Shockwaves have been hitting the UK economy for several years now, from Brexit to the COVID-19 pandemic, there has been a lot of challenges thrown at UK businesses. As a result of these unprecedented events the UK is now experiencing a recession, with The Bank of England raising interest rates to 2.25%.
In a world full of fake-news and media scare-mongering it can be really challenging to navigate these troubled waters. To prepare you for what’s to come, we have taken a look at 5 ways a recession could impact your business.
What is a recession?
A recession can be defined as a significant decline in economic activity resulting in negative gross domestic product (GDP), that lasts longer than two consecutive quarters
Recessions can happen for a number of reasons and are to be expected as part of the business cycle. The current recession has been the result of multiple factors including Brexit, the pandemic and the Ukraine war. We took a look at the causes of the recession in detail over on our blog: Why do SME's need to take extra precautions in the UK recession?
5 Ways a recession could impact your business
Reduced profits and lower demand With a cost-of-living crisis in the UK, consumers are tightening their purse strings and avoid or delay making ‘unnecessary’ purchases, reducing the demand and profits coming into your business. Additionally, operating costs and supply costs might increase due to the rise in energy prices, therefore reducing your profits further.
The majority of SME’s have smaller cash resources available and will have a reduced buffer to help during these times. For this reason, SME’s need to be prepared by running cash flow forecasts and regularly reassessing your business plan to help prevent problems in the future.
The majority of cash flow problems can be avoided by having a thorough financial understanding and the correct guidance. However, we understand at the best of times investing in this guidance can be costly - let alone during a recession. The Finance People believe that getting the correct guidance is not prioritised enough by SME’s which is why we have made it our mission to provide affordable part-time financial professionals. Take a look at how we can help your SME.
Unfortunately, job losses are to be expected during a period of recession and SME’s with reduced cash flow are likely to be faced with this sooner rather than later. And even if you don’t need to make job losses, you may still struggle with retention as staff may look to find work with a higher salary.
However, making job losses and redundancies is not always a quick win, as remaining staff become demoralised and overworked. If we learnt one thing during the pandemic, it is to adapt. Companies across the country adjusted their working ways to enable employees to continue to work from home, as well as increasing the amount of processes which could be automated or digitised. The UK recession is another hurdle to overcome, seek to find other ways to save costs during a recession and look to find other staffing solutions such as reduced hours or job sharing.
Lending from bank Lenders are not immune to the impacts of the recession and will reduce and restrict lending, often impacting SME’s first as they do not have the reputation or business size to reassure lenders. This, along with he potential for increased interest rates will make it difficult for SME’s to access lines of credit.
To prevent unexpected risk, a SME will need to take extra precautions when borrowing in the future or paying off any outstanding loans. When applying for loans, SME’s and startups will be scrutinised and inspected under a microscope before any financial agreement is made. By seeking expert financial help, with managing your current loans or helping you put your ducks in a row ahead of requesting lending, you will put your business in the best position possible to navigate the recession.
In an attempt to reduce spending, one of the first steps many SME’s take will be to limit the marketing budget. However, this can be a costly mistake when reducing your marketing spend has a domino effect preventing new customers from finding you and impacting future profits.
If a SME has a loyal customer base or little market competition then they may be able to afford to cut marketing for some time, but for the majority of SME’s will likely make matters worse by reducing advertising as larger corporations will not need to make such cuts and can reap the benefits of customers not finding the SME.
Investing in your business with various forms of marketing from email marketing, organic social media and paid advertising will ensure your business stays competitive by increasing brand awareness. It may seem like an added expense but when done properly, the benefits will outweigh the initial costs.
Reduced product quality or delays
The discussed impacts in this article will also be affecting your suppliers, which can cause delays or a reduction in product quality. Ultimately, this will impact your products and services which can cause repetitional damage to your SME as well as reduced profits if refunds or replacements need to be given to disappointed customers.
This impact is unfortunately one that is going to hit SME’s the hardest as larger companies will have the power to negotiate better contracts and cash flow to absorb the increased costs. To counter-act this you’ll want to ensure regular quality control of your offerings and not be afraid to shop around for a better deal.
How to manage the impacts of recession
Do you need help preparing for recession and minimising the impacts we have discussed? Or perhaps you're not sure how to manage your finances and cash flow, then get in touch with us, we offer free consultations.
At The Finance People, we specialise in providing affordable part time finance professionals, interim finance personnel and a virtual finance director service for businesses across the UK. Founded specifically for SME’s to help manage your finances and continue to scale.