What Is a Recession?
A recession can be defined as a period of temporary economic decline. However, it can be significant, widespread, and prolonged. Generally, two consecutive quarters (or six months) of negative gross domestic product (GDP) growth equals a recession.
Recessions typically lead to employees being laid off, poor retail sales numbers, and manufacturers reducing their output to account for less product demand. Since 1970, Canada has endured six recessions.
What Are the Causes That Trigger a Recession?
Many factors can cause a country’s economy to slide into recession. Among them are unexpected events such as the COVID-19 pandemic, spiking interest rates triggering an inability for individuals and businesses to pay down their debt, rising inflation, a surge in the price of oil, and war that disrupts supply chains, like the one in Ukraine.
One of the ugliest things about recessions is they can become self-perpetuating. For example, when companies lay off their employees, it hurts consumer demand as people understandably reduce how much they spend.
5 Ways for Small Businesses to Prepare for a Recession
Most economists expect Canada to experience a mild recession in 2023, where GDP slips to –1%, meaning many small businesses may not notice it too much. Fingers crossed that proves correct, but you can’t run a business on wishful thinking. Therefore, here are five ways business owners can try to be ready for the months ahead:
1. Hope for the best, prepare for the worst
Preparing your financial readiness involves analyzing all aspects of your business.
If you prepare your company’s monthly operating budget, that budget should include your cash-flow statement and balance sheet. Do you know your monthly cash burn rate? Do you hold monthly financial planning meetings with all stakeholders in your organization? You should.
Look at your historical financial and sales data to understand future health. For example, what does your liquidity look like to help pay bills? Also, examine your organization’s profitability, productivity, and the amount of debt you’re carrying.
The effort also includes improving how you manage your inventory and identifying and eliminating unnecessary production waste at your small business. Having a comprehensive, forward-looking budget allows you to prepare for multiple scenarios but be ready to revise it with data that’s most relevant to your business. Effective financial management is an ongoing process.
2. Put off major expenditures if possible
Identify and defer any non-essential expenditures, especially big purchases. The idea here is to preserve your cash for as long as possible and save more than you spend. Do a deep dive into your company’s cash reserves and find ways to save more.
If you need a new loan or a more extensive line of credit, start talking to your financial institution sooner rather than later. Banks and lending institutions don’t like surprises, so getting them involved as early as possible is best.
3. Manage your debt and protect your revenue
While clobbering your debt as quickly as possible in tough economic times is tempting (and not out of the ordinary), don’t do it at the expense of depleting your cash reserves. Otherwise, you could have cash flow problems in the weeks and months ahead. Instead, look at the interest you’re paying on your debts and target the one with the highest interest rate you can comfortably manage.
Furthermore, identify your best revenue channels and focus on protecting them. That might mean changing your pricing structure or reducing the number of products or services you sell. It may also mean talking to a Zensurance broker about adding trade credit insurance to your policy to protect against counterparty payment default risks.
4. Get creative selling your goods and services
Up your online selling game, enhance how you promote your business using social media, explore ways to grow your email marketing list, and embrace remote working opportunities for your employees if possible. Emphasizing digital operations can help you sell more to people outside your community and reduce operational costs.
5. Get advice from your trusted advisors
Creating a recession strategy isn’t easy, and it can be stressful. Also, a well-thought plan shouldn’t fall solely on one person’s shoulders.
Talk to the people you trust most for advice, like your business mentor, the accountant or bookkeeper you use to help balance the books and speak to a financial advisor at your bank or credit union for guidance.
How Can Insurance Help Small Businesses During a Recession?
When the financial screws are being tightened, small business owners know they need to take action to protect their bottom lines. Those cost-cutting measures can be far and wide, but if there’s one area you don’t want to slash, it’s your business insurance policy.
It’s never a good time to operate a business uninsured. Furthermore, eliminating certain coverages in your policy could prove disastrous if you face a third-party lawsuit or a fire damages your place of business and inventory.
Have a conversation with a Zensurance broker about your existing policy and coverage needs. They can review your policy and explain the details of your coverage, limits, deductibles, and exclusions.
Sometimes, they can find ways to lower your annual premium by making a few adjustments. For instance, they can look into lowering your policy limit or shopping the market to see if it makes financial sense to switch providers to lower your insurance bill without exposing your business to unnecessary risk.
– Reviewed by Michael McDermott, Director of Underwriting, Zensurance.