The Bank of England has warned the UK is likely to enter a recession before the end of 2022. Inflation may rise as high as 13%. While the immediate response for business may be worry and concern, it is also a time for action and organisation.

The current economic climate is heading toward recession due to a number of factors. Coronavirus, Brexit and the Russian invasion of Ukraine all play a part in the economic downturn we are experiencing in the UK. Rising fuel costs and other price increases are also impacting your business bottom-line.

For business owners around the UK it is understandable to have concerns. However, preparation and organisation will be key to riding out the storm and succeeding in business. Below we’re going to explore how to safeguard your business during a recession in the following ways:

  • Business financial management in a recession
  • Building a cash buffer for recession
  • Borrowing cheaply to get through the recession
  • Taking inspiration from recession-resistant businesses

Fail to plan, plan to fail: business financial management for recession

Economic downturn will have a knock-on impact on businesses of all sizes. You may find it impacts your business in terms of profits, cost of goods and may impact your cashflow.

There may also be a further credit crunch where we see a decline in lending activity. Preparing now can help to mitigate these problems. It could also be a good time to consider diversifying into industry areas with a recession-resistant history.

Plan your cashflow and budget

Comprehensive cashflow planning and budgeting must be your first line of defence in a recession. Having a full understanding of your business accounts and knowing exactly what is spent where can help you find the best places to make cuts or changes. Understanding how to make a budget for your business is vital to immediately spot issues before they become significant financial problems for your business.

Invest in customer service

A recession makes people more reluctant to spend, so attracting new customers may be difficult. However, it is important to ensure your customer service is of the highest standard. Committing time and energy to satisfying your customer’s expectations will help ensure your customer base does not entirely disappear. Having a loyal customer base you can rely on becomes even more important during difficult economic times.

Explore recession-resistant industries

No business is recession proof but there are some sectors which seem to thrive, even during hard times. Confectionery and treats companies, for example, continued to profit during the 2008 recession. Cadbury’s reported an increase in profits of 30% and Mars and Nestle reporting growth too.

Businesses in sectors where it is possible to easily move into a new area where there is higher demand during a recession may want to consider this switch. During the Coronavirus pandemic many brands diversified, with gin and whisky distilleries turning their skills to hand sanitiser production, for example.

How to build a cash buffer for recession

Recession is not the time for risky investments or taking a chance on a big deal. Taking a conservative approach to your financial management will help retain cash in the business and give you a bigger buffer should you need it.

Your business’ cash buffer is calculated by dividing balance by outflow. To build a cash buffer you need to look at ways to minimise your outgoings. Remember, there is usually no need to be overzealous and cut indiscriminately. Instead, look at you cashflow forecast and find room for compromise. Other ways to build up that essential cash buffer include:

  • Reviewing and evaluating your accounts: tighten up your budget in a manageable way that won’t negatively impact the business. Cut unused subscriptions and services and trim any excess you simply do not need to spend.
  • Speaking to your lenders: if you have credit or finance in the business then get in touch with your lenders and see if they can offer any leeway. Many understand the impact of financial uncertainty and may be able to accept lower payments for a time.
  • Negotiating with vendors: evaluate your current payment terms for vendor and service providers. If you pay on receipt you may be able to negotiate to pay on 30 or 60 day terms and help improve your business cashflow.

Be bold when borrowing

Interest rates usually fall during a recession as governments are forced to act to mitigate the decline in the economy. Reducing interest rates can help to stimulate growth in the economy and this can make it cheaper to borrow money and therefore borrowing to invest in your business could be a savvy move, as long as you’re careful about the amount and terms of any loans.

Applying for a business loan during a recession may seem like a counterproductive move, but you may be able to benefit from those low interest rates and drive your business in a more positive direction.

Take inspiration from pandemic success stories

The recent Coronavirus pandemic saw the economy turned upside down and many businesses felt the pinch. However, there were many success stories, not least the multinational tech giants such as Apple and Amazon who thrived through these difficult times. Their successes were closely linked to their ability to adapt and deliver what customers wanted quickly and efficiently. Amazon’s same day groceries service, for example, was a lifeline for many people isolating due to the virus.

While the average small business cannot access the same resources as a global technology firm, you can take inspiration from their approach. Finding solutions to the problems people face during difficult times can be the key to business success.

Furthermore, opting to look positively forwards rather than being distracted by the negative possibilities during a recession can also work in your favour. LEGO, for example, didn’t hide away like other toy companies during the 2008 recession, they took the time to explore and expand in new markets. This resulted in an increase in sales of 23% in a year when many other companies were struggling. It is hard to be dynamic and forward thinking in difficult financial times, but it can be the most effective way of ensuring your business doesn’t suffer.

Run your finances effectively with Countingup

Countingup is designed to help small businesses save time and money. Our two-in-one app and accounting software allows you and your accountant to keep track of your books with ease. You also receive live profit and loss reports, cash flow insights, tax estimates, and instant invoices, ensuring you can keep check on your cash if recession does hit in the next few months.

Download the Countingup app today.