How to Start a Business in An Inflated Economy?
In this blog, we will discuss steps on how to start a successful business in an inflated economy. Businesses and entrepreneurs can and do succeed during hyperinflation. Starting a business is hard, let alone trying to set one up amid the highest inflation levels seen in the last 40 years. Incredibly, no one under the age of 50 has witnessed such times.
Inflation is a thing but not a permanent factor
The thing about starting a business during the high inflation period is the opportunities to create innovative solutions to problems we did not know existed until now. When prices go up, consumers are savvier in how they spend. Companies adapt and change their selling structures to give better deals and discounts and push more local products – reducing logistical costs.
Steps you should take to start a business
Let’s explore some basic steps to start a successful business in an inflated economy.
External Industry Analysis
Before starting your own business, it is critical to understand exactly what you’re getting into, particularly for first timers. As the First step, you need to do external industry analysis, and you should break this down into five segments, following Porter’s five forces1:
- Threat of New Entrants- If the industry presents a low or no threat for new companies, then the threat of new entrants is high. This may happen when initial capital requirements are low, and state and federal requirements are none or low.
- Threat of Substitutes- This threat is high if there is a large volume of indirect competitors to your product or service.
- Bargaining power of Supplier– The bargaining power of suppliers is low when all groups of suppliers do not have the same power.
- Competitive Rivalry – This threat is high if there are a lot of direct competitors in the industry offering the same product or service.
- Bargaining Power of Buyers – This power is high when buyers can influence prices for the product or service offered.
A whole range of things can happen in your industry but outside of your business, meaning that external factors can play a part in your company’s performance. The more you know and understand your industry, the better you will be positioned for success.
You should develop an internal analysis of your company’s strengths and weaknesses. It would help if you created an analysis of the company’s infrastructure that makes up the primary and secondary activities. You can do a SWOT analysis outlining internal strengths and weaknesses and external opportunities and threats.
When deciding what industry to choose, you should look at how it gets affected by the economy. Cyclical Industries are affected by a recession. This is a bi-product of how much discretionary income a consumer spends on specific products or services.
In times of economic downturn, it is essential items that are recession-proof. We all need access to food, water, gas, electricity, and medical care. So when starting, it may be wise to opt for a product or service that is highly needed.
During the COVID lockdown, many restaurants folded, but the smaller, localized take-out and delivery stores created innovative solutions to adapt and bring your favorite foods to your door. Delivery services also boomed during these times.
Hyperinflated economies can lead to opportunities to create innovative solutions to a problem with this type of economy. During COVID, the restaurant had to change its business model to adjust to the new way of living. Some restaurants created a new service offering farm-to-table-made baskets by creating synergies with farmers. Other restaurants closed their doors to reduce overhead costs and only served fresh, packed-to-go meals off the menu at standardized prices.
Consumers’ spending habits also changed during COVID, increasing sales for e-commerce startups. Many startups reached $1 Million in gross sales thru their online website, creating a solid brand presence.
When creating a business during a recession, the idea is to pay attention to behavior patterns and trends. Although COVID has been an event that was not easy to predict based on past recession trends, how the government reacted to it was a good indicator of what to expect from consumers. At least for some time.
Create a business plan
Once you are clear on what innovative solution you want to focus on creating as a business, you need to finish completing a business plan. We say completing a business plan because all the steps mentioned above are part of your business plan. This business plan will come in handy when requiring capital infusion.
A business plan should have the following sections:
- Executive Summary
- Company Introduction
- External Industry Analysis
- Internal Industry Analysis
- Strategy analysis
- Strategy Formulation
- Strategy Execution
Once you have created the necessary external and internal industry analysis research, you can start building your business model.
Strategy analysis, formulation, and execution will come as you line up the next five years of your company. You should be able to determine where your company will be and the capital required to hit those milestones.
Go to our blog How To Build A Startup Financial Model – Startup Tandem to get more information on building a simple model for your startup.
Determine capital needs
One of the most challenging areas is determining the capital needs of a business that is not fully running yet. Many entrepreneurs create projections that are very ambitious on revenue growth. Determining the expenses that will take the company to hit that revenue growth should be a logical, industry-standard year-over-year growth approach. Once you have developed a strong and conservative proforma, you can determine the cash (capital) needed to launch and each growth stage.
Before setting up a business, check if you are eligible for a government grant to help get your business off the ground. It’s been a rough ride for many smaller businesses during the pandemic, but help may be available for you on a government, state, federal or local scale, as well as a bunch of private sector firms.
Research your eligibility before starting up.
How can Startup Tandem help?
Startup Tandem business model is to scale with your business. Services are customized accordingly to each business’s growth. Startup Tandem has a team of financial analysts, accountants, and fractional CFOs that can support you in creating your startup.
Startup Tandem is known for its network of professionals that can help you create a successful business. Success can be achieved by increasing revenue, getting legal advice, getting in front of venture capitalists or banks, being placed in retail, or helping you solve any other problem you may have. Head over to the blog Will My Business Survive The Current Economy? (startuptandem.com) to read more about if your business can survive a recession.
Start today with an initial call to discuss your business needs. From there, we can develop a plan that fits your budget and growth stage. Monthly meetings can ensure you stay on track to achieve your business and financial goals.
1-CGMA Affiliates. June 10, 2013. Porter’s Five Forces of Competitive Position Analysis (cgma.org)