We all know that periods of economic recession are challenging, but do you know how they can directly affect your business? We’ll take a look at the indications that a recession is imminent and the various ways it can impact your business. Armed with this knowledge, you can be proactive in recession-proofing your business prior to the slump hitting.
What is a recession?
A recession is a period of economic decline in which businesses experience reduced demand for their products or services, often due to consumers having less disposable income available to spend. This can lead to layoffs, wage cuts and reductions in investment.
How to identify a recession
There are a few indicators that can help you identify whether an economy is heading towards a recession:
- Decreased economic activity, as measured by gross domestic product (GDP): If GDP growth slows down or reverses course, it is generally a sign that a recession is on the horizon.
- Increased unemployment: As people lose their jobs, they have less money to spend, which can further hurt businesses.
- Inflationary pressures typically ease during a recession, as businesses cut prices in an attempt to increase demand. Inflation tends to soar prior to a recession hitting, which is why it is helpful as a business owner to understand economic concepts such as what causes inflation.
If you see these recession indicators beginning to emerge, it’s important to take steps to protect your business from the potential negative impacts of a recession.
How a recession could impact your business
When it comes to a recession, it doesn’t matter whether you’re a large corporation or a small business. Nobody is immune to the potential impact economic downturns can have on a business. Here are some of the most common outcomes of a recession:
1. Decrease in demand: A recession often leads to a decrease in the demand for goods and services, resulting in decreased sales. With fewer customers buying products and services, businesses can experience reduced profits as well as cash flow problems if they are unable to adjust their operations quickly enough to account for the decline in revenue.
2. Layoffs and reduced hours: Decreased demand may force businesses to let go of employees or reduce hours to cut labor costs. This could lead to lower morale among remaining employees due to increased workloads and job insecurity.
3. Loss of credit availability: Companies often rely on access to credit from banks or other lenders during difficult times, but lenders may not be willing (or able) to extend new lines of credit during an economic slump. Rising default rates on existing loans make them financially vulnerable themselves. Without access to the additional capital resources needed to fund day-to-day operations or expansion opportunities, business owners may find it difficult, or even impossible, to keep their companies afloat until the economy stabilizes.
4. Increased competition: During a recession, many companies will try lowering their prices or offering incentives to drum up sales in a market with fewer consumers. As a result of the increased competition among vendors vying for sales, it can become more challenging for less established players that may have less wiggle-room within their budgets to funnel more resources into marketing and promotional activities.
5. Lower customer spending power: Consumer spending power also tends to take a hit due to rising unemployment rates. People don’t feel comfortable making purchases beyond basic necessities such as food and housing-related expenses since it’s likely their wages haven’t kept pace with inflation, which reduces the amount they can spend without going into debt.
The good news is it is not all doom and gloom. Recessions can also create opportunities for small businesses. Lower demand may allow small businesses to enter into new markets or offer discounted prices that attract new customers. Alternatively, some small businesses may find that they are better positioned to weather a recession than larger businesses because of their ability to adapt quickly to changes in the economy.
The takeaway
During an economic recession, businesses must be prepared to make difficult decisions in order to protect their financial future. Understanding how a recession might affect your business is key to staying resilient and competitive during times of uncertainty. Utilizing tools such as cashflow forecasts and cutting costs where possible can help you manage the effects of a recession on your business. By taking proactive steps to recession-proof your business today, you will ensure that your business is well-positioned to weather any stormy seas ahead with confidence and ease.
