It is a fact of life that recessions will occur every now and then, either on a national or global level. Thankfully, modern-day economists have come up with fairly reliable methods of determining the probability of a recession occurring or not in an economy. Perhaps the only uncertainty about them is the intensity with which they will occur and how long they will last.
Some American economic trends and authors have opined that there is likely going to be a recession by the end of 2021. While the US economy appears to be on a rebound from the economic lockdown that many states went into at the start of the COVID-19 pandemic, a popular saying tells us that things aren’t always as they appear.
The fact of the matter is that stock markets are very volatile, and they can sometimes signal an impending recession. There is currently also a trade war between the two largest economies in the world, while there is a threat that the EU might soon join that fray.
There are also the uncertainties that hang in the air regarding the results of the US general election, and perhaps worst of all, is the fact that the pandemic is still very much with us and there are no guarantees that subsequent lockdowns will not be imposed. Any of these situations, individually or collectively, including other unforeseen negative events that are yet to happen, can easily become a recipe that triggers a recession.
The Great Recession of the late 2,000s greatly affected businesses and it safe to assume that the next one will do the same. In preparing for the next recession which is sure to come, small businesses, in particular, should start now to look into potentially trying to reduce its effects as much as possible, by strategizing and planning for that eventuality. To better understand what the looming recession means for business owners big and small, let’s take an in-depth look at what effects a recession has on businesses.
Effects Of a Recession On Businesses.
Small businesses usually experience setbacks that take them a long time to recover from during and after an economic recession. Perhaps because, unlike larger corporations, they usually don’t have the financial muscle and other resources to help them weather the storm.
However, over and above the immediate and direct negative impacts of a recession on a small business, there are often the longer-term and secondary effects that affect not just businesses, but the communities and families that house and own these businesses. These might include a deferment of educational achievements, an increase in poverty and personal debt, an increase in crime, personal bankruptcies, among others.
Some of the more impactful effects of a recession on small business include:
- Reduction in sales revenue
- Reduction in demand
- Freeze in hiring and/or potential reduction in staff
- Marketing constraints
During a non-recessionary period, some of the challenges that a small business might face include things like delayed invoice settlements, money that gets tied up in inventory, operational expenses, and more. During a recession with a slowdown in business activities, all these challenges and their effects obviously get exacerbated, which, if sustained, can make it difficult for the business to stay open.
The good news is that while there is nothing that a business can do to prevent a recession in the economy, there are things that they can do to potentially reduce the negative impact that such a recession can have on their business. If you cannot pay back a business loan interuption loan scheme, there are services to help you make ends meet.
Helping Your Business Prepare For The Next Recession.
1. Maintain and Nurture Business Relationships: The business relationship that you have with suppliers, creditors, and customers can be crucial in seeing you through the downturn of an economic recession. From relying on your loyal customers to keep patronizing your business through thick and thin, to earning the trust of your suppliers and creditors to the point where they would be willing supply you with the needed stock, raw materials, or finance when you most need it are just some of the things that can lessen the pain of a recessionary period.
Honesty and transparency, good communication and personal relationships, great products, and customer service, are just some of the necessary tools that can be used to make this happen.
2. Protect Cash Flow: The lifeline of any business is its cash flow. Preparing and staying on top of your cash flow projections, being frugal with business expenses as much as is possible, ensuring that customers meet their debt obligations to your business, while also building up a healthy cash reserve are just some of the things that can be done to ensure a healthy balance sheet during the time of plenty. This, hopefully, will give you a fair amount of buffer to withstand the lean times of recession when it comes around.
3. Marketing: One mistake most businesses make during a recession is cutting down on their marketing. This is perhaps the opposite of what you should be doing. On the contrary, several schools of thought and well-informed thought leaders have opined that such periods calls for a stepping up, or at least maintaining your marketing efforts.
Consumers will usually be looking to make informed changes to their buying or spending habits during an economic downturn. Investing in marketing that puts your products and services in front of them as capable of meeting their needs at such a critical time makes the most sense.
Also, there is also the risk that stopping or reducing your marketing provides an opportunity for your competitors to step in and fill in the gap. This is an advantage that they will potentially enjoy long after the recession has ended.
4. Diversify Your Business: Diversification is one of the cornerstones of any successful business. Whether in times of economic boom or bust any business that is able to master this art has a higher chance of success than not. The diversification of the revenue stream of the business can be especially important during a recession and can sometimes be the difference between the business staying afloat or having to shut down.
5. Avoid Unnecessary Expenses/Keep Debt to a Minimum: It has often been said that debt can sometimes be a good thing and for the most part this is true if that debt is managed properly and used constructively.
Debt can be used to grow a business and during an economic boom and this can be beneficial to it. However, if and when an economic recession comes along and your business has a rather high and unsustainable debt profile, it can easily spell doom for your business when your creditors come calling and you are unable to service your debt.
In such situations, while your business may have an ‘escape’ route if you have gone through the process of forming an LLC or any other corporate entity and, therefore, might have the option to file for business bankruptcy, it should be noted that there are instances where a corporate veil will be pierced and you may personally be held liable for any debt the business owes, more so if they have been personally guaranteed by you.
Similarly, cutting out unnecessary business expenses means that these monies can instead be reinvested into the business to increase sales or can be used to build up its cash reserves, both of which can make a world of difference during a recession.
6. The Workforce: Many business owners who have experienced it will tell you that there are few things worse than having to layoff employees who depend on you for their (and their families’) livelihoods. And yet, this is exactly what you may have to do during a recession if your business has not done many of the things spoken about in this article and anything else you can do to help you stay afloat during such times.
Perhaps the first thing that needs to be done to reduce the chance of this happening is to ensure that your workforce is always kept at an absolute minimum. Just because times are good and business is booming is no excuse to go on a hiring spree.
Hire new staff only when absolutely needed, and in many cases, you might find that you will be better served by getting your existing employees to take on more roles, training them for these new roles, and paying them accordingly, rather than hiring new staff.
And if you must increase your workforce, perhaps first consider hiring freelancers or contractors instead of taking on full-time employees. Freelancer platforms like Upwork and Fiverr have made finding such people significantly easier.
Doing this will keep your staff levels at a more manageable level and, consequently, when leaner recession times come around, you will not have an unnecessarily bloated staff level that you might have to let go to help the business stay afloat.
Also, whether you hire freelancers or full-time staff, always ensure that any employment contracts that they sign, and in fact any contracts that are signed between your business and any external parties are looked over by a good and experienced business lawyer to ensure that you would not be inadvertently putting your business in trouble.
While there are no guarantees that if taken, these steps will ensure that your business will not go under as a result of a recession. What they do is ensure that it has a higher chance of surviving the negative effects of the downturn.
Following these steps will help to strengthen your business upon the looming or any other future recession. The stronger your business, the fewer risks you will have to endure during the economic downturn. It’s not all doom and gloom, however, considering that the United States has been on the track of growth for the past six years. Since 2009, the unemployment rate in the US dropped from a high 10% to an impressive 5.9%. The United States stock market is on a continuous high, and interest rates are significantly lower. The wise option, when threatened by talks of a possible recession, is to prepare for the unprepared.
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