Craig McIvor: Bad times can be a good time to launch your new business

There may be no better time than the present to start a new business venture.

Newly formed companies have a distinct competitive advantage as they can start with a blank sheet of paper and create an efficient business model from their first day of operation.

They can source cheaper business inputs to produce products and services that will earn them sustainable margins over the next few years. In many ways, they go into a business better prepared, with their eyes wide open.

Existing companies, in comparison, are grappling with how they can morph into leaner, more efficient types of organisations.

Existing pay structures and incentives, residual cost structures and staff attitudes, built up over the good years, are now working against these incumbents.

The last recession in New Zealand was in 1998 and according to a paper published by the Ministry of Economic Development in 2004, nearly 38 per cent of all small businesses started in that year were still active five years later. Not surprisingly, the newly formed companies with the best survival rates were those involved in electricity, gas and water supply, finance and insurance. The poorest survival rates were in accommodation, cafes, restaurants and communication services.

During times of recession, companies and consumers look at all expenses, seeking ways to lower costs. In effect, they are going through what marketers call the "Evaluation of Alternatives" mode for all the services they buy. This provides great opportunities for new entrants with the right mix of utility and price to get in front of potential customers.

A new venture in a mature market can be well-received as a new, cost-effective alternative to existing suppliers.

Older companies may find it difficult to swallow significantly lower prices, especially if they have accumulated a high level of fixed costs. This may lead them to be less flexible in dealing with customers, giving new entrants a chance to win the business.

Businesses that are focused on cost-saving initiatives can do very well, but beware of a misconception that people will pay $100 today to save $120 over the course of a year. Cashflow is at a premium at the moment, and even though the economics may seem sound to you, customers may not have $100 today to spend.

Starting a new business that is in blue-sky territory is more tenuous. Economic conditions may mean spending on new or untested initiatives is curtailed, so it may take considerably longer than expected - with all the implications for funding. You may think there is a niche in the market, but the real question should be: "Is there a market in the niche?"

The global crisis has already signalled that some of the really innovative sustainability projects, for example, are simply going to be put on hold till better times emerge.

New businesses that rely on overseas sales to succeed need to be very cautious, at least in the short term, due to fluctuating foreign exchange rates. While the new company may make good products and may find deep offshore markets, it may all be for naught if these exposures cannot be managed. Any business plan should include sensitivity analysis around the swings that could occur.

The principles for starting a new business today are the same as in buoyant times, but with slightly different emphasis:

A WELL-DEVELOPED BUSINESS PLAN

The plan for the business needs to be well researched, realistic and achievable. Most importantly, the timing aspects of revenue generation and cost outlays need to be carefully understood given the state of the market. The value proposition should be compelling and thorough testing with real customers is recommended.

FUNDING

Most businesses fail in the first six months of operation, mainly due to lack of funds. One positive for new businesses is your new business

that start-up costs such as premises rental, technology purchases and staff costs should be significantly lower than in boom times.

Businesses should have enough funding to get to a self-funding situation, with a comfortable buffer for slow sales and higher-than-expected costs.

Access to additional funding may be difficult to source, so it is best to have the funds upfront before you start.

PEOPLE

The current market may be very fortuitous for new companies as there may be more applicants than they can handle.

While the cost of labour may be more economical, it does not substitute for having the right people with the right skills and motivation.

Many very good ideas and business concepts have never got off the ground simply due to the inability of people to work effectively as a team.

BEST PRACTICE

Start where you intend to finish and ensure that good management techniques are employed to maximise your chances of success. If you can't measure it, you can't manage it - so put in place metrics that are right for your business from inception. Review these metrics and your cashflow forecasts regularly.

New businesses can be successfully started in all parts of the business cycle.

Each part of the cycle provides different types of opportunities and risks, and if an entrepreneur understands these then they can mould their strategy accordingly.

The Chinese saying that "fortune under disaster crouches" shows how the Chinese recognised even 1000 years ago that new businesses flourish out of the ashes of economic downturn.

People around you may warn you otherwise, but if you know your market and you understand the dynamics of your potential customers, now is as good a time as any other. In fact it may even be the best time to act.

In a few years we will look back and see a new generation of companies emerge from this part of the business cycle which will set a new standard of innovation and business competency borne out of the need for economic rationalism.

Craig McIvor is the managing director of Corporate Management Advice.

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