Many champion a company’s ability to overcome failure. But how often do you recognize the need to build failure into your business plan?
There’s rarely a straight path from Point A to Point B, as any business owner will tell you. Creating a strong, marketable app might take three iterations and a major pivot between the second and third. Becoming the industry leader in customer service likely came on the back of a near-miss PR disaster, when a renewed focus boosted the team’s work.
What’s often missing in this discussion, of course, is the space needed to make those kinds of mistakes. For small-business owners, especially those getting started or struggling to get by, having enough in savings can be the difference between having to close or having another six months, year, or more to keep pursuing their goals.
According to a 2018 study, nearly 40 percent of Americans don’t have enough savings to cover a $400 emergency expense without selling an item or borrowing money. Even before a pandemic, a looming recession, and rental housing crisis highlighted the problem. In a tight financial spot, how can entrepreneurs avoid the worst while positioning themselves for the best?
Creating a Longer Runway
Personal finance expert Winnie Sun has talked about a “stop, drop, and reassess” approach to a recession. She told CNBC that the best thing to do is avoiding more debt right now if it can be helped to create more flexibility in an uncertain time.
The key part is if it can be helped. There’s necessary and unnecessary debt. Plenty of small-business owners will–and do–incur some debt to keep things going. This is particularly true if their business relies heavily on in-person traffic or is impacted greatly by social distancing. With a pandemic changing the rules of the game, a regular cushion may not be enough.
This notion of giving yourself a longer runway–in other words, time to fail–before you succeed didn’t appear suddenly. It has always been critical, though often undervalued by some in today’s “hustle culture” of entrepreneurship. Companies, aware of this, have been trying to find ways to keep small businesses moving in the right direction.
When it’s commonly accepted that eight out of 10 small businesses will fail, this failure rate has less to do with the concept of a business and more to do with the amount of time the owner can run it without turning a profit. That’s why so many companies invested in working with small businesses look at personal finances as a critical component.
These resources and initiatives were forced to pivot quickly in March to help hourly workers find ways to weather Covid-19 and aid businesses in creating emergency cash programs to help their workers. Tackling economic issues from both sides of the equation is paramount to sustained success.
Just as each person should have emergency savings on hand for a disaster, entrepreneurs need to have emergency bandwidth to pivot and meet the needs of the people they’re looking to serve.
How You Can Determine Your Next Step
If you’re running a small business, the good news is that there are plenty of resources that offer advice for creating a longer runway and learning more about personal finance. If you’re lucky enough to be in a holding pattern with your business, use this time to research ways to create a longer runway. What 2020 has taught us is that nothing is guaranteed.
Even if your business is doing well currently, remember that there’s a lot of uncertainty surrounding reopening that will have ripple effects across the economy. 2021 budgets for many companies, clients, and vendors may look different. Consumer spending could tighten. Conversely, things could return to the standard we’d become accustomed to in recent years–it’s just too soon to tell.
What is clear is that giving yourself the maximum amount of time to ride out anything unforeseen is the safest and best play. Use your resources, and pad your savings. That extra runway could propel your company past many others in your industry when the going gets even tougher.