Recession and SMEs
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What is an economic recession?
A recession is a notable decline in economic activity that spreads across industries and lasts longer than 2 consecutive quarters. It occurs when the national economy experiences rising levels of unemployment, falling retail sales and negative gross domestic product (GDP).
Additionally, recession can also be brought on by things like the recent pandemic and other world events.
What is the impact on SMEs?
Reduced cash flow
Increased operating costs and decreased profits can strain on business cash flow. To avoid reduced cash flow:
Be prepared with a buffer.
Check for any red flags in cash flow e.g. lack of visibility.
Run periodic cash flow forecasts.
Reassess business plan.
Speak to an advisor.
Layoffs
Reduced cashflow means tight budgets. Employee layoffs can be a key part of those cuts. Layoffs can happen in the form of:
Redundancy
Reduced hours
Job sharing/Stand down
Low demand
Some business depend heavily on a few large customers for revenue. During a recession, if the large client is lost the business can take a hard hit. To avoid this, it is important for business owners to plan for the loss of potential customers in the future by considering new sales avenues or innovations.
Limited marketing
As the business cuts costs, all department budgets are reduced. One of them is generally marketing.
Lending limits
During recession, gaining access to lines of credit can be difficult due to lender restrictions (high interest rates and strict eligibility criteria’s).
How to prepare for a recession?
It is essential for business owners to have a business continuity plan and strategies in place to be prepared for any potential outcome.
Here are a few tips:
Have an agile business plan.
Look into government business grants and schemes.
Don’t forget your employees!
Everyone feels the effects of a recession, including employees. So, ensure that you check up on the employees, offer EAP details and encourage use.