Following a year of uncertainty and political upheaval, it seems the UK may very soon be heading into a recession.
The good news is that most predictions are suggesting that, if and when the UK does experience the next recession, it’s likely to be less severe and shorter than earlier estimates.
However, even with these new predictions, the prospect of a recession of any length can be daunting for any small business owner.
If you’re thinking about how you can prepare for the impact of a recession in 2023, read on to discover how it could affect your business and what you can do now to minimise the challenges you could face as a result.
A recession could hit your business from any angle
It’s important to remember that a recession may not only affect how your customers buy from you. There are a few different things that could pose a threat.
When costs start to rise, it can have a big impact on your monthly expenses, in turn affecting how much profit you make.
Some of the costs that could, or have already begun to, rise are:
- Energy costs
- Office rent
- Costs of borrowing
- Raw materials or wholesale product prices
- Increased wages.
Keep a close eye on how much each cost is rising by to ensure you can budget accordingly.
Suppliers going out of business
It’s virtually impossible to run a business in a vacuum, so chances are you are dependent on suppliers to be able to run your business.
Unfortunately, each of those suppliers is also vulnerable to the effects of a recession, and if they go bust, it can have sizable repercussions on your business.
Lower consumer spending
Perhaps one of the most obvious effects of a recession is that consumers tend to have less disposable income to spend, which can result in lower sales.
The consequences of this can be wide-ranging for businesses. Not only does it lead to lower profits, but it can also mean that other processes become less effective. For example, it could lead to a lower return on investment of your marketing spend.
Accounts receivable taking longer to be paid
While a drop in sales can be expected during a recession, another impact that might be a bit less obvious from the outset is that customers who owe money from previous sales might be slower to pay this back.
Additionally, if you are a supplier to another business, it’s possible that your client may be looking for longer payment terms of your invoices as a result of restricted cashflow.
5 practical ways to prepare your business for the impact of a recession
Even though a recession can be a worrying time for business owners, there are plenty of things you can do to prepare yourself. This could ensure that the impact of recession is less severe on your business and profits.
Here are five methods you could consider.
- Building cash reserves
One of the first steps to boosting your ability to withstand a recession is to build up a healthy emergency cash reserve.
Knowing that you have additional cash available to cover increased bills or for any other emergencies is likely to bring peace of mind, as well as relieving additional financial pressures that the business could be under.
An additional benefit is that lenders may be more agreeable to giving credit to a business that has a large cash reserve, since they are viewed as a less risky investment.
- Reviewing borrowing options
The criteria for lending are usually much stricter during a recession, since it is a riskier time to be investing into businesses.
This means that you might need to shop around to get the best rates for borrowing, and even to be approved for a loan if you need one. It might also be beneficial to search for organisations that offer support for small businesses looking to secure financing, or speaking to an adviser who will be able to advise you about what is available to you.
- Managing expenses
As well as improving the safety net of your emergency cash reserves, it’s helpful to review your monthly and annual expenses to see if it’s possible to reduce them.
While this may be something you do regularly as part of your cashflow management, taking a particularly hard line when it comes to regular purchases that aren’t bringing you a proportionate benefit could help you to strengthen the overall health of your business by reducing wastage.
- SWOT analysis
It might be some time since you last sat down and mapped out the strengths, weaknesses, opportunities, and threats (SWOT) that your business currently has, but it’s often a useful exercise in the face of a possible recession.
By revisiting this analysis, you might find that there are some opportunities you have yet to explore, or some new threats that weren’t around previously. This could be an invaluable starting point for creating an action plan to put your business in a stronger position for weathering the storm that could be approaching.
- Make data-driven decisions
One of the most important pieces of advice about surviving a recession is not to panic – which of course is easier said than done.
But if you can hold back from acting on the emotion that the situation might make you feel, and instead act based on the data that you have, you are much more likely to make sensible decisions that will stand the business in good stead for the future.
For example, using the results of your SWOT analysis, you could decide which services you should prioritise based on highest sales and lowest cost of delivery. Are there any services that are less popular, or that cost a lot to deliver and so are less profitable for the business?
Use this sort of data to make smart decisions and you’ll likely find yourself in a much stronger position, regardless of whether a recession is on the way or not.
Get in touch
If you’re a business owner and would like our advice about how you can protect your finances from the impact of a possible recession, we can help. Email email@example.com or call 01204 300010 to speak to us today.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.