Recession Advice: Navigating the Q4 downturn – Image by Menzies LLP

The economy continues to slow, and UK inflation is rising at a record rate. Households across the UK are feeling the cost of living crisis more than ever. The Bank of England recently published a Financial Stability Report. It warned that the economic outlook for the UK and globally has ‘deteriorated materially’, and the UK inflation rate is expected to reach over 11% by the end of the year.

Despite the UK economy growing slightly in June, its contraction in the two preceding months suggests it could be heading for another recession. Few businesses expected to feel the weight of another economic downturn so shortly after the pandemic. However, those that performed strongly during 2020 and 2021 will be well placed going into the arduous times ahead. Many organisations adopted a nimbler approach to decision-making and business management at the start of the pandemic, largely out of necessity when orders dipped dramatically or disappeared altogether. This nimbleness has stuck in many cases and become part of more resilient business models. Many businesses also already have a robust network of third-party advisors in place. These will help support their decision-making in the months ahead.

Prepare ahead of time

An economic downturn may cause businesses to get caught at the wrong point in their working capital cycle, depending on their operating model. For instance, they could be left with surplus stock or work in progress from which they cannot realise value. This is especially a potential problem for businesses that have been affected by the global materials shortage as, to get ahead of the demand curve in recovery, many have chosen to increase inventory and production rates. It is important to have a variety of suppliers to supply crucial products and services as it mitigates the risk of a supplier failing during an economic downturn.

Guide your personnel

Employees might need extra support during an economic downturn to maintain their well-being and morale. Business owners have to take a proactive role in communicating and motivating their workforce and lead them from the front. This will enable them to maximise performance and retain skilled people, which is more important than ever.

Attain additional finances

Economic recession is as much a period of opportunity as it is a period for bunkering down for many businesses. But to utilise market opportunities by recruiting skilled staff or buying assets, businesses need to have adequate headroom in terms of funds. Businesses might want to secure a ‘safety net’ now, before loans become harder to obtain, even if there is a cost attached to borrowing.

Customer Insight

As the cost of living crisis worsens, it is likely to curtail consumer spending, leading to trading challenges for businesses. Rather than changing services or products to increase income, businesses might have to avoid risk in some areas by lowering their dependence on customers with greater financial risk exposure.

Periodic credit checks should be conducted to monitor customer performance. Sales and procurement teams can also supply valuable market intelligence. Businesses should also have a precise understanding of what makes a ‘perfect’ customer, versus those that bring less value due to reduced operating margins or are higher maintenance.

Concentrate on managing debts

Focusing on debt management is another way to protect cash flow. Ensure any outstanding money owed to the business is paid as soon as possible. To reduce costs, businesses might want to reform their debt finance especially if interest rates rise and business loans become more expensive to service.

Implement pre-emptive cashflow management

If revenues start to drop in a climate of rapidly increasing costs, the situation may quickly escalate into a financial crisis. Businesses can immediately work to alleviate cash flow risk by implementing proactive cost and cash flow policies. For instance, it might be possible to arrange better credit terms with key customers and longer payment terms with key suppliers.

However, this is merely passing the problem on and could cause a supplier to fail. Suppliers, especially larger enterprises, should conform to standard industry terms to avoid this risk.

Businesses should keep their prices under review and pass cost increases on to customers where possible. Understanding the impact on costs because of high inflation and being able to adjust pricing quickly to maintain margins is important.

Predicting what lies ahead

Regardless of what takes place in the near future, businesses cannot afford to get caught in a reactive and corrective approach. They must preserve a long-term, flexible and tactical overview. Businesses can use the downturn as a growth opportunity by implementing techniques such as:

  • Scenario planning
  • Using reliable financial data
  • Forecasting models
  • Renegotiate terms with supplier customers and on loans
  • Ensure you have advisor(s) in place that have seen recessions before
  • Talk to staff to understand their concerns, and consider well-being initiatives

Contact Menzies if you have any queries or questions about preparing your business for an economic recession.

Menzies LogoMenzies is a top 25 leading firm of accountants, finance and business advisors that operate out of a network of offices across Surrey, Hampshire and London, providing our clients with easy access and local knowledge. Described as the ‘best performing firm outside of the top 10’ by Accountancy Magazine, Menzies has over 400 employees and an annual turnover of more than £40m.


Please enter your comment!
Please enter your name here