Explain the Concept of a Recession

A recession occurs when all of the following criteria occur at the same time: the country in general generates less and sales decrease dramatically, incomes tighten, and jobs are rarer, and these conditions last for many months. It should come as no surprise that economic forecasters rarely agree on whether or not we are headed into a recession, when it will begin, or how long it will last given the multiple parameters that are at play here. Even the National Bureau of Economic Research does not issue such forecasts; rather, it does not label a period as being in recession until after it has ended.

What Kind of Effects Does a Recession Have on Small Businesses?

You might not be able to tell if we are on the verge of entering a recession or even in the middle of one, but there are a few signs you can look out for in your own company that may indicate such a scenario. Take into consideration things like the following:

A Decrease in Available Cash

A decrease in cash flow is the first and most obvious way in which a small company is impacted by any kind of economic downturn or even just economic instability. The moment there is any indication that the economy might be in jeopardy, consumers in the wholesale and department store sectors start cutting back on their spending.

Challenges Involved in Obtaining Credit

Lenders and financiers are less likely to lend credit to small companies during a recession because these companies have smaller financial cushions to fall back on during difficult economic times. As a direct consequence of this, it can be challenging to secure the necessary funding.

The problems can be made worse by the location. Some areas are experiencing a greater and more rapid loss of jobs than others for a variety of reasons. The perspective for a small company that relies on customers from the local community is bleak if local economies come dangerously close to collapsing.

Concerns With the Supply Chain

Customers are beginning to skip payments or delay payments as a direct result of businesses and financial institutions becoming less willing to extend credit. Even in the absence of a pandemic that causes suppliers to close their doors for extended periods, this phenomenon causes supply chains to become more constrained as companies further up the chain make cuts in their spending.

Spending by Consumers Has Been Cut Back

Because smaller companies are more inclined to spend money as soon as they receive it than larger companies are, smaller companies are more susceptible to the effects of economic uncertainty. A decline in sales might not be a big deal for a large business in the short term, but for a smaller company, even a small amount of lost revenue can have a significant impact.

The consequences of a recession can be almost instantaneous, including the following: When the Great Recession began in 2008, over 64,000 enterprises declared bankruptcy, which was a significant increase from the slightly more than 28,000 companies that did so the previous year.

What Kinds of Things Should Small Businesses Do to Get Ready for a Recession?

Individuals who own smaller companies frequently do not have the time to wrangle the specifics that mitigates the impacts of a recession. However, it is much better to go on the offense instead of being on the defense, which may be too late to do anything about the situation. The following are some of how you and your team can get ready:

Establish Adequate Funds Set Aside for Emergencies

Consider methods by which you can boost the cash flow of your company, or at the very least keep it stable, and find cost-cutting options that will cause the least amount of discomfort for your organization. Your objective ought to be to develop your liquid assets so that you can remain solvent even if sales remain stagnant for several months.

Delve Into Your Records to Get an Image of Your Performance in the Past

Look for patterns: When did the most successful sales occur? Is it possible for you to switch to a marketing strategy that is more effective for whichever services or products cost you less to provide? This would increase your net profit. Examine times when sales were higher and times when sales were lower. Do you have an explanation for their reasons? Is there a way that you can use that to your advantage right now?

Take a Look at the Overdue Invoices That Are Owed to You

Check into the possibility of establishing payment plans if, despite sending multiple invoices, you have not been paid. Take into account that other companies may be in a financially precarious position as well. It is preferable to make a small payment than to make no payment at all; the goal is to maintain a steady stream of cash.

Check to See That Your Prices Are Comparable to Those of Your Competitors

If you charge a premium, you’ll lose sales; if you undersell, you’ll lose income. If you’re having difficulty making your payments on time and in full, you can ask your lenders to let you make alternative payment arrangements. This is true even though it’s always an excellent idea to pay your expenses in full and on time. This strategy shouldn’t be your first line of defense, but it’s there if you have to use it. You can also look into negotiating terms agreements with landlords and distributors; even though they may also be feeling the strain, it doesn’t hurt to ask if they would be willing to work with you.

Maintain the Satisfaction of Your Customers

Repeat customers and word-of-mouth referrals are more important than ever in a time of economic uncertainty. Increase your interaction with your existing clientele, and do so in novel ways. This is the time to initiate or expand a recognition program, even if it is only intended to be temporary. Think about ways to provide a more individualized form of outreach.

Increase the Focus on Whichever Aspect of Customer Service You Currently Provide

Whether it’s live chat, email advertising, easy access to your team, telephone service, or special offers for customers who have purchased from you before, you should implement more of these customer service strategies. Pay attention to the comments and suggestions made by customers, and seek out ways to let them know that you are doing so.

Although it can be tempting to begin cutting back on marketing and advertising buys, this is one area in which you may want to consider doing the opposite. You should strive to keep your brand in the minds of as many people as possible. Utilize any form of marketing that is either free or relatively inexpensive that you already have or can establish, such as social media or email. Make sure your marketing is up to date; people tend to ignore something that they’ve seen more than once. Examine your previous marketing efforts to determine what was successful and what was not, and don’t be afraid to experiment with new approaches.

Keep in Mind That Your Clients Are Also Experiencing Financial Strain

If you feel it necessary to raise prices during a period of economic slowdown, do so openly and honestly. Inform your customers that a rise in prices is on the way, as well as the reason for the increase and when it will take effect. Additionally, you may want to consider providing them with the previous price for a limited period. If you take these steps, customers will have a greater propensity to shop with you again and to recommend you to others.

Reduce Your Costs as Much as You Reasonably Can

You may have additional and greater options available to you than you realize if and when the time comes for you to seriously cut back on your spending. It might appear as though reducing staff is the faster way to cut spending. However, economic downturns don’t last forever, and you’ve already made substantial investments in your staff; you’ll need them to be ready to go as soon as you start climbing out of a slump.

Instead, now is a good time to review any company expenses that aren’t necessary, such as travel or lunches. Look for minor expenses you made on things you don’t require while you’re going through your books to evaluate your past performance. This tip for managing the budget of a household is also applicable to businesses: What does your company’s version of ordering too many overpriced coffees look like?

A companies largest outlays of cash may come from its fixed costs, which include things like its real estate. Investigate the possibility of working from home, downsizing your current space, or renegotiating the terms of your lease. Think about sharing a workplace with another company if it makes sense for what you’re trying to accomplish with your company.

Examine the Success of Your Products in Terms of Sales

Is it possible to reduce expenses without losing customers if a certain line or product is eliminated from the offering? Would you be able to prioritize the products that generate the highest profit margins without compromising on the quality of the other products? Marketing and staffing are the two areas that should be protected from cuts by businesses during a recession. Marketing is what brings in new customers, and staffing is what keeps the old ones coming back. However, if you are in the position to do so and must lay off employees, try to provide them with a severance package.

Main Takeaway

The most important thing to remember is that maintaining a steady flow of cash into your company is necessary during a recession; to gain an understanding of what steps to take next, you may need to examine the historical trends in your company.