Parkinson's Law and Profitability: A Business Owner's Guide

Today we're diving into a topic that is mentioned in the book, Profit First by Mike Michalowicz. Back in 1955, economist C. Northcote Parkinson wrote an article in the Economist magazine that began with the observation that "work expands so as to fill the time available for its completion".

This has come to be known as "Parkinson's Law". 

What is an example of Parkinson's Law?

The example given in the Profit First book is that of toothpaste. It's a great example of how our use of resources expands to match the supply. I'm sure you'll agree that in happens in our businesses all the time.

Think about reams of paper. When there's a stack of paper next to the printer, we print merrily away, with little thought for expense or for the environment. It's not until we run low on paper and realise that we're not going to get a new delivery for a couple of days that we start to print on both sides, or use scrap paper for making notes on.

Parkinson's law applies to resources, to time and to money.

Let's say that you have an ecommerce business. You've got new seasonal products to launch in two months, and you know that you've got to get the product photography done, load the products to the website and create the marketing materials for the launch.  

When you're not aware of Parkinson's Law, you assume that two months is plenty of time to get all of this done. So you might decide to get a few other, less important tasks out of the way first, and you delay working on the new products for a week or two. You procrastinate, thinking, "I've got plenty of time to get this done". And before you know it, the launch is next week and you're stressed out, working late and trying to get everything ready at once. Or even worse, you delay the launch of the products, and lose a couple of weeks of income. 

For example, if you've ever been in charge of planning an event, you've likely experienced how the expenses seem to rise to match the budget you've set. That's Parkinson's Law in action, and it can have a significant impact on your business's profitability.

What is the Parkinson's law trap?

When it comes to money, Parkinson's Law can mean that we get caught up in a never ending cycle of increased spending. As your business starts to generate more income, it's tempting to get caught up in the excitement and start investing in fancier office spaces, higher salaries, and other nice-to-haves. It's like getting a salary increase and suddenly deciding to upgrade your entire lifestyle. Also, as your business expands, it becomes more complicated, so you add more team members, more processes, more marketing. And all of these mean higher spending. In short, when your business revenue increases, expenses tend to increase as well, and this is where Parkinson's Law comes into the picture - we spend up to the limits of what's available, and keep spending as what's available increases. 

It’s like we have an uncanny ability to use up every available resource for any given task. And indeed, this is exactly what Parkinson theorised.

 So how does this apply to your business?

Overcoming Parkinson’s Law

There are ways to counter Parkinson’s Law.

It all comes down to planning and setting clear goals and deadlines.

When you're aware of Parkinson's Law, you're aware of how tasks expand to take up all the time available. Create a roadmap for your tasks and projects, creating specific timeframes and deadlines. Make sure that you have a way of keeping yourself or your team accountable.

In our ecommerce business example, you could estimate the required hours to complete the project, then set incremental deadlines for each of the tasks required to complete the project. You might estimate that it will take a week to do all the photography, two weeks to load everything to the website, and a further three weeks to create all the marketing materials. You may decide to set a deadline for completion in six weeks time, giving yourself an extra two weeks in case things get derailed. And, you make sure that you check in each week to ensure that you're staying on track.

For time management, think about using techniques like the pomodoro technique to work in time blocks. Write yourself a specific task list of no more than three tasks that you need to get done each day, and make sure that you get them done.

Working more efficiently will help your productivity, and your profitability.

When it comes to your expenses and budgets, you need to set yourself goals and targets as well. This is one of the reasons that we recommend Profit First.

How Parkinson’s Law Works With Profit First

We can use Parkinson's Law to our advantage in our businesses. One of the main principles of Profit First is that we need to have multiple bank accounts for our business. In fact, there are 5 main bank accounts that every business needs. As money comes in to our business, we make the proper allocation of funds to each account. Each account has a specific purpose, and by using this structured, planned approach, we learn to manage our cash flow effectively.

We set allocation percentages for each account, which helps prevent overspending, and we ensure that we are prepared for different financial scenarios.

The Profit First Principle

Profit First takes the standard accounting principle of sales - expenses = profit and flips it to sales - profit = expenses. When we take our profit first, we are forced to reverse engineer the profitability in your business and reduce your expenses to ensure that your business can pay its bills.

That means that we can take advantage of Parkinson's Law. We reduce the amount of money available for expenses in our business, thereby forcing us to find ways of doing the same job with less. We get innovative, we reduce wastage, and we find ways to get the job done without constantly increasing our expenses. And when we reduce our expenses, we can increase our profitability. 

Giving ourselves a hard limit on our expenses forces us to cut out unnecessary spending, to think hard about new expenses, and to get creative and find alternative solutions so that we can meet our expenses targets.

Remember – Parkinson’s Law theorises that we use all available resources to get the job done. Expenses always increase to meet income, so we need to find a way to limit what we are spending on expenses. Take your profit out first, and give yourself a smaller pool of funds for expenses. You’ll find a way to reduce your spending, just like you’ll find a way to get a job finished on time. 

Sustainable Growth Through Profit

By setting ourselves clear financial goals, ensuring that we allocate our resources effectively, and curbing our natural tendency to expand work or money, we can become more efficient and more profitable. 

We can harness the power of Parkinson's Law to drive financial sustainability and long term growth in our businesses. 

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