RECESSION

• Recession


  A period characterised by falling levels of consumer demand, output, profit and business confidence, little investment, spare capacity, and rising levels of unemployment.
• Effects of Recession on Businesses: Falling demand

  • Falling demand and therefore excess stock may lead to reduced prices
  • Falling demands an d reductions in output may lead to low profits or even lossess being made and workers being laid off if the recession is long term. On the other hand , firms producing inferior goods may benefit as consumers switch form luxury items to low priced alternatives.
• Effects of Recession on Businesses: Liquidation

  Liquidation, or business closures as a result of falling demand and losses, may result in fewer suppliers of certain products and fewer customers for other products.
• Effects of Recession on Businesses: Lower Income

  As businesses struggle with falling demand and individuals feel the effects of lower incomes, firms are likely to experience an increase in bad debt (customers who cant pay debt). To fix this, firms may introduce tighter credit control procedures, which may lead to less trade.
• Effects of Recession on Businesses: Statement of Financial Position

  A strong statement of financial position, sufficient liquidity (able to pay debts when due),and low gearing are important to survive recession. High unemployment will lead to a drop in demand for some goods and a switch in demand to inferior goods. This may lead to firms facing falling demand to search for new markets by diversifying the product range of consumer goods (capital goods are what businesses buy). After diversifying the product range the business isn’t too dependant for its profits on luxury goods.
• Effects of Recession on Businesses: Low Investment

  Low investment due too falling demand may lead to a decline in the output of firms producing machinery.
• Effects of Recession on Businesses: Surival

  To survive a recession, businesses need to operate as efficiently as possible, resulting in businesses being stronger and better after recession. Businesses may change their objectives from growth to survival.