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What is a recession?
An economic recession is a significant and prolonged slowdown in economic activity. To determine if an economy is experiencing a recession, the U.S. National Bureau of Economic Research (NBER) will monitor indications of economic decline including, real income, purchasing power, manufacturing outputs, employment levels, retail sales, and gross domestic product (GDP).
While preparing for a recession can be terrifying for business owners, itâs important to realize that a recession is simply one of the four phases of the economic cycle:
- Expansion â Economic growth which results in low-interest rates, surpluses of suppliers, and competitive, fair consumer costs.
- Peak â The economy reaches the maximum level of expansion.
- Recession â Also known as a contraction, the economy attempts to correct the peak resulting in higher prices at the grocery store, higher interest rates, and unemployment increases.
- Trough â The low, or bottom, of the cycle where the economy will start to recover again.
While thereâs no scientific way to tell how long a recession will last, NBER says that the average recession, measured after World War II is 11 months. When the world was exposed to the pandemic in 2020, it triggered a short-term recession that only lasted two months, but the Great Recession that began in December 2007 lasted 18 months. While the length of a recession cannot be predicted, history shows that recovery always follows.
Should we be concerned about a recession in 2022?
If youâve been watching the news or keeping up with sites like Forbes.com or LinkedIn, youâve probably heard a lot of the terms âinflation and recession.â Many individuals and business owners are beginning to ask, âAre we in a recession or is one coming?â The answer is a bit complicated. While the present economic activity does not qualify as a recession, there are some indications that we may be heading in that direction.
- Inflation â Despite efforts by the Federal Reserve to fight inflation, the current annual inflationary rate is 8.3%, the highest itâs been in more than 20 years.
- Interest rate hikes â The Fed responds to increasing inflation rates with attempts to slow economic activity down. This results in an increase in the federal funds rate, which in turn raises interest rates on small business loans, mortgages, the stock market, credit cards, car loans, and other forms of debt.
- Yield curve inversions â The yield curve is used to monitor the economy by measuring the present yields of U.S. Treasury Notes. Currently, the yield curve inversion is the most defined itâs been since the year of the Great Recession.
- Supply chain disruptions â Since the Coronavirus affected the world in early 2020, there have been severe disruptions to the supply chain due to regulations, labor shortages, forced layoffs, and political strategies.
What are the risks for a small business during a recession?
As we continue to navigate the economic downturn, small business owners everywhere are noticing the impact of inflation and a possible recession. During periods of a recession, a business may be affected in the following ways:
The costs to deliver inventory for manufacturers and suppliers increase because of rising unemployment rates and reduced access to affordable raw materials. Those inflated costs are pushed onto the purchasing business. Large companies can typically navigate supply chain issues more effectively than small business owners because of their access to resources.
During a recession, the cost of goods increases because of the increased expenses of the supplier. Existing customers begin to spend less money because they are coping with layoffs, increased living expenses, and fear. The combination of increased costs and reduced revenues can have a negative impact on a small businessâs credit score.
During a recession, small business owners may miss a loan payment or utilize all available credit. Financial decisions made during a recession may have lasting consequences if they weaken the businessâs credit history.
Business plans are designed to project consistent growth. A recession affects the rate of growth for a small business. In the wake of a recession, the business plan regarding staffing, expansions, and capital concerns needs to be revisited and revised.
8 Things a small business owner can do to prepare for a recession
While we canât say for certain whether we are heading for a recession or not, we can say that implementing some of the following tips can benefit your business. With some minor adjustments to your business model, you may find your business prepared to do even better during a recession.
- Reduce expenses
Certified financial planner, Christopher Lyman, suggests that âentrepreneurs and small businesses should set aside one year of expensesâ during times of economic uncertainty. One of the most direct ways to build cash reserves, or an emergency fund, is to reduce expenses. Cutting costs will free up more cash flow, which will allow the business to move some cash to a savings account each month.
It is good practice for a business owner to frequently review the income statement and budget to identify areas where the expenses can be decreased, but it is even more important in the wake of a recession. Some tips for cutting costs include:
- Review subscriptions and licenses and suspend or cancel those that arenât essential.
