Here's a self-evident truth: businesses generally fail because they run out of cash. Whatever the long-term problems that contribute to a company closing it's doors, most of the time the proximate cause is the same — the founder just can't keep the lights on and make payroll. The company goes bankrupt.

Knowing this fact, you have no doubt given a lot of thought to your financial situation, your cash flow, and your expenses. In short, you keep a close eye on your money. But according to a thoughtful recent Medium post from Praxis founder and CEO Isaac Morehouse, there's another sort of balance sheet you need to pay attention to.

What's your social capital?

You know your bank balance, but do you have a handle on the balance of social capital you can draw upon?

“Every time we interact cordially with another person, we generate some good will. It's like putting a deposit into a social bank account with their name on it. A simple smile and a handshake is worth a little. A interesting conversation is worth more. Connecting them to an idea or person of value to their goals, offering insightful feedback, or helping them achieve something can be worth quite a bit. Being reliable and doing these things consistently over time can build up a massive balance,” he writes, defining the concept.

Just as you can gradually save up and become rich in social connections and goodwill, you can also spend beyond your means and end up socially bankrupt. In fact, it's quite common in Morehouse's experience.

“I've observed a lot of ambitious types try to withdraw the tiny amount of capital they've accumulated two minutes after shaking hands with a new person... If all you've done is say 'hi' and tell them where you work, you've deposited the minimum balance to establish an account. When you follow this by immediately asking them to introduce you to someone or read your manuscript, it's like setting up a free checking account, dropping five bucks in, then hitting up the ATM for ten grand,” he writes.

Which isn't to say you can't live beyond your means for awhile. Just like you can inflate your lifestyle with credit card debt, you can create an inflated sense of success by pestering near strangers to help you.

“But you'll owe so much to so many,” Morehouse warns. “Your reputation, like a credit score, will scare away the prudent, who are those you'll most need in the long run. If you tap your Rolodex for social capital for every new pursuit, you'll have nowhere to go when the really good idea comes along. You'll be a short term prodigy and a mid to long term failure.”

Saving for a rainy day

Rather than spend more than you earn socially, Morehouse urges those with big dreams to follow the same sensible strategy they would with more concrete assets — shepherd your resources wisely and build up an emergency fund.

“Create a relational reserve. See every person as another place to deposit some social cash, let it earn interest and be accessible when something really worthwhile pops up,” he advises. “If you spend your professional life building up social capital by being generally helpful, resourceful, reliable, and likable, you'll soon have tremendous net social worth.” Then, when you're really in need, you'll have the support and connections you need to solve that problem or launch that dream venture.

Honestly, are you squandering or saving your social capital?

Published on: Oct 7, 2015