With everyone talking about a potential recession and the never-ending negative headlines (not only about a possible recession but of rising interest rates and inflation, too), I thought I’d check in and ask… how are you feeling? Confused? Worried? Tired? All of the above? It’s normal to feel like things are up in the air right now if you’re a business owner, so I wanted to bring some honesty and lightness around what’s happening. The reality is if Canada does enter a recession, businesses are going to be affected in different ways—and some may actually experience opportunities coming out of it. The best thing you can do is understand how you may be impacted and act according to your own situation. This is something I talked about on The Finance Café Podcast where I shared more about what a recession might mean for small businesses and what you can do to prepare. You can listen to the full interview and read the highlights below for tips on how to navigate these uncertain times.
Pay attention to what’s happening, but use caution
Whenever there’s a potential for a recession, the media coverage around it tends to be sensationalized, which can kind of turn it into a self-fulfilling prophecy. Here’s what I mean: If news starts spreading that a recession is coming before it actually has, it can affect consumer and investor behaviour. Investors may pull their money out of certain markets, consumers might spend less out of fear; which can then bring on a recession. So, how will we know if we’re in a recession? The truth is we won’t know until we’re in it because recessions are measured on historical data. To get a little technical, every quarter, the government measures the country’s GDP (Gross Domestic Product), which is essentially the money circulating in the economy. They compare this figure to past quarters, and if the number has gone down for two consecutive quarters… then it means we’re in a recessionary period. Some good news? If a recession does hit, experts predict it’s going to be short-lived. What can you do to prepare? If you haven’t been paying enough attention to your finances, now is the time to do so. In a recession, your goal is to avoid running out of cash, so your first step is planning ahead to make sure you always have money in place before you need it. Run scenarios of what your business would look like if you saw a drop in sales over a few months and create a ‘plan B’. This could be building a 6-month buffer of your cash reserves or locking in financing—the sooner you do this, the better, because interest rates are going to continue to rise. Having access to a bank overdraft or a business line of credit can also help if you need a short-term cash injection. How to deal with inflation Costs are rising and everyone’s feeling it. Stay on top of your finances by regularly doing your bookkeeping and reviewing your income statement. This will help paint a picture of how inflation might be impacting your profitability. You may notice you’re making less profit if your costs are going up but your prices are remaining the same. Once you understand your numbers, you’ll have a better idea of what to do next. Is it time to raise your prices? Should you trim your expenses? Stay calm and keep your head up
Don’t get discouraged by the headlines. Just as there are challenges in an unsteady economy, there are opportunities. During a recession, capital will dry up for riskier businesses, eliminating weaker competition. Businesses that can manage their costs and find opportunities to increase their revenue will be the ones to thrive.
Remember that every business will be impacted differently, so focus on your financial situation, and act accordingly.
Your takeaway: No one really knows what the future holds. So make decisions about your business based on your data, not the headlines.