How to prepare your business for a recession

On Thursday 17th November, Chancellor of the Exchequer Jeremy Hunt presented the government’s Autumn Statement. He told the House of Commons his plans to tackle the cost-of-living crisis. “rebuild our economy” and significantly reduce borrowing over the coming years”.

Things will get worse before they get better

The Chancellor said that global factors are the primary cause of current inflation. But, most countries are still dealing with the fallout from the pandemic. He stated that the measures taken to combat Covid-19 in the UK must be paid for. He also acknowledged that the UK is in recession. Saying, things will have to get worse before they get better.

Rise in taxes

Tax as a percentage of national income. will increase by 1% over the next 5 years. This is now amongst the highest proportion of income going to HMRC for at least 70 years.

Some of the key spending statements made include:

• Government departments will be subject to tighter controls to tackle waste and inefficiency, except for the department for Health.
• The NHS budget will be increased in each of the next two years by £3.3bn.
• Education will have an additional £2.3bn for schools.
• Additional funding will be available for the devolved administrations for the NHS and schools.
• Overseas aid spending remains at 0.5% for the forecast period.
• A commitment to the climate pact agreed upon at COP26, including a 68% reduction of emissions by 2030.
• Northern Powerhouse rail, the HS2 and the East West Rail will go ahead as planned.

Economic Forecast

Immediately after the Autumn statement, the Office for Budget Responsibility (OBR) released its November 2022 economic and fiscal outlook. Forecasts predict the economy will shrink by 1.4% next year.

Their summary makes grim reading

They state that inflation is set to peak at a 40-year high of 11% in the current quarter. The peak would have been a further 2½ percentage points higher without the energy price guarantee (EPG). Limiting a typical household’s annualised energy bill to £2,500 this winter and £3,000 next winter.

Rising prices will erode real wages

These will reduce living standards by 7% in total. But, over the two financial years to April 24 (wiping out the previous eight years’ growth). Despite over £100billion of additional government support. The squeeze on real incomes, rise in interest rates, and fall in house prices all weigh on consumption and investment. Tipping the economy into a recession lasting just over a year from the third quarter of 2022. With a peak-to-trough fall in GDP of 2%. Unemployment rises by 505,000 from 3.5% to peak at 4.9% in the third quarter of 2024.

Preparing your business to be resilient

Some businesses are more likely to be affected by the downturn. These will get into cash flow problems, while others will be more resilient. If you are a business owner, you might be wondering which category your business falls into. No matter how inventive or simple your business model is, you can still have problems with cash flow. Here are our thoughts on managing the flow of cash in your business:

• Understanding: The first stage of understanding and predicting how funds flow is to perform a health check on your accounts. Look at your latest profit and loss statement and check that your income is sufficient to cover your expenses. If your income is falling behind your expenses and cash flow is slowing down, you might need to act. Prepare a funds flow statement so you know where the money goes.

• Budget: Next, create a yearly budget and look at where cash could become tight. Also, months where you can save to cover the quieter times. Look at those quieter months. Think about flexible work scheduling, new products or services or other activities to tide you over.

• Cashflow: Finally, make sure to collect your money quickly from those who owe you. Reward customer loyalty by offering early bird discounts. Set credit limits and payment terms to ensure customers follow the rules. If you take on new customers, make credit checks. Penalise late payers and request upfront deposits or payment.

Talk to our team about preparing a cash flow statement and annual budget on 01903 234094.