What would a Recession mean for Businesses?

Published on Monday June 6, 2022

The UK economy is set to slump into a recession later this year, according to bleak predictions from the Bank of England. Alarm bells are ringing for businesses as a result of the ongoing cost of living crisis and the war in Ukraine.

The warning came after the Office for National Statistics confirmed the inflation rate had risen to 9% – its highest in 40 years. Increasing interest rates to 1%, the Bank of England warned the British public of the likelihood of a recession in the near future.

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Business leaders fear the unprecedented inflation will spark a recession as soon as the end of the year. The interest rate hike, by a quarter of a percentage point, has increased the base rate to a level not seen since 2009.

The move was designed to curb the soaring cost of goods and services that has caused millions of Brits to plunge into poverty. According to figures released by the Joseph Rowntree Foundation, 22% of the population (equating to 14.5 million people) are now officially living in poverty: this includes 8.1 million working-age adults; 4.3 million children; and 2.1 million senior citizens. A social change organisation striving to solve the problems of living in poverty, says children in the UK now have the highest poverty rate in the past 25 years.

How will a recession impact business?

A recession will have many different impacts. People are already feeling the negative effects of the economic downturn, in terms of massive price hikes this year for food shopping, utility bills and petrol prices. This means consumers have less money to spend in general after purchasing essentials.

Inevitably, this will lead to lower profits for businesses, as customers simply don’t have spare money – especially on non-essential items. One example is the jewellery industry, where goldsmiths are suffering higher costs for gold, gems, silver and copper. Now consumers are cutting back, sales are down, yet the cost of running their business has gone up.

Reduced profits mean businesses will struggle to invest in the company and new products, so it will become increasingly difficult to generate new sales without the merchandise to sell. To cut costs, it might be necessary to make staff redundant to slash overheads and keep afloat.

Lenders will also have to tighten their belts, making it even more difficult for businesses to successfully apply for the usual lines of credit. Lending requirements are getting stricter and interest rates are increasing, making it tougher for the borrower.

During a recession, there is a reduction in cashflow, which means businesses are more likely to have to spend time chasing unpaid invoices. This, in turn, will delay their own payments to suppliers.
For those who sell B2B, the situation can become increasingly difficult. If customers go out of business themselves, their bills may not be paid.

The reduction in profit leads to declining stock prices and dividends. Shareholders will be unhappy at the decline in stock prices and will be looking to the business leaders to find a way forward.

A knock-on effect of a recession is a general reduction in quality, as bills go unpaid and manufacturing slows down. Companies have to seek new ways to reduce costs and improve the bottom line. For some, it may mean a decline in product quality if you can’t afford to stick to your usual high standards.

How can businesses survive a recession?

The most important piece of advice is to take regular stock of your finances. Don’t bury your head in the sand and then have a nasty shock. Look at your budget now instead of waiting ‘til we’re in the grip of a recession. Keep track of expenditure on an ongoing basis.

Draw up a cash flow forecast to help predict future financing. Although it will be challenging, try to leave yourself with a safety net now, as this may help avoid redundancies and a decline in product quality if a recession kicks in.

Take stock of your employee resources now. It’s unlikely you’ll be able to hire anyone new in the foreseeable future, so look at how to utilise your existing talent. Use data-driven metrics to help your task, tracking performances, identifying potential leaders and engaging in team-building activities to reassure your staff.

While no business can completely avoid the impact of a recession, try to mitigate its effects with careful financial planning. Some companies hire the services of a professional accountant to help balance the books. Signing up for a service such as accounts management can help businesses keep abreast of financial and statistical information to make wise managerial decisions. Run through different scenarios with an accountant and put crisis planning procedures in place.

Remember that even when times are tough, you can’t afford to let customer service slide. Strong customer service can help a business to maintain good relationships through the tough times, so customers will continue to spend with you when the good times return.

No economic recession can last forever, so help your business to survive this temporary setback with long-term financial planning.

 

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