What Exactly Is A Recession, and How Do You Protect Your Business?
What exactly is a recession and what steps can you take to protect your business? The first in series I will be writing over the summer and autumn to help female founders lead their business confidently through the coming economic recession.
A lack of confidence in the economic outlook is “the number one issue” facing British businesses according to a recent survey by The Institute of Directors (IoD) last month. Cost of living crisis, inflationary pressures and uncertainty about Ukraine mean the UK’s pandemic rebound is running out of steam, heightening the risk of a recession.
What exactly is a recession and what steps can you take to protect your business? This is the first in series I will be writing over the summer and autumn to help female founders lead their business confidently through the coming economic recession. In this article, you’ll learn:
WTF is a recession?
How do recessions work?
What is causing the current economic crisis?
How long will this recession last?
Can anything be done to prevent a recession?
How do recessions affect women-led businesses?
The benefits of a recession.
How to protect your business during a recession.
Let’s rewind to this time last year when the UK economy was accelerating out of the biggest slump in 300 years and there was a sense that the worst of the pandemic was over. Businesses were starting to feel more confident and to make plans. The outlook is now very different, reflecting the high cost of the war ravaging Ukraine, the supply chain blockages that can be traced back to China’s return to sporadic lockdowns of industrial centres and ports, blocking global supply chains and the consequences of a hard Brexit.
Although the UK is yet to enter recession, the data company GfK’s monthly look at consumer confidence found that the relatively upbeat mood as Britain emerged from lockdown in 2021 has been replaced by deepening pessimism. As rising inflation saps morale, the public is becoming gloomier than it was during the recessions of the mid-1970s, the early 1980s, the early 1990s and the late 2000s. This is important because a recession is usually triggered by a lack of spending. See below.
Growth is the natural state of modern economies. But from time to time, wither a country’s economy - or the world's - stops growing and starts to contract. This contraction may range from a little to a lot, before the economy returns to growth. Economic experts call these occasional periods "recessions." The reason we fear recessions is because the consequence is hardship for many people, as businesses fail, and unemployment rises. But recessions also create new opportunities for business and investment, and I’ll explore this in more detail.
WTF is a recession?
To put it in simple terms, a recession is when there is a general reduction in economic activity over two successive quarters. Countries measure their economic health by measuring the total value of goods produced and services provided within their borders. This is known as Gross Domestic Product (GDP).
The important thing to understand is that while positive economic growth has been the norm for most economies, from time to time there are periods of slow or negative economic growth, which may last from a few months to several years. In most cases, the economy will bounce back to its previous growth trend. But sometimes a severe recession knocks the economy permanently onto a different growth path.
The Great Recession of 2008 to 2009 was such a recession: In countries such as the U.K., the economy is significantly smaller than it would have been had there been no recession. The financial crisis which broke in 2008 was followed by the deepest recession experienced in the UK (and much of the western world) since the Second World War. We had got used to the economy, and with it the public finances and household incomes, bouncing back strongly following previous downturns. That did not happen this time.
Read: To understand why the 2008 financial crisis precipitated what has proved to be a big and permanent hit to the size and structure of the UK economy, read this article by the Institute For Fiscal Studies (IFS).
So how do recessions work?
Whatever the cause of the recession – whether it’s been caused by a a pandemic, a natural disaster, a financial crisis or general gloominess about the future, the way a recession affects the economy is always the same. The dual pistons of the economy that drives economic growth - consumption and production - temporarily slow down.
This means that on the consumption side, households cut spending and increase saving (including paying down debt, which is economically equivalent to saving). This lowers demand for consumer products and services. Meanwhile businesses cut costs and may put expansion and investment plans on hold. This reduces demand for business-to-business (B2B) products and services.
On the production side, faced with falling revenue, businesses introduce cost cutting measures to balance the books. This can involve cutting working hours and/ or hourly wages, reducing terms and conditions and laying off some staff. They may decide to cut prices in order to attract more customers, sell down inventory and maintain cash flow. If this doesn’t work, businesses will look to make deeper cuts to production, working hours and wages and lay off more staff.
What is causing the current crisis?
