Generally its quite hard to predict whether or not there will be a recession with a high degree of accuracy. For example, whilst its possible some people may have predicted the recessions after credit crisis and Covid-19, they would have been a shock to the vast majority of small and medium sized businesses. However, in 2022 there are clear signs that a recession is on the way and the Bank of England almost appears to be relying on this to bring inflation under control.
Economic outlook
The ONS has reported that Gross Domestic Product (GDP) grew by just 0.1% in February 2022, following 0.8% growth in January 2022. GDP then fell by 0.1% in March 2022 and 0.3% in April 2022.
Worryingly services, production and construction were all negative in April 2022, the first time since January 2021 during the height of the pandemic.
We won’t find out about the GDP May and June 2022 for quite some time, but early indications are that consumer confidence are at a record low.
This is unsurprising given the impact of soaring inflation of 9.1% in May 2022, the highest in 40 years, resulting in real incomes falling for most households and the cost of living crisis.
With interest rates also rising and likely to increase further, many consumers and also businesses can be expected to batten down the hatches by reducing discretionary spending and cutting back in general.
In previous recessions we have seen that deals fell through because companies didn’t want to take on risk, they wanted to save cash and to basically weather the storm. Although the Covid-19 pandemic and multiple lockdowns killed off numerous businesses, some of those which survived are in a perilous state with high levels of debt and may not survive another recession.
Preparing for a possible recession
Although most of our clients are generally in a good position, its always good to review finances. The points below are not very complex, but mainly guard against complacency.
Review cashflow/forecasts
- Review your costs such as staff, rent, overheads etc and gross profit margins and work backwards to calculate how much income is needed in the next 1 year to stay afloat:
- established businesses will also need to make a profit to pay dividends etc
- startups will need to review runway and cash burn
- Stress test these calculations, what happens if you lose some customers, or some deals in the pipeline fall through, or there are unexpected costs or investors fall through?
- Is there a cash shortfall? If so, how can the gap be filled?
Financing
- Many established businesses run up large aged debtors balances as they don’t want to aggressively chase their customers, and they know that they will usually pay in the end. However, in times of economic uncertainty its best not to hold off too long and regularly chase customers for payment. What happens if your customer’s customer doesn’t pay them? Credit control can be done in a polite manner, without threatening court etc.
- Maximise your funding and check your access to loans, overdrafts and credit cards etc. It can be a good idea to have facilities on tap, in case you need them. With interest rates at a low level, the cost of financing a loan to sit in your bank during the next 1-2 years could give you peace of mind if you have a low cash balance.
Sales and marketing
- Established businesses can sometimes run on autopilot, but customer behaviour has been shown to change during times of recession or economic uncertainty. Clients or customers may focus on low cost but conversely high quality/reliability/luxury etc can sometimes become more important for other customers. How can you use this to your advantage? Are there any niches or customer segments you can target?
- Look after your core customers, keep them happy and help their businesses and they’ll stick around/survive as customers.
- It may not be possible to enter a completely new market, but businesses may be able to use their skills and capacity in different ways. For example, during lockdown high quality fresh food suppliers to restaurants and hotels lost their customers, but a whole new consumer market opened up for home deliveries.
Costs
- Review your staff contracts and consider how the redundancy process could work, in the worst case scenario. If you have under performing staff, put communications with them in writing about their performance and take legal advice. Its best to prepared just in case.
- After the pandemic, many businesses are already quite lean but there could be some projects or spending which could be delayed.
- Marketing spend is a tricky one, it can often take spending money to make money! Its easy to leave Adwords/Social media spending running in the background, but now is definitely a good time to review the effectiveness of marketing campaigns and check how they are performing.
