Aug 1, 2022 |
Starting a business during uncertain economic times can be daunting, but it’s not impossible. Over the last two years, small business owners have faced countless challenges, including pandemic-related shutdowns, supply chain shortages, mass employee resignations, and—most recently—record-high inflation in the United States.
However, despite the obstacles, many established business owners and entrepreneurs alike are starting new ventures. Almost 5.4 million new business applications were filed in 2021, the highest number on record since 2005, according to the Census Bureau.
Whether you opened a new operation recently or are considering taking the leap, here’s what you need to know about starting a business amidst economic uncertainty.
What is economic uncertainty?
Economic uncertainty refers to an unpredictable economy, one with swift or unprecedented changes. Recessions, depressions, slowdowns, and economic downturns all fall under the umbrella of economic uncertainty. There are lots of social, political, legal, environmental, and technological factors that affect economic conditions and contribute to uncertainty. Here are some:
- Public health crises
- Wars or famines
- Technological advancements
- Natural disasters
- Changing business regulations
For small business owners, uncertainty in the economy can make it challenging to assess risks and accurately forecast market trends.
When is the right time to start a new business?
There’s no perfect time to start a business. Your ability to build a successful business during tough times depends on several different factors:
- Your experience: Having knowledge and experience with entrepreneurship will make it easier to develop a business growth strategy during uncertain times.
- Your finances: If you have more capital to experiment with (and less personal or business-related debt to pay off), you have an advantage. More cash flow means more time and resources to make your business profitable.
- Your business’s market potential: If your target market shows promise, you’re likely in a good position regardless of what’s happening with the economy.
- Your execution: A viable business idea is just one half of the equation; you also need to be able to carry out your plans effectively. That means making strategic marketing decisions, timing your launch right, and setting yourself up for success with the right team and resources.
- Your adaptability: In difficult times, you need to be able to switch directions and adjust your goals quickly.
Advantages of starting a business during uncertain economic times
There are downsides to starting a business when economic uncertainty is high—but there are also distinct advantages, including:
- Less competition: Most people start businesses when the economy is doing well, so your target market may be less saturated when the economy is less stable. Plus, lots of corporations stop innovating in times of economic uncertainty, which means your new business may be able to address a big gap in the market.
- Lower interest rates: Interest rates often drop when the economy is unpredictable, which means it’s easier to take on business debt. It’s important to note, though, that unless you have a fixed-rate loan (where interest rates stay the same), your interest rate will likely increase over time.
- More potential customers: During unstable economic times, many consumers change their habits and preferences. They want better options, and are generally more open to trying new things. As a business owner, you have an opportunity to stand out and gain customer loyalty.
How to decide whether or not to start a business amidst economic uncertainty
To figure out whether or not it’s a good time for you to pursue a new venture, take the following three steps:
1. Research your market
If your business addresses a gap in the market or gives customers something they didn’t know they needed, you’ll have a stronger foundation to build upon. To get a better understanding of your target market, make sure you:
- Research the goals and pain points of your target demographic.
- Study the latest consumer reports to understand consumer trends.
- Compare your business model to similar businesses.
- Review your industry’s trends and forecasts.
2. Figure out your business’s profit potential
The key to a business’s success during economic uncertainty is profitability. Before you start investing time or money into your business, it’s crucial to analyze the numbers. A business accountant can help you calculate your break-even point, determine your ideal profit margins, and figure out your cost of goods sold (COGS).
As a starting point, do the following:
- Estimate the costs of starting and running your business. Consider fixed expenses like rent, insurance, and payroll, as well as variable expenses like startup costs, inventory, and marketing.
- Figure out how much you’d need to charge for your products or services to turn a profit, and when you’d actually start making money after recouping your initial losses.
- Figure out how much cash flow you have now, and how much money you’d need to borrow. Make sure you take into account your personal debts and financial goals as well.
3. Create a business plan
Writing a business plan is a good way to assess the viability of your business idea and clarify what you need to do to achieve your goals. Your business plan should have the following sections:
- Company description and mission
- Market analysis
- Services and products
- Marketing and sales strategy
Once you develop your business plan, send it to a fellow business owner, mentor, or accountant to ask for feedback or suggestions.
