Author Topic: Small business monte carlo simulation spreadsheet  (Read 605 times)

SeattleCPA

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Small business monte carlo simulation spreadsheet
« on: May 28, 2018, 08:10:06 AM »
I've been doing some blogging about monte carlo simulations and the insights one can gain. Thought this Google sheets monte carlo simulation workbook that tries to model small business entrepreneurship might be interesting to one or two folks here:

Small business monte carlo simulation workbook

I know, I know... arguably so theoretical as to lose connection with reality. But I think one or two actionable insights drop out of the calculations. First, the wide variability in outcomes entrepreneurs experience when you're talking about, maybe, 20% annual returns and 40% annual standard deviations. Second, the possibility the math does a better job of explaining Microsoft and Facebook than Inc. Magazine or Forbes.

plantingourpennies

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Re: Small business monte carlo simulation spreadsheet
« Reply #1 on: May 28, 2018, 11:30:38 AM »
So you're saying that you can find a business that you can buy/start for 25k, requires no further time from the investor, and also has an average 20% ROI, albeit with a wide range of possible returns?

Sign me up =)

I'm on bizbuysell.com pretty often...the major issue that I see with businesses int he sub-100k space is that they all require management from the owner. In other words, you're buying yourself a job.

SeattleCPA

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Re: Small business monte carlo simulation spreadsheet
« Reply #2 on: May 29, 2018, 07:00:35 AM »
@plantingourpennies , monte carlo simulations provide a pretty cool handle to grab hold of some topics. But the simplicity of the inputs are sort of deceptive.

The arithmetic mean return input isn't actually your or my average annual return. It's really just the simple mean average.

What that arithmetic mean average along with a standard deviation allows, however, is calculating realistic investment outcomes.

BTW, the better measure of a likely outcome if you invest in something with an arithmetic mean return of 20% and a standard deviation of 40% is around that median return of 13% shown in cell C8 (see simulation workbook fragment below).