A recession can be a daunting and uncertain time for businesses, especially for those who have not experienced one before.

But by being proactive and taking steps to prepare and protect your business, you can increase your chances of weathering the storm and emerging stronger on the other side.

In this article, we’ll provide practical tips and strategies for navigating a recession and safeguarding your business during these challenging times.

What is a recession?

A recession is a period of economic downturn that can have far-reaching impacts on businesses of all sizes.

A global recession is a period of economic downturn that affects countries around the world. It’s characterised by declining GDP, rising unemployment, and declining trade and investment.

A recession in a particular country refers specifically to economic downturn in that country. It can be caused by declining demand for exports, domestic economic policies, or external economic shocks.

Identifying the signs of a recession

There are several economic indicators that are commonly used to assess the health of an economy. These include GDP, unemployment rate, inflation rate, and trade balances. By monitoring these indicators, businesses can get a sense of the overall health of the economy and anticipate potential challenges or opportunities.

For example, a decline in GDP is often seen as a sign that an economy is slowing down or entering into a recession. Similarly, rising unemployment can indicate that businesses are struggling and may be cutting back on hiring or laying off workers.

Inflation, or the general increase in prices for goods and services, can also be a sign of economic stress, as it can erode the purchasing power of consumers and businesses.

Trade balances, or the difference between a country’s exports and imports, can also be a useful indicator, as a decline in exports or an increase in imports can signal a slowdown in demand for a country’s products.

How the cash rate can impact a recession

The cash rate, also known as the benchmark interest rate, is the rate at which banks lend and borrow money from one another overnight. It’s set by a country’s central bank, so in Australia this is set by the Reserve Bank of Australia and in the United States this would be set by the Federal Reserve.

The cash rate can have an impact on a recession in several ways. By adjusting the cash rate, central banks can influence the cost of borrowing for businesses and consumers. If the cash rate is low, it can encourage borrowing and spending, which can help to stimulate economic growth. On the other hand, if the cash rate is high, it can discourage borrowing and spending, which can slow down economic growth.

During a recession, central banks may lower the cash rate in order to stimulate economic activity and help to boost demand. This is known as monetary policy. By lowering the cash rate, central banks can make borrowing cheaper, which can encourage businesses and consumers to borrow and spend more. This can help to stimulate economic growth and mitigate the impact of a recession.

The cyclical nature of business

The regular pattern of economic expansions and contractions that economies experience over time can be seen as a cyclical.

According to the business cycle theory, economies experience regular periods of growth and contraction, with recessions being characterised by declining economic activity, rising unemployment, and falling asset prices. The length and severity of recessions can vary widely depending on the specific circumstances.

Some recessions are mild and short-lived, while others are more severe and longer-lasting. Understanding the cyclical nature of recessions can help businesses to anticipate and prepare for economic downturns and take steps to protect themselves.

Australia’s last recession

With the last recession being more than 30 years ago, there will be a good number of Australian business owners that are strapping in for their first potential recession.
The last recession Australia experienced was in 1991. That’s more than 30 years ago now. Which means that many Australian business owners, will not have experienced a recession before.

The 1991 recession was caused by a combination of factors, including a slowdown in global economic growth, high interest rates, and a decline in the domestic housing market, and it lasted for eight quarters. The recession was relatively mild, with GDP declining by 0.3% in 1991 and by a further 0.1% in 1992. Unemployment also rose during this period, reaching a peak of 11.2% in 1992.

Since the 1991 recession, Australia has not experienced a technical recession, defined as two consecutive quarters of negative GDP growth. That said, the country has certainly faced its share of economic challenges in this period, including the global financial crisis of 2008 and the COVID-19 pandemic in 2020. These events have had negative impacts on the Australian economy, but GDP has not declined for two consecutive quarters.

Protecting your business during a recession

While recessions can be challenging for businesses, there are steps that SMEs can take to help mitigate their impact and increase the chances of weathering an economic downturn. These include:

Reviewing and assessing your business plan: Take a close look at your business plan and assess your financial position. Identify any potential vulnerabilities and consider what changes you might need to make to weather a recession. This might include adjusting your pricing strategy, seeking out new sources of revenue, or reducing your overhead costs.

Managing your cash flow: Tighten up your cash management practices, such as invoicing promptly, negotiating more favorable payment terms with suppliers, and seeking out any available financing options. Having a strong cash position can help your business weather a downturn and take advantage of opportunities as they arise.

Reducing costs: Look for ways to cut costs wherever possible, such as reducing inventory levels, negotiating lower rent or other expenses, and finding more efficient ways of operating. By becoming more cost-effective, you can improve your profit margins and make your business more resilient in the face of economic challenges.

Diversifying your customer base: Don’t rely on a single customer or a few key customers for a significant portion of your revenue. Diversifying your customer base can help to reduce your risk and ensure that your business is not overly exposed to any one market.

Seeking out new markets: Consider expanding your business into new markets, either domestically or internationally, to help offset any decline in demand in your existing markets. This might involve identifying new customer segments, entering new geographic areas, or launching new products or services.

Maintaining a strong online presence: With more people staying at home and shopping online during a recession, it’s important to maintain a strong online presence and make it easy for customers to find and purchase your products or services online. This might involve investing in e-commerce capabilities, improving your website’s search engine optimisation, or using social media and other digital marketing strategies to reach new customers.

Seeking out government assistance: Many governments offer assistance to small businesses during economic downturns. Look into any available programs or initiatives that might be able to help.

Takeway

It’s important for businesses to understand what a recession is and how to identify the signs of an impending recession.

To protect your business during a recession, consider reviewing and assessing your business plan, managing your cash flow, reducing costs, diversifying your customer base, seeking out new markets, maintaining a strong online presence, and seeking out government assistance.

By understanding recessions and taking proactive steps to protect your business, you can increase your chances of weathering an economic downturn and emerging stronger on the other side. By staying informed and prepared, you can better navigate any economic challenges that come your way.

Level up your business

At Fifo Capital, we specialise in helping SME and corporate businesses to improve their cash flow and their overall business.

We can help you to to take control of your finances and better position your business for success, even during challenging economic times.

If you want to explore the full potential of your working capital, get in touch with our team to book in a free consultation.