There are multiple factors contributing to the financial crisis facing the UK. First, the UK economy has not recovered from the 2008 financial crisis, and second a set of big challenges, which, in isolation, are not disastrous. It’s the combination of successive lockdowns in the UK slowing down the economy and causing supply chain disruptions, coupled with Russia’s invasion of Ukraine damaging the international market price of gas and oil, which are putting the UK economy at risk of another downward turn.
These problems will be compounded if, and when, the Bank of England increases interest rate rises. This will particularly affect small businesses who are the most likely operate with limited cash flow. Small business owners will have to set aside more money to be able to repay any loans and debt which in turn reduces the income available to the business.
The combination of high inflation and high interest rates suppresses the ability of small businesses’ ability to grow and invest, making it impossible for many to think about anything beyond survival. This means that the UK’s long-running growth and productivity puzzles look set to stay in place for some time yet.
The situation is further complicated by the absence of any meaningful government response. To date, there’s little sign that the government understands the scale of the issues that small businesses are facing or that it will come up with a comprehensive plan that is equal to the task of addressing them.
How long will this recession last?
The Bank of England has said that the UK is heading for the longest recession since the 2008 financial crash. According to projections, the economy will be pushed into a five-quarter recession – with gross domestic product (GDP) falling in each quarter of 2023.
If global wholesale energy costs remain as they are currently, then the recession is expected to last the whole of next year, with inflation barely below 10% even in a year’s time.
Can anything be done to prevent a recession?
When the economy is struggling to grow (as is the case in the UK) at the same time as there is high inflation, there is a situation called stagflation, which is very difficult to solve. Normally, the Bank of England - which is independent of government - would cut interest rates if the country was going into a recession. It’s expected to raise them because prices are rising so fast.
I’ve led several organisations through a recession over the past 30 years. (I’ve written about my experience as a CEO here). My concern is that the perfect storm of economic forces that small businesses will face this autumn is on a completely different scale to anything I’ve seen before.
How do recessions affect women-led businesses?
It probably won’t surprise you to learn that researchers have found that the media typically ignores or trivialises female entrepreneurship. This means there’s a lack of information about how women-led businesses are affected by a recession.
That said, research by the impact investing advisory firm Cornerstone Capital Group helps to shed light on how recessions affect women-led businesses. It found that although businesses owned by women or people of colour were more likely to shutter during the Great Recession of 2007-09, they helped stabilize the economy during the subsequent recovery.
Minority and women-owned and minority businesses were massive job creators and stabilizers of the US economy, adding 1.8 million jobs in 2007-12. Meanwhile, companies owned by white men lost 800,000 jobs, and firms owned equally by white men and women lost another 1.6 million jobs over this period.
Some of this disparity can be explained by the industries affected. Manufacturing and construction were hit particularly hard during this time - both sectors with a high concentration of white male owners. Meanwhile, the economic recovery was largely fuelled by growth in industries such as health care and food services, which are more likely to be minority and women owned.
What’s clear is that small businesses run by women founders play an important role in helping pull the economy out of a recession by providing needed products, services, and jobs. Women-led businesses often help their communities by filling in gaps in education, health and social care services (which are no longer provided effectively due to underfunding by the government). That’s because women-led businesses tend to be in sectors of the economy which are more recession proof.
The benefits of a recession
We saw very clearly during the recession of 2020 that many businesses thrived because they made changes to the way they delivered and marketed their products and services. For example,
Hundreds of restaurants started delivering high-quality meals to people's homes;
Gin manufacturers switched to producing antibacterial gels;
Gifting brands significantly increased their online sales;
Events venues streamed productions to all parts of the country and around the world, making them accessible to new audiences and opening up them whole new markets.
Beauty sales went up as demand for premium beauty products increased.
Businesses that were able to adapt to the new ways of working and living benefited; those that couldn't adapt, lost out.
A recession is a good time to review and streamline a business to make sure that it’s staying true to its mission and values as well as to reduce costs, automate processes where it’s appropriate to do so and increase efficiency. It’s also a good opportunity to cut less profitable products and services invest in those of the business that hold the greatest promise for the future. You should also review your supply chains to make sure they are able to withstand a recession.
Because recessions clear out zombie businesses (that earn just enough money to continue operating and service their debt) this can be a good time for tech-savvy start-ups and growing businesses. This means it can also be a good time for strategic acquisitions, since struggling businesses may welcome being bought out, rather than being forced to close.