- Negotiate a price reduction with monthly contractors, landlords, and suppliers.
- Postpone large purchases, like new equipment and bulk inventory.
- Implement a hiring freeze.
- Increase revenues
Strategizing to increase revenues before tough times is the best defense against unpredictable revenues. Whether your small business provides goods or services, there are some ways you can ramp up revenue before the impact of a recession overwhelms your customer base.
- Consider running a special on gift cards
- Recycle old inventory and sell it at a discounted price
- Offer reduced service rates for current customers that commit to long-term contracts
- Promote a referral incentive to bring in new revenues
- Collect receivables
Over time, unpaid invoices can start to add up, which causes a rising accounts receivable balance. At a time when economic concern is putting pressure on small business owners everywhere, collecting unpaid accounts receivables is a smart way to increase cash. To work down the amount of money owed to your business by customers, begin by printing a detailed ledger or making an accurate list of unpaid invoices and then contacting those customers. For clients that canât pay the invoice in full, consider offering a payment plan and setting up recurring payments for the agreed monthly payment. Another option is to offer a discount for customers that are willing to settle their debt quickly.
- Upgrade your marketing strategy
Revisiting your current business strategy is a proactive way to prepare for the next recession. Many entrepreneurs mistakenly cut marketing and advertising costs when they are trying to decrease expenses, but that can negatively impact future sales. An effective marketing plan will drive customers to your business before, during, and after a recession. In tough times, consumers try to cut back on their own spending, so they become more selective with the goods and services they purchase and where they get them from. So, now may be the time to ramp up marketing efforts. Here are some ways to upgrade marketing:
- Consider using social media or a podcast to get the word out about your business
- Add a blog to your website to increase internet traffic
- Look for advertising specials on television and radio channels
- Sponsor local youth sports teams
- Upgrade window or storefront advertisements
- Focus on value
After some time in business, it is not uncommon to experience a shift in priorities. However, when preparing for a recession itâs important to revisit the value your service or product is bringing to the customer. Have you changed suppliers without product testing or found yourself being able to complete projects must faster than in your businessâs early days? If so, it may be time to get back to the basics. It can be challenging to find the balance between quality and quantity, but nowâs the time to focus on the value your business provides to customers.
- Strengthen customer relationships
A proactive measure to take in case a recession hits is to work on customer loyalty. If youâre an established business owner or even if youâve just launched your first startup, now is a great time to nurture customer relationships. Loyal customers are more likely to continue to support your business if they feel connected. Tough times make good times to reach out to customers that have purchased any service or product in the last six months and thank them. This can be achieved by sending coupons or thank you notes, either by mail or email. Hosting a customer appreciation day may also be a great way to reconnect with your loyal customers and connect with new customers.
- Review credit lines
Business credit cards and lines of credit are excellent resources during a recession. To prepare for an economic downturn, review the credit limits on sources of revolving credit, like credit cards and credit lines. While it is not ideal to max out credit cards or draw all available funds on a credit line, in a crisis the credit can save your business. Work with lenders, credit unions, and banks to review increase options so your business has fast access to more working capital if needed. If your small business doesnât have a line of credit, now is a great time to apply. Remember, monthly payments will only be calculated on the amount of funds youâve used not the maximum credit line.
- Secure capital
There is no surefire way to recession-proof your business but making sure your business has enough capital can be done before the slowdown. Working with a bank or lender to consider small business financing options is beneficial to do as a proactive measure because your businessâs creditworthiness may be evaluated based on the last two years of income tax returns. It will be easier to secure a loan when your annual revenue is stable or increasing than to wait until the business is experiencing financial hardship. Some financing options to consider include:
As there is more and more talk of a recession, it is natural for people to be concerned about their personal finances and business incomes. A recession could last as long as 18 months and affect interest rates, employment, and the cost of living. Small business owners can take steps to prepare for the recession by cutting costs, revising marketing efforts, collecting receivables, and connecting with customers.
Considering financing options is also a great solution for small business owners. If securing capital is on your to-do list, reach out to Biz2Credit today to get started, like Brian Lillie of The Party Staff, Inc, who found Biz2Credit while experiencing financial strain due to the pandemic.