How the 1% Rule Can Transform Your Business
In the first installment of our blog series, The Hidden Cost of Doing it All, we established how important it is for business owners to know when to call on the experts for support. The practice of delegation is the easiest way to leverage one of your most valuable assets – TIME – so that you can be more productive.
As research by the American Psychological Association shows, multitasking reduces productivity by about 40% and juggling too many activities ends up costing the global economy more than $400 billion annually.
Entrepreneurs that know when AND what to outsource will ultimately find themselves with increased free time and energy to focus on more valuable activities.
Understanding Opportunity Cost
While you’re likely shaking your head yes and agreeing that all this makes sense, sometimes it’s not so simple. Quite often, determining the opportunity cost of how and where your time is being spent is the most difficult part of the process.
Merriam-Webster defines opportunity cost as, “The added cost of using resources (as for production or speculative investment) that is the difference between the actual value resulting from such use and that of an alternative (such as another use of the same resources or an investment of equal risk but greater return).”
In other words, the opportunity cost is how much it will end up costing you to make one decision over another. This cost is not just financial, but also in time, effort, and utility (enjoyment or satisfaction).
For example, if you are a business owner managing your books and finances, it’s important to ask yourself:
How comfortable am I with overseeing such an integral part of the business?
How much time in my day is spent on financial-related activities such as the reconciliation of bank accounts, updating of balance sheets, etc.?
Is the time it takes to manage the finances of the company taking away from other aspects of the business that require attention?
Opportunity cost impacts the decisions business owners make daily because so many decisions must be made, particularly when it comes to managing their own time.
Applying the 1% Rule
“We advise our clients to implement the 1% rule to determine the activities that are most valuable and worth their time.”
This approach aims to make the opportunity cost of extremely important decisions crystal clear. It also highlights the importance of being proactive and savvy about ways a company can grow,” said George R. Gerhard, owner of Trivium Point Advisory, a financial services and business consulting firm located in White Plains, NY.
The concept of the 1% metric is not specific to the percentage to manage the business; it is the percentage of value to help manage the wealth created. As profits are earned, business owners could then ensure that this percentage is earmarked for high-value, growth-focused efforts.
Adhering to the 1% metric would budget for the following critical components:
We’ve already discussed that hiring an outside party to perform services for your company is a practice and can help contribute to future success. From less overhead costs to hiring someone more suited to a task, there’s a reason why so many use this approach as a cost-cutting measure. Going outside your organization could ultimately save you money, which means that your budget should allow for it.
Cost of Empowering and Retaining Your Key People
Businesses that make the effort to empower their employees will most likely experience lower turnover and end up saving money. According to Gallup, a conservative estimate projects that the cost of replacing an individual employee can range from one-half to two times the employee’s annual salary. Finances aside, losing top talent in an organization is never good for morale, which means it’s extremely important for a business to put the time and resources toward employee retention.
This might mean things such as ensuring your managers are highly trained and able to effectively lead, investing in high-quality tools for efficiency, and cultivating a culture of open communication and fairness.
Cost of Protecting the Entity
“The theory is to shift the business owners’ mindset to manage their wealth around the business, just like they manage their investment portfolios,” explained Ron A. Pac, Owner of Trivium Point Advisory.
The 1% should cover budgets necessary to address items such as
- Annual Business Valuation
- Funding of Buy-Sell Agreements
- Business Financial Management / Accounting
- Personal Financial Planning / Accounting
It is Ok to Start at a Smaller Percentage
For the business owners that worry that this approach feels “too aggressive,” try starting your budget closer to .25% and ease your way into it.
“The percentage should scale down as the business valuation goes up. The goal should always be that these value costs should cover themselves through efficiencies and returns on the investments,” said Pac.
Pac and his team strive to help you determine the threshold for what your business can and should budget for. You might be surprised how much you can handle!
Additionally, for the most cost-effective route, the business owner should look to a firm or team that can handle all of these simultaneously. A one-stop-shop that has the experience to help you manage all of the key elements working towards saving you both time and money in the long run!
Creating Sound Financial Opportunities for Future Success
As a boutique Westchester-based firm, Trivium Point Advisory is committed to bringing experienced and savvy financial and business strategies to businesses of all sizes. Their team of seasoned industry professionals work to help you evaluate your business, determine how to implement the 1% rule, and create projections for potential growth.
Aristotle said, “We are what we repeatedly do. Excellence then is not an act, but a habit.”
The long-term effects of the 1% approach seeks to provide; less energy spent on invaluable activities and more focus and resources on areas that pursue long-term, sustainable profitability to your business.
Next up in our The Hidden Cost of Doing it All blog series, we’ll examine a example where a client implemented the 1% rule in his business. We’re excited to share how Trivium Point Advisory contributed to this entrepreneurial story of excellence.