Is a Recession Coming in 2022?
The consensus is that a recession is coming in 2022 if we are not already there. The talk of a recession makes many business owners uncomfortable, as economic downturns strain small businesses. Especially those small businesses that are still recovering from the pandemic.
Recessions put a financial strain on businesses because companies tend to see their sales levels shrink from past performance, forcing many to downsize their payrolls and start cutting expenses.
There are ways that business owners can prepare for a recession which we will discuss further in a minute.
What is a recession?
Let’s start by clearly explaining what a recession is. According to Investopedia, a recession is a “significant, widespread, and prolonged downturn in economic activity. Because recessions often last six months or more, one popular rule of thumb is that two consecutive quarters of decline in a country's Gross Domestic Product (GDP) constitute a recession.”
What happens in a recession?
Spending everywhere typically reduces during a recession. Consumers and businesses become more aware of their spending habits and choose to reduce spending to protect themselves from financial damages.
During a recession, business owners tend to get nervous about keeping up with sales levels, and consumers tend to worry about the stability of their employment. This is why most people are cutting their spending – because they feel uncertain about the economy and how they fit into the big picture.
Business cycle
Experiencing a recession is a normal part of a business cycle. Business cycles are cycles of fluctuations in the Gross Domestic Product (GDP) around its long-term natural growth rate. It explains the expansion and contraction in economic activity that an economy experiences over time.
How to prepare for a recession
There are a few recommendations for business owners to prepare for a recession: to prepare your business finances. When you manage the money in your business well, you are protecting yourself from economic downturns and recessions because you know the business cycle expects recessions approximately every ten years.
Since we already know that being a business owner means being cash confident, we know you understand that cash is the lifeline for your business. You don’t want a recession to destroy you financially.
Implementing these key ways to prepare for a recession is recommended, but it’s not too late to start practicing them now. It’s always better late than never.
The best ways to prepare your business for a recession:
1. Be proactive about your finances
Being proactive with your finances includes having a financial plan to help get the business through a recession and being strategic with your cash management systems. The best thing you can do for your business is to plan and follow it.
2. Start reserving cash
Part of cash management is saving cash and building up a cash reserve. Because cash is the lifeline of a business, you need to have a cash management strategy in place to guard against cash shortages.
3. Apply for lines of credit or loans
Now is a good time to apply for lines of credit or bank loans if you don’t have any lined up already. It’s better to apply for these products when business is going well vs when you need them. The chances of getting approved are higher when you don’t need the credit.
4. Trim excess expenses
Monitor your income statement and see where you can trim excess business expenses. If you plan for revenue decreases, you’ll also need to plan for expense decreases. If you don’t need a service for the foreseeable future, you may want to discontinue it.
5. Monitor your business numbers regularly
Regular monitoring of your financial reports can help you pick up on issues before they become problems and help you plug any money leaks you may have in the business. It is proactive to monitor your business finances and stay current with decision-making.
6. Get creative with sales
As you anticipate your revenue levels to decrease during a recession, you may need to develop creative sales strategies and revenue goals to get revenues going. Just because it’s a recession does not mean people aren’t spending – they are more aware of what they spend their money on.
It’s important to remember that recessions are a blip in time and not necessarily going to shutter your business (if you have a plan). Being proactive and taking measures to keep your business finances current and going into a recession with a financial plan will increase the likelihood that your business will weather the economic storm.
If you realize that you don’t have a financial plan or want to revisit it but need help, you can sign up for the Cash Confident Course, where I teach my signature Cash Confident Framework to business owners so they can thrive financially in their business.
If one-on-one work is preferable, you can book a free consult with me to see if we are a good fit to work together.
