Recession looming, what will it mean for your business?

The growth outlook for the UK has deteriorated. Over 2022, PWC  expect UK GDP growth to average between 3.1% and 3.6%, followed by two years of slow, or even negative, GDP growth. The PWC model predicts the UK to enter a recession as early as this year. This is largely due to surges in inflation as the cost of living crisis impacts all demographic groups.

Source: https://www.pwc.co.uk/services/economics/insights/uk-economic-outlook.html

What is a recession?

A recession refers to a period of economic downturn, usually defined by two consecutive quarters of negative economic growth when adjusted for a country’s real GDP.  Most recessions only last for a few months, although some may take years to turn around.

Indicators might include:

• Job losses
• Manufacturing slowdown
• Decline in consumer spending
• Decline in real income

Impact on business

Reduced profits

As recession hits, consumers become wary when it comes to spending. Therefore your business might find it more difficult to keep up with its usual sales and you may need to cut costs accordingly.

Credit crunch

Lenders tighten their belts as well, making it more difficult for businesses to access usual lines of credit.  Interest rates will increase and lending requirements become more strict.

Reduction in cash flow

Customers find it more difficult to make timely payments during a global recession.  Businesses might need to spend more time chasing invoices and delay their own payments to suppliers.

Declining share prices and dividends

The reduction in cash flow and profit eventually makes its way to your business’s financial statements.  Dividends may also decline.

The upside of recession

A recession gives businesses the chance to reinvent themselves by looking at innovative ways to cut costs.  You might decide to try a new business model with lower associated costs to protect your interests. Competition may also be reduced as some businesses are unable to remain open.

What can you do to weather the recession?

So how can you take advantage of the positives and avoid falling by the wayside as a recession casualty?

Don’t wait until the middle of a recession to look at your budget.  This should be carried out on an ongoing basis ensuring you have a safety net so you can avoid employee redundancies and a decline in output quality.  A cash flow forecast can help you predict future financing needs.

If you have any questions or need help with financial scenario planning, please get in touch with your Swindells’ partner who will be able to advise you further.