Starting in a downturn

It may seem like a bad idea to start a business during an economic downturn, but don’t ditch those hard-thought business plans just yet. The good news is that a tough trading environment at the start can mean great potential for growth when conditions improve; a quiet beginning can let your business find its feet and allow you to perfect systems to ensure it runs as efficiently as possible. Your smaller size can also have the dual advantages that you’re less expensive and more flexible than larger companies.

On the downside, your business may have fewer resources, less capital and may rely on a smaller number of customers than a more established business. The biggest issue of all, however, is cashflow. If credit is scarce and payments are late, you may find yourself paying out money faster than it’s coming in. And unless you have a healthy cash balance behind you, this could mean struggling to pay bills and survive.

By asking yourself a few simple questions before you go ahead, you can make sure that your business is in the best possible shape in order to make the most of the current financial situation.

In brief

• What to ask yourself before you start
• Taking the first steps
• Businesses that do well in a downturn
• Reducing start-up costs
• Managing cashflow
• What to do next

• What if the situation gets better – or worse? A good business plan will show how your business will cope in the short, mid and long term. In a downturn, it’s even more important to consider not only how you will manage if the economy continues to decline, but also how you might cope with demand when the situation improves. It is sensible to forecast cashflow predictions for three economic scenarios; good, average and poor.
• Who are your customers? Ask yourself who will buy your product or service, how they will benefit from it and what support you can offer them. A good product on its own won’t make a business; customer-focus will give you a head start.
• Have you asked the opinion of potential suppliers, stakeholders and customers? In a difficult economy, early feedback at every stage of your business’s development can help prevent costly mistakes and may provide you with your first customer.
• How will you make money? Transforming a product or service into cash is the essence of a successful business. During good times, this is easier as there is more available cash around. During a downturn, you will need to have a good understanding of where your profits will come from.
• What about funding? Ensuring you have enough money to start the business – as well as sufficient cash to keep it going – is essential, especially in an environment that makes investors nervous.
• Have you asked for advice? There is lots of free advice available if you’re thinking of starting a business. Talking to your bank’s Business Manager, business networks and other business owners is a great way to get an overall view of what starting up involves.

Starting a business doesn’t have to be an all-or-nothing affair. Even when the economy is thriving, taking small steps towards launching on your own may be a better approach than ditching the day job and jumping into your business 24/7.

During a downturn, working on your business part-time while you continue to get paid for another job, finding a partner to share the risk and workload with you, starting up from home, or initially starting an internet-only business, are all ways to reduce costs and boost security while you get started.

You may also consider buying a franchise. While not immune to economic worries, a long-established franchise could well have weathered the last downturn and may bring experience – in addition to effective systems and processes – to help it cope in the current situation.

If it is a well-known and respected brand, this too gives you a distinct advantage.

Although no business is invincible, there are certain sectors that historically do well whatever the financial outlook. People still eat, live and die, whatever the economic climate, so food, healthcare and funeral products are savvy options for new business owners. Financial and legal services, including family law and debt collection, can actually see an upswing in an economic downturn. And we all need to keep our homes in good repair, even when the house market is slow, so plumbers, electricians and other home-maintenance providers may find plenty of work.

Niche businesses and those that offer an affordable luxury can also benefit from tough times – experts say that sales of smoked salmon and champagne rise when the economy suffers, as we celebrate birthdays with a special meal at home rather than eating out. Häagen-Dazs ice cream is a success story from the downturn of the early 1990s because it was an indulgence that most of us could afford.

Another approach is to target customers who may be relatively unaffected by the financial situation. The over-50s are likely consumers as they have little debt, equity in property and other savings and investments. The very affluent are other potential customers. Although their assets will have been reduced by the downturn, they still have a high amount of disposable income. Suppliers of high-end luxury fashion and jewellery, for example, are reporting that sales of expensive, investment pieces are strong.

Regularly reviewing costs – what you’re spending, why and whether you actually need to make that outlay – is good practice for any business. For anyone starting out now, getting a handle on spending before you start is essential. Here are a few tips on reducing your outlay:

• Start an internet-only business. Trading online is a cheaper option than leasing a shop.
• Work from home. Having a home office or workshop at the end of the garden will be cheaper than renting or buying premises, and there are associated tax breaks available.
• Compare prices of power, internet and phone providers. It’s not only domestic customers who can benefit from good deals or switching suppliers. Shop around and you could bag a great deal for your business.
• Review travel costs. If you have a regular monthly meeting with a supplier, book ahead for cheap train travel or join a loyalty scheme so you get points back on petrol. Alternatively, ask them to come to you. Or arrange a conference call to save yourself time and money.
• Rethink advertising and marketing. Could you send that press release via email rather than an expensive mailout? Will a black and white classified ad work as well as a coloured one? A few small tweaks could still get your name out there, with less expensive outlay.
• Make your product smaller or cheaper. We all watch the pennies when times are tough, so products that come in smaller packs or bottles, or a three-day rather than a five-day course, will be perceived as good value. If you want to keep things big, think about reducing the packaging or altering inputs in order to keep prices low.

When you’re starting out, your biggest concern may be getting orders in, but being paid should also be a priority. The best way to do this is to have an accurate cashflow forecast – knowing what you are owed and when you are likely to be paid. You’ll also need systems in place that allow you to manage your invoicing and payments. The following tips will help you manage your cash and flag up any potential problems before they get out of control.

• Put your payment terms in writing and make sure your customers know about them
• Do credit checks before doing business and monitor late payments. If you’re worried about a customer not paying, think about asking them to pay in stages or pay cash on delivery
• Limit your exposure to bad debts by issuing invoices promptly and requesting sales receipts before shipping goods
• Encourage prompt payment. You could offer discounts for quick payments or charge interest on late ones
• Contact customers before payment is due to check they have received your invoice and will pay on time
• Give customers plenty of ways to pay.