How to start up in a downturn

At a glance

• An economic slump could be as good a time as any to launch a new business. Small, agile companies are well placed to capitalise on new opportunities that may appear at this time.
• A positive mindset can put you on the right track. It’s also crucial to offer a compelling product that fits your market’s need, excellent service and strong digital engagement.
• A common pitfall for new ventures is not having enough cash, so focus on cash-flow forecasting. Remember to plan for the tough times as well as the good.

Steve Witt, Co-founder of Not Just Travel and The Travel Franchise, is an example of how to start up in a downturn.

He and Co-founder Paul Harrison launched their company the day before the 9/11 terrorist attacks decimated the global travel market. Undeterred, he worked harder than ever to build a travel company that would thrive, adapt and fill a gap in the market as the sector recovered. Today, he has sold hundreds of millions of pounds worth of holidays.

Steve says his secret is simple – a positive mindset.

“Even now, our competitors are talking down the peak holiday-booking season,” he says. “It’ll be a self-fulfilling prophecy for them. We’re incredibly positive. January sales are double last year’s and we’ve had some of our busiest booking days ever.”

His advice? “Don’t let a [near-] recession limit your capabilities. If you have a positive outlook, you will succeed.”

Steve is not alone in this optimism – British start-up owners are more bullish than ever. In 2021 to 2022, there were 753,168 company incorporations, the second-highest on record.¹ The highest ever was the year before, according to government statistics. These records suggest there are many great opportunities for new entrepreneurs, regardless of the harsh economic conditions created by Brexit, the pandemic and double-digit inflation.

Of course, there are plenty of risks in an economic slump, too. Figures from the Office for National Statistics show that corporate failures also hit a record high in 2022.² But these statistics don’t show how many failing companies were relatively new and how many were older companies unable to adapt to the rapidly changing conditions.

Is now a good time to launch a business?

Any time can be right to start a company if you spot a good niche.

Carol Evans is a coach and mentor to female entrepreneurs and Founder of Planet Peacock Business Success Club. She says a downturn can be a good time to start up as the increase in failing businesses can create gaps in the market for more agile firms.

“Many businesses will be struggling and there’s an opportunity to deliver more effectively,” she says. “Just make sure you’re not only selling something people need and want but they’re prepared to buy it at a price that allows you a profit.”

Andrew Shepperd, Director and Co-founder at Entrepreneurs Hub, says: “Many great new businesses are born in times of adversity, when new niches can emerge. As well as being more agile, smaller firms can often take more risks than larger firms due to the latter’s internal processes and obligations to shareholders and regulators.”

The pandemic was the perfect example – the overall economic situation was dire, but new markets and providers popped up in areas such as safety equipment, medicine and working-from-home technology.

What performs well in a downturn: things to consider

To start a company during a tough economic climate, you must focus harder than ever on having sound fundamentals. In addition to a compelling niche, you also need:

•a market opportunity
•a great story to tell customers and investors
•exceptional service
•good digital engagement ¬– for example, through online and mobile.

Another pre-requisite is a keen understanding of your area of business. Do as much research as possible, get advice and talk to other companies in the market. Find out who is doing well or badly and why.

Andrew says: “You may be clever enough to develop an invention. But that’s not always necessary. Sometimes, you just need to do something cheaper or quicker than the competition, or provide a better customer experience.”

Pitfalls to avoid

Andrew says most start-ups that fail do so due to lack of cash, not customers. For example, they trade beyond their resources, owe too much to suppliers while still waiting for payments to arrive, and run out of cash.

To avoid this, focus on cash-flow forecasting and planning to ensure you have enough for the journey. A robust three-year business plan is also crucial to help you keep cash flow on track and be ready to make bold decisions while also mitigating risks.

“Many start-up owners rig for fair weather – they plan around a best-case scenario and don’t prepare for storms,” says Andrew. “Many even go several years with no monthly management accounts. But the rigour these plans and financial reports bring to your business can’t be understated.”

How to deal with rising inflation

Inflation at over 10% is a challenge for any new business, however well run. Try to focus on less energy and material-intensive operating models. For example, you could use pop-up shops rather than invest in expensive high-street property.

Look at how you can exploit online delivery to save resources and time. And consider smart buying ideas such as joining other businesses to increase your purchasing power.

Carol says rising prices for energy and other commodities are impacting many companies’ margins. Start-up owners must analyse what all their overheads and running costs will be and only buy what they need. If you can’t absorb ongoing cost increases, you must up your prices, she says.

Brexit and the weaker pound have been huge challenges too, especially for those who import and export.

“Running a domestic business is easier, post-Brexit,” says Andrew. “But there is more familiarity and expertise in the post-Brexit import and export processes now. There are riches to be seized in exporting. And there’s a lot of help available from the government and organisations such as UK Export Finance.”

So a positive mindset is not the only trait you need to start up in a downturn – you must be well prepared, agile and resilient.

“Things are generally much harder when the business is new,” says Steve. “When we started, it was tough and relentless. But our business model adapted quickly towards high-quality and unbeatable service. Now our customers come back repeatedly.”

How SJP can help

Before starting a new company, speak to us to get a clear understanding of your personal finances. This should include how much money you need to live on, how much you could afford to invest in the company and how to align your business and personal finances.

We could also help by discussing funding sources, business insurance, and introducing you to other business owners and professionals, such as consultants and tax advisers.

Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

Links from this website exist for information only and we accept no responsibility or liability for the information contained on any such sites. Please note that clicking a link will open the external website in a new window or tab.

Sources

¹Companies Register Activities, 2021 to 2022, Companies House, June 2022

Paragraph locked by Anonymous user ²Commentary – Monthly Insolvency Statistics December 2022, The Insolvency Service, January 2023

SJP Approved 27/02/2023