The UK is on the eve of recession. Not only that, but it is on the eve of potentially the longest recession in the nation’s history, as businesses brace for the medium-term impacts of Brexit, the coronavirus pandemic and the war in Ukraine – to say nothing of the direct and disastrous impacts of misrule from recent conservative governments.
Recessions are not the be-all and end-all for businesses by any stretch, but they do represent times of unique strife, nonetheless. For entrepreneurs new to business leadership, the recession might be a new experience, and a scary one to boot. It is crucial to fully understand some of the key risks that face businesses in such difficult times – and why they impact businesses the way they do.
Reduced Sales
First, and perhaps most obviously of all, recessions beget reduced sales for many businesses. It is in fact baked into the definition of the word ‘recession’; recessions are periods of reduced consumer spending, that beget shrinking growth rates and the folding of ill-prepared businesses.
A sudden plunge in profits can throw finances into disarray – in ways we will discover shortly – but can also play havoc with existing supply chains and agreements. As sales become less predictable, so too do relationships with other parts of the supply chain become more costly and fraught.
Negative Cashflow
While slumps in sales are naturally worrying to recognise within financial data, they are not by themselves existential threats to businesses. Consumer expenditure can shrink, and companies can survive; indeed, many do. The real risk comes from the increased potential for negative cashflow, a metric that can spell insolvency for many businesses unprepared to right the course.
Cashflow is a metric distinct from profit, that describes the movement of money in and out of a business in a given timeframe. Positive cashflow is when more money enters a business than leaves it, with negative cashflow being the inverse. Profits can be at record highs, and cashflow can still be negative. This occurs where businesses have high credit or debt burdens or choose to invest their revenue immediately into assets and expansion as opposed to simply banking the money.
Negative cashflow is a supremely negative sign for investors. It signals that the business is not on tenable ground, and that its financial responsibilities might preclude it from being financially secure. In times of recession, not only is this more likely but also more damaging. As such, negative cashflow can be the negative feedback loop that kills interest and investment in a business immediately.
Loss of Employees
Lastly, recessions can see businesses battening down the hatches financially speaking. This means trimming the fat and making savings wherever possible – and can mean particularly difficult decisions when it comes to employees. Redundancies are difficult to enact at the best of times, but a necessary evil for short-medium term survival. The long-term risk is that the loss of talent will stunt post-recession growth.
