The Impact of a Recession on Canadian Small Business
Recession in Canada - What is it?
First and foremost, a recession is a normal part of the business cycle. It is an economic event that is expected to occur from time to time. While the experience of one has the potential to be unpleasant, it is, in fact, part of the process of growth in an economy. Times of recession are necessary and serve an important role in returning the economy to a normal state - where inflation is not wreaking havoc and interest rates return to an accessible level. According to The C.D Howe Institute’s Business Cycle Council, a recession in Canada is defined as: a pronounced, persistent, and pervasive decline in aggregate economic activity. Three dimensions are considered by this council when identifying a recession:
How much did economic activity decline by?
How long did the decline last?
How broad was this decline across economic sectors?
Gross Domestic Product (GDP) and employment are used as the primary metrics of economic activity when investigating these questions, but others, like real income, manufacturing, and consumer confidence are also important variables to consider as indicators of an economy about to enter a recession.
Canada is expected to enter a recession within the next year (some argue we are already experiencing one). You can read a deeper dive into all the details here.
What could a recession mean for my small business?
The impact a recession has on a business can be dependent on its size and financial situation going into this part of the economic cycle. Those who have solid cash flow, a great credit rating, and financial monitoring as part of their standard operating procedures will likely experience less disruption than those that have constricted or unpredictable cash flow, have not established business credit, and don’t have a clear understanding of their financial goings on.
For many businesses a recession may equate to:
Reduced Sales & Cashflow
Lower consumer confidence combined with higher unemployment rates tend to result in reduced spending on items deemed as non-essential. This will of course depend heavily on your specific industry, offers, and target market. There is a bit of a domino effect caused in a recession wherein the increased experience of individuals and businesses having less cash on hand results in payments being delayed, so customers who might generally pay in 30 days are now paying in 90 days, creating delays in that business being able to pay their vendors on their normal schedule and so on and so on.
Access to financing
Or at least access to affordable financing. Oftentimes, when revenue is reduced, or cashflow is tight a short term solution is to borrow funds in order to maintain operations at their non-recession levels but increasing interest rates and less availability of financing overall can make it so that this is a less viable option in times of recession.
These areas of impact clearly illustrate how the impact of a recession will be felt to different extremes depending on the specific situation in which a business enters into it. Likely your business has experienced these or similar obstacles at one time or another - and you know they can certainly be overcome.
For some tips on how to prepare for a recession, take a look at this.