How to Prepare Your Small Business for Upcoming Recession
Worldwide economy is experiencing hard times. How to prepare your small business for upcoming recession
A recession in the economy is a decline in the economy of a particular region/country/planet. This is an unambiguously negative phenomenon; production rates, GDP growth, and real wages are declining. A small business owner can in no way influence the occurrence of a recession and the timing of its completion, but he can at least prepare his small business for it, reducing the consequences to a minimum.
Recession should not be confused with stagnation. Stagnation is the state of the economy, which is characterized by a prolonged stagnation of production and trade. During stagnation, there is a lack of economic growth, but macroeconomic indicators do not decrease, being at levels close to the values recorded during periods of growth. With stagnation, there is an increase in unemployment, a drop in wages and the standard of living off the population.
The key difference between a recession and stagnation is that during a recession, the economy is in recession, but not stagnant.
What is Recession?
To better understand the essence of this phenomenon, you need to immerse yourself in economic theory. In recent decades, economists have adhered to the concept of wavelike development of the economy. According to it, the economy in its development goes through certain cycles. Each cycle comprises four phases.
Climb. Industry is developing, incomes of the population are growing, inflation is kept at low levels.
Peak. The highest point of economic growth. New technologies are being actively introduced, demand is increasing, unemployment is falling to a minimum.
Recession. Having reached its peak, the economy goes into decline. Production is slowing down, business and investment activity is declining, and inflation is rising.
Bottom. Unemployment reaches a critical level, prices are skyrocketing, production is at a standstill.
It is impossible to predict when this or that phase will begin, and how long it will last. For many years in a row, the economy can flourish, and then fall.
The main indicator of recession is GDP - the total value of all goods and services produced in the country. Every month, quarter and year, experts evaluate the level of GDP and compare it with the previous reporting period. If it is steadily declining, then the economy is in recession.
What Small Businesses Need to do to Prepare for Recession
Naturally, all this talk of inflation and a looming recession can make you worry about your finances. But there are a few steps you can take right now to prepare your small business for whatever lies ahead.
1. Manage your budget and cut costs
First, it’s important to know how much money you spend each month. One way to do this is to write your expenses or use a budgeting app to help you keep track of your daily, weekly or monthly expenses to see where you need to cut unnecessary expenses. While it may take a little work at first, your financial stress will lessen once you can put some money aside.
2. Create an emergency fund
Now that you have saved up money, you can start building your reserve fund. When the economy collapses, jobs and incomes can be at risk, so building an emergency fund is what companies need to do before a recession. No matter what situation you’re in, whether you’ve been fired, lost your job, aren’t making money from your business, or made some bad financial decisions, emergency savings will provide you with a safety net to ride out the storm. Borrowing money and using a credit card as a safety net may not be the best idea during a recession because you will need a higher income to repay the money (plus interest). If you already have debts, start paying them off at an sped up pace.
3. Pay off your debts
Having a debt burden is just a burden. During a recession, high debt repayments are likely to exacerbate an already tense situation. And don’t forget that central banks have raised interest rates to curb runaway inflation. This will most likely cause your bank to tighten the financial terms on your loan, which will ultimately make your debt cost higher just when it hurts the most. Again, the first step to successfully paying off debt is to create a budget that accurately reflects your business’s income and expenses. As mentioned above, this will help you identify where you can cut spending so that more money goes towards debt repayment. The second step to getting out of debt is creating new sources of income.
4. Diversify your income
When you rely heavily on one market, you risk losing your only source of income and failing to meet all of your financial obligations if the economy collapses. You don’t have to look for a second business to diversify your income. For example, if you’re a small business owner, you could start a new trade campaign that will be oriented to foreign markets. And diversifying your investment portfolio is just as important as diversifying your income, especially during a recession.
5. Diversify your investments
An economic downturn can be a financial disaster if all your money is invested in one type of asset. And this is the reason diversifying your investments is so important. If you spread your investments across different industries and different assets, your investment losses will be less severe if the market crashes. During a recession, people move from riskier assets to safer assets such as gold and precious metals. There is a consensus that during a recession, riskier assets such as stocks and high-yield bonds decline, while gold and Treasury bonds rise. Therefore, so many investors choose to buy gold regularly, which allows them to increase their savings and protect their wealth in the long run.
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.
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