After months of speculation and mounting uncertainty, economists all over the developed world are, once again, ramping up warnings of an impending economic downturn. Slowing global trade, international politics, as well as the more localised political difficulties that are impacting many of the world’s largest economies are beginning to take their toll. With that, experts are beginning to forecast the end of what, for many countries, has been the longest growth-phase in history. While a recession isn’t guaranteed, warning signs are emerging not only in Australia, the UK, or the US, but all over the developed world.
For their own sake, as well as that of the economies they operate in, businesses need to understand how recessions work, and what they can do to blunt the effect they can have on them. By knowing what to expect, and responding in a careful and measured way, businesses can protect their own interests, reduce the depth of the recession, and help the economy to recover more quickly. More importantly, they can learn how to drive growth for their business, even as demand in their entire industry might be contracting.
Many businesses have never experienced recession
Many western countries haven’t experienced a recession in nearly a decade. Some, like Australia, haven’t had one in nearly 30 years. As a result, an unusually large proportion of businesses, not just startups or SMEs, have no direct experience in navigating challenges associated with a contracting economy. For them, growth, and the ever-growing consumer demand to support it, is a reliable constant.
Adapting to succeed against the economic headwinds of a recession, then, will require major adjustments that many businesses currently aren’t prepared to make. To do that, it’s important to first understand what happens to businesses when the economy they operate in starts to shrink.
How recessions impact businesses
A recession is the inversion of the same feedback loop that drives economic growth. The cause of a recession could be an event that impacts any of the factors involved, but the most common is an external impact on consumer confidence. This decrease in consumer confidence leads to a reduction in consumer spending, meaning that people and businesses buy less. This, in turn, means a drop in sales, and a reduction in revenues for businesses.
To deal with this, businesses are forced to cut costs, often by laying off workers or reducing wages. The problem is that workers—now earning less than before, and fearing for their jobs— also make up most of the consumer base. The loss of income drives down consumer confidence even further, and the feedback cycle begins again.
Fundamentally, recessions translate to decreased consumer demand, shrinking markets, and reduced access to funds for businesses. After all, falling sales figures and layoffs are unlikely to impress either lenders or investors. Fortunately, things don’t have to turn out this way for businesses who are ready and prepared to operate in an adverse economic environment.
Thriving during hard times
The fundamental challenge faced by businesses in this situation is a lack of funds. While cost-cutting is often inevitable, businesses who can maintain the necessary funding to preserve their production capacity will be in a better position to bounce back when the opportunity presents itself. While the economy overall tends to recover slowly, individual businesses can still grow during a recession.
Finding growth opportunities during recession
When an economy is growing, businesses can almost grow by themselves. As consumer spending grows, so does the potential customer base of an industry. All things being equal, all businesses in a given industry would grow. When the economy shrinks, though, this is reversed, and the overall trend pushes businesses to shrink. More significantly, growth opportunities become much more situational.
As demand falls, businesses begin to lose customers and revenue. Those who are ill prepared to deal with this might find themselves forced into bankruptcy, leaving their remaining customers behind and available to other businesses. The businesses who remain can then compete for their business, growing their respective market share.
Accessing flexible funding to drive growth
While growth opportunities do materialise during recessions, it can be difficult for businesses to get the funds they need to pursue them. Alternative finance tools like invoice finance and supply chain finance, however, are an excellent way to come up with the needed working capital. Invoice financing allows a business to almost immediately exchange an outstanding invoice for cash, making it much more accessible, and much faster than a traditional loan. This allows businesses to respond to potential opportunities very quickly, which is essential in this kind of highly competitive economic environment.
Other tools like this, such as supply chain finance and trade finance, can help businesses to extend their payment terms, freeing up growth capital in the near term. While an economic downturn changes how businesses can best approach growth in their industries, it doesn’t have to slow yours down. To learn more about these tools, and how they can help your business to grow and to maintain stable finances in any economic environment, reach out to one of Fifo Capital’s financial representatives today!