What is a Recession?
Recession can be defined as a period during which the economy declines temporarily for at least a period of six months. As a result of the recession, trade and industrial activities are also reduced. Recession can be identified when the Gross Domestic Product (GDP) rate becomes negative for at least two consecutive quarters. Apart from GDP, there is also a fall in some of the other economic indicators. They are employment, income, manufacturing and retail sales.
Effects of recession on small businesses:
1. Reduction in the cash flow –
During the period of recession, the entire system of cash flow becomes disturbed. Unlike large companies, small businesses do not have any substantial cash resources. They run on a tightly controlled cash flow, where the money goes out as soon as it comes in. During the time of recession, there is a delay in the purchases and payments made by the customers because they themselves do not get the salaries on time. As a result of delayed payments, the cash flow of the small businesses is reduced. This results in the borrowing of money by the organisations.
2. Reduction in the demand –
During the recession, there is a reduction in the purchases and payments as the customers themselves face economic problems. Small businesses usually depend on a small group of major customers. Thus, when one or more customers stop buying from small businesses, it results in a loss of demand. As a result of which, the organisation undergoes financial losses.
3. The result is unemployment or reduction in job opportunity –
Recession causes a loss in the revenue of the organisation, resulting in financial shortages. Thus, as a result of financial deficits, the budget of the company decreases. To cope with the reduced budget, one of the steps the business owner takes is to reduce the number of workers or employees. This causes unemployment. The remaining workers can get demoralized and overworked as a result of which the entire system jeopardizes.
4. Reduction in advertisements and marketing –
With the decrease in the budget, another step taken by the owners of the small businesses is to stop advertising and marketing their organisations. Established companies often have a customer base, so it is possible for them to continue without any marketing or advertising for a certain period of recession. On the other hand, small businesses rely on only a small number of customers. Thus, it becomes almost impossible for them to manage without marketing. As a result of which, new buyers are not attracted.
5. Lower the quality of goods and services –
In order to cut the costs so that to cope with the budget, another step taken by the business owners is to lower the quality and desirability of the good produced and services provided.