It can also be a good time to start a business. That’s because difficult economic times can lead to changes in consumer behaviour, and this is an opportunity for businesses that can adapt and cater to these changes. And because there’s less competition, it’s easier for new businesses to stand out and attract customers.
How to protect your business during a recession
1. Create a cash flow plan
Running out of cash is always a top concern, but it’s especially important to conserve cash during a recession. If you haven’t done so already, start by getting a handle on your current cash balances and monthly sources and uses of cash. This means creating a rolling cash flow forecast for the next 16 weeks to guide you and your management team and serve as an early warning tool.
Set VAT and taxes aside in a separate bank account and if you have money left over at the month, use this to build an emergency cash fund to protect you from any unexpected bills and help you cope with a loss of revenue. Putting aside three months' worth of your average expenses is a good rule of thumb, then steadily increasing this to six months.
2. Reduce debt
Look at the amount of money that you owe to see if there anything that you can do to reduce this burden? Can you reduce the impact of the debt? If you have multiple debts, see if you can pay off those with the highest interest rate first, and then move onto the next. If you do not have enough cash to pay down your debt, see if you can move to a cheaper interest rate. While this will only offer some temporary relief, it will give you more time to organise your finances and stop your debt from growing as quickly.
Another option is to consolidate your borrowing over a longer repayment period, so that less cash is going out each month. The interest rate may be higher, but the monthly cash saving may make the extra interest cost worthwhile.
3. Manage your creditors
Robust credit control processes will reduce risk and improve your cash flow. If this is an area you struggle with, consider outsourcing the function to a credit control agency. This will take away any stress or worry about customers potentially not paying you on time.
Bear in mind that if you’re struggling, then it’s highly likely that other businesses will be too. That’s why your credit control must be tighter than ever. If someone isn’t paying you on time, you may have to stop doing business with them, until the matter is sorted. It might seem counter-intuitive to turn business away, especially if you’re struggling for work, but doing work that you might not be paid for is not going to help.
4. Reduce overheads
Look at your overheads to see whether there are things that you can cut back on. Are there areas which you could digitalise, systematise or automate? You’d be surprised where you can make savings. If sales have reduced, do you still need as many admin staff? Is there anything else that you can outsource, such as bookkeeping or Human Resources? There will still be a cost involved but you will have taken things like holiday pay or even holiday cover out of the equation.
Can you reduce overheads through hybrid working? If you’ve now got less people working in the office, do you still need all that space? If not, can you move or let part of it to someone else?
5. Pay Attention to Your Creditors
Don’t ignore your creditors or bury your head in the sand. If you’re struggling to pay someone, talk to them and try to come to an agreement that you’re able to adhere to. Most suppliers will want to support you if you’re open and honest and are true to your word.
This will make it less likely your creditors will take precipitative action when your resources are stretched, for example through the courts. Apart from still having to deal with that creditor, word will soon get around, only adding to the pressure.
In Summary
Remember that any recession or downturn is only temporary because economies are cyclical. No one really knows how long it will last, and different sectors are affected very differently. Something I’ll explore in a future article. Hopefully now that you know that women-led businesses powered the economic recovery following the Great Recession of 2007-09, you can see that there are grounds for optimism.
What’s important is that you’re in the best position possible to move forward again, so make sure that you haven’t burnt any bridges! That’s why it’s important to lead not manage your way through a recession, the topic of my next article.
About The Author
I’m Denyse Whillier, and I was a Chief Executive for 8 years, I spent 25 years in senior management and leadership roles and trained at Cranfield School of Management. I made the leap from corporate to founding my boutique business consultancy and have worked with a wide range of small and medium sized businesses, many of which are purpose-led. My mission is to close the gender gap in business and make it easier for women to start, grow and scale a successful business without compromising their values.
Whatever circumstances you find your business in, know that you’re not alone – and that I’m here to support you. An experienced and empathetic business advisor can make a massive difference to your business – as well as to your own sanity – so do consider getting in touch to book a friendly (and free) chat at any time. I’m always happy to talk you through how I could help. For examples of my work, check out my portfolio of case studies.