How Recessions Affect Small Businesses

Small businesses are often times the victims of an economic recession or other harsh financial realities. Although businesses are affected differently, with some bearing more brunt than others, one thing is always certain; customers always drastically cut back on their spending. With small businesses often solely dependent on the patronage of customers, it becomes hard for them to adequately survive any economic recession. An inability to foresee and adequately prepare for an economic recession or financial meltdown also contribute to their downfall.

Yet, in other situations, some small businesses show doggedness and flexibility in their ability to seek and pursue ways to effectively militate against and protect themselves against the destructive effects of an economic recession. In the course of this series, we will get to the creative and novel ways some of these small businesses survive a recession.

The effects of an economic recession, especially on small businesses, often culminate in the layoff of staffers and eventual closure. We look at a few of these effects to get a full grasp of how an economic recession actually affects small businesses.

 

Reduction in the Flow of Cash

Small businesses typically operate under a cash flow that is strictly controlled. This is an obvious fact, as they don’t have available to them the luxury of enormous cash resources. Their income and expenditures are strictly regulated and linked in a close cycle. A late payment or an overbearing expenditure puts an obvious strain on the entire financial structure of a small business.

In an economic recession, due to the harsh financial realities, customers, more often than not, may have to delay payments or purchases. This may be necessitated by the delay in their own cash flow, hence translating to a delay in payments and purchases. A delay in income for small businesses translates to a delay in their expenditure and an eventual stand still in their business operation.

 

Reduction in Demand

Due to a reduction in cash flow, the demand for goods and services by major customers of small businesses may reduce. Generally, the major share of the income of small businesses come from their major customers who make steady purchases and payments. In the advent of an economic recession, small businesses will lose a significant percentage of their income when these major customers cut back on their purchases or stop fully. As demand reduces, sales also plummet, especially for businesses that sell non-essential items. Even if these small businesses manage to keep up sales, there could still be a marked reduction in the profit margin.

 

Reduction in Staffers

Due to an economic recession, small businesses may find it imperative to cut back on costs. This often necessitates laying off of staffers, to reduce expenditure on salaries. This often becomes the first step small business owners take when there is a need to cut back on costs. Either by laying off the newest staffers or those that are least functional or redundant. There is obviously going to be more work for the remaining staffers to do, as they have to take up the roles of those laid off. This puts more pressure and strain on the remaining staffers, reducing morale and eventually leading to a reduction in the income generated.

 

Increase in Competition

In the advent of an economic recession or financial meltdown, while some businesses shut down, some other ones spring up, increasing competition. This is caused by the increase in the occurrence of competitors vying for the limited customers and resources available.

 

Increase in Expenditure

Economic recession causes an increase in inflation, leading to an increase in costs incurred by small businesses. With sales plummeting, this could add an extra pressure on small businesses. Apart from this, employees might also push for an increase in their salaries, to compensate for the lingering inflation.

 

As stated in Darwin’s survival of the fittest postulate, only the smartest and most informed owners of small businesses survive an economic recession, while others crumble.

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