What is recession in business?
A recession is defined as a period of two consecutive quarters where gross domestic product (GDP) is lower than the previous quarter.
In Canada, an independent committee analyzes the economy to determine whether a recession is really taking place. It considers how broad and deep the economic slowdown is and how long it has lasted.
What causes recessions?
Recessions occur when something happens to disrupt the economy, such as an economic crisis, overly restrictive monetary or fiscal policy, a pandemic, a burst bubble or a problem with a natural resource such as oil.
How does recession affect businesses and the economy?
A number of economic phenomena occur during a recession. It’s like a chain reaction, with each consequence leading to further consequences. As a general rule, as consumer spending declines, certain things go down in value—businesses, the stock market, resources, etc. This can result in job losses, leading people to be more cautious and rein in their spending.
How does recession affect businesses?
A recession could have a direct impact on your business. Here’s how to minimize the effects—or take advantage of them.
Lower spending
During recessions, the economy slows, so your sales may drop. But some sectors tend to perform well, particularly those that provide essential goods and services. Each business is different, so expect the impact to vary depending on what your business does.
To prepare, imagine various scenarios of declining revenues and how that could affect you. You can then plan accordingly, for example, by figuring out how much liquidity your business will need and how to keep things rolling despite that constraint.
Slower payment
When the economy slows, people can find themselves in a cash crunch. Customers may be slower to pay and suppliers may ask to be paid more quickly. If your cash flow is being squeezed, you’ll need to keep a close eye on your receivables.
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Talk to your business partners and make sure everyone’s abiding by your payment agreements, yourself included. If needed, negotiate discounts for faster payment.
Inflation
Usually when demand drops, prices tend to go down, but that’s not always the case. When an economic slowdown is accompanied by spiking prices, we call it stagflation. In such cases, you could find yourself paying more for raw materials, equipment and other resources right when your revenues are dropping. Although it should be temporary, it’s a tough situation to be in and you’ll need to plan ahead and be as efficient as possible.
Rising interest rates
During a recession, interest rates are often kept low to stimulate spending. But they can also be hiked to fight inflation. Since many businesses use debt as a way to finance their operations, a change in financial terms could put you under added pressure.
If you’re financed at a fixed rate, you’ll see the difference when your loan comes up for renewal. If your interest rate is variable, you’ll feel the impact right away when the rate goes up. In either case, you’ll need to plan ahead.
When your interest payments go up, your profit margin goes down. Once again, consider the impact different borrowing rates will have and plan accordingly.
Good to know: Sometimes a variable rate can be locked in during the term of a loan. Talk to your lender.
Difficulty obtaining financing
When everyone’s being careful about money, businesses may find it harder to borrow. Credit is said to be “tighter.” But rest assured, that’s unlikely to happen unless the economic situation is dire and a huge recession is underway.
If your investment project has good potential, the economic downturn shouldn’t be a major stumbling block. In a recession, however, you will need to be able to prove to lenders that you can succeed in a difficult economic environment.
Widespread economic uncertainty
The uncertain economic times during a recession cause some companies to rethink their plans, investments and projects (thus exacerbating the recession). Some decide to wait it out before going ahead with expansion plans, new initiatives or marketing campaigns. It’s good to get the lay of the land to make sure you’re making the right decisions. If you need help, seek out the advice of credible experts. They can help you take a step back and focus on economic opportunities and information you can trust.
How to recession-proof your business?
The key is planning. Start by identifying the different ways an economic downturn could affect your business, then develop mechanisms to deal with it.
Also, be careful as the economy adjusts—leave yourself some wiggle room. You’ll be glad you did, particularly with your cash flow.
The experts at your financial institution can help you build forecasting scenarios. They’re familiar with the various options available to you depending on the economic context, including government support to your industry or for entrepreneurs in your situation.
For personalized advice about your business, your plans and your financial situation, make an appointment with our specialists. We’re here to answer your questions.
