Last version published: 26/07/2022 13:45
Publication number: ELQ-52297-3
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How to Prepare your business for an economic downturn
There is much speculation regarding a potential economic downturn following Covid-19. But how can businesses prepare for this? Find out below👇
Introduction
With the news breaking that the European Central Bank has made the decision to raise interest rates after withholding doing so for 11 years, it is evident that the worldwide Inflation surge is already causing issues for the global economy.
( https://www.forbes.com/sites/jonathanponciano/2022/07/21/european-central-bank-raises-interest-rates-for-the-first-time-in-11-years-as-global-inflation-surges/ ),
However, how and when is it possible to know when a recession is about to occur?
Here are a few ways that indicate when a recession is about to happen:
1. Changes in interest rates.
As expressed above, changes in interest rates are a key indicator in showing that a recession is about to occur.
2. A fall in consumer confidence.
When consumer spending falls, this indicates that spending habits have tightened. This indicates that people are less well off in real terms, or that they’re expecting a crash soon so they’re not confident in buying, and are instead hedging their bets by saving in case they come across financial difficulties.
3. Job turnover might fall.
This indicates that workers are worried that they won’t be able to find a job elsewhere. Therefore again meaning that they have less confidence within the economy.
Unfortunately it appears now that nothing can be done to prevent a global recession, with all warning signs currently appearing within the economy. Although some businesses will almost definitely take a significant hit, there are ways that you can mitigate the risk and prevent your business from becoming one of them.Â
Outlined below are some of the ways that you can prepare your business for the upcoming recession:
- Step n°1 |
Try to stay as debt free as possible:
Perhaps the most obvious, but one of the most potent ways to mitigate against risk, is to pay off as much existing debt as possible. As interest rates are rising and are at risk of rising further, this means that it will evidently be more expensive to pay off debt in future. In addition to this, if your business does face unexpected issues in future, it is much more preferable to have a better debt to equity ratio. If there is more liquidity within the business, if any unexpected issue occurs, it is easy to pay it off, whereas if the company is in debt, it will have issues borrowing more due to potential credit score issues, or having the money readily available.Âthumb_up pay off any outstanding debts.thumb_down avoid paying off loans, take out more loans.
- Step n°2 |
Establish a cash reserve:
To follow on from this, it is necessary to establish a sufficient cash reserve so that the company has enough liquidity so that it can pay off anything that it might need to in a time of crisis. Having enough liquid reserves will allow for any unexpected costs associated with an economic downturn. Holding cash means a minimisation of transaction costs that are associated with external payments.Âthumb_up Make sure that a large percentage of income is available to pay off any debts.thumb_down leave all money in fixed assets, leaving none to pay off debts.
