Economic slowdowns and recessions are often described synonymously. However, an economic slowdown is generally less severe. There can still be economic growth during a slowdown, but the speed of this growth will have decreased. A recession is when a country’s GDP (gross domestic product) has declined for at least two successive quarters. Business leaders will be acutely aware of the impact these events can have, but they will perhaps be less clear on how to safeguard against them.
In this article, we identify when a business should prepare for a recession and discuss which types of company tend to have the most survivability in these situations. We also examine the effects of a recession and provide our top tips on how to best protect your business from an economic slowdown.
What are the causes of an economic slowdown?
There could be one large event that sends shockwaves through the economy, but in many cases, it will be a series of smaller occurrences that happen sequentially like a chain of dominos.
Economic shrinkage could be caused by an environmental situation, such as a natural disaster. Or it could be a political event, like Brexit, which created uncertainty around aspects like supply chains, trade deals, and legislation.
The pandemic also had large-scale repercussions for the business world and wider economy. Many businesses had to close as a result of government restrictions, or due to lack of footfall in their vicinity.
The global recession of 2008 was multifaceted. First the US housing bubble burst, which led to a decrease in the value of mortgages, and ultimately the collapse of many banks, which had worldwide implications.
When should I prepare for a recession?
Businesses should arguably be prepared at all times, due to the unpredictable nature of recessions. The economy is in a constant state of flux too, so it makes sense that it will occasionally create unfavourable conditions in reaction to external forces.
Companies that strive to always be as financially robust as possible are best positioned to cope when the inevitable happens. However, it is still helpful to be aware of some common warning signs that indicate a recession might be on the horizon. This way, even further measures can be taken at the optimal moment.
If unemployment is generally rising, the value of property is falling, manufacturing operations have slowed down, and consumer spend/confidence has reduced, these are strong indicators that tough financial times are around the corner (or have already begun).
Which companies perform best during a recession?
By looking at the characteristics of businesses that do best during a recession, it may be possible to replicate these traits to have an increased chance of survival. Although, it should be noted that some companies will perform better simply because their industry is more well-placed to deal with the issues at hand.
For example, many supermarkets will often be able to generate continued income throughout any economic climate, as people simply cannot go without food. There are many other examples of essential products and services too, such as baby products, healthcare/personal hygiene products, medical services, car repairs, and plumbing services, to name a few. Those that work within these fields, either directly or indirectly, will usually enjoy continued demand in any situation.
However, it’s still possible for businesses outside of these essential industries to achieve greater survivability by embracing one or more of the following traits:
Multiple revenue streams
This serves as a safety net, so that in the event of one revenue stream drying up, there’s always a backup that keeps finances ticking over. Sometimes the backup will supersede the primary revenue stream, going on to be more successful, which can be an unexpected bonus.
Ability to pivot quickly
Being more agile can begin during the recruitment process, by hiring individuals with a diverse set of abilities and experiences, as well as a tendency to challenge the status quo. Processes and structures should be as flexible as possible too, along with a core set of foundational products that can be remoulded and repurposed in many ways. During the pandemic we saw businesses pivot quickly, with many retailers choosing to move their sales online, by embracing e-commerce platforms and other technologies.
It’s important not to lean too heavily on a single customer, partner, or supplier. This is particularly true during economic turmoil, as these businesses will be more prone to their own troubles (which could affect you). Of course, businesses cannot prosper without strong relationships, but it’s important to mitigate operational risks by being as self-sufficient as possible. Partners can be selected strategically, to ensure they are as resolute as possible. And it may be sensible to keep the supply chain local, as this will be less likely to break down in any circumstances.
How are businesses affected by economic slowdown?
The customers they rely on may have less spending power during these times which could lead to a decline in demand. When businesses have the same financial outgoings but have lost the ability to generate the expected income, reduced profitability/revenue will be a consequence.
Poor cash flow
If income through sales has decreased, it also means that cash flow will not be as healthy, as it is this money that has the most fluidity within a business. If most of a company’s wealth is tied up in fixed assets, they may not be able to fulfil monetary obligations to suppliers, landlords, or energy providers.
