The Recession Business Cycle

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The Recession Business Cycle

It’s no surprise to anyone that we are at the start of a recession business cycle that could last months or even years. If you own a business, this can be alarming news and present particular challenges that you will need to overcome until it is over.

What is a Business Cycle?

A business cycle is a pattern of expansion and contraction that typical businesses experience over time. The amount of time will vary based on many factors. During good times, these cycles might include hiring new staff, expanding product lines, purchasing excess inventory, increasing sales, and paying people higher wages. During a downswing, the opposite will happen. Companies may need to lay off workers, cut salaries, and be careful with expenses. 

What is a Recession?

A recession is a prolonged, steady economic downturn that affects consumers, businesses, and the entire population. Recessions are measured by three things depth, longevity, and reach, meaning how widespread the event is and how it affects entire communities and even countries. Typically, if these conditions last more than six months, it is declared a recession. Recessions can last a few months to several years.

Some signs of a recession include:

  • High unemployment
  • High-interest rates
  • A slow real estate market
  • A downturn in purchases/buying
  • Layoffs

Some would call the COVID-19 economic downturn a recession, and technically it is classified as one, but it did not have any lasting effects for many companies.

What Does the Recession Business Cycle Look Like?

Typically, recessions follow a period of growth or expansion and things may change rapidly. They can also have a domino effect. As companies see sales decline, they may lay off workers who, in turn, don’t have disposable income for purchases, so things slow down even further. Stocks are often negatively affected by a recession, and a company’s value may dip during this time, causing even more problems.

If things get too tight for small businesses, some may have to declare bankruptcy or go out of business altogether. 

Often the federal government will cut interest rates to try and stimulate the economy, but usually, it’s too little too late.

Companies that survive well during a recession business cycle have good cash flow, low expenses (because they prepared for it), and strong financial statements. Conversely, if a company has a lot of debt, chances are it will be much more difficult to hang on until the recession is over.

As with any cycle, recessions eventually end as things take an upswing, workers are hired back, wages increase, and sales resume. However, it is impossible to know when that will occur. Therefore, it’s best to recession-proof your business now to prepare for it.

Where to Turn for Help

Contact Interactive Accountants today if you want to learn more about the recession business cycle or help recession-proofing your business or want to learn how to weather the inevitable economic ups and downs. We have years of experience helping clients survive the slow times and thrive during the good.