What Does A Recession Mean For Your Business?

No economy stays the same forever. There are ups and downs, markets evolve, economies cycle, and people’s needs change as world events take place. So there will always be times when the market isn’t as stable as it could be. When the economy takes a more prolonged downturn, it’s known as a recession, and this has historically not been great news for businesses.

What is a Recession?

A recession is essentially a period of economic downturn. The big defining factor is that there have been two consecutive quarters of negative economic growth, when adjusted for the country’s real GDP.  It’s something that the government tracks, announces when it happens, and takes measures to improve and rectify when it happens. Most recessions only last for a few months, although some might take years to turn around and fix.

The UK slipped into a recession at the end of 2023, but there are already hopes that we will be out of recession again in the second half of 2024.

But all of that is very high level. In reality, living through a recession looks like:

• Job losses
• Slowdowns in manufacturing
• Declines in consumer spending
• Decline in real income

And all of that means difficult times ahead for businesses.

What Are The Main Effects of a Recession on Business?

While recessions themselves usually don’t last for more than a few quarters, there are some knock-on effects that can last for far longer. That’s why so many businesses get nervous when they hear the word ‘recession’ The main effects of a recession for business include:

Reduced profits: Economic growth stalls, or even goes backwards in a recession, which means that consumers and competitors get wary when it comes to spending. Everyone does. This means that you might find it more difficult to generate the sales you’re used to. Your sales forecast probably doesn’t account for a recession, which means you will need to cut costs accordingly if you want to maintain any profit at all. On top of that, you’re less likely to invest in new products, employees might need to be made redundant, and overheads need to be trimmed to the bone to account for the reduction in profit. The purse strings might be tight for a while!

Credit crunch It’s not just businesses and consumers who tighten their belts during a recession. Lenders tend to get very, very strict about who they’ll lend to, what for and for how much. Lending requirements get incredibly tight. That makes it very difficult for any business to access their usual lines of credit. Not only that, but interest rates often increase during a recession, so you pay more for less money.

Reduction in cash flow: Late payments are common, but the number of customers and vendors paying late will skyrocket during a recession. So you’re going to need to spend more time chasing invoices, and potentially delaying payments to your own suppliers. If you sell B2B, this can become very challenging. And if one of your customers goes out of business? Their bills aren’t getting paid at all.

Declining stock prices and dividends: That reduction in cash flow has a knock-on effect when it comes to any businesses operating with shares and dividends. The hardship eventually makes its way onto your financial statements, including your quarterly earnings report. Dividends will likely get smaller, and they might even disappear completely.

Decline in product quality: One of the things many businesses don’t think about is exactly how costs get cut during a recession. Manufacturing slows down, bills go unpaid, and cost-cutting means cheaper materials and labour. So your business might have to temporarily reduce your service or product quality just to get through the recession.

How to Survive a Recession

So the big question is, how do you survive a recession? Given that 21,811 businesses went into liquidation during the last recession, how do you make sure your business doesn’t become a statistic?

Take regular stock of your finances: Keep a close eye on your finances at all times. Don’t wait until the middle of the recession to look at your budget. You should be doing this on an ongoing basis, so you have a clear understanding of what’s going on in your business. That means you have a safety net so that you can avoid employee redundancies, or that reduction in quality. Revisiting your cash flow forecast is another way you can prepare and keep an eye on things.

Take stock of your talent: We know you want to avoid redundancies, if possible, but it’s likely that a hiring freeze is on the cards. So it’s time to look inward and assess the skills and talent you have on hand. Are you using that talent in the best way? Are your employees performing as well as they could be? Are your managers experienced or well-trained enough to take good care of your employees?

Make your business recession-proof: No business can avoid the impact of a recession entirely. But there are ways you can plan for it. This mainly means running through different scenarios and creating crisis plans to mitigate it. Finally, maintaining your strong customer service can help you maintain your relationships with customers even in touch times. With long-term planning and the understanding that no economic recession lasts forever, you can help your business survive any temporary setbacks.

Remember, a recession doesn’t have to mean a panic, and it doesn’t mean the end of your business. All you really need to survive a recession is to be focused, flexible and financially aware. Consider it an opportunity to get to know your company better and get creative with your offerings. And if you need some support chasing overdue payments or navigating the tough times, just get in touch with the team today and book a free, no-obligation consultation.