How to prepare your business for a recession
Discover what an economic downturn means for businesses, how to prepare for it, and how to get through a recession.
The Bank of England believes the UK is going to fall into a long recession.
It raised interest rates again on 3 November 2022, from 2.25% to 3%, with a belief that a recession could last two years in the UK.
Some businesses have already been preparing, seeing the effects of slowing consumer demand and rapidly rising costs.
In this article, we examine what an economic downturn means for businesses, how to prepare for it, and how to ride it out.
Here’s what we cover:
- What is a recession?
- How a recession can affect your business
- 7 tips to prep your business for a recession
- Final thoughts: Look at a recession as an opportunity
What is a recession?
Normally, our economy grows, and we get slowly richer as the goods and services—our Gross Domestic Product (GDP)—increases.
However, if the value of our goods and services falls for a period (usually pinpointed as two three-month periods or quarters in a row), then a recession occurs.
A recession shows us that our economy is doing badly. In the UK, a mini-recession occurred in 2020 when the coronavirus pandemic was at its peak.
How a recession can affect your business
A recession is not a good thing for most businesses, although there are examples where some escape from its negative effects and become stronger.
How a recession affects your business depends on what type of product or service you’re selling and how you meet customer needs. For example, customers will still buy food and basic utilities to survive, but they may cut back on goods they don’t necessarily need and consider a luxury.
The chances are that your business will be affected.
- Your customers may spend less, meaning fewer sales and less profit.
- Your cash flow may be affected if customers and suppliers find it harder to make timely payments.
- Lenders may tighten their belts, making it more difficult to access credit.
Whatever the economy, doing what has already made and kept you successful should keep your business in good shape despite the financial headwinds.
However, there are certain things you can do to prepare for what’s likely to come.
7 tips to prep your business for a recession
1. Build cash reserves and review your finance options
With inflation still high, you may have looked to strengthen your balance sheets. Not having cash reserves means you may be firefighting as a business during a recession.
Traditional wisdom states that it’s wise to set aside a minimum of six months of business expenses to keep your business operational during a recession.
Kevin Johns, managing director at Prime Accountants Group, says it’s wise to keep a cash reserve because sales can dry up quickly.
He says: “Build up that cash reserve now. Don’t wait until a recession happens to get on top of your debts because it’s too late once it happens.
“If a customer has already built up debt with you, they may never be able to get rid of that debt. So now’s the time to act.”
If you’ve looked at your cash reserves and think you might be struggling, review ways you can spread and defer your debt.
Look at options such as grants and loans. You might also look at invoice factoring, where you can raise money immediately by selling your invoices to a factoring company that will collect all the money outstanding.
Another way to raise your cash balance is by dealing with your inventory and selling off your stock as quickly as possible.
Kevin says: “Don’t overstock. If you’ve got stock sitting in your warehouse, cash is tied up and not earning you money.”
2. Manage cash flow
In a recession, it’s even more crucial to be on top of your cash flow.
Rick Smith, managing director at specialist business recovery and debt advisors Forbes Burton, says you should pay off bad debts first and ensure all your outgoings sync up.
He says: “This is the aspect of finance that sinks most businesses. Not being able to pay staff, suppliers or partners is a step towards insolvency, and if you can work out a way to negotiate a more manageable timescale, then this is all for the better.”
In times of recession, collecting money owed to you gets more difficult, so Kevin Johns of Prime Accountants Group recommends you have conversations with your customers about taking deposits, so you at least have guaranteed cash coming in.
He says: “To your customer, you aren’t a priority to pay what they owe until they come to buy from you again. So, you have to change that narrative.
“Let’s say you’re selling a product for £1,000. Get some of that money upfront before the order is placed. You’re reducing risk and not allowing that debt to grow. Get your customers in that way of working.”
Kevin also recommends you use software tools to remind customers what they have to pay, that their invoice is due for payment, and that if they are having problems, get in contact.
“Get on the front foot,” he says. “Don’t sit down and wait for things to happen. That’s the best thing you can do regarding account receivables and payables.”
3. Analyse cash flow projections
Ben Price is the Founder of Heatable, an innovative price comparison website where customers can get instant quotes for a boiler and installation without needing a salesperson.
With sales likely to decline during a recession, Ben advises you to analyse cash flow projections based on a series of potential scenarios—and predict sales for each scenario in the next 12 to 24 months.
He says: “For example, we can predict sales based on the worst possible scenarios—a 50% drop in sales, a 30% drop in sales, and so on.
“This forecasting allows us to realistically see what future cash flow we could be working with and determine how we can operate a sustainable business to survive a recession.”
4. Manage your expenses
If your cash flow isn’t where it needs to be, you’ll be surprised how much money you can free up by streamlining and renegotiating your expenses.
