What can small businesses do to prepare for a recession?

A UK recession is becoming more likely, according to most economic experts. Strengthening cash reserves and cutting costs could help businesses not only survive one but even thrive during one.

4 September 2019

The UK economy shrank by 0.2% between April and June − the first time the economy has shrunk since 2012, according to the Office for National Statistics.

We’re not in recession yet, of course. A recession is defined as when the economy shrinks for two consecutive quarters. We may know soon. Figures for the UK’s gross domestic product in the third quarter will be published on 9 September.

Is the UK on the verge of a recession?

Given that recessions typically happen every 10 years or so (the long gap between the recession in the early 1990s and the global financial crisis of 2008 was unusual), by historical standards, we’re due one soon.

The case for an imminent recession is easy to make. The economic news in the past six months has been far from encouraging.

In August, British retail sales over the past year fell at the fastest pace since December 2008, according to a survey by business group, the Confederation of British Industry.

There were hopes that consumers were largely unphased by the possibility of recession and a no-deal Brexit. Consumer confidence has been boosted by rising wages and inflation that’s still fairly low.

Consumers’ willingness to spend has compensated for companies cutting investment or delaying it because it’s unclear what will happen with Brexit, which is due to happen on 31 October.

A separate CBI survey published in August, found that business “optimism” across the services sector fell sharply in the three months to August.

“The outlook for services firms is bleak at the moment, with Brexit uncertainty holding back investment and expansion plans,” said Rain Newton-Smith, the CBI’s chief economist.

Not enough gloom? In July, the Resolution Foundation warned that the UK was at its highest risk of recession since the financial crisis.

Earlier that month the governor of the Bank of England, Mark Carney, said that a there had been a “sea change” in financial markets, driven by increasing worries about the global economic outlook.

But not all economists are gloomy. For example, Samuel Tombs, chief UK economist at Pantheon Macroeconomics (who last year topped the Sunday Times’ poll of the most accurate economic forecasters of the UK economy) has argued that the core parts of the UK economy (consumer spending, government investment and business investment, strong labour market) are in decent shape, despite the uncertainty.

Further afield, things don’t look good. Recessionary fears are growing outside the UK. One recent warning sign in financial markets was when the yields, or returns, on US government bonds became “inverted”.

Usually 10-year yields for the bonds are higher than those two-year bonds. It may sound rather dull and technical but inverted yields are important. They are a sign of low confidence in the future of an economy. And they often occur before a recession.

How can UK business prepare?

Gemma Went, a business coach who specialises in small businesses and entrepreneurs, says that although a UK recession is likely, small and medium-sized businesses can act now to help them weather any slump.

“Reviewing costs and cutting them now, creating a much leaner business with a higher profit margin will always help,” she says.

Another tip: try to create a higher “burn rate” − how long the cash in your business will cover operating costs. Went says that she usually aims for a minimum of a three-month burn rate.

Other tips include analysing how a recession will affect your customers and what you can do to help them, possibly by altering your services or trying new ones.

Businesses that are typically most vulnerable during a recession are ones that sell what could be seen as non-necessary items, such as luxury items. The housing market – and therefore construction – is usueally hit too, because it relies heavily on people having confidence in the economy.

High streets can also suffer in a recession, as people are likely to stop spending money on things such as new clothes and eating out, says Ryan Barnett, economic policy adviser at the Association of Independent Professionals and The Self-Employed.

What's the good news?

Recessions can also create opportunities, though. For example, says Went, if you’re a digital marketing professional for small business owners, think about who else would need you during a recession. Pitch to brands and corporates, who need to invest more in digital marketing to survive the recession, but cannot recruit permanent members of staff.

The collapse of large companies during a recession can open-up markets, too. Consider how Woolworths dominated UK high streets until it went into administration in 2008.

Since then numerous niche small businesses have moved into the gap it left, Barnett says. “Recession is bad news for SME’s but there is always a chance [that] small businesses could capitalise [on any opportunities] if there is a gap to fill.”

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Nick Huber is a business journalist based in Liverpool. He's written for the BBC, the Financial Times and The Independent and specialises in Fintech.

Article updated on: 18 March 2020

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