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When the Tide Turns: What Happens to Businesses and How Leaders can Help

by Krishnendu P
by Krishnendu P

You might have often heard people talk worriedly about ‘economic recession’. You might also have seen news telling people about the recession and you might also have had sudden pangs of worry. But, do you know what recession is and how to navigate these choppy waters?

Economies thrive on a delicate balance of ups and downs. There may be times of huge profits, and bustling economic activity which can be followed by a period of recession, marked by low economic activity, posing a significant threat to businesses.

In 2020, the global economy contracted by an estimated 3.5%, marking the sharpest downturn since the Great Depression. Unemployment rates surged globally, with millions of people losing their jobs or facing reduced working hours. According to the International Labour Organization (ILO), global unemployment increased by 8.8% in 2020, equivalent to 220 million people worldwide. Small and medium-sized enterprises (SMEs) were particularly vulnerable, facing widespread closures and financial strain. The World Bank estimates that the pandemic pushed approximately 120 million people into extreme poverty in 2020, reversing years of progress in poverty reduction. Governments worldwide responded with unprecedented fiscal stimulus measures, amounting to trillions of dollars, to mitigate the economic fallout and support affected individuals and businesses.

Understanding Recession: A Period of Economic Contraction

A recession is characterized by a period of deficient economic activity in a country. This period can last 6 months or more. This period is measured by negative Gross Domestic Product (GDP). This indicates a drop in the value of products and services a country offers to its citizens and others too.

Low GDP: 

As mentioned earlier, a recession results in a low value of GDP which should last up to 2 consecutive quarters. This results in negative economic activity as well as production in the affected country. 

Rise in unemployment: 

The recession witnesses a rise in the number of unemployed people. This is the result of a fall in consumer’s spending power, which in turn affects the inflow of wealth into a company. Without wealth, a company’s workforce cannot be maintained. 

Decreased consumer spending power: 

An economic downturn can cause a decrease in a consumer’s spending capacity. A low economic activity ensures that people do not get money and this in turn affects the spending capacity of people. This also affects the businesses and their profit.

The Ripple Effect: How Recession Affects Businesses

Recessions don’t just affect individuals, they also affect businesses and disrupt the entire economic ecosystem. Here are a few ways recession affects businesses:

Reduced demand and revenue: 

Weakened consumer spending power and increased prices of products result in reduced demand for goods and services. This impacts the profitability and stability of a business. 

Profitability squeeze: 

Lower sales and revenue may affect a business’s profit margin. This can even be a deficit to cover the company’s operational charges, making the company’s profitability margin even lower. 

Cash flow constraints: 

When there is a decrease in cash flow from the revenue and profit of a business, the company struggles to stay afloat and may find it difficult to break even the profit and spend ratio. This in turn can affect a company’s ability to invest in growth or maintain operations. 

Credit tightening: 

When there is a recession, the banks may find it more difficult to give out loans for businesses. With loans sparse, the companies may not find enough money for operations or even for the day-to-day work of a company. 

These are just some of the ways that recessions can disrupt and cripple businesses. Effective leadership and strategic planning become crucial during such times to ensure the survival and long-term success of the organization.

Navigating the Storm: Ways and Strategies for Leaders to Mitigate the Destruction by Recession

With the world undergoing recessions, leaders of companies can help make the economy better. This is by implementing a few strategies and ways to cripple the fatal effects of a recession in common life and businesses.

During a recession, leaders must focus on tightening the belt and maximizing efficiency. This means identifying and getting rid of any unnecessary spending across different parts of the business. By streamlining operations, leaders can make sure that every dollar counts, helping to weather the economic storm.

At the same time, keeping a close eye on cash flow is essential. Leaders need to make sure that money keeps coming in by prioritizing collecting outstanding debts and exploring different financing options. By managing working capital tightly, businesses can keep the lights on and continue operating smoothly, even in tough times.

The UK has faced numerous recessions, but none as severe as the COVID-19 pandemic-induced economic downturn. In 2020, the country experienced a historic 9.9% drop in GDP, the largest in generations. This decline led to a sharp rise in unemployment, with rates reaching 5.1% by early 2021, significantly higher than before the pandemic. Businesses, especially small and medium-sized ones, bore the brunt, facing a surge in closures across various sectors. In response, the UK government swiftly introduced support measures, like the furlough scheme and business grants, to ease the economic strain. While there are signs of recovery in subsequent quarters, the long-term effects of the recession highlight the need for strong policy actions and support to build economic resilience and ensure lasting recovery across the UK.

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