Christy Kulasingam is a business strategist and founder of Radbourne Consulting. Hannah Martin is the founder of Talented Ladies Club and host of the Get Rich Slow podcast. They say you should audit your spending.
Ask yourself questions like:
- Is every outgoing necessary?
- What are the must-haves?
- Are there discretionary items that can be eliminated or paused?
- Have you secured the most competitive price or supplier?
Edward Coram James, co-founder and CEO of digital marketing agency Go Up, recommends that you “lean up the ship” and ensure your business isn’t carrying dead weight.
He says: “Review all software that you are subscribing to. Drop anything that is surplus to requirements.
“The same applies to everything from office supply shops and corporate entertainment to underperforming suppliers.
“Better to get your notice period when the sun is still shining, instead of having to do it when the roof is falling in.”
Energy costs
It’s particularly challenging for businesses because a recession will come when energy bills have shot up (although there is support from the government in the form of the Energy Bill Relief Scheme).
Organisations such as the Carbon Trust and Energy Savings Trust offer advice on how your business can use energy more efficiently.
Connor Campbell, business finance expert at financial adviser NerdWallet, suggests you conduct an energy audit to assess where you use the most energy in your business.
Doing this allows you to spot areas where you’re potentially wasting energy and make the required changes.
For example:
- Take stock of your workplace at different times throughout the day to get an idea of when and where your business uses the most energy.
- Can you spot any trends or spikes in energy usage?
He says: “If you noticed that your energy bill was still high overnight despite no one being in the office, you could be wasting energy on computers on standby or heating an empty office unnecessarily.
“By assessing how much you use energy—when you use it and why—you can plan for change.”
5. Keep employees in the loop and manage wellbeing
Steven Jagger is the founder of UK and Germany-based tech recruiter Maxwell Bond, which has worked with FTSE clients such as the BBC, Barclays, TalkTalk and Mastercard.
He says it’s natural to consider reducing headcount to cut spending in times of recession, but it may leave your business bare once the turmoil is over. It’s less a time to panic and more a good time to review your company’s leadership, culture, and vision.
A recession can damage employee morale and health, especially if your people have concerns about their jobs, financial security, impact on family, and greater workloads.
You can provide support for your people in numerous ways, be it by communicating regularly or via practical help such as offering financial assistance or flexible working schemes to reduce stress.
Steven says: “A recession shouldn’t impact staff turnover or retention if your culture is right. Leaders should revamp their culture if they want to weather the trouble ahead.
“Companies need to go the extra mile to attract and retain candidates if they want to hit their hiring aspirations, stay ahead of their competitors, and weather the incoming storm.”
6. Communicate with customers
In a recession, keeping your customers happy is more important than ever.
You may have great products and services, but reputation can help your business stand out from the crowd and even be what convinces people to pick you rather than a competitor.
“A reputable business should be as open and honest as possible,” says Connor Campbell of NerdWallet, “If you’re experiencing shipping delays, for example, clearly communicate these with customers, so they know there’s likely to be a problem.
“If there’s a product issue meaning items need to be recalled, ensure you tell all relevant customers and why.
“And if services are unavailable at certain times and dates, be sure to use all channels at your disposal to let people know.
“It is much easier to do this before there are issues than once problems start to arise and get traction.”
7. Ensure your operations are lean, streamlined, and agile
Rob Israch, president at Tipalti, says you should take stock and look for ways to maximise the efficiency of the team you already have, which will not only drive you through a recession in the short term but also give you a boost to growth in the long term.
Look at ways you can free up time for employees to spend on business-critical activities that can help the business, rather than on manual tasks they need to grind through.
Let’s look at finance.
According to Tipalti research, more than two-thirds (68%) of accounts payable teams will manually key invoices into the accounting software.
At the same time, 56% spend more than 10 hours a week processing invoices and supplier payments.
One way you can transform your business’s operations and increase your business’s visibility and control is by adopting automation, which can ease the pressure on your people and help you face upcoming challenges.
Rob says: “By shifting the mindset from short-term growth to maximising efficiency, businesses can use a time of economic uncertainty to become more productive, increase visibility and control, and ultimately be fit to scale and grow in the future.”
Final thoughts: Look at a recession as an opportunity
The pandemic hit businesses hard, but many came out OK because they adapted and created new revenue streams.
It’s always good business sense to look at offering additional products and services to complement your existing ones.
Another tactic you might want to use is to look at your employees and how you can redeploy them to sell those extra products and services.
Although it’s easy to think of doom and gloom, you may want to look less negatively at the recession and view it as a positive opportunity to give your business a tune-up and position it for long-term success.
Editor’s note: This article was first published in September 2022 and has been updated for relevance.
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