As of late, the word ‘recession’ has been thrown around more than usual due to the economic downturn caused by COVID-19. So, what does a recession mean? How will it affect my business and most importantly, how can I protect my business?
What is a Recession?
In simple terms a recession is when there is a significant decline in economic activity, a widespread drop in spending. Typically, it is recognised as two consecutive quarters of economic decline, as reflected by gross domestic product (GDP) together with monthly indicators such as a rise in unemployment.
Singapore GDP has now declined over 2 consecutive quarters (Q1 -3.3% and Q2 -41.2%, respectively), confirming that Singapore has indeed entered a recession.
How does a Recession Impact My Business?
The last time Singapore went into recession was back in 2007. It was due to the Global Financial Crisis or often referred to as the GFC – it lasted for 18 months. Whilst the recession caused by COVID-19 is predicted to be shorter than the GFC recession, the impact it has on businesses can linger for much longer. Below, we will take a look at some examples.
Loss or Decline in Sales
Generally, when there is a recession, businesses and consumers are spending much less than usual. They will be looking to cut costs in all corners which results in businesses and consumers spending less, or not at all. This translates into a reduction in company’s sales and revenues.
Difficult Getting Access to Credit or Finance
As default rates increase due to increased credit and market risks, financiers tend to tighten up their credit assessment criteria. This means, it will be more difficult to get access to much-needed funding. Your suppliers are also more likely to reduce credit terms afforded to you on your payables or may even demand cash on delivery.
Late Payment from Your Customers
As cash flow is extremely tight for many businesses during a recession, your customers will more likely take longer to pay. Some may ask for a discount or at worst case default on payment. This will have a direct negative impact on your business cash flow and cash reserves.
How to Safeguard Your Business?
Recessions are a natural part of the business cycle. While they may be daunting and difficult at the time, they are always followed by a period of economic recovery and growth. Here are some tips on how to ride through a recession.
Spend within Your Means
As your business finance is tight, hence it is essential to live within your means. Only spend what the business can actually afford. Review your business expenses and make hard decisions as to which items are vital and look for cheaper alternatives wherever possible. This could mean finding a cheaper rental office location or opt for remote working for a period of time to cut rental costs entirely.
Focus on Your Cashflow
Cash is king. Ensure you have sufficient runway for at least 6 months. Look out for cash flow solutions that suit your business needs to ensure you are able to meet all business payment obligations.
You could consider tapping into available government assistance or obtain external financing. Invoice Finance or Factoring could be a vital cash flow tool to your business. It allows your business to sell your outstanding invoices to a financier to obtain payments up front rather than waiting 60 or 90 days for your customers to pay. A huge advantage of Invoice Finance is that it does not add more debt to your balance sheet as it converts your trade receivables into cash. A loan on the other hand will increase debt and liability in your books.
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Diversify Your Product Offering
Analyse your products offered and market needs to see whether there is an opportunity for you to diversify your product to increase sales. This could mean looking for a product or service that is in need now. Increase your marketing and sales effort through online channels.
Upkeep Your Relationship with Your Network and Customers
Ensure you are in communication with your network, your leads and your existing customers. There is no excuse not to pick up the phone to have a chat. When business picks up again (it will), you want your business to be at the forefront of their minds.