increase in manufacturing capacity, and that increases the company’s manufacturing throughput. The surest way to lower cycle times is to identify the root causes of work stoppages. The end goal is to identify what causes work stoppages, or put differently, what causes downtime in a given work cell. However, it’s not just about identifying the individual causes of the work stoppages, but more about identifying what “root causes” are the most egregious offenders. After all, lost time in manufacturing is commonplace. There isn’t a guaranteed way to eliminate idle time entirely. As such, the focus should be on mitigating the impact of work stoppages. However, to do that means your company must pinpoint your biggest issues in manufacturing. This is where the Pareto principle comes in. What is the Pareto principle? We’ll review that in detail by providing a graphical depiction of the Pareto principle in action.

Understanding the Pareto Principle

The Pareto principle implies that 80% of outcomes are derived from 20% of the causes. This principle is often referred to as the 80/20 principle. Companies use this rule to explain why 80% of their revenue comes from those customers occupying the top 20% of their client list. The same principle can be used in inventory. It can be used to explain why 80% of the company’s quickest selling products come from the top 20% of its product lines. In most business applications, the focus is on leveling out the Pareto principle. The idea is that by leveling out this ratio, the company is able to limit its risk. For instance, leveling out the 80/20 rule in sales means the company isn’t as negatively impacted by a reduction in sales volumes from one of its top clients. Consequently, if the company can level out its inventory ratio, then it can avoid the damaging effects of inventory obsolescence, inventory damage, and it can reduce its long-term financing costs.

For manufacturing, the Pareto principle is more focused on identifying what contributes to 80% of the work stoppages. If the company can eliminate the root causes of 80% of its work stoppages, then it can dramatically lower its production cycle times. However, this is only possible if the Pareto principle holds true. If it doesn’t, then it means the company’s lost time is caused by multiple factors. Ultimately, this will include the company spending more time trying to eliminate multiple causes of downtime. Companies can reduce the incidence of this occurring by grouping causes together. For instance, there may be multiple issues with the company’s assembly outlines, but tracking each separate issue is not always efficient. Therefore, it’s best to put all issues pertaining to assembly outlines under just one heading. We’ll provide an example of the Pareto principle.

An Example of the Pareto Principle

The table below summarizes a Pareto analysis on a given work cell. The company has captured all the work stoppages occurring in this work cell and has narrowed it down to the six causes outline in the table. The biggest cause of the work stoppages includes issues associated with, “unclear work orders,” which accounts for 29% of the lost time. The second biggest cause includes issues with, “poor bill of materials,” which represents 27% of the lost time. Now, it’s important to note that the first two causes represent a cumulative total of 56% of the work stoppages. This number is represented in the far right column. Finally, the third biggest cause of work stoppages includes issues with, “bad assembly outlines,” which represents 23% of downtime. It’s at this point where the sum of these three issues total 79%. Granted, it’s not exactly 80%, but it is close enough. In this case, the Pareto principle is present and indicates that if the company eliminates these three issues, it will effectively eliminate 80% of its downtime.

The Pareto principle is a powerful tool. It allows companies to identify which areas of their business should be addressed in order to minimize their risk. The idea is to continually level out the ratios that are present in the Pareto rule. In sales, the rule gives companies the impetus to reduce the risk associated with a sudden and drastic loss in revenue. In inventory, it allows companies to reduce their long-term financing costs. In manufacturing, the rule can empower companies to identify the root causes of work stoppages. Once those root causes have been identified, the company can use the Pareto rule to identify the worst offenders. Finally, they can put a proactive plan in motion to remove these root causes altogether. If successful, the company will drastically reduce its cycle times, lower its costs, and increase its production capacity.

Using a Pareto Chart to Lower Your Company’s Customer Service Cost

Does your company include freight as a value-added service? Do you see your company’s delivered price as an important differentiator, one that allows you to distinguish your company’s product offering? If you’ve answered “yes” to both of these questions, then it’s a guarantee that any increase in freight does nothing more than erode your gross profit on sales. Better yet, these unforeseen spikes in expenditures have a direct impact on your company’s bottom line. However, it’s not merely about bearing the burden of increased costs, but also about what these additional costs mean to your company’s customer service. After all, issues with freight tend to coincide with delivery delays, and it’s these delays that upset customers and impact your customer retention.  So, what’s the solution?

Despite the fact that no company can control the costs of fuel, or limit the damaging effects of fuel surcharges, there are still some simple tools to reduce the burden of high freight. Reducing these costs will improve your company’s gross profit, lower your customer service costs, and ensure your customers remain loyal to your company and its product offering. Therefore, our analysis will center on identifying the causes of high freight that your company can eliminate. Now the question becomes: What method should your company use to identify and eliminate the high costs of freight?

Using the Pareto Principle to Track High Freight Costs

We’ll ignore the issues of high fuel prices, and instead focus our analysis on the other reasons your company may be facing a higher freight bill. However, it’s not merely about tracking any and all causes. Instead, it’s about dialing into the most obvious causes of high freight and eliminating these causes altogether. The tool that makes this possible is to use a Pareto chart. So, what is a Pareto chart and how does it help companies reduce their high costs of freight?

A Pareto chart comes from the Pareto principle, or more commonly referred to as the 80/20 rule. This rule is used by companies to define why 80% of their revenue comes from 20% of their biggest customers. In essence, the rule states that 80% of a given outcome is often the result of the top 20% of causes. It’s a rule that is used to explain the variations and ratios in sales, inventory, operations and human resources. Leveling out this 80/20 rule allows a company to reduce its risk across all of these aforementioned business functions. In our example, we’ll use a Pareto chart to identify what is causing 80% of the company’s increase in freight costs. In essence, we’ll isolate the most egregious offenders and give the company the impetus to eliminate them altogether.

The Pareto Chart Explained 

The following table and graph is an example of a Pareto chart. In this case, the company has tracked how and why its freight costs have increased. It lists these reasons in the first column on the left. Next, it tracks the number of incidents that occur and correlates them to back to the same list on the left. Percentages are then determined by taking the number of incidents, and dividing it by the total number of incidents from the entire list. For instance, the first issue of “poor packaging” has a value of 27%. This is calculated by taking the 51 incidents and dividing it by the total number of incidents of 187. Finally, the total column on the far right provides the cumulative amounts of these percentages. You’ll notice that the first three items listed are highlighted in yellow. This is because their cumulative total is 80%. Therefore, these three issues represent 80% of the reasons why the company’s freight costs continue to climb.

Looking at the Pareto chart above, it becomes abundantly clear that the company must focus its efforts on the first three items listed. The Pareto rule is an impactful tool that helps companies reduce their costs and mitigate their risk. It allows them to identify their biggest issues and use simple strategies to alleviate them as going concerns. This same rule can be applied to inventory, sales and other operational concerns. Use this rule properly, and your company can dramatically reduce its cost structure.