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When you are building your business, you need to prepare for both failure and success. By planning for the possible failures of your business venture, you will have a parachute to help break your fall on the way down. You may think your business has great prospects and see nothing but sunshine and rainbows in the near future for your company, but the reality is that nearly half of new businesses fail within the first five years and two-thirds of new businesses will fail within the first ten. These are not impossible odds, but they are an indicator that your first business venture will probably not be your last. Dealing with instances of major failure in your business along the way will change you and how you look at your business model. 

Financially Preparing for Failure 

To effectively plan for failure, you need to make sure that you are both emotionally and financially prepared for its possibility. Preparing for failure in terms of your finances is the easy part. It makes sense to reduce the amount of debt you carry and build as large a cushion as possible in savings. Dave Ramsey and other financial personalities tend to recommend building a three-to-six month emergency fund. Thomas Stanley, author of the Millionaire Next Door, reported that some millionaires that he interviewed had built up two year’s worth of emergency savings or more. That way, they could weather the total failure of their business and have time to get something else started. Do not panic if you do not have a healthy emergency fund in place, but know that if you are already self-employed or preparing to go full-time with your business in the next year, now is the time to start putting some cash away for a rainy day. 

The other way to make sure you are okay financially when the inevitable failure does come is to have a good, “Plan B” for how you can generate some cash. I maintain friendly relationships with several different website design agencies in the city that I live in. I know that if my business were to suffer a total failure, I would likely be able to get a job with them or at least do some consulting work for them to provide a stream of income for a period of time. I also know that I could do some freelance writing, or scrounge up some other freelance development work to generate an income in a worst case scenario.

Another option would be to create secondary revenue streams that will still provide some amount of income even if your primary business fails. For example, I started a side business last summer with a couple of friends of mine that generates $1,000-$2,000 per month in additional income for my family. My partners run the day-to-day operations of the business, but I have an equity share in the company in exchange for doing some of the programming and administrative work up-front and helping with marketing and finance when the need arises.

Emotionally Preparing for Failure 

Preparing emotionally for failure is a much more difficult task. As an entrepreneur, you are very passionate about your business ideas and you think of them as a member of your own family. There is almost a grieving process that you go through when you lose part or all of your business, especially the first time. I do not have a formula or plan to recover from those emotions when they do come, but knowing that failure is always a realistic possibility and giving yourself permission to grieve over the loss of your business for a specific period of time is a healthy thing. It is always good to have a list of new business ideas in a notebook or on your laptop you can look at to determine future possibilities when you are in the midst of failure. 

Planning for Success 

Conversely, you should also plan for the possibility of your business becoming a wild success. What happens if the demand for your business’s product or service is much greater than you thought it would be? Will you be able to meet that demand? If your business is solely reliant on a particular skill that you have to offer, a service you provide, or a product you build, your business is going to hit a ceiling in revenue growth when you run out of time. While your business may only start off with you as the sole employee, you need to start thinking about how your business might be structured if it were operating at a significant scale. 

Start thinking about how you can grow your business beyond yourself. Who should you hire to help run your business? What skills, education, and personality would they need to work well with you to grow your company? What would your organizational chart look like? What additional equipment, technology or office space will you need? How will your business look when it is much larger than it is now? What does your role look like when your business is ten times its current size? If you can answer these questions, you are on your way to being equipped for the possibility that your business succeeds beyond your expectations. 

Action Steps: 

  • Build an emergency fund of three-to-six month’s salary to pay bills as you weather downturns in your business.
  • Have your, “Plan B” to earn income if your business stops generating revenue.
  • Create an organizational chart for what your business looks like when it is operating at scale.