How a Recession Affects Your Business

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Economists tend to frequently worry about a recession any time there's even a slight dip in economic performance. As a small business owner, it's important to pay attention to the national and global discussion of economics, but to also take it with a grain of salt. Instead of panicking at the first mention of recession in the news outlets, you need to know when you really need to make adjustments for a recession. You should also understand how a recession affects your business overall so that you can prepare.

What Is Considered a Recession?

A recession occurs in a region when the economy declines in two back-to-back financial quarters as measured by GDP. Other metrics that point to a recession include an increased unemployment rate and a decrease in housing prices.

But not just anyone gets to officially declare a recession. As much as economists like to debate and predict the likelihood of a recession coming, only the National Bureau of Economic Research has the authority to say the United States is experiencing a recession.

What Causes a Recession?

There is no single cause of a recession, but economists have identified factors that contribute to it. These include high interest rates, inflation, overproduction of goods, reduced wages and an overall belief in consumers that the economy is declining, which is known as low consumer confidence.

How Does a Recession Affect Small Businesses?

A recession does not spell out imminent doom for your small business, but it does mean you need to adjust your strategy, budget and practices. Because a recession affects consumers, buyers become much more choosy. Luxury items go back onto wishlists and stay out of shopping carts. Services that don't require a professional are tackled by intrepid do-it-yourselfers looking to save money.

These penny-pinching habits mean that you're likely to experience a decline in customers unless you offer basic goods or professional services. Your own business budget will need to tighten up to reflect the decrease in revenue. If you recently expanded your business, it's relatively easy to go back to your pre-expansion strategy and budget, but you'll likely have to cut employees or looking into terminating your property lease early in order to meet budget expectations.

How Can Small Businesses Weather a Recession?

The key to getting through a recession is to make smart financial decisions while the economy is still in good shape. For example, why not take a look at your budget right now? Just because you can easily afford to pay the bills doesn't mean you can't get a better deal on your Internet, phone service, management tools, etc. You might also want to consider opening a line of credit before you end up desperately needing it.

Make sure you're also personally protected by ensuring your business is incorporated in some way. Diversify your offerings by either improving your education, getting certifications or offering additional products. You never know what kind of jobs or consumers will come your way, and when you need money, you won't want to turn them away. Get a solid handle on how to find more clients or customers while the economy is good, and find as many as you can so that you have enough money to put into savings.

Finally, take a look at your policies, especially with regard to payments. Be clear about when you expect payments to be paid in full, develop and enforce a late fee policy and only accept payment methods that you feel are safe and secure.

Don't Panic, but Be Smart

Being prepared can take away much of the anxiety associated with a recession. As long as you have a solid business plan for the good times and the bad and can offer goods or services that will remain necessary no matter what, you should be in good shape to forge ahead during a recession.