A recession is a prolonged and pervasive reduction in economic activity. Generally speaking, multiple successive quarters of negative growth in gross domestic product constitute a recession.
A recession can last for several months or longer, and recovering to the nation’s previous economic peak can take years, even after a recession ends. Because a recession typically results in diminished economic output, lowered consumer demand and reduced employment overall, such a downturn can present various challenges for organisations across industry lines—especially small businesses.
Unfortunately, many businesses are already facing these challenges. According to data from the Office for National Statistics, 5,629 company insolvencies took place between April and June 2022. This amount represents an 81% increase from the same period in 2021 and is the highest figure seen since the third quarter of 2009 when the UK was already in the midst of a recession.
Although organisations can’t prevent a recession from happening, they can take steps to limit its ramifications and maintain financial stability. This article provides more information regarding how a recession impacts small businesses and what these businesses can do to adequately prepare for an economic downturn.
How a Recession Impacts Small Businesses
Amid a recession, organisations of all sizes and sectors usually experience decreased sales and profits stemming from changing consumer behaviours. An economic downturn may also limit organisations’ credit capabilities and reduce their overall cash flows as customers take more time to pay for products and services.
While these behaviours can threaten the financial stability of any organisation, large businesses are often better positioned to weather a recession because of their substantial revenues, excess reserves and privileged access to a wider range of credit markets. Small businesses, on the other hand, may be particularly vulnerable during an economic downturn, as they generally lack the additional capital necessary to offset extended periods of loss. As a result, when a recession occurs, small businesses are more likely to have to make difficult financial decisions to avoid issues such as insolvency or bankruptcy. Primarily, these businesses may need to cut operational costs and consider staff reductions to stay afloat.
Tips to Prepare for a Recession
To promote financial stability during an economic downturn, small businesses can consider the following recession-proofing tips:
- Establish a financial plan. It’s critical to closely monitor current economic conditions and form a plan for remaining profitable amid a recession, whether this entails adjusting specific business practices or scaling back certain operations. Having such a plan in place will help eliminate unnecessary spending and highlight investment priorities.
- Prioritise savings and cash flow. In addition to having a solid financial plan, building up reserves and maintaining a steady cash flow are key steps in successfully navigating an economic downturn. This may include limiting excess inventory, finding ways to reduce overhead expenses, implementing shorter payment terms for customers and even encouraging early or advance payment options.
- Ensure proper debt management. While it may be tempting to pay off any debts in the face of a recession, doing so can rapidly deplete reserves and threaten long-term financial stability. Instead, it’s often best to reassess interest rates on current debts and consider paying down debts with the highest rates first. If reserves are already low, utilising additional financing options and establishing a line of credit may be useful. Yet, it’s always vital to carefully review potential costs before taking on new debt.
- Be innovative. Frequently researching the economic climate and seeking ways to adapt business strategies in response to recession-related trends can promote innovation and operational success during challenging circumstances. For example, diversifying income streams by creating an online shopping platform to boost product sales or offering a new service to attract additional customers could prove valuable.
- Stay transparent. An economic downturn impacts multiple parties. That’s why employees, customers and other stakeholders should be informed of shifting business strategies and associated decisions amid a recession. Open communication will help these parties understand the reasoning behind any changes, make them feel valued and provide them with a chance to share ideas they may have to increase financial stability.
- Leverage effective marketing strategies. Even when an economic downturn is on the horizon, utilising solid marketing practices should always be a top business priority. Specifically, crafting a unique brand and messaging techniques can make all the difference in attracting new customers and keeping profits up.
- Maintain sufficient cover. To ensure ample financial protection against potential losses, it’s crucial to have proper insurance. After all, business risks tend to rise amid a recession, making insurance cover increasingly important. Policies should be customised to address specific exposures. It’s best to consult qualified insurance professionals to determine particular cover needs.
A recession can have serious impacts on small businesses. Fortunately, by adequately preparing for an economic downturn, these businesses will be better positioned to minimise financial hardships. For more risk management guidance, contact us today.