Starting a business in tough economic conditions

You can use what you know about the volatile financial climate to help you develop a targeted and specific business idea.

Your business idea

Some types of business are more likely to succeed in a tough economic climate than others. If you want to start up a business but you haven't decided which area you'd like to work in, find out what sorts of business are thriving, and what about them makes them 'recession-resistant'. You could also look into:

• the 'essentials' markets - eg food and house maintenance
• the affordable luxuries market - in an economic downturn, the market aimed at people aged over 50 may still be growing, as they may have equity in their property and savings
• existing businesses - not only is buying a business which already has established revenue a safer option, but you might get a bargain in difficult economic times
• franchises - an established franchise stands a good chance of surviving when economic conditions are tough as they have experience and streamlined systems and processes

Test your business idea

You can use the economic downturn as an opportunity to define what you and your business want to achieve. Consider whether customers would really buy your product or service, particularly in the context of the current market.

Difficult market conditions are often caused by very specific issues, such as an unavailability of loan finance. Finding out what these issues are and how they will affect you will allow you to rethink the nature and scale of, as well as the market for, your business.

You should look at the business pages of newspapers for information about the issues involved in an economic downturn and their effect on businesses. Understanding these issues will help you develop strategies for coping with them.

If you need to raise money to start up your business, there are various options, including:

• using personal money - such as savings, redundancy payments or a pension windfall.
• approaching a bank or business investor for a business loan - this may be more difficult during difficult economic conditions. Any lender will want to review a detailed business plan before loaning any funds.
• finance from family and friends - they may be more likely to lend you money than a bank and may offer a longer repayment period and lower rates of interest.
• applying for a grant - there are many business grant schemes, geared to different industry sectors and project scales. Applying for a grant may take some time, and they may be more difficult to get in an unstable economic climate.

Find out more about funding support for start-ups.

Risk management

It's important to identify the key risks your business may face and develop strategies to eliminate or reduce them. This will make your business more flexible and more able to withstand volatile market conditions.

Common risks include:

• losing customers and failing to attract new ones
• increased competition
• poor cashflow
• failure to anticipate problems/inability to adapt to changing market environment

Customers and competitors

It will help to develop a clear strategy for identifying key customers and developing relationships with them. You should try to plan for worst-case scenarios, such as losing a major customer, and expand your customer base as quickly as possible to provide a firm foundation for future growth.

You also need to consider potential opportunities that could arise, for example, if one of your competitors ceases trading.

Keep your cashflow healthy

Cashflow is the balance of money entering and leaving a business. It is important to anticipate cashflow problems as early as possible, so that solutions can be found to ensure stable growth.

You should always know how much money your business has in the bank, how much it owes and how much it is owed. If you regularly update your financial records and develop forecasts showing likely sales, profit and loss, you can identify when additional funds might be required.

If you anticipate serious cashflow or funding problems in the early stages of your business, your accountant or your bank may be able to suggest options to counter this.

It's important to ensure that your business is lean and efficient, particularly when economic conditions are difficult.

Minimising costs

Even this early on in your business, you may have options to reduce your business costs by considering whether:

• any element of your business product or service can be removed
• there are cost-effective alternatives to high-cost elements

You may be able to make savings on your fixed costs (often called overheads), which you pay for regardless of how much you produce or sell. They include rent, rates and wages.

You may be able to make savings on your variable costs, which are linked to how much you produce or sell. Variable costs include materials, packaging, overtime and transport costs.

Choosing and managing your suppliers

To minimise your costs, you should manage relationships with suppliers effectively and assess their performance regularly. Being reliable in placing orders and paying on time will lead you to become a valuable customer. Drawing up a contract or service level agreement can ensure good service from them.

Your bank is also a supplier so try to minimise your banking costs and make sure you get the cheapest form of credit available.

Maintain a good relationship with your bank or other lender. Always try to be personally involved in dealings between your business and the lender.

Ready to access more information about starting up? Use our free Planning to Start tool to get information relevant to you.

Plus read our guide on starting up: common mistakes and how to avoid them.