10 Ways your business can get through a recession 

A recession has been looming since the global Covid-19 pandemic, but the UK’s economy has managed to dip in and out of growth until the last two financial quarters of 2022. Now, the Bank of England has warned that the country is likely to face at least a two-year long recession – the longest-lasting recession in UK history.  Whilst recessions are normal and recurring, they are no less challenging for everyone. If you’re a small business owner and concerned about closing down your business, our tax and accounting experts have compiled 10 ways your business can get through a recession.

1. Build a cash reserve

There’s a reason why the saying goes “cash is king”, and that’s because it’s vital to the survival of any business. The best piece of advice that is sure to get your business through a recession is to build a cash reserve or buffer as early as possible before cash starts getting tight and as much as possible. By doing this, you’ll be able to weather through any spells of low income whilst still being able to pay off outstanding debt and ongoing expenses to keep your business running. Perhaps you own a shop. With a cash reserve, you’ll be able to keep paying for the rent and utilities so that the shop can remain open even if customer footfall or sales is low. The longer you can keep your shop open for, the more likely your business will survive the recession and still be around when customers return and are able to afford spending again.

2. Limit your expenses

A natural reaction to a recession is to tighten one’s belt, and that is no different for businesses. However, knowing where to cut costs is the tricky part. You can start by looking at your profit margins to determine if there are certain areas of your business that could become leaner, or you could compare whether outsourcing certain job functions could actually be the cheaper option.  Be careful to not be too cut-throat when it comes to limiting expenses as it could have a detrimental effect in the long run. For example, scrapping marketing spend is often one of the most common ways that businesses choose to reduce costs but this can be counterproductive. That’s because consumers change their buying behaviour during a recession and so are more likely to be looking for and are open to new providers. If you stop marketing, then there is less chance that new customers will be able to find you. Similarly, larger businesses may want to reduce staff numbers as a way to cut costs, but this should be considered carefully first. During the pandemic, many industries significantly reduced staff numbers, but are now struggling to recruit sufficient workforce now that business is back up and running as usual.

3. Invest where you can

It may sound contradictory or risky to invest, especially after our advice to save money and reduce outgoings as ways for your business to survive a recession, but ultimately investing in your business means to improve it. As competitors cut back, recessions can be a real opportunity for businesses to stand out; which is why you’ll see some businesses thrive during an economic downturn. If you’ve had plans to diversify, this could be the moment to seize. Alternatively, if it has been increasingly apparent that your business needs to pivot towards a new direction as a result of changing consumer behaviour or industry trends, do not put off investing where needed to a later time as it could be too late. Investing does not have to be on a large scale. It can be as simple as adopting new technology or upgrading equipment to something more energy efficient. Although the super-deduction allowance and increased £1 million annual investment allowance is due to end on 31 March 2023, any small amounts of investment may still qualify as a capital allowance to reduce your corporation tax.

4. Improve your cashflow

During a recession, you will need to pay particular attention to your cashflow. Struggling to pay staff or suppliers on time can be the first signs that your business is heading towards insolvency, so managing your cashflow will be one of the most important things to do to ensure your business survives. If you normally only issue an invoice once a job is completed, you may want to think of ways to secure cash upfront to minimise the risk of a customer failing to pay and it becoming a bad debt. You could do this by asking for part payment as a deposit first or requesting payment for material costs before proceeding with a job. Make sure you communicate your payment terms with customers clearly at the start of any transaction or even consider running credit checks if suitable, issue your invoices promptly, and chase outstanding debts regularly. Manage your own debt by paying off high-interest loans first as quickly as possible or consider debt consolidation if it means you could be paying your debt off at lower interest rates.

