Recession: The Businesses That Survive — and the Ones That Thrive
The word recession has a way of making business owners nervous.
Customers become cautious. Headlines become gloomy. Banks become more conservative. Owners postpone investment, watch the bank balance more closely and start wondering: What happens if things get worse?
But recession doesn’t affect every business equally.
Some businesses disappear. Some scrape through. Some emerge stronger than they went in.
And the difference is rarely luck alone.
What does recession actually mean?
The commonly used definition of a “technical recession” is two consecutive quarters in which real GDP declines.
But that’s not necessarily the most useful definition for a business owner.
The Reserve Bank of Australia describes recession more broadly as a sustained period of weak or negative economic growth, generally accompanied by rising unemployment. Household spending and business investment typically weaken, loan defaults rise and more businesses close.
For the owner of a small business, recession is therefore better understood in practical terms:
There is less money moving around the economy, and people become much more careful about where they spend it.
That changes everything.
Customers delay decisions.
Businesses postpone projects.
People trade down.
Price sensitivity increases.
Debtors take longer to pay.
Banks become more cautious.
And suddenly weaknesses that were manageable when revenue was growing become serious problems.
A recession doesn’t necessarily create those weaknesses.
It exposes them.
What caused the last recession?
Australia’s most recent recession was extraordinary because it wasn’t primarily caused by the normal economic cycle.
It was caused by COVID-19.
Governments restricted travel, closed or limited many activities and introduced stay-at-home and social-distancing requirements. Parts of the economy effectively stopped operating.
Australian GDP fell by 7 per cent in the June quarter of 2020 — at the time the largest quarterly fall on record — and unemployment rose sharply.
Small businesses were particularly vulnerable.
Around 71 per cent of small businesses reported falling revenue during the early stages of COVID, while many had to fundamentally change how they operated.
Restaurants became takeaway businesses.
Retailers became online retailers.
Offices went remote.
Consultants moved online.
Businesses changed staffing arrangements, suppliers, products and delivery methods.
By June 2020, almost three-quarters of Australian businesses were operating under modified conditions.
That tells us something important about surviving a crisis.
The businesses that survived weren’t necessarily those with the perfect plan. They were often those that changed the plan fastest.
Why recession matters disproportionately to small business
Large companies generally have things small businesses don’t.
Cash reserves.
Access to capital.
Negotiating power.
Multiple products and markets.
Dedicated finance teams.
More ability to absorb a bad quarter.
Small businesses frequently have less room for error.
The Reserve Bank’s analysis of business failure during COVID identified several factors that influenced whether businesses could withstand the downturn: the cash buffer they had going into it, how far revenue declined, their ability to reduce operating expenses and their access to external support.
That equation is worth remembering.
Cash + adaptability + control of costs + access to capital = time.
And time gives a business owner options.
A highly profitable business can still fail if it runs out of cash.
A less profitable business with cash reserves, low debt and flexible costs can survive much longer.
That’s why recessions turn cash flow from an accounting subject into a survival subject.
How did the survivors behave?
Looking back at 2020, one characteristic stands out: adaptation.
Three-quarters of businesses continued trading with modifications. Businesses changed staffing, altered products and services, adopted new operating practices and found different ways of reaching customers.
But there are broader lessons that apply beyond COVID.
Successful businesses tend to move early rather than waiting for the numbers to become catastrophic.
They protect cash.
They examine costs carefully — but don’t indiscriminately slash everything.
They talk to customers.
They concentrate resources on profitable products and services.
They collect debtors faster.
They renegotiate commitments.
They maintain relationships with banks and lenders before they desperately need money.
And perhaps most importantly:
They accept that yesterday’s business model doesn’t have a divine right to survive tomorrow.
Weak businesses often respond to recession by doing exactly what they were doing before, only harder.
Strong businesses ask a different question:
What does the customer need now?
Is this one the same?
Probably not.
And that’s extremely important.
The 2020 recession was an external shock. Governments deliberately restricted economic activity to address a health emergency. At the same time, extraordinary fiscal and monetary support was deployed, helping households and businesses build financial buffers. Activity subsequently rebounded rapidly as restrictions were removed.
A conventional economic downturn behaves differently.
Rather than customers being physically prevented from spending, they choose not to spend — or can no longer afford to spend as freely.
That can happen as interest costs rise, household wealth falls, unemployment increases, credit tightens and confidence deteriorates.
Those pressures can last much longer.
So owners shouldn’t assume that the strategies that got businesses through COVID will automatically work again.
COVID rewarded businesses capable of changing how customers bought.
A conventional recession is more likely to reward businesses that understand why customers buy at all.
That is a much more fundamental test.
Who will survive?
The businesses most likely to survive won’t necessarily be the biggest or even the most profitable today.
They will be businesses with room to manoeuvre.
They are likely to have:
Cash reserves.Cash buys decision-making time.
Low or manageable debt.Debt that looked sensible when sales were growing can become suffocating when revenue falls.
Flexible costs. Businesses able to adjust their cost base without destroying their ability to operate have an enormous advantage.
Good financial information.Owners need to know what’s happening to margin, cash, debtors and forward orders — not discover it three months later from the accounts.
Strong customer relationships.When customers cut spending, trusted suppliers tend to survive longer than interchangeable ones.
A clear value proposition.Customers become ruthless about distinguishing “nice to have” from “need to have.”
And finally:
Management willing to act.
Waiting is itself a decision — and during a downturn it can be an expensive one.
Who will thrive?
This is where recession becomes interesting.
Because economic downturns don’t simply destroy businesses.
They rearrange markets.
Competitors disappear.
Good employees become available.
Commercial rents become negotiable.
Assets become cheaper.
Customers reconsider suppliers.
Poorly managed competitors reduce service.
Entire markets suddenly become open to businesses strong enough to pursue them.
The businesses that thrive are therefore likely to combine two apparently contradictory characteristics:
Defensive finances and an offensive mindset.
They protect cash while looking for opportunity.
They control costs without destroying capability.
They stay close to existing customers while pursuing competitors’ dissatisfied customers.
They preserve borrowing capacity.
They invest selectively when everyone else has stopped investing.
They recruit exceptional people when talent becomes available.
They acquire customers, equipment or even competitors at prices that would have been impossible near the top of the cycle.
In other words, they don’t confuse caution with paralysis.
The question every owner should ask
Nobody can predict a recession perfectly.
And waiting until economists officially declare one isn’t particularly useful to the owner of a small business.
By then your customers may have been behaving as though they’re in recession for months.
The better questions are much closer to home:
What happens to us if revenue falls 10 per cent?
What happens at 20 per cent?
How many months of cash do we have?
Which customers and products actually generate our profit?
Which costs are genuinely fixed?
How quickly are customers paying us?
What debt expires or needs refinancing?
Which expenditure would we stop first?
And, crucially:
What would we invest in if our competitors suddenly stopped investing?
Because preparing for recession isn’t simply about preparing to survive.
The best businesses prepare themselves to have choices.
When conditions are good, almost every business looks competent.
It is when money becomes tight that the differences become visible.
Some businesses will discover that growth had been hiding poor economics.
Others will discover that their balance sheet gives them resilience.
And a smaller group will discover something else entirely:
A recession can be the moment when a well-run small business stops merely competing with its rivals — and starts taking their market share.
If you want your business to be a survivor of recession, why not take advantage of a ‘Business Finance Health Check’ with a CFO On-Call?
