Factors that indicate an economic downturn include job losses, slower manufacturing and industrial production and a drop in consumer spending. A recession or economic downturn can lead to panic among business owners, but this period of time doesn’t have to spell doom for your company.
During a crisis, cash flow issues are likely to arise for any business. If you’re prepared for these issues, you may be able to keep your business afloat and your cash flow strong even during a recession.
As a business owner, you should understand how a recession may affect your business, what industries tend to be affected the most during a recession, how the cash conversion cycle works and how you can improve your cash flow during a recession.
How Does a Recession Affect Businesses?
The impact of a recession can vary depending on the business, but you may want to anticipate the following effects during a recession:
- Less profit: Consumers are likely to reduce their spending during times of economic downturn. This could be due to job loss and less discretionary income or higher costs, which can lead to your business experiencing less profit. When this happens, you may need to let employees go, cut down on overhead costs and delay investments in new products.
- Slower cash flow: During a recession, making timely payments can become more difficult. You may need to spend time chasing after invoices and even delaying payments to your suppliers. If you sell B2B, a customer going out of business could mean their invoices go unpaid. This can significantly impact your cash flow.
- Decline in lending: Many consumers and businesses may avoid taking out any new loans — even lenders may be less likely to approve new loans. This could make it more challenging for a business that needs a new line of credit. Additionally, lending requirements could be stricter and interest rates may be higher.
- Drop in product quality: Businesses looking for areas to cut costs may sacrifice the quality of their products or services. This can negatively impact the desirability of your products.
- Reduction in employee morale: Employee morale may suffer if there are layoffs and reductions in benefits. If your business is forced to lay off workers, your remaining employees may grow increasingly distressed by longer work hours, more arduous work and fear of more layoffs.
- Less consumer reach: The advertising budget is likely to get cut during a recession, which can lead to your business reaching fewer customers. Consumers may also feel less confident in your brand and spend less.
- Drop in the stock market: Stocks can drop during a recession, and dividends may decline or disappear altogether, especially if the quarterly earnings report shows declining revenues.
For some businesses, there could be a silver lining in a recession. Inflation and borrowing rates may drop, so if you can obtain financing, your payments may be lower.
Industries Most Affected by a Recession
Some industries feel the impact of a recession more acutely than others. For many of these industries, this is due to consumers’ unwillingness to spend money unnecessarily. The most common businesses affected by a recession include:
- Restaurants and bars: Businesses in food service tend to be hit hard during recessions. Even major restaurant chains can experience difficulties. Restaurants and bars could be forced to lay off workers and pivot to delivery and takeout services, which could reduce revenue. One of the exceptions tends to be fast food restaurants, as consumers turn to faster, more affordable alternatives to sit-down restaurants.
- Retail: During a recession, discretionary spending is typically the first line item to get cut from consumers’ budgets. As a result, many retail stores feel the impact of this reduced consumer spending. Some big box stores and discount purveyors may be exceptions. This industry also tends to be hit hard by job loss in a recession.
- Manufacturing: As demand for products slows and supply chains are disrupted, businesses in the manufacturing industry can suffer during times of economic downturn.
- Leisure and hospitality: The leisure and hospitality sector tends to suffer in a recession, as fewer consumers are traveling or indulging in luxury expenses. Events like weddings may be delayed or downsized, and venues like casinos and movie theaters may not draw the large crowds needed for a good cash flow.
- Service providers: Service providers like personal trainers and hairstylists often feel the impact of a recession as consumers choose to save rather than spend.
Understanding the Cash Conversion Cycle
The cash conversion cycle refers to the amount of time it takes a business to convert investments into cash flow. This cycle also factors in how much time collecting receivables takes, how much time the business has to pay bills and how much time is needed to sell inventory.
If your cash conversion cycle is rising, this can indicate you need to analyze the factors involved. Use your cash conversion cycle during times of economic downturn to assess how your business is performing.
Cash Flow Strategies to Use During an Economic Downturn
Follow these steps for managing cash flow during a crisis:
1. Carefully Watch Your Accounts Receivable
Watch your accounts receivable carefully during a recession to make sure your customers are paying the money they owe you. During times of economic downturn, some customers delay payments or default, and credit card charges may be disputed. Monitor your accounts receivable closely and establish a plan for dealing with these issues should they arise.
2. Optimize Your Customer Invoicing
Customer invoices are crucial to your cash flow. Utilize the tips below to optimize your customer invoicing during a recession:
- Send invoices as soon as possible.
- Incentivize early invoice payments
- Send invoice reminders
- Opt for invoice factoring
These steps can help your business get payments in a timely manner, avoid invoices that go unpaid long-term and prevent cash flow disruptions.
3. Buy Less Inventory
Spend less on inventory to avoid tying up your cash and disrupting your cash flow. In some cases, it may make sense to keep less inventory on hand during a recession and order inventory only when you need it.
If you have unnecessary inventory, you may want to consider liquidating it to improve your cash flow. If you need to sell quickly, you may want to offer it at a discount.
4. Seek a Business Loan or Line of Credit
Though obtaining a new line of credit or business loan can be challenging during a recession, it may still be worth applying for one. If you have tangible assets or real estate, you may be able to use these assets to obtain a line of credit. When you choose Porter Capital, you could be eligible for a working capital loan.
5. Review and Renegotiate Agreements With Vendors
One of the best times to review your agreements with vendors is during a recession. Analyze the terms to ensure the agreements remain competitive in the market.
You may even be able to renegotiate your agreements with vendors. For example, you could free up some cash by negotiating with vendors to rely on your credit history or working relationship rather than deposits.
Related Article: Common Cash Flow Problems & Solutions
Porter Capital Can Help Improve Your Cash Flow
At Porter Capital, we understand how to overcome cash flow problems. Whether you own a growing startup or an established company, any business can face cash flow issues during a crisis, which is why we offer funding for all the ways you do business.
We help businesses with cash flow through invoice factoring, accounts receivable financing, and working capital loans:
- Invoice factoring: With Porter Capital, invoice factoring makes it easy to expand your business and get the funding you need.
- Accounts receivable financing: Choose accounts receivable (AR) financing to immediately get funds for outstanding invoices.
- Working capital loans: Easily manage your baseline expenses with a working capital loan.