Last week, it was announced that the UK economy was officially in a recession following two successive quarters of decline due to lockdown restrictions. This news will be unwelcome for many businesses across the country, particularly those still recovering from the aftershocks of coronavirus.
While there is little any company can do to reverse a recession, you can prepare yourself for the scenarios you may face as a result. Every business will feel different consequences during an economic decline, and some may even be able to turn the tide to see a strong performance during the period. However, many more enterprises will need to overcome obstacles to survive the storm.
In this blog, we have outlined some of the most common effects your company could experience as part of the current recession or any future economic downturns. We will also detail what you can do to address the challenges and increase your chances of survival.
- Fewer sales and less profit
- Reduced cashflow
- Issues with suppliers
- Changing tact – the impact of a recession on your plans
Fewer sales and less profit
Common symptoms of a recession include increased unemployment rates, reduced incomes and higher consumer uncertainty. As a result, customers may be less likely to spend unless they deem it as a necessary purchase while they are concerned about their own financial situation.
In a recession, it is therefore unsurprising for an enterprise to see its sales drop. You may witness existing customers lowering their spending amount or struggle to attract new customers to your brand. Falling sales are never ideal, and in turn, leads to reduced revenue and reduced profit. This will go against the goal of most owners to increase their profit.
If your sales fall by enough, you may struggle to meet your overheads. When this happens, you will need to consider ways you can cut expenditure to keep the balance right between your incoming and outgoing payments. This means spending time looking at your regular expenses, and identifying where you can reduce costs, such as by cancelling standing orders, switching to cheaper suppliers and reducing your stock.
In most cases, cutting costs is a temporary measure to trim away the fat while times are hard in your operations. However, if your sales continue to fall, and there is a risk of running at a loss, you may have to make harder decisions, such as redundancies, to save the business.
Alternatively, if you are seeing falling demand in a recession, reconsider your offering to identify ways you can offer value to customers now their needs have changed. By coming up with creative and innovative solutions, you may be able to reverse the effect on your business and increase sales.
Reduced cashflow
Falling sales and profit are often accompanied by reduced cashflow. When less money enters your operations, it limits the amount of working capital you have to pay bills, purchase supplies or invest elsewhere. Cashflow management is therefore fundamental in allowing funds to circulate through your business to keep processes working correctly.
One cashflow issue you may face during a recession is struggling to obtain payment from customers, particularly if they are having financial difficulties. This leaves you at a loss, awaiting the money you need to cover the expenses incurred when fulfilling the order. In this instance, invoice finance may ease the strain.
With invoice finance, a lender funds up to 90% of the money owed to you via your unpaid invoices so you can get the working capital you need. However, it is essential to make sure your customers will pay you within the timeframe provided by your lender, as you could otherwise be left footing the bill.
Similarly, trade and stock finance can free up cash in your operations by using lenders to fund the supplies you need to fulfil orders and keep up output. Trade finance works on any supplies imported from overseas providers towards orders from your UK customers; stock finance works by securing materials sat in your warehouse as collateral against a loan, so you can benefit from loaned monies while still having the goods you need.
There are many additional cashflow options you may choose to utilise to boost your finances when things are tight, such as sale and leaseback of plant and machinery or equipment, credit management and supply chain finance. By doing so, you allow your business to continue to meet any demand it retains while improving liquidity.
Issues with suppliers
A side effect of a recession may not be related to your finances, but those of your suppliers. With many firms likely to feel the pressure of an economic decline, the companies you work with have as much chance of facing cash issues or even having to close as you do. As a result, you may find that you suffer from delays and shortages in your supply chain.
An issue with your partners can have a knock-on effect on your productivity, which is even more frustrating in times when being able to meet demand and make sales is essential. So, you will want to minimise any impact on your operations.
Be sure to keep open communication with your suppliers, so you are in the loop if they are facing any challenges. By doing so, you prepare yourself for any delays or changes in process. In some cases, suppliers might raise their costs to attempt to stabilise their companies, which in turn will need to be considered in your finances. If a provider becomes unreliable or dissolves, you will need to find suitable alternatives to fill the gap before your output is harmed. You may also need to find cheaper providers if you are struggling to meet the payments of your existing partners.
It could be worth considering supply chain finance, which allows companies to lengthen their payment terms to suppliers while enabling them to get paid earlier by a lender. If this finance is used across the chain, it can give each member increased working capital, thereby keeping supplies running smoothly and preventing disruption.
Changing tact – the impact of a recession on your plans
If you are implementing growth plans in your company, these may become the unfortunate casualties of the recession. This is because, in hard times, your focus will naturally shift to seeking stability across your business rather than expanding it.
If your business is in the progress of reaching specific growth targets or plans, it is essential to consider whether it is still viable given the changing economic climate. Understand what the repercussions might be on your enterprise if it is negatively impacted, and, if the worst were to happen, whether you would still be able to move forward safely with your intended strategy.
In some cases, companies may successfully grow despite a recession; their growth may even help them to counteract the challenges. However, if you believe the added pressure will be too much, there is no shame in halting your plans until finances are more stable. In fact, it would be responsible to do so.
It is precisely due to unexpected events, such as recessions and pandemics, that you should revisit your business plan over time and adapt your objectives accordingly. Amend your timelines and tactics to create an effective strategy that ensures success while accounting for challenges that come your way. Just make sure that the changed tact is documented, and your forecasts are updated so that all stakeholders can understand your new position and focus.
Get advice
There is no denying that a recession is difficult to deal with. However, understanding the consequences it could have on your business rather than blindly going into the storm will help you to prepare and come out on the other side.
If you are concerned about the economic situation of your company or are already experiencing financial instability, it is vital to utilise available support.
Our team of experts have knowledge across many businesses, industries and financial obstacles, meaning that we can offer tailored advice for your unique needs. Get in touch today to find out more