Recession is a scary idea for most small business - however, a financial crisis or economic decline do not have to be a major threat to your company. This is why we've compiled this short guide to what recessions are, how they impact business, and how to survive them.
Recession - explained
A recession describes a sustained period of a significant decline in the economy. It is commonly defined to be two consecutive quarters of negative economic growth. Usually, recessions last for a couple of months, although some have taken years. Indicators of a recession include a decline in consumer spending, slow economic activity, real income, a slowdown of manufacturing, and large job losses.
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Effect on businesses
A recession and its economic downturn usually have a significant effect on a view financial quarters and the economic recovery can take a long time. But how does a recession affect businesses?
Impact on cash flow: You as the business owner will likely feel a recession when looking at your cash flow. Clients might take longer to pay invoices which delays your payments to suppliers. Also, if one of your customers goes out of business, their bills are likely to not be paid.
Impact on profits: Clients and potential customers will be more sceptical towards spending. This can impact the revenue generated through sales and can force your company to cut costs. Also, businesses may not be able to invest in new products and staff members might have to be let go.
Access to credit lines: During a recession, it is likely to be more difficult for your company to access lines of credit. Also, interest rates are likely to be higher and requirements for lending stricter.
Impact on product quality: With slower manufacturing and delays in bill and supplier payments, companies are likely to try and cut costs. This will then lead to a decrease in the quality of their services or products.
Impact on stock prices and dividends: Reduction in profit and cash flows will affect official financial statements. This can cause dividends to decline and shareholders to be sceptical as stock prices drop.
Even though recessions can be scary and bring many disadvantages for the global economy and small businesses, there are a few silver linings: inflation rates drop and borrowing rates tend to be low. Economic downturns can allow your company to streamline and invent ways to cut costs.
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How to act during a recession
Keep an eye on your business finances
If you consistently keep an eye on your business's financial health, you are more likely to have a safety net should a recession occur. This can help reduce redundancies and cuts to the quality of your product or services. This can be helped by a cash flow forecast.
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Manage company talent
Utilizing existing talent within your company can help react to recessions as you will be unlikely to be able to hire. Knowing that you have a functioning team and people that can step up to a leading role within it can assure the minimum impact of a recession on your staff.
Make your business recession-proof
Scenario and crisis planning can help establish procedures to fall back on should a recession occur. Also, good customer relationships can help carry you and your business through periods of economic downturn.
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