What SMEs can do to prepare for a recession

All signs point to an economic recession in the UK that, without the correct action being taken, may turn into a depression.

Mario Draghi, the President of the European Central Bank (ECB) has warned that if European governments fail to inject cash into their economies, they risk falling into a prolonged decline due to the coronavirus pandemic.

With the UK and much of Europe in lockdown, the economy is grinding to a halt. Businesses are struggling to remain in existence. While the impact of the pandemic is difficult to predict, its effects on the economy are escalating.

The GDP, finances, and employment are all under threat due to the impacts of the rapidly spreading virus. However, a recession has been looming since even before the pandemic began.

The latest figures show that the UK economy is falling into a recession that will sink deeper than the financial crisis of 2008-2009. Already, public finances have dropped, and unemployment has risen due to the lockdown.

As the pandemic escalates, business activity is dropping, with March demonstrating the most significant monthly decline in economic activity since records began.

Rishi Sunak, the Chancellor of the Exchequer, has stated that he will do 'whatever it takes' to protect businesses from the impact of the imminent recession. But what can SMEs do for themselves to prepare?

Five Ways Businesses Can Prepare for a Recession

There are five ways in which every SME can help to recession-proof their business. The first strategy is to reduce expenses. When times are tough, business owners need to spot where they are spending money on things that do not stimulate growth. Any spending that isn't necessary should be cut.

Next, having an emergency fund is vital in preparing to weather a recession. It's never too late to make for a reduction in cash flow by putting aside as much cash as possible to face an adverse financial scenario.

Diversifying revenue is a powerful strategy for preventing loss of revenue due to a recession. The more diverse a business's client group is, the less likely it is to lose a significant income. No single buyer should represent more than 10% of a business's revenue.

Tesla is an excellent example of the next tactic, and that is to keep a lean inventory. The car producer makes vehicles on-demand, meaning that it doesn't hold massive stock in preparation for orders. This can prevent a business from keeping their cash tied up in their stockroom.

Finally, businesses should do what they can to clear their debt, or at least, as much as they can afford. A recession will not prevent debt collectors from calling in what is owed to them. It will more likely cause them to enhance their recovery efforts.

It should be taken into consideration that this isn't a typical recession. The nature of it is self-inflicted in that the economy has reduced due to government orders to stay at home. It is also likely temporary, with economic activity set to start up again once the pandemic has been addressed. However, the outcome of the pandemic's long-term impact on the economy remains unpredictable, and, therefore, SMEs should take all the action they can to prepare.

Export Portal recognizes the importance of communicating essential, relevant information to enable export businesses to survive. This means that we will continue to bring you important updates as the world's economy continues to react to the pandemic.