January 7, 2019

Playing the business odds

In August 2017, Mavis Wanczyk won the $758 Million Powerball Jackpot drawing. Aside from divulging her identity she also elected the lump sum payment. This means that her estimated claim against the lottery is reduced to $480M, and results in an estimated taxable amount of $120M. However, getting a lump sum of $336 Million overnight is a ridiculous windfall! The odds of her win was 1: 292,000,000. Let’s put that number into perspective:

  • Odds of death by lightning — 1:10,000,000
  • Odds of being attacked by a shark in US — 1:15,000,000
  • Odds of dying by a vending machine — 1:112,000,000
  • Odds of death by a falling coconut — 1:250,000,000

The current estimated population on the planet is 7.5B. That is a pretty huge number — 7,500,000,000.

The odds of being born to rich parents, growing a Billion dollar company, or even surviving the 1st five years in business as an entrepreneur are all very low. Unfortunately, there is nothing you can do about being born at the right place or time, but there is something you can do about launching and maintaining a successful business. Playing roulette with your business, or rolling the dice and hoping for the best is not a reliable solution. I’ve written before about why a business might fail, but I want to focus on some specifics about how to avoid those failure points.

Understand the Definition of Business Success

Did you or will you launch your business so that you can simply replace the income from a job? If so — you really need to broaden your horizon. A successful business is not just about income solely for you, in other words, if your only employee is yourself — it is not a successful business.

At the risk of sounding unsympathetic to sole practitioners in hundreds of industries, if your business can’t live without you, then you haven’t grown a successful business. Instead, you have created a very busy job.

For example, if your business is hair styling, and you rent a seat at a local hair-salon and make lots of money — you have not created a successful business. Rather, the hair-salon owner has created a successful business and you are simply an independent contractor. The same is true for accountants, doctors, dentists, realtors, real estate investors, etc. The definition of a successful business is the growth beyond yourself.

A successful business is measured by several factors, but here are the few I feel to be most important:

  • Enterprise value
  • Entrepreneur take-home pay & quality of life
  • Viability of succession plan
  • Company is Socially Responsible (makes the world a better place)
  • Number of Employees
  • Employee Job Satisfaction
  • Appropriate Employee Compensation
  • Customer satisfaction of product/service
  • And lastly, Gross & Net Revenues

You must understand that personal success is not the same as business success.

Creation of Adam — Michelangelo

An entrepreneur, or team of entrepreneurs, has the responsibility to breath life into the business. Their endeavor is both creationist and evolutionist. Once initial life is breathed in, the business will require constant refinement and change to becomes a positive contribution to the owners and to society.

I ask myself these questions regularly:
If I died today:

  1. Would the business continue without me?
  2. Have I set up sufficient processes to allow the team to work independently?
  3. Do I have contingencies in place to ensure my family is taken care of for the foreseeable future?
  4. Am I adding positive contributions to my employees lives?
  5. Are they compensated fairly and do they receive acknowledgement of their contributions?
  6. Are my clients happy with the contributions?
  7. Are my clients receive the help and advice they need — whether they appreciate it or not?
  8. Am I positively contributing to society?

When I am able to answer all of those affirmatively, then my business is successful. If not — then I am still only on the path to success.

Please don’t misunderstand me here. An entrepreneur can have financial success. They can make lots of money and consider themselves successful… but a successful business is more than just financial success for the owner.

Define Success for yourself.

Now that I’ve ranted about what a successful business looks like, forget everything I just said. My definition of success might be very different than yours and that is okay. You must decide for yourself what you want to contribute to your business and what your business should provide in return. Without a measure and understanding of what success looks like — how will you know when you’ve arrived?

Alice: Would you tell me, please, which way I ought to go from here?
The Cheshire Cat: That depends a good deal on where you want to get to.
Alice: I don’t much care where.
The Cheshire Cat: Then it doesn’t much matter which way you go.
Alice: …So long as I get somewhere.
The Cheshire Cat: Oh, you’re sure to do that, if only you walk long enough.

- Lewis Carroll, Alice in Wonderland

Your idea of success might look very different from mine or anyone else. Identify what your idea is, document it, understand it, and then work towards it.

Expand your knowledge

There are hundreds of articles available online as to why startups fail and just how bad their odds of success are. Here is an example from Business Insider: “Dear Entrepreneurs: Here’s how bad your odds of success are”. This article sucks — don’t even read it! Their statistics and information are all taken from Y-combinator, who are only looking for “sexy” new stuff. They completely overlook anything which isn’t IT related. I guarantee they are not interested in your business. Additionally while applicants to Y-combinator might be super nerds — they might not be all that smart.

