(recession – 5 minute read)
Hi Accounting fans, its that time of the economic cycle again.
Consumer confidence levels are dropping and the stock and property market are facing a downslide. Many economic pundits are forecasting a recession just over the horizon. We’ve previously wrote about surviving the COVID-19 recession and another guide for business owners. But then the recession didn’t occur back in 2020 like we predicted. 2021 defied all expectations and saw a year of record growth for large corporations.
So where does that leave us in 2022? With rising inflation and higher interest rates, many households are starting to the feel the sting. This affects their spending habits and will eventually have a trickle up effect to businesses that they buy from. Whether or not we’ll face a recession this year is still anyone’s guess. What is certain is that buyer habits have changed. The real question is what can we, as business owners do to weather the storm?
Analyse your business income, will it stand a recession?
Income made from sales is the lifeblood of your business. Have a look at your sales levels over the past 3 months. Work out the sources of these sales, down to each individual customer (if possible). If you are in retail or hospitality, analyse the timing of your sales based on date and even time of purchase. What you want is to have clarity about where your income has come from.
This will help give you a better idea if these sales figures can continue into the foreseeable future. If you are a business to business operation, look at each individual customer and have a think about whether they will continue to use your services in a recession. If you are business to consumer, (like retail or hospitality) think about how your product offering is priced and the wealth of your regular customers. A recession will impact their desire (and ability) to purchase your products.
With this information, you can put together a forecast for the next 6 to 12 months based on lowered sales. You can work into your calculations the drop in consumer confidence and the individual clients who you think will be most affected by the recession.
Analyse your business expense, is it reasonable recession spending?
The other side of running a business is spending money. To keep your operation running, you have to pay rent, buy supplies and pay wages. If your sales figure is going to drop over the next 6 to 12 months, it may be worth analysing what your biggest expenses are and determining if you can continue paying them.
Over the past 3 months, have a look at what your biggest expenses were. You will want to ignore any one-off expenses (like training, paying penalties or making refunds) since you’re unlikely to repeat those expenses monthly. You want to focus on the recurring expenses such as rent, cost of sales, wages and subscriptions.
Then you want to justify the spending you have made on these recurring expenses. I would recommend to look at subscriptions first. These are monthly payments made for software use, licensing fees, or other services. Sometimes it may be worth downgrading a software you use to a free version if it means saving $200 a month. Cost of sales are also a good place to cost cut. If you are in retail or hospitality, you may want to source cheaper products or find cheaper suppliers.
I don’t recommend taking an axe to wages as doing so can hamper future growth (when the recession is over) and you risk burning bridges with some of your most valuable staff. Staff you lay off now are unlikely to come back when times are better. However, if your business is in dire straits, a reduction in staff count may just help put you back in the black. But this should always be the last resort.
Determine what expenses you want to keep spending. Everything else can be reduced over the next 6 to 12 months to keep your business afloat.
Communicate, communicate, communicate
No person is an island. It may be your business, but it operates as part of a network of stakeholders. Your customers, suppliers, staff, lawyer, accountant, banker and others all have an interest in seeing your business survive. Never be too proud to admit you need help and ask for it.
Talk to your accountant for help in forecasting your future performance. Speak to your lawyer about the obligations you have to make on existing contracts. Your banker may be able to help you with reorganising your loans. Seek better terms and prices from your suppliers, be honest with them about how your business is doing.
Tell your customers you may have to reduce your offerings (if necessary). Most importantly, always talk to your staff. It is their business as much as it is yours. They are your team and deserve to know what is happening in the business and how it may impact them. Be honest about how the business is performing and what the next 6 to 12 months will look like. They may have some ideas on how to help. At the very least it gives them time to plan their lives if it looks like the business can’t continue to hire them.
Bring on the recession!
A time of crisis can also be a time of great opportunity. This is the time to put your business to the test. Recessions don’t typically last for too long (in general). But some industries may be more impacted by it than others. If you are able to weather the storm, your business will be better placed to take advantage of the opportunities that arise post recession. You’ve got this!
Stay positive!