How to prepare your business for a recession
Data suggests that it’s the first time that the UK’s main sectors have contributed to a negative GDP since January 2021.
A week ago, the Office for National Statistics revealed that UK GDP contracted 0.3% in April, this contraction comes as a surprise to many economists who expected an expansion of the overall GDP by 0.1% during this period.
This April decline indicates the second month that UK GDP has fallen, following a 0.1% drop in March.
The ONS revealed the Government’s national Covid-19 Test and Trace scheme, which cost £37 billion, as a significant contribution to this drop – which took 0.5% off GDP growth after it was stopped.
Reportedly, another factor driving inflation has been UK residents saving over the pandemic, with these savings being released into the economy over the past two quarters.
In an interview with Sky News, a former Bank of England Governor Mervyn King claimed the UK is about to enter an ‘unpleasant period’ as a result of central banks printing too much money over the pandemic.
Does this mean we are going into a recession?
A recession requires two successive quarters of contraction. So far, we have only had two months of continued contraction – so the UK isn’t quite in a recession yet. However, if we continue to experience contraction at this rate, we could be in the wake of one.
The Bank of England hasn’t claimed that a recession is imminent. However, an increased rise in goods and services due to the pandemic, price hikes in oil and gas, and global factors such as the war in Ukraine and lockdowns in China are all impacting the global economy.
All of these factors are influencing household expenditure. The Bank of England revealed costs will rise a further 40% by October, taking the average cost of household bills to more than £2800 a year.
Inflation is also at an all-time high of 9% and The Bank of England has warned this is set to increase to 10% in the last three months of 2022. This will leave businesses and UK workers feeling as though they have less money – causing them to spend less, and in turn, causing the economy to fall further.
These factors all contribute to a recession.
What is the government doing to support businesses?
With a noticeable drop in GDP and a rise in inflation, many businesses are preparing for the worst. UK businesses have already had to adapt to and recover from the unprecedented impact of Covid-19. As a result, many will be debt-laden, meaning a recession could prove particularly challenging for them.
At the start of the pandemic, the government introduced the ‘super deduction’, which is effective from 1 April 2021 to 31 March 2023 and allows companies investing in new plant and machinery assets to claim a 130% capital allowance and a 50% first-year allowance for special rate assets.
The ‘super deduction’ was created to cut tax bills by up to 25p for every £1 they invest. This was created to encourage firms to invest in productivity-enhancing plant and machinery assets and ensure the UK’s capital allowances remain competitive.
Commenting on the drop in GDP, Rishi Sunak said: “Countries around the world are seeing slowing growth, and the UK is not immune from these challenges.
“I want to reassure people; we’re fully focused on growing the economy to address the cost of living in the longer term while supporting families and businesses with the immediate pressures they’re facing.
“We have a plan to turbocharge productivity through investment in capital, people, and ideas, so everyone across the country can benefit from a strong, healthy economy.”
Despite promises to boost the economy, the Confederation of British Industry (CBI), which represents 190,000 UK businesses, warned that the government must “take the vital actions needed to spare the country from dipping into recession.”
Tony Danker, Director General at the CBI, said: “Times are tough for businesses dealing with rising costs, and for people on lower incomes concerned about paying bills and putting food on the table.
“It’s as clear as day that business investment is one of the few bright spots left in our economy. The ‘super deduction’ is one of the only reasons we have staved off the threat of recession for now – there must be a permanent successor.”
Economists said that the challenges facing the economy have “proven to be a toxic recipe for UK growth”.
“Against the backdrop of the rising cost of doing business and continuing supply chain pressures, easing trade flows is in everyone’s interests. It’s not just about lowering non-tariff trade barriers in Europe and signing FTAs,” said Rain Newton-Smith, Chief Economist at the CBI.
“Post-Brexit regulatory reforms to support growth, innovation and sustainability can build competitiveness. But divergence for the sake of it could introduce further red tape and friction undermining that mission.”
What can your business do to prepare for a potential recession?
Be careful with overheads and costs
In the wake of a potential recession, it is important to understand what business costs you can reasonably cut. Cutting costs will help your business maintain profit margins, even when consumers lessen and the cost-of-living increases as a result of a recession.
Look at your business and ask yourself whether any of your resources can be outsourced or cut down. Finding a cheaper office location, reducing spending on promotion and advertising, and reducing administration costs and services are all ways you can successfully reduce costs.
If you are a consumer-facing business, temporarily finding new, cheaper suppliers of resources and raw materials may help you maintain profit margins. Despite this, it’s important to maintain the quality of your product so you do not lose any customers, so make sure that if you change suppliers, the integrity and quality of the materials aren’t compromised. You can also reduce excessive packaging, which will reduce your costs and be better for the environment.
It’s crucial to remember these changes are only temporary and can return to normal once the economy picks up again – you might find that when this happens you’ve adopted some efficient cost-saving strategies for the business in the long term.
Keep debt to a minimum
Debt can be positive for a business by allowing owners to grow their firm without having to dilute ownership or use any cash flow while being cheaper than equity. However, if debt isn’t managed efficiently, this can lead to the demise of a business in a difficult economic climate.
If your business has debt and revenue lessens during a recession, it may be difficult for you to pay back your debt. In a worst-case scenario, it’s good to think about what you will do in the case that you cannot pay back debt. Forming an LLC or another business entity that allows you to file for business bankruptcy could exempt you from needing to repay business debt.
Diversify what you offer
Being able to diversify your offering, and therefore your revenue stream, during times of economic boom and stability will give your business a greater chance of not being negatively impacted by a recession.
In this sense, you are putting your eggs into multiple baskets as opposed to just one – if there’s a reduction in demand for one of your services, there may not be a reduction in all your services. Diversifying will give you the capability to adapt to changes in the economy and consumer behaviour.
Only keep the workforce you need
Before a recession, it may be a good idea to re-evaluate your team and keep new hires to an absolute minimum. Have you employed people unnecessarily? Could you employ part-time workers or freelancers? Could you keep on employees at a reduced pay rate instead of letting them go?
These are all hard, but necessary questions to ask yourself in the lead-up to a recession. Ensuring that you don’t have an unnecessarily large workforce when a recession hits will reduce the likelihood of having to make redundancies in a worst-case scenario.
Create a recession management plan
A crisis management plan can be used in multiple scenarios. Recent events, such as Covid-19, the war in Ukraine, and supply chain issues as a result of Brexit have proven that developing a business crisis plan, especially in a state of stability, is crucial.
Sitting down with your team and discussing the potential impact of a recession on sales, reputation, expenses, and customer retention could be a saving grace, as if the worst happens, you will already have a game plan to action. Within this plan, you can be as specific as deciding what actions will be taken to resolve issues brought about by a recession, and which team members will carry out the necessary actions.
It’s important to face the reality that a recession towards the end of this year is a real possibility and this will likely impact your business to some degree. It might be tempting to bury your head in the sand leading up to a recession, but you would be badly mistaken to not prepare your business sufficiently while there is some economic stability. Even if your business is currently on an upward trajectory, preparation before a recession can only benefit, not harm you.