Are we in a recession or not?
Seems there is a lot of hullabaloo on that question. In practical terms, we are in a recession. A practical definition for a recession is two consecutive quarters of declining gross domestic product (GDP) activity. That milestone was reached after the second quarter of 2022.
Officially, it turns out we have given the enviable permission to declare recessions to a group known as the National Bureau of Economic Research (NBER) — an average of one every six years since world war two. They define when a recession has happened, what type of recession it was, and the duration of the recession. Trouble is they don’t typically declare this information until well after it is commonly known that we are in a recession and many times after the recession is over. I would consider NBER as the recession historians.
Why the hullabaloo on the definition of a recession? Of course there is politics, academia, and private industry competing for a voice. The recession declaration is centered around a sticking point, which is the unemployment rate. Even though economic activity is slowing, the US economy has been able to add jobs month over month even in a tight labor market. If it were not for that point alone, everyone would agree on whether we are in a recession without disputes.
But a recession can be measured by many indicators, not only GDP. But the broadest measure has been GDP. Forbes provided a report outlining 15 data points that mark a recession, including GDP. The consensus is that 9 data points were bad, 2 data points were neutral, and 4 data points were good. Forbes concluded, “The economy may not officially be in a recession, but it’s not looking good.” Forbes
Recessions can be “V” shaped, “U” shaped, or “L” shaped, as well as “W” and “K” shapes. When graphed the picture resembles these shapes. The shape relates to how fast an economy rebounds. “V” shaped recessions reflect a quick drop and then rise in economic activity, over a short period of time in quarters. This is the preferred way to have a recession, short and sweet. “U” shaped recession means that the bottom of the “U” lasts for longer than a “V” shape type in number of quarters. “L” shaped recessions are ones you would like to avoid. They are described as long lasting recessions with difficulty in seeing the signs of recovery.
What is the long term average GDP, so we know when we see a good GDP anyway. “GDP Annual Growth Rate in the United States averaged 3.14 percent from 1948 until 2022, reaching an all time high of 13.40 percent in the fourth quarter of 1950 and a record low of -8.40 percent in the second quarter of 2020.” Trade Economics
That is all interesting, but how do I survive and prepare to thrive, despite economic downturns? Recessions are great tests of business savvy owners. Discipline is always needed in any environment. Cash is still King. Accelerate accounts receivables, and differ accounts payables is the strategy to manage cash flows in good times, and more importantly in bad. If your average accounts receivable cycle is 30 days, can you cut that to 10. What would the process look like to change that from 30 to 10 days? Believe it or not there are businesses that don’t carry accounts receivable. You may not be able to go that far, but what can you do.
If your average accounts payables cycle is 10 days, how could you extend that to 30 or even 60 days. I am close to one company who automatically was able to push all accounts payable out 90 days. They never even considered paying their suppliers until 90 days. They were able to hold that strategy because of their size, but that kind of striving will help you to think about what needs to happen at the process level to change account receivable money inflow versus accounts payable money outflows that will help you survive in recessionary times.
Another simple idea is to stay close to your suppliers and lenders particularly those that you have a long standing working relationship with. Suppliers and even lenders, believe it or not, are under the same recessionary pressures that you are under. Open and transparent communication is what they need too. They would much rather keep you as their client, who they know, than to start over again with new start up relationship costs. You can prepare a letter to your suppliers or lenders, explaining your dilemma to pay on the previously agreed terms, and your need to pay on different terms for the short term, will help you. If your desire is to be open and transparent and your suppliers and lender get that sense, that will go a long way in creating good will and keeping them in your corner. Small businesses are dependent on the environment that they are a part of, and do not exist or survive in a vacuum. You may have to be willing to do this, if needed.
A recession is also the ideal time to review every part of your business process to insure it is running at its optimum. An outside consultant could help you “think outside the box” related to your business processes to see if there are easy, simple, improvements that are feasible. While recessions are a great time to look at business process efficiencies, it is not the best time for heavy investments that realistically are not in the business pocket book.
Owner’s Champion, would like to honor small and mid sized businesses that are striving to make a difference in the world and provide for their families and others against difficult head winds. We salute you.
If you have interest in bookkeeping, accounting, payroll, system advisory, or virtual CFO services, we can schedule a discovery call to explore the value of partnering to help your business. We would like to be in your corner.