During an economic recession, small businesses are often hit the hardest. Some industries are affected more than others, and typically luxury services suffer first as both business and private customers cut back on spending. Budget constraints, reduced spending power and inadequate preparedness for a recession can make it impossible for a small business to survive. In many cases, this causes companies without adequate supports to be unable to continue operating. In other situations, however, small businesses show remarkable flexibility and find creative ways to survive a downturn.
Reduced Cash Flow
Along with your sales coming under pressure, your expenses will also go up as inflation starts pinching your wallet.
This will result in you tightening your financial belt, as your business becomes part of this downward cycle. You will have to ensure that you give priority to those expenses that directly affect your business over those that do not.
If you don’t have a lot of savings, then spending on luxury items through your credit card is a strict no-no.
Loss of Demand
Small businesses that depend on a few major customers for the bulk of their revenue could lose a significant amount of income if one or more of those customers reduces its purchase amount or stops buying completely. If a large customer goes out of business, it compounds the company’s problem because not only does it lose regular business, but it also may also fail to get money the customer owes. In inventory-intensive industries, should this happen at a time when the vendor has a large quantity of stock earmarked for a particular client, the business owner could lose money by being unable to sell the goods to anyone else.
As inflation eats into the pockets of your employees, they could ask for higher salaries in order for them to maintain their lifestyles.
You might then have to let go inefficient employees in order to maintain your payroll at the same level.
Often seen as a luxury for companies, marketing is frequently one of the first activities to be cut when a business experiences budgetary constraints. Particularly in companies with a well-established customer base or a unique product that has little market competition, it’s possible to manage without marketing and advertising for several months at a time. This might be detrimental in the long-term because no new customers are being brought in to counter customer attrition. The ripple effect of this is that advertising media may raise rates to cover their fixed costs in the absence of enough business, making it even tougher for the small companies to resume marketing when the economy improves. Many small businesses combat this by finding creative new guerrilla marketing techniques that cost less money to implement.
Interest Rates Might Come Down
During a recession, interest rates could come down; and in case you need to apply for a loan, then you may not be faced with high interest rates.
The only problem is, since there will be a liquidity crunch in the monetary markets, you could have a tough time qualifying for a loan as lenders’ qualifying standards go invariably higher.