The Odds of Profitability
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Transcript of The Odds of Profitability
By David Saint-Onge�This article is a re-printed from the�
November 2010� edition, as approved by the�UP Business Today�
The game of Monopoly™ has been in�existence since 1903. Its history can�be traced to a Quaker woman named�Elizabeth (Lizzie) J. Magie Phillips�who wanted a way to explain the sin-�gle tax theory of an American writer,�politician and political economist�named Henry George. Since its hum-�bling beginnings, the board game has�been played by almost a billion people�around the world.�
In many ways, Monopoly mirrors�business life. Consider the following:�
Each player is allocated a limited�amount of money ($1,500) out of a�total pool of $20,580;�
“House Rules”, different than the offi-�cial game rules, have been created�over time to permit players to cre-�atively earn more money;�
Property values are based on location�and the laws of probability (rolling a�seven occurs with a probability of 1 in�6, whereas 2 and 12 occur once in 36�rolls of the dice);�
There are only 12 hotels and 32 houses�available for purchase and players are�not required to upgrade properties�with hotels (e.g. building each prop-�erty out to a maximum of four houses�and then refusing to upgrade ensures�the maximum amount of rent and mo-�nopolization of the game); and,�
Although the game is carefully de-�fined, bankruptcy and related property�auctions make winning the game�(under official game rules) an almost�unreachable goal.�
Monopoly is a game of luck, strategy�and people skills. If you are a small�business owner, you know these are�the same ingredients necessary to be�successful in today’s competitive envi-�ronment. Unfortunately, the tactics of�winning a board game generally do not�hold true in real life.�
Derek Sivers in his review of the book�by Adrian Slywotzky titled, “The Art�of Profitability”, has succinctly identi-�
fied the fundamental problem with�many business owners. Mr. Sivers�writes, “To succeed in business you�have to have a genuine interest in prof-�itability; and most people don't.”�
As is the case for many small business�owners, it seems the ‘ends justifies the�means’. What I mean by this state-�ment is that many business owners�simply see their businesses as a means�to live; often compromising opportu-�nity for growth and increased profit-�ability because of their genuine fear of�risk. In many ways, a majority of�small business owners proceed down�an inevitable path that starts out as an�all-out risk-taker who wants to prove�he/she can do it – to a conservative,�it’s ‘good enough’ mentality that in a�strange way compromises the true def-�inition of an entrepreneur.�
By their very nature business owners�talk tough, but when it comes to earn-�ing a commensurate risk-based return�on their businesses, many miss the�mark. Consider the current rate-of-�return for a simple savings account or�Certificate of Deposit at your local�bank. At 1 to 2%, many will admit�these bank rates are less than typical�annualized inflation rates and simply�are laughable considering the time�value of money. If true, then why do�many small business owners operate�their companies at profitability levels�that produce similar returns? Could it�be that many entrepreneurs start out�with the goal of simply surviving, but�then getting to the point where their�maturing company becomes merely a�vehicle for the owner to achieve a level�of economic comfort; or in other�words, ‘a means to an end’? If making�a 1-2% return on your bank deposit is�not good enough, why is making a�similar return on a much riskier busi-�ness investment acceptable?�
For every entrepreneur, the odds of�forming a profitable business venture�are the utmost concern when deciding�whether or not to enter the market with�a new business idea. In trying to make�this important decision, few measures�exist to help potential business owners�
assess their chances of forming a fi-�nancially successful enterprise. Pro-�spective business owners and those�interested in new business success face�at least two critical questions: (1) what�are the chances (i.e. probability) the�owner of a new business will have a�profitable firm, and (2) what are the�chances (i.e. probability) the owner's�firm will be sufficiently profitable to�alter the owner's financial condition/�standing?�
Recent research suggests that, on aver-�age, there’s a 50/50 chance small busi-�ness owners will operate a profitable�venture during the initial start-up�phase. Perhaps this is a result of a�willingness to tackle risk in the early�days of competition. However, over�the long-term as businesses mature�and business owners become more�conservative, just 17% form profitable�ventures that improve the owner's�overall financial standing, while 6%�form unprofitable ventures that nega-�tively affect the owner’s financial�well-being.�
New business owners generally open�their firms flush with optimism. Their�goals are often immodest, with about�one-third expressing a desire to grow�their businesses into large firms.�However, typically no more than 3 to�4% of the business population actually�achieves high growth status. What is�most daunting is the fact that new�business attrition rates are high. While�it is clear that business failure is a�function of available opportunities and�making sound business decisions, al-�most 20% of new start-ups are gone by�the end of the first year, with 60%�out-of-business by the end the fifth�year.�
The issues of business growth and�profitability rest solely on the shoul-�ders of the business owner and their�inevitable transition from risk-taker to�fiscal conservatism. This assessment�is exemplified when the business’ cus-�tomer base and/or market conditions�change, then the profit model changes,�therefore the business design has to�change. For small business owners�
who have achieved some level of fi-�nancial success, this evolutionary�crossroads forces the owner to make a�decision to change the business model;�to take a risk. For many small busi-�ness owners in this position, they don't�want to take action because they’ve�been financially successful. In short,�the more deeply you're enmeshed in�yesterday's success system, the more�impossible it is for you to imagine�what tomorrow's success system will�be.�
According to the official rules of Mo-�nopoly™, if a player lands on a prop-�erty that is not owned and the player�who rolled does not wish to buy the�property, the property must be pub-�licly auctioned. This is also true in�business life. If a business refuses to�take action, a competitor surely will.�In the end, the competitor who recog-�nizes and manages risk, and takes�commensurate action, always wins.�
The Odds of Profitability�
David Saint-Onge is President�and Principal Strategist for�Black Ink Assets�(www.blackinkassets.com), a�business consulting company�that enhances organizational�performance, guides business�growth, helps businesses un-�derstand productive sustain-�ability, and serves business�owners with effective business�exit strategy planning and im-�plementation services.