How Will A Recession Affect My Business?

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A recession is a period of economic downfall, and irrespective of the duration, small businesses are often hit the hardest. Furthermore, the impact on your business also depends on your industry. For example, the luxury service suffers considerably compared to the food sector since customers cut down on spending. 

Essentially, unfortunate factors like reduced spending power, budget constraints, and poor readiness for the recession make it impossible for small businesses to survive during recessions. 

For better education, this article will present more information on how a recession will affect your business, alongside some practical ways to survive during this time. 

Effects of Recession on your Business

Here are some special effects small businesses will experience in an economic recession:

  • Loss of Demand

Small businesses earn that title due to how much revenue they earn. Since the bulk of that amount comes from the small customer base they serve, a significant decrease in patronage significantly affects their bottom line. 

Furthermore, suppose the business gains its revenue from the continued patronage of one large customer. In that case, the business will experience extreme financial difficulties if that customer goes out of business or limits spending. 

This issue can even become more problematic if your business has a large quantity of stock in its inventory to meet the monthly demands of clients that have now withdrawn their continuous patronage. As a result, you can lose money and be unable to sell goods at enough pace to keep the business running. 

  • Reduced Cash Flow

Small businesses typically operate a tightly controlled cash flow since they don’t have a large cash reserve. In other words, the money goes out as quickly as it comes in. Therefore, if a customer’s payment is late, this cycle is jeopardized. 

During an economic recession, customers may delay purchases and payments for extended periods as they solve their financial issues. This factor further delays payments from one vendor to another, halting all aspects of the business. 

  • Loss of Employment (Downsizing)

Financial shortages due to decreased patronage and revenue can result in budget cuts in a small business. Furthermore, this reduction directly results in laying off workers since it’s more accessible than abandoning other crucial business parts. 

In addition, by reducing staff from recent employees or departments with a redundant workforce, the remaining members are left to handle more tasks with less support. This increased responsibility further affects your business’s performance since employees are overworked and demoralized.

  • Marketing Constraints

Companies with a relatively steady customer base or products with very little sometimes regard marketing as luxury. Unfortunately, this perception often makes it the first activity to be cut whenever budgetary constraints are implemented. 

If predictions reveal the recession will last for a few weeks, cutting on marketing is a brilliant idea. However, the prolonged strain on your advertising budget is detrimental to your small business’s success because no new customers are acquired to combat customer attrition. 

This issue also results in a ripple effect where the advertising media raises their rates to cover fixed costs in the presence of no business. Unfortunately, the increased price makes it more challenging for small businesses to resume marketing even when the recession subsides. 

  • A decline in Product Quality

As previously mentioned, small companies are forced to implement budget constraints during an economic recession. Unfortunately, this also results in a drop in the quality of the company’s products since the business finds new ways to cut costs and improve its bottom line. 

This cost reduction often leads to a temporary reduction in product quality service since adhering to the usual quality standard isn’t commercially savvy anymore. However, a drop in quality can also result in less patronage, resulting in a snowball effect to doom. 

Surviving a Recession as a Small Business

While the drawbacks of a recession are daunting and depressing, there are options available to survive during these times. These recommendations include:

  • Invest in Technology

No matter your business, a recession will compel you to cut costs and employ financial constraints to keep the establishment afloat. In this case, technology can help you complete tasks in certain areas without needing human intervention or complicated machines. 

One of such technologies is Tapeeno, a smartphone app that lets you take contactless card payments directly through your phone. Essentially, it eliminates the need to own or buy a traditional card machine by turning your smartphone into a card reader.

Such technology allows you to cut costs and invest in other areas without harming your business quality. 

  • Focus on Marketing

Your business isn’t the only entity suffering from the recession; your customers and their families are thinking of ways to reduce costs and spend only on trustworthy brands. For this reason, you need to stay top-of-mind for your customers and budget funds to create a solid online presence during the financially depressing time. 

Some recommendations include:

  • Regularly sending content-rich emails to current customers 
  • Reach out to prospects that ghosted you 
  • Check-in on old clients and make them a compelling offer 
  • Make consistent social media posts and hold online events or contests 

Remember that irrespective of how you communicate with your customers and prospects, ensure to consider people’s feelings about the current situation. Keep your messages relevant, and don’t push too hard.

  • Consider Automation

While setting your budget, identify areas that cost-effective automated solutions can handle. These options can complete repetitive tasks more efficiently than any staff and often cost less than a salary. 

Consider leveraging automation as it doesn’t affect your product quality and bottom line and can save money when implementing budget constraints. 

  • Protect your Cash Flow 

Recessions directly affect your bottom line, which eventually diminishes the health of your establishment. Therefore, to prevent business death by starvation, it’s essential to employ several measures to protect your cash flow. Three recommendations include:

  • Limit unnecessary expenses 
  • Renegotiate agreements with vendors for more financially favorable terms 
  • Seek financial assistance like business grants and loans.

Conclusion

While recessions present minor benefits like reduced inflation and borrowing rate, it presents more harm to companies, especially small businesses. These include declining customer demand, downsizing, and low product quality. Fortunately, companies can survive this financial turmoil by investing in technology, capitalizing on marketing, and protecting their cash flow.

By Michael Caine

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