Starting a business in a recession - what you need to know

It may seem counter-intuitive, but a recession may actually be the best time to start a business. Some of the world’s largest and oldest companies have taken advantage of the unique opportunities provided by a downturn, proving it is possible for forward-thinking start-ups to flourish in what are otherwise testing times.

Think about your business type

One of the unique characteristics of this recession is that many people considering setting up a business are doing so because they have been laid off from well-paid jobs, and have a redundancy payment in their pockets. They might not have a firm idea of the type of business they want to run, but they know that the best way to avoid redundancy is to become their own boss.

If you are one of these people, you should consider the types of business that are least likely to be affected by a recession.

Regardless of the state of the nation’s finances, there are always a number of lifestyle things that people still need to do. Grocers, for example, enjoy some insulation from a downturn because their services are necessary. Similarly, affordable luxuries traditionally do well during periods of recession; sales of lipstick, for example, are famously healthy in difficult economic times as consumers reach for items that make them feel good but don’t break the bank.

There are also some ‘white collar’ business types that benefit from a downturn. Debt collection agencies, for example, are enjoying unprecedented success as companies struggle to secure invoice settlements. Elsewhere, firms specialising in business re-organisation and streamlining are also doing well.

If you are on the look-out for a suitable business type, it is important to strike a balance between a venture that will do well in a downturn and one that will succeed in normal economic conditions. Bear in mind that the recession will not last forever, and it is important that you are able to take advantage of the recovery and to keep flourishing during economic stability.

Low start-up costs, low overheads

In times of recession, businesses across the board take action to minimise their costs and shore up their margins. You should adopt this model from the start. Only the leanest, most cost effective businesses will survive in the current climate, and you should begin with your costs as pared back as possible.

Inevitably there are significant costs incurred when starting up a business, some of which are simply unavoidable. However, you should think carefully about things like outsourcing - do you really need to outsource tasks like bookkeeping, or can you do it yourself and save the money? Similarly, do you need business premises or can you work from home? Working from home can present some tax benefits, but it is only suitable for some business types.

Consumer spending is still low and looks set to remain so for some time. As such, it may well be wise to save your cash at the outset in order to provide some contingency in the event that you cannot drive sufficient business.

You may also wish to read our article on key accounting ratios for some simple methods of keeping track of overhead spending.

Have a firm plan - and fund it yourself

It is important to ensure that you have a watertight business plan.

Your business plan will have a number of important applications. Primarily, it will act as a roadmap against which you can judge the progress of your venture. Furthermore, a clearly established set of objectives for your first 12, 18 and 24 months of business will help to ensure that you are not sidetracked but remain focused on your primary goals.

For many entrepreneurs, a business plan is also the key to securing funding. However, in the current climate third party financial support is extremely difficult to find. Many business advisors are suggesting that self-financing is currently the only viable option for those interested in starting a new venture.

This should not necessarily be seen as a bad thing. In many ways, self-financing can be beneficial to the health of an organisation, particularly because business owners feel more of a responsibility to their venture if they are the sole investors. Furthermore, professional investors are likely to be on the lookout for businesses with a proven track record. As such, a ‘DIY’ approach is a good way to start where possible.

Plough your resources into marketing

The recession has resulted in increased competition for a significantly reduced number of customers. As such, it is vital that you convince potential clients that they need the goods or services provided by your company - and that you are the firm to fulfil those needs. Developing and acting upon a comprehensive marketing strategy is therefore vital for the success of your business.

Your marketing strategy should touch upon the concerns of consumers in the current market. Price is likely to be primary amongst these, however it is not the only consideration - even during a recession. You may wish to read our article on conducting market research for more information on the ways in which a sound knowledge of your potential customers can increase the health of your business.

Many people are sceptical about the prospects for any business starting up during such a difficult economic period. However, many of the factors that are making life difficult for established companies may actually work in a new venture’s favour. Enforced frugality and an increased focus on the bottom line are likely to be of benefit. If your company is well managed and sticks to a clear set of objectives, it has every chance of flourishing.