But Dave” you say, “Those guys all have … like Masters Degree’s in IT stuff or are Phd’s or whatever. They have tons of education from the best schools and everything”.

Ah yes” I reply, “but there is a whole world of difference between reading about holding a pile driver with your bare hands while someone swings a 40lb hammer on to it, vs actually holding the pile driver”.

Formal education is only one of a 1,000 piece puzzle. During my Bachelors and Master’s degree in Accounting, I’ve completed hundreds of case studies about fortune 500 companies, studied Financial Accounting Reporting Standards for publicly traded entities, learned about diagramming internal processes and control systems, and so on, but never once received training on completing a simple bank reconciliation — why?

Blink 182 — First Date

We never spent a single moment on how to deal with an incredibly successful business owner who doesn’t understand the differences between cash and accrual accounting. We didn’t receive training about working with small businesses. We spent time learning how to work inside a monolithic public entity. Why do I know so many CPAs who don’t know how to do their own taxes or how set up the required systems for their own accounting practices? Why are so many small accounting practices still using Quickbooks desktop as their go-to solution for their clients? Why do so many accountants fail at applying advanced management accounting skills in a small business?

The answer is — formal education is insufficient to qualify anyone as a professional. Learning about a Debt-to-Equity Ratio in an accounting class or about macroeconomic supply and demand curves is very interesting and useful, however, these learned skills are difficult to translate into actionable information in your small business without experience.

You must be prepared to gain further knowledge from courses and experiences outside of University/College. Take an online course specific to skills you need. Watch youtube videos. Read blog posts from people you like and trust. Find a great mentor and follow their advice. Most importantly, try things! You must accept that failure is always an option when you try something new. If you’re too afraid to fail, you’ll never try, you’ll never improve, and your odds of success are diminished.

Reduce your risks

Cliff dive forward somersault belly flops are awesome! Everybody loves them.

Synchronized Olympic diving is okay too.

Diving off a cliff or a board requires only a few key elements.

  1. Sufficient water
  2. Lack of rocks/objects at location of destination
  3. Ability to swim or safety flotation device
  4. Height of Dive won’t cause damage due to surface tension.

The manner at which the diver arrives at the water is dependent on diving skill. Skill is only attained through practice. An Olympic diver has had thousands of unsuccessful, ungraceful arrivals. In order to perfect their dives they need a safe place to practice. A new diver doesn’t start out from overly high boards, without sufficient water, in rocky waters, with an inability to swim. However, many business owners start out taking unnecessary risks expecting to perform gracefully on their first attempt. This thought process is truly bizarre to me.

As a business owner, you have a responsibility to mitigate your risks. Don’t take unnecessary financial leaps of ignorance. Figuratively test the waters. Measure the depth. Understand where the rocks are. You are gambling with your livelihood when you dive off a cliff into the waters of business ownership. No need to jump in sight unseen. I wrote a little more about Risk Mitigation here: so start there and plan out your dives so they are as smooth and graceful as possible.

Know when to call it quits

As much as I hate to bring it up… sometimes you need to know when to be done. The adage of “don’t chasing bad money with good money” is penned for the entrepreneur. Understand the sunk cost fallacy. Know how to logically break down the pros and cons and identify when a business is broken. I’m not suggesting you quit when the going gets tough, because it will always be tough. What I am suggesting is that sometimes our ideas are stupid or our execution of the idea has buried us.

The definition of insanity is doing the same thing over and over again and expecting a different result.
Quote not actually by Albert Einstein

Quitting doesn’t mean shutting everything down. Quitting can be like getting rid of a bad habit — like quitting smoking. In business, we need to quit our bad business practices. We need to quit our losing products or poor services. We need to terminate bad employees. We need to be constantly reevaluating our business and understand what needs to change when the results are unfavorable. Your job is to understand when to pick your head up and evaluate the business and when to keep your head down and focused on the prize.

Evaluating your business should not happen on a daily, weekly, or even monthly basis. Certain things definitely need to occur periodically, like reviewing your budget vs actual performance on a monthly basis. Quarterly performance reviews with employees are a good idea. Daily process management meetings or similar should be occurring (i.e. following a process like AGILE) but big picture evaluation shouldn’t be taking up your time regularly.

Knowing when to quit only occurs after investment of significant time and effort. The evaluation of your business practices/services/products should be careful and deliberate. If you’re concerned about your business — prepare to step away for a few days and look at the big picture. Take a vacation or work on something completely different for a few days to allow your mind to break the issues down. Write out your thoughts. Evaluate the issues. Then define your plan of attack.

Changing the nature of the game by being prepared will shift the odds in your favor. While you need luck to win the lottery you can be a successful business owner without it.