The most important thing for a business owner to know about a recession is how it will likely affect their business. Recessions impact businesses differently for many reasons, mostly relating to size and the nature of the business.
So, what do you need to know about your business?
Remember, a recession is two consecutive quarters of negative growth in the Gross Domestic Product (GDP). Most economists right now are saying that we’re in one and don’t know it yet, or that we soon will be in one. In either case, as a responsible business owner, there are a few things you should know, in order to better prepare for the recession.
Job Losses & Business Contracts
No matter what else is true about a recession, it will virtually always result in job losses and a slowdown in commerce. As your business contracts and the related revenue shrinks, you may have to think about personnel. Do you still need the same number of people? Can you still afford the same number of people? How will you deal with potential downsizing if your answers are no? Will you try to weather the short-term struggle or expect a longer-running recession?
Eric Hovde, CEO of Sunwest Bank, a regional bank that specializes in business banking and lending, suggests, “Small businesses should build cash and reserves and ensure that their operating costs are held to a minimum. It’s also critical to make sure that you have the right people on your team.”
Falling Sales & Excess Inventory
Even though we’ve been worried about supply chain problems for months now, businesses are beginning to experience falling sales, leading to excess inventory. As wages contract and employment falls, lower demand for those same goods will also increase excess inventory.
Impact on Small Businesses
Small businesses are a significant element of the US economy. Businesses with 500 or fewer employees account for more than 40 percent of our GDP. However, nearly half of all small businesses have revenue of less than $100,000. Further, only one in five of identified small businesses actually have employees.
These facts mean that small businesses have few financial resources and little cushion or fat to cut in the event of a recession. Lenders know this too, which is why you want to take the time now to develop a relationship with a solid small business lender to help you prepare for the potentially difficult times ahead. Having financial options is always a good idea, especially if you can outline those options before you need them.
Fate of Small Businesses in a Recession
Small businesses have a high level of financial risk during a recession. Their typical lack of financial cushion and inability to raise capital easily means that without adequate preparation, bankruptcy is a possibility.Traditionally, small business bankruptcies spike in a recession because any loss in sales during a period of financial uncertainty devastates a small business. Working with a solid and experienced small business financial institution and seeking professional help from business experts can help you mitigate the treacherous waters of a recession without sinking.