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What is the impact of a recession on SMEs?

Learn about the potential impacts of a recession on small businesses and find out how to best protect your company during tough times.
Published 1 Jul 2022
Updated 4 Nov 2022
5 min read
Person sitting at a meeting table, only their hands visible, as they sit in front of a laptop

If there’s been one buzzword from the last few years, it’s got to be ‘unprecedented’. There’s good reason of course – before 2020, the concept of a global pandemic was reserved for science fiction and worried scientist warnings. Now, we’ve seen exactly what it’s like for a ‘world first’ to take hold for real.

However, the effects of Covid-19 on the world has led to something that definitely isn’t unprecedented – an economic recession. While the prospect of a recession for small businesses isn’t unknown like the pandemic, it is daunting. Here’s what you as a business owner might see in the next few months.

What is an economic recession?

According to the National Bureau of Economic Research, the general definition of a recession is a notable decline in economic activity that spreads across industries, and lasts longer than two consecutive quarters. It’s usually declared by experts when a national economy experiences rising levels of unemployment, falling retail sales and negative gross domestic product (GDP).

Recessions are generally part of the business cycle as the economy expands and recedes, but they are sometimes brought on by large scale shockwaves – in this case, the pandemic and other world events. The spending involved in keeping people safe, the effects of the virus on businesses and the damage on supply chains have all left a large imprint on many economies across the world.

What are the impacts of a recession and economic downturn on small businesses?

When it comes to small businesses, what does a recession look like? It’s important that business owners know how economic uncertainty affects their bottom line. Here’s some negative effects that you could see.

Reduced cash flow

As everyone’s budgets get tighter and purchases get delayed, small businesses might find that they’re not getting the same amount of profits coming in as before. Likewise, their operating costs might increase, putting further strain on cash flow. This can be significant – 82% of small businesses fail due to poor cash flow, so make sure you’re prepared with a buffer if possible or looking for ways to mitigate the impact.

To help reduce the risk, keep an eye out for common red flags in your cash flow, including a lack of visibility and mounting bills. Get ahead of those early issues by running cash flow forecasts monthly, reassessing your business plan and speaking to your accountant or advisor about future troubleshooting. The best thing you can do is be prepared.

Employee layoffs

As small and medium-sized businesses see reduced cash flow, it’s likely budget cuts are on the cards. Unfortunately, job losses can sometimes be a key part of those cuts and it’s something that many business owners will have to consider as a recession takes hold.

That’s not to say that redundancy has to be the first thought. Just like during the pandemic, there are alternatives to redundancy, including reduced hours, job sharing or stand down periods. Just ensure you’re meeting the compliance requirements in your country and that you’ve formalised any changes.

Lack of demand

If you’re an SME that depends on a few large customers for the bulk of your revenue, you could particularly be at risk. In a recession, everyone has to cut costs and should you lose an important customer or client, your business could really take a hit.

Make sure that you’re scenario-planning for the loss of any potential customers in the future. If demand for your products goes down, have you got a plan for new sales avenues or product innovations? See what you can do to ensure your business has a broad financial foundation.

Limited marketing

As your business investigates ways to cut costs amid decreasing revenue, one of the most common budgets to get reduced is marketing spend. While getting money back that you otherwise might have spent on Facebook could seem like an easy win, it can have a ripple effect. As mentioned above, if you’re at risk of losing customers and not seeking any new ones, the business could really suffer.

That said, there’s nothing like tough times to promote innovation. Now is the time to really try things differently in your marketing. For example, word of mouth is a powerful tool, driving $6 trillion in annual global spending and 13% of all sales for businesses worldwide. Consider how you can make customers into brand advocates – in the long term your reputation will precede you.

Lending limits

With the recession impact, it’s not just customers and businesses who get more cautious with spending. Lenders will restrict what they give out too, making it challenging for businesses to access lines of credit. There could also be an increase in interest rates and stricter criteria for eligibility.

With that in mind, SMEs should be cautious about any borrowing they’re considering for the future, as well as any outstanding loans they already have.

Preparing for a recession as a small business owner

Yes, we know, this all sounds a little bit grim. But a recession doesn’t necessarily have to spell catastrophe. Some proactive planning and innovative thinking can help your company weather the storm, as some businesses have done in previous recessions.

Here’s some advice for the coming months.

Have a business continuity plan in place

No one likes to think about things getting tough, but it’s important to prepare for all potential outcomes. Making a business continuity plan is essential, not just for natural disasters or pandemics, but when your company is under financial strain. Assess the impact of a recession on your business and think creatively about how you can react.

Be agile in your business plan

Being flexible about your business’s financial future is crucial for success. In a recession, challenges can throw a spanner in the works of your business plan. It’s important that you don’t get too attached to earlier dreams, but think creatively about how your company will survive in the future. Keep that business plan refreshed often.

Utilise government business grants and schemes

If the recession impact could really hurt your finances, look into available government grants and schemes for businesses. This support is often preferable to high interest loans and can be an important lifeline until we reach economic growth again.

Consider payroll software to roster more effectively

If your payroll processes are all over the place, it might be time to consider how you can safeguard that part of your business. Having software that can regularly report on how much you’re spending, as well as how efficiently employees are being rostered on shifts, will allow you to see where cost cuts can be made.

Employees feel the pinch of a global financial crisis too

As stressful as a recession is for small business owners, don’t forget that everyone feels the effect in times like this. Make sure you’re not just focusing on budget cuts, but considering how your team members are getting on. Share your employee assistance program (EAP) details with your team and encourage them to use it.

Remember, that if an essential staff member quits and you need to replace them, it can cost 150% of their annual salary to get someone new. Team satisfaction is another way to protect your budget, so make sure and appreciate the employees you have.

This doesn’t have to add to your budget either. There’s plenty of creative ways to support your team through challenging times, as detailed in our guide.

The Team
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