PREPARE FOR ECONOMIC DOWN-TURN
"If your neighbor gets laid off, it's a recession. If you get laid off, it's a depression."
That's what former president Harry S. Truman famously said. A recession is defined as two consecutive quarters of negative GDP growth, according to a more technical definition. A recession is defined by a "significant decline in economic activity distributed across the economy, lasting more than a few months," according to the National Bureau of Economic Research.
Both definitions are correct since they point to the same economic outcomes: job losses, a drop in real income, a slowdown in industrial production and manufacturing, and a decrease in consumer expenditure.
What are the effects of economic downturns?
IMPACT ON SMALL BUSINESSES
Smaller businesses may have a harder time surviving a recession without big cash reserves and large capital assets as security, as well as more trouble obtaining new funding in tough economic circumstances.
Small firms are typically unable to offer additional shares to the public in the same way that large publicly-traded enterprises may. Smaller businesses are more likely to file for bankruptcy than larger businesses. To some extent, these bankruptcies might be seen as chances for other, often larger, enterprises to purchase assets or enter small-business industries. During recessions, many smaller enterprises are liquidated, resulting in industry and market consolidation. Bankruptcies may also make it difficult for banks and other lenders to make startup loans for new businesses.
During this period, it is essential to cut operational costs.
IMPACT ON EMPLOYEES
Employers may be laid off, and fewer individuals will be able to complete more work. As hours are lengthened, work becomes more difficult, wage increases are halted, and the threat of additional layoffs lingers, morale may worsen.
As the recession worsens and lasts longer, management and labor may come together and agree to mutual concessions in order to rescue the company and jobs. There may be wage cuts and benefits reductions as a result. Manufacturing firms may be forced to shut down factories and phase out underperforming brands.
IMPACT ON CONSUMERS
Because businesses affected by the recession spend less money on advertising and marketing, large advertising agencies with annual billings of millions of dollars will feel the pinch. The fall in advertising spending will eat into the bottom lines of major media firms across the board, whether they are in print, television, or online.
Consumer confidence weakens as the consequences of a recession spread throughout the economy, prolonging the recession as consumer spending falls.
The bankruptcy or closure of a small business that services a community—for example, a franchised convenience store—can cause hardship for small business owners and neighborhood inhabitants. Following such bankruptcies or dissolutions, the entrepreneurial spirit that motivated someone to start a business may be stifled, inhibiting, at least temporarily, any hazardous economic operations.
A secondary effect is that manufacturer's goods and services may be harmed. To further reduce expenses and increase its bottom line, larger corporations may have to compromise the quality and consequently desirability of its products. This can appear in a variety of ways and is a common reaction of many large corporations during a severe recession.
Customers will be inconvenienced, and the economies of the canceled destinations will suffer. Routes to marginally lucrative or money-losing destinations may be eliminated. Airlines, for example, may add additional seats per plane, cramming the already-squeezed customer even more.
Consumers are already seeing "shrinkflation," which occurs when the size of a product (typically food) shrinks while the price stays the same – or rises. It's also possible that the quality of the food produced will suffer.
WHAT TO EXPECT
Recessions can result in a rise in bankruptcies and foreclosures, as well as decreased spending by consumers and businesses and the loss of jobs.
WHAT CAN YOU DO
First, recognize what's happening. This is no time to play ostrich. We're in the first stages of a major economic downturn, and we all need to prepare.
Next, cut all unnecessary spending. Look at all monthly bills closely and find ways to trim the fat. (VoIP phone lines are an excellent and obvious starting point - cut that phone bill in half.)
Meanwhile, reassure your employees. Times are going to be tough all over, as the saying goes. Make sure your team knows that by keeping your business healthy, you're looking out for their well-being too.
Lastly - but not least - keep your good humor. Practice relentless optimism with yourself and others.
FINAL THOUGHTS
Recessions come and go, with some being more severe and lasting longer. However, history has shown that economies run in cycles, and recessions end. When they do, people come through it stronger, and a period of economic recovery follows.
KEY TAKEAWAYS
• Recessions are defined as periods of broad decline in economic activity and economic indicators.
• Unemployment is generally high during a recession.
• All types of enterprises, large and small, are affected by recessions.
• Smaller enterprises that lack access to financial and equity markets are less likely to get government bailouts due to tightening lending conditions, decreased demand, and widespread fear and uncertainty.