No access to credit
When cash flow is poor, businesses may turn to banks or other lenders to maintain a healthy stream of fluid money. However, during an economic crisis, many lenders will be less willing to provide loans or other forms of credit, as the risk of failed repayment will be higher.
Unfortunately, one of the quickest ways to cut costs during financial struggles is to let employees go. This not only affects those that are made redundant, but those that continue working as well, as they are expected to pick up more responsibilities for no extra pay.
Lower quality of products/services
When costs are being scaled back this can lead to a worsened output. If corners are being cut in the production process, products will not have the same quality. And if staff are overworked or feel stressed/demotivated, they likely won’t provide the same level of service.
Lack of investment
Not only will lenders be less willing to provide financial respite, but the same applies to prominent investors/shareholders too. If they’re under the impression the business or industry is sinking, they may feel obliged to jump ship to more prosperous pastures.
If it’s not possible to remedy the situation, then the business will simply be unable to meet the obligations they have to stakeholders. Ultimately, the worst-case scenario is that the business will no longer be able to continue.
How to protect your business from economic slowdown
Cut costs smartly
The good news is that these negative impacts can be minimised by taking proactive measures. The first of which is to be as efficient as possible, especially around spend. This doesn’t mean cutting corners or sacrificing the best resources/talent. Instead, any spend that is unnecessary should be eliminated. Can a better deal be found for raw materials, office space, or gas/electric? Are there any processes that can be streamlined by removing unneeded steps, and can structures/systems be rearranged to be less wasteful in terms of time and energy being spent?
Gain credit while it’s still possible
If poor market conditions are seemingly imminent, it could be wise to open new lines of credit while the option is still available. By taking this step to inject cash into proceedings, it should mean that operations are in less danger of halting when the going gets tough. Of course, adequate research should be done to find a suitable deal and a credible creditor. Putting ‘rainy day’ money aside or searching for government grants/schemes could be other sensible options.
Clear outstanding debts
Clearing the books in the lead up to a recession could be a good idea, as it means these debts are dealt with while the company is still in a strong position. It also means that there’s one less obligation to worry about once the recession begins, and the finance team can focus on the payments that really matter rather than fighting multiple fires. This should perhaps only be completed if there are excess funds/budget, rather than tapping into the fluid cash that will be imperative to ongoing activity.
Full financial review
The finance team should continuously strive to have clarity around key metrics and overall performance. But it’s even more important to carry out a detailed financial review if the economy is looking gloomy, so that the company’s financial health can be determined. Actions can then be taken to strengthen health and eliminate any weaknesses. This could also involve a risk assessment to predict what would happen in many scenarios.
If the more difficult times have already started, business leaders should look to communicate regularly and transparently with the workforce. This helps to keep motivation high by dispelling false rumours and keeps everyone pulling in the same direction. It also means that any unwarranted fears stakeholders have can be extinguished. If they’re part of the conversation, employees may have some useful ideas that help with overcoming the challenges at hand.
Adopting technology is one of the quickest and most sure-fire ways to cut costs, increase efficiency, and gain invaluable insights. By using the latest digital systems and automating many repetitive tasks, businesses can increase the speed of their processes, meaning they can create more output, take on higher demand, and ultimately generate a greater income. Accounting software allows finance teams to use their financial data to its maximum potential, and empowers them to more effectively complete forecasting, budgeting and other key activities.
Using Cloud technology to minimise recession risk
At Advanced, we provide a Cloud-based accounting solution called Advanced Financials. This easy-to-use system makes accounting simple, while simultaneously providing transformational results, in a single digital location. It empowers finance teams to automate their repetitive tasks, so they have more time to focus on the complex and innovative work (which is particularly important during a recession).
With dedicated functionality for the likes of accounts payable/receivable, sales invoicing, credit management, bank reconciliation, purchasing management, and much more, the software gives finance teams a view of what the business is owed, as well as any outstanding debt they have. They similarly have a clear and constant picture of financial health thanks to helpful dashboards. And with over 1,000 customisable reports, the team can instantly gain accurate insights and use them in valuable ways, rather than simply spending all time compiling and validating data.
If you want to protect your business from the negative financial repercussions of an economic slowdown, then be sure to read more about our transformative Cloud-based accounting software.