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How Small Businesses Can Prepare for a Recession A recession is a prolonged and pervasive reduction in economic activity. Generally speaking, multiple successive quarters of negative growth in gross domestic product—a monetary calculation of the market value of goods and services generated and sold during a set time period within a given country—constitute a recession. A recession can last for several months or years. Furthermore, recovering from this state to the nation’s previous economic peak can take years, even after a recession ends. Because a recession typically results in diminished economic output, lowered consumer demand and a drop in employment, such a downturn can present various challenges for organizations across industry lines—especially small businesses. Although organizations can’t prevent a recession from happening, they can take steps to limit its ramifications and maintain financial stability. This article provides more information regarding how a recession impacts small businesses and what these businesses can do to adequately prepare for an economic downturn. How a Recession Impacts Small Businesses Amid a recession, organizations of all sizes and sectors usually experience decreased sales and profits stemming from changing consumer behaviors. An economic downturn may also limit organizations’ credit capabilities and reduce their overall cash flow as customers take more time to pay for products and services. While these behaviors can threaten the financial stability of any organization, large businesses are often better positioned to weather a recession because of their substantial revenues, excess reserves and privileged access to a wider range of credit markets. Small businesses, on the other hand, may be particularly vulnerable during an economic downturn, as they generally lack the additional capital necessary to offset extended periods of loss. As a result, when a recession occurs, small businesses are more likely to have to make difficult financial decisions to avoid issues such as insolvency or bankruptcy. Primarily, these businesses may need to cut operational costs and consider staff reductions to stay afloat. Financial media website Investopedia reported that nearly 1.8 million small businesses closed their doors amid the last major U.S. economic downturn, known as the Great Recession, which took place between 2007 and 2009. Looking ahead, a recent survey conducted by investment banking company Goldman Sachs found that the vast majority (93%) of small businesses fear the nation will enter another recession in the coming months. With this in mind, now is the time for such businesses to prepare for an economic downturn. Tips to Prepare for a Recession To promote financial stability during an economic downturn, small businesses should consider the following recession-proofing tips:
Conclusion A recession can have serious impacts on small businesses. Fortunately, by adequately preparing for an economic downturn, these businesses will be better positioned to minimize financial hardships. For more risk management guidance, contact us today. |
This Risk Insights is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. © 2022 Zywave, Inc. All rights reserved. |