5. Use a director’s loan to manage personal cashflow

Whilst our advice when you run your own business is to always keep your personal finances separate from your business finances, we understand that the two are inextricably linked. After all, you run your own business to be able to afford your personal expenses. It may be the case that your business is doing well, but your personal finances are struggling, especially where unexpected costs arise such as home repairs. If that’s the case, then you may want to take out a director’s loan from your limited company as opposed to lowering profits by taking out a higher salary (which will also increase your income tax liability) or taking out cash reserves via dividends (which attracts dividend tax). By taking out a director’s loan instead you’re able to withdraw funds from your business tax-free so long as you take no more than £10,000 and it is repaid within 9 months and 1 day. This method will enable you to manage your personal temporary cashflow issues, whilst being able to repay the company to ensure it stays solvent.

6. Small businesses may want to consider using the flat rate VAT Scheme

Taking the time to ask an accountant for advice on the most beneficial VAT scheme for your small business will be a worthwhile exercise during a recession. Not only does ensuring you’re on the most suitable VAT scheme improve your cashflow, but it can save you time on bookkeeping or even potentially add to your profit margins. For small business owners earning no more than £150,000 a year (excluding VAT), you may want to check if you can use the flat rate scheme. You continue to charge the normal rates of VAT for your goods or services, but depending on your industry, you’ll only pay a fixed rate percentage of VAT to HMRC. For example, if you’re a photographer and have charged a client £1,000 for a project, you’ll need to add 20% VAT on top which totals to £1,200. Normally, the £200 would be due to HMRC but with the flat rate scheme you apply your industry rate which is only 11%. 11% of £1,200 is £132 which is due to HMRC and you keep the £68 difference.

7. Manage bad debts with the cash accounting VAT scheme

If you’re unable to use the flat rate VAT scheme, then another VAT scheme which may be advantageous is the cash accounting VAT scheme. You’ll only be able to use it if your business is earning less than £1.35 million a year. By using the cash accounting VAT scheme, your VAT payments due to HMRC are based purely on when cash has been received as opposed to when invoices have been issued. Therefore, it means that if you issue an invoice to a customer who does not pay, you’ll also not need to pay the VAT due on that invoice. Whilst this does not completely eliminate the problem of bad debts and its impact to your business, it does offer valuable tax relief. Many small businesses foresee struggling with debt collection during a recession and so the cash accounting VAT scheme could be one solution to minimise heading into a negative cashflow. 

8. Revalue your stock

If your business requires high levels of inventory, then it could be sensible to get your stock revalued. Your stock may have decreased in value from when you first purchased it, especially during a recession if your goods are more likely to be seen as a luxury rather than a necessity. By revaluing your stock, you can then update your balance sheets and financial statements to report on your income and profits more accurately. Reduced profits will naturally equate to a lower tax liability. If you find that your stock revaluation has further resulted in a loss, then you may decide to offset that loss against other income from the same tax year if you’re running your business as a sole trader.

9. Carry back losses for a tax rebate

For those running your business as a limited company, you are only able to offset your company losses against trading profits as opposed to other income. Therefore, if you are suffering from financial loss, either because of stock revaluation, or just reduced levels of earnings, you may instead choose to carry back losses to offset against the previous year if that year was profitable. Doing this will mean that you’ll be able to receive a tax rebate, enabling you to use the cash to keep you afloat for a bit longer.

10. Make pension contributions

Finally, one of the most commonly overlooked ways your business can get through a recession is to make pension contributions. For limited company directors, paying employer’s pension contributions (even to yourself) is tax-deductible against company profits. We often recommend this tax strategy as a win-win solution to reduce your corporation tax whilst increasing your pension fund to be accessed at retirement age. For sole traders, making pension contributions does not reduce your earnings to reduce your income tax; however it can extend your basic rate income tax band so is recommended to those who fall into the higher or additional rate income tax bands. You can find out more about the tax advantages of paying into a pension.

These are our top 10 tax strategies to help your business survive a recession. If you enjoyed this article please sign up to our free monthly email newsletter. If you would like more tailored advice for your business, then please contact us to book in for a consultation to discuss how we can help.