What is a Recession? How SMEs are Impacted by Them

What is a Recession_ How SMEs are Impacted by Them

What is a recession? A recession is a severe decline in economic activity that usually lasts for months or even years. The economy will struggle, companies will make fewer sales, people will lose their jobs, and the country’s economic output will decline. These are all the impacts of the recession on SMEs that every country will likely experience.

Experts usually declare this condition when a national economy experiences rising levels of unemployment, falling retail sales, and harmful gross domestic product (GDP). Malaysia’s GDP reached RM1.42 trillion in 2020, while the Gross National Income per capita decreased to RM42,503 from RM45,311 in 2019 due to weaker domestic and international economic activity.

To prepare for an economic downturn, business owners need to understand the signs that the economy is entering or exiting a recession. With the current situation the world is facing, here is what your business might see in the next few months as an impact of the recession on SMEs.

Reduced Cash Flow

As budgets tighten and purchases are reduced, small businesses may find that they are making less money than they used to. When there is a decrease in sales, the profit decreases as well.

Since their business relies heavily on cash flow, this is the most common impact of the recession on SMEs. They can start to utilise the technology to develop cutting-edge, low-cost marketing tactics such as social media campaigns or enlisting employees as brand ambassadors to attract new customers. After all, 68% of consumers can interact with brands and businesses via social media.

Loss of Demand

When their customers are short on cash, a fall in sales is another common impact of the recession on SMEs. Customers are more inclined to use that money to buy necessities and save for the unexpected future. This is when small businesses begin to lose demand and customers as purchasing power declines. The situation then affects your revenue and profits.

They need to start considering what they can do to mitigate the declines. Do they have a strategy to guarantee a solid financial basis for their company? It would help if they had a ready-to-execute scenario for any potential losses.

Employee Layoffs

Even though the number of unemployed Malaysians fell by 1.8% (-11.6 thousand people) to a record 637.7 thousand in May 2022, reducing the cash flow caused small businesses to cut their operating budget. Because of that, they might consider reducing the number of employees and laying them off.

However, the impact of the recession on SMEs does not necessarily have to be the first idea. During the pandemic, we see businesses start to find alternatives such as reduced hours, job sharing, and stand-down periods. It is because morale among the staff may suffer as workloads increase, but salary stays or ceases.

Lending Limits

Customers and businesses are not the only ones being more cautious with spending due to the recession. Lenders will limit what they lend without solid cash flow and capital assets that may be used as collateral during times of increased uncertainty and business risk brought on by recessions, making it difficult for businesses to obtain lines of credit.

Small businesses are especially vulnerable to bankruptcy as a result of the impact of the recession on SMEs. Small firms typically do worse during recessions than larger ones because they are less equipped to sustain poor sales and economic uncertainty.

Interest rates may also rise, and lenders may tighten eligibility criteria. Recent research by the World Bank found that central banks have been hiking interest rates this year. This trend is expected to last well into next year.

SMEs are feeling the pinch of the global financial crisis. Small businesses will have less cash available to keep their doors open due to reduced revenue and access to financing due to the recession’s impact on SMEs.

However, a recession will compel big and small companies to re-evaluate their strategies and plan for expansion while adjusting to a sudden decline in demand. We have seen this in history. The toughest survivors may gain market share as rivals fall behind, helping them succeed in the subsequent economic recovery.