As you consider your options, it’s critical to weigh the viability of your idea against your personal financial situation. If you have a promising business concept and a financial cushion to fall back on, taking a risk could pay off. However, if you think one or two setbacks could destroy your operation and put you too deep into debt, you may want to spend more time planning and refining.
In general, it’s a good time to start a business if:
- There’s significant market demand for your business offerings.
- You have an idea or plan to stand out from the competition.
- You have the resources and cash flow to get your operation going.
- You have experience with starting a business or working in the industry you’re going into.
On the flip side, you may want to go back to the drawing board if:
- There’s little to no demand for your business offerings.
- Your brand, product or service, or business model isn’t different enough from what’s currently available.
- You have a low credit score or unstable personal finances.
How to set your business up for success amidst economic uncertainty
There’s no one single action you can take to protect your business against the effects of economic uncertainty. However, there are some key practices that can help minimize your risk along the way. Consider these eight strategies:
1. Maintain a narrow focus
In an uncertain economy, it’s helpful to hone in on one business objective or offering to start, then adjust or expand as you go. Maintaining a singular focus makes it easier to satisfy new customers, improve operational efficiency, and eliminate unnecessary costs.
Imagine, for example, that you want to start a home spa service offering manicures and pedicures, facials, and massages. Instead of trying to do all four services from day one, pick the service with the greatest potential, then build out the customer options. If massages have the greatest demand, for instance, you could focus on offering several different types and lengths of treatments.
2. Practice smart cash management
Be diligent with your cash flow. You want to make sure you have enough to cover inventory and operating expenses, as well as emergencies. To maintain good cash flow, you may need to:
- Implement an invoicing system.
- Shorten your net terms.
- Use software for expense tracking.
- Space out your bill payments.
3. Create contingency plans
Creating contingency plans puts you one step ahead when the economy shifts course suddenly. Consider a handful of different worst-case scenarios for your business, then write out the risk management steps you can take to either prevent or respond to the situation.
For example, if Scenario A is losing customers due to price competition, your prevention plan could include creating a customer rewards program, while your response might involve offering a promotion.
4. Enlist expert help
Don’t be afraid to reach out to professionals for guidance. Think: certified financial planners, on-demand CFOs, business attorneys, and marketing consultants. Hiring an outside consultant is a significant investment, but the hands-on support and advice you receive can end up saving you time, money, and stress in the long run.
5. Follow market news and economic trends
When it comes to your business, ignorance isn’t bliss. Make sure you stay up to date on the latest economic developments that might affect your operations. Pay attention to online industry reports, local and international news, and major newspapers and financial journals.
6. Invest in your customer happiness
Loyal customers translate to steady business. Make an effort to continually check in with your customers or clients and find new ways to enhance their experience. Depending on your business and customer needs, that might mean offering free or discounted shipping, revamping your customer service, updating your website, or creating a rewards program.
7. Protect your supply chain
If you run an eCommerce or product-based business, it’s crucial to have supply chain backups in case of emergencies or problems. Work on streamlining your production process, securing alternate vendors, and stockpiling a certain amount of inventory in case things slow down.
8. Improve your marketing
Good marketing keeps your business relevant during uncertain times. Instead of taking a laid-back approach to marketing, be proactive. Make a point to understand consumer trends and continually experiment with new marketing tactics and distribution methods to see what works.
Strategy is key
There’s no optimal time to start a business, but certain conditions present more obstacles than others. If you want to start a business during a turbulent economic time, you can position yourself for success by weighing your personal risk factors ahead of time and making strategic business decisions.
Having EBC HR & Payroll Solutions, Inc. on your team allows you to move forward with confidence, knowing that we’re doing right by your employees, doing right by you, and it’s all being done in accordance with all the latest rules, regulations, and laws. Our philosophy is to provide a comprehensive, wide range of services to all our clients.
For more information regarding Tax/Banking and Payroll Services provided by EBC, please reach out to Mark Terry, Business Development Consultant at 716.998.4404 or email@example.com and/or Charles Bagley, Sr. Human Capital Management Business Consultant at 716.574.9947 or firstname.lastname@example.org.