Starting a business in tough economic conditions

By choosing the right type of business and conducting it in the right way, your business could thrive when economic conditions are tough.


4 min read

1. Overview

Although it may seem counterintuitive, turbulent economic times can bring new opportunities. For some, a change in employment status may bring to fruition an idea that’s been burning. For others a new idea may be born out of a crisis causing changes to consumer behaviour.

In an economic downturn, businesses could experience falling sales, cashflow problems, employment freezes or redundancies. However, there may also be opportunities.

Starting a business during tougher times can keep you focused on stepping out on the right footing as, more so than ever, proper planning, financial forecasting and future proofing is essential for the business to succeed. The learnings from this difficult period will stand business owners in good stead to tackle challenges they face in future.

By choosing the right type of business and running it in the right way, your business could thrive when economic conditions are tough.

Here we summarise some key considerations to help you get things moving.

2. Is running your own business right for you?

While running a business can be rewarding, it’s a challenge requiring personal drive and resilience.

At the beginning, and in some cases for many years, you may be the only person driving the business forward until your income justifies hiring staff. How much time do you have to give? Do you want to work part time or full time? What financial resources do you have to start up and are these sufficient to cover your overheads and outgoings? How will you juggle working with family and other commitments?

You might find our article on considerations for starting your own business useful in working through this thought process and asking yourself some hard questions before taking the leap.

3. Do your market research

Is your idea viable now in the current economic and technological environment? What might have worked as a business model before may need some diversification to remain profitable in line with changes in consumer behaviour.

Perhaps you can offer a solution to a new gap in the market. Many existing business owners have to adapt their product or service to stay relevant and profitable.

Some types of business are more likely to succeed in a tough economic climate than others:

  • the 'essentials' markets - e.g. 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

Start-ups however, while small and not tied to premises or without the responsibility for many employees, can be flexible, nimble and creative, moulding a business idea to fit new marketplaces.

A good way of testing your idea would be to carry out some research with your target customers. Talk to them and find out if what you want to sell is something they'd be interested in buying, and if so, what they'd pay for the product or service. Where would they be most likely to buy it? Online or in person?

Once you've sense checked your idea, you can use the same process to develop and validate your business name and branding. Does it strike the right tone and have the impact you hope for? This is your opportunity to get it right.

4. Write a business plan

See this as a validation exercise - a way of demonstrating you have a thorough understanding of your business and product or service. It will help you understand pricing, what you need to do to break even or make a profit. You may require a business plan when applying for financial support or funding and it will demonstrate to potential partners, distributors and suppliers that everything has been thoroughly thought through.

Our video tutorials on bringing your business idea to life and business planning provide more guidance on carrying out market research and naming your business.

5. Forecast your financial needs

Most businesses fail because their finances put them under pressure and that creates cashflow issues and limits progression through their business plan. And, at a time when the economy is uncertain, you don’t want to take any big risks.

Cashflow is king, so make sure you have enough to live but be prepared to spend or speculate to accumulate. You might even want to run your new business part time, whether juggling home life or alongside another source of income.

From the get-go, set up a business bank account so you can keep your business accounts and personal finances separate. This will enable you to track your income and outgoings more easily and make it easier when it comes to submitting a tax return each year.

How you set up your business will determine how you manage your taxes each year and your personal liability. For more information on different legal structures for businesses and the pros and cons of each read our dedicated guide on legal structures – the basics.

Our guide on surviving until my business is off the ground offers some useful tips on financial planning for your new business.

6. 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 if you 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.

7. Efficiency in a tough economic climate

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.

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You can connect with us through the contact form, call us or contact your local Business Gateway office.

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