With increased globalization comes increased interdependence between economies of different countries. As such, the impact that an economic downturn within a nation’s economy can have on other nations’ economies, and indeed the world market, has grown.
Recession is the term used to describe when the GDP growth rate of a country is negative for two consecutive quarters or more. According to the National Bureau of Economic Research, a recession is marked by a "significant decline in economic activity spread across the economy, lasting more than a few months."
A recession is characterized by:
Early on in a recession, businesses can expect credit conditions to tighten and new terms may need to be agreed upon. Your accounts receivable will begin to move sluggishly as liquidity becomes an issue for all parties up and down the supply chain.
Customers who owe you money may delay their payments or even default on them. Protecting a reliable source of working capital becomes critical. If staff layoffs occur, morale suffers and the risk of overwork and burnout increases.
An economic recession can be particularly hard on small businesses, as they generally have minimal cash reserves or assets, and are less likely to be able to secure additional financing.
If liquidity issues persist and the business cannot meet the terms of its creditors, bankruptcy proceedings may follow. A chapter 7 bankruptcy of the US Bankruptcy Code puts the company out of business and liquidates its assets. An alternative option, which allows the company to continue operating, is a corporate restructure (or reorganization), also known as a chapter 11 business bankruptcy.*
Typically, businesses focus on cost-cutting and protecting cash flow during a recession.
The specific steps a business takes during a recession will depend on the size of the organization and what resources it can access or liquidate to weather the storm.
Common steps include staff cuts, renegotiating payment terms, financial restructure, and seeking government assistance.
*Note: Companies in the UK do not face “bankruptcy”. Different terminology is used relating to insolvency.
Whatever the size of your business, preparation is key—as is having complete oversight of company financials and other material information, for total confidence and speed in decision-making.
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Read now: Recession Planning for Businesses
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