What Would a Recession Mean for a Small Business?
The term ‘recession’ is used a lot in the corporate world and rightly so, as it does have a significant impact on how businesses should run according to the economic activities within the world. This is to gain maximum revenue as resources would be used more efficiently at a set price. The intention of this article is to explain what a recession is, if the UK is headed towards one, and the effects it has on small businesses.
What is a Recession?
A recession is part of the business cycle, where a decline in Gross Domestic Product (GDP) is seen. A more technical approach to take would be to say two consecutive quarters of negative growth would be called a recession. This is a common part of the business cycle, which comes right after the peak. A peak is never sustained therefore negative growth is expected. Usually, recessions last a few months, then makes way upwards in recovery. However, some recessions can, and historically have shown to prevail for many years. Famous examples of this are the Great Depression in 1929-1939 and the 2008 to 2009 economic crash, both stemming from the American economy.
During times of recessions, consumer spending tends to change as they are more sensitive to prices. Primarily, this is due to a chain reaction that occurs in this period. Initially, firms may be forced to cut back on employees therefore individuals struggle to find jobs. Consequently, this shakes consumers’ confidence/animal spirit, hence they hesitate to spend and rush to save. As consumer spending is limited, production reacts by producing less. Generally, as the economy starts to pick itself up again, confidence increases hence willingness to spend will gain momentum. Overall, this would inject money into the economy rather than individuals withdrawing by putting it into savings.
Is The UK Headed Towards a Recession?
Many have speculated that the UK is headed towards a recession following the rise in inflation/prices. Analysts (forecasters) have stated that the risk of recession has escalated after a noticeable shrinkage of 0.1% after the UK recovered from Covid, back in March. As I mentioned before a recession is defined as negative growth throughout 6 months (two consecutive quarters). Therefore, taking into consideration that consumers are being hit with visible higher prices such as petrol and food, the UK is more at risk of entering a recession. The higher prices were aided significantly by the Ukraine war, however, was not the sole factor as the rise in prices were felt just beforehand. Inflation occurs when production costs increase. In this instance, by England leaving the European union as well as the outbreak of war in Ukraine made it more expensive to buy raw materials and employ workers.
What Would This Mean for Small Businesses?
Small businesses often get hit harder than bigger companies as the knock off effects can be felt much further to the extent where less-established businesses would have to close down.
One-way small businesses are affected is through reduced profits as sale revenue decreases considerably. This means that cuts would have to be made, making it harder to invest and keep employees on. Any previous earnings may have to be used in order to survive during a recession. The impact hits harder on smaller businesses as they do not have much reserved in order to carry on in the current temporary situation.
In addition to this, lenders become more wary regarding who they loan their money to.
Usually, small businesses are seen as more of a potential risk, hence making it harder to gain funding/ investment. If small businesses do tend to gain loans, even though interest rates fall, credit requirements are harsher, and it does not guarantee that the business would not go bust.
Another way small businesses are affected is through cash flow cutbacks. Recessions make it difficult to pay bills when they are due. Delayed payments can affect the whole supply chain, prolonging payments throughout the whole processing/delivery system. B2B (Business to Business) can be seen as more of a risk because if a company goes out of business, it often affects the people they owe money.
How Have Small Businesses Been Affected in the Past?
Evidence accumulated from 2008-2009 financial crash shows that small businesses suffered disproportionally compared to bigger firms. Research suggests that this was due to weak performances created by uncertainty around the economy as well as poor sales during the recession. There is no doubt that this affected bigger businesses but at a less severe rate. The decline of demand meant that revenues were reaching a low thus impacting investment.
Edited and Reviewed by Tanish Bagga.