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How does recession impact businesses?

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Last editedMay 20213 min read

The thought of entering a recession isn’t a positive one for most business owners. Yet periods of economic downturn don’t automatically have to be a disastrous experience, provided you prepare for them. To begin with, it’s helpful to define what an economic recession is, and why recessions happen.

What is a recession?

A recession refers to a period of economic downturn, usually defined by two consecutive quarters of negative economic growth when adjusted for a country’s real GDP. Most recessions only last for a few months, although some may take years to turn around.

What does a recession look like in reality? Here are a few key indicators:

  • Job losses

  • Manufacturing slowdown

  • Decline in consumer spending

  • Decline in real income

Recession impact on business

Although recessions usually don’t last longer than a few financial quarters, the knock-on effects can go on for far longer. Here are just a few examples of how an economic recession might impact your business:

1.  Reduced profits

As economic growth stalls, consumers and competitors become wary when it comes to spending. This means your business might find it more difficult to generate its usual sales, and you’ll need to cut costs accordingly. Businesses are less likely to invest in new products, employees might be made redundant, and overheads are slashed to account for a reduction in profit.

2.  Credit crunch

It’s not just businesses and consumers who become more cautious with their spending. Lenders tighten their belts as well, which makes it more difficult for businesses to access the usual lines of credit. Interest rates might increase, and lending requirements are stricter.

3. Reduction in cash flow

Vendors and customers alike find it more difficult to make timely payments during a global recession. Businesses might need to spend more time chasing invoices, delaying their own payments to suppliers. The situation can become difficult, particularly for those who sell B2B. If one of your customers goes out of business, their bills may go unpaid.

4. Declining stock prices and dividends

A reduction in cash flow and profit eventually makes its way to your business’s official financial statements, including the quarterly earnings report. At this point, dividends might decline or even disappear. Shareholders might even call for new leadership as stock prices drop.

5. Decline in product quality

One of the knock-on effects of a global recession is a drop in quality. As manufacturing slows down and bills go unpaid, companies look at new ways to cut costs and improve the bottom line. This might lead to a temporary reduction in service or product quality when you can’t afford to adhere to your usual standards.

The upside of recession

It might be hard to imagine, but there are a few silver linings to look at when going through a recession. Inflation rates drop, and borrowing rates tend to remain low. If you’re able to jump through the hurdles of obtaining financing, you’ll be able to benefit from lower loan repayments.

Recessions also give businesses the chance to reinvent themselves by looking at innovative ways to cut costs. You might decide to try a new business model with lower associated costs to protect your interests. Competition may also be cut, as some businesses are unable to remain open.

How to survive a recession

So, how can you take advantage of the positives, and avoid falling by the wayside as a recession casualty? Here are a few tips when looking at how to survive a recession.

  1. Take regular stock of your finances: Don’t wait until the midst of a recession to look at your budget; this should be an ongoing basis that leaves you with a safety net so you can avoid employee redundancies and a decline in quality. A cash flow forecast can help you predict future financing.

  2. Take stock of your talent: You want to avoid redundancies if possible, but it’s likely that a hiring freeze will be necessary during a serious recession. To mitigate these effects, you need to look at how to best utilise existing talent through competent management. Identify potential leaders, engage in reassuring team-building activities, and use data-driven metrics to track performance.

  3. Make your business recession-proof: No business can avoid the impact of a global recession entirely, but there are ways to plan for it. Make sure you’ve run through different scenarios with crisis planning procedures in place. Finally, strong customer service can help you maintain your relationships through tough times.

With long-term planning and the understanding that no economic recession lasts forever, you can help your business survive any temporary setbacks.

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