, Britain
In late 1990 a builder in the Midlands had eleven men, a yard and a full order book that emptied in about four months. In 2009 a print firm with three decades of trading lost its overdraft, not its customers. In April 2020 a café that had traded profitably for eleven years took nothing at all for eleven weeks.
Three different recessions, three different mechanisms, and a pattern that repeats enough to be worth learning from.
Each one broke a different thing
The early 1990s recession was a monetary one. Interest rates had been raised hard to squeeze inflation, and Bank Rate stayed in double digits for a long stretch. Britain joined the Exchange Rate Mechanism in 1990 and left it on 16 September 1992, a day on which the rate was raised twice in a single morning before the policy was abandoned. Mortgage costs and business borrowing costs were brutal, house prices fell, and negative equity trapped both households and the small businesses secured on their owners' homes. Construction and anything tied to house moves went first.
The 2008 recession was a credit one. The failure was in the banking system, and it reached small firms through their lenders rather than their customers. Overdrafts were withdrawn from businesses that were still trading profitably. Bank Rate was cut to 0.5% in March 2009 and stayed there for years, which helped anyone with existing variable-rate debt and did nothing for anyone who needed new borrowing.
The 2020 contraction was the sharpest and the strangest. Output was stopped by instruction rather than by demand, with the Office for National Statistics recording a fall in GDP of around a fifth in the second quarter of 2020 before an equally unusual bounce. The Coronavirus Job Retention Scheme and Bounce Back Loans meant that, unlike 1990 or 2008, a large part of the shock was absorbed by the state rather than by the businesses.
The same trades fall first every time
The order is predictable because it follows how households respond to uncertainty. Deferrable purchases go first. Then discretionary services. Then anything downstream of housing transactions.
In practice that means construction and fit-out, estate agency and conveyancing, furniture and carpets, kitchens and bathrooms, vehicles, recruitment, advertising and marketing services, commercial print, corporate hospitality and non-essential business travel. A business-to-business supplier whose customers are in those sectors is in them too, one quarter later.
What holds up: food at home, repairs and maintenance, accountancy and compliance work, veterinary and medical, utilities, funeral services, childcare, and anything on a contract with a notice period. Discount and value retail often grows, because trading down is a substitution rather than a cut.
The 2020 recession broke the pattern once, because the constraint was physical rather than financial. Hospitality and personal services, normally resilient, were closed, while construction and home improvement did well because people were at home looking at their kitchens.
Survival is a cash problem, not a profit problem
Businesses do not close because they made a loss. They close because on a particular Friday there is not enough money in the account.
The businesses that come through a downturn tend to have done the same unremarkable things:
- Cut cost early and once, rather than in six apologetic instalments. The second and third rounds cost more in disruption and morale than the first would have done at full size.
- Protected cash over turnover. That means chasing debtors properly, taking deposits, tightening credit terms with new customers and being willing to lose a sale to a customer who will not pay.
- Kept talking to the bank and to HMRC before missing anything. Time to Pay exists and is granted far more readily to those who ask in advance.
- Held onto the two or three people who actually make the business work, including through reduced hours, because rehiring capability in the recovery is slower and dearer than keeping it.
The most common fatal error is trying to trade through on price. Cutting prices in a downturn to hold volume works only if your costs are variable. If they are not, you have swapped a volume problem for a margin problem and then run out of cash faster.
Recovery rewards whoever kept capacity
The recoveries after 1992 and 2009 share a feature: the firms that grew fastest afterwards were the ones that still had staff, plant and a credit line when demand returned.
Downturns are also when the inputs get cheap. Commercial rents soften and landlords offer rent-free periods to fill units. Second-hand equipment becomes available from firms that have failed. Good people become hirable who would not have moved in a strong market. Competitors disappear, and their customers have to go somewhere.
That is not an argument for expanding into a recession with borrowed money. It is an argument for being the business with cash when everything is cheap, which means the preparation happens during the good years and consists mostly of not spending everything.
The counter-cyclical move that most reliably pays is taking market share from a weaker competitor who has stopped marketing entirely. In every downturn a large part of the field goes quiet, and the cost of being visible falls at exactly the moment most people stop being visible.
Where this shows up in the game
A Business Baron career can start in any year from 1930, and the economic cycle runs underneath everything you do, including the recessions above. Interest rates, consumer confidence, credit availability and sector demand all move, and a business built for the good years behaves very differently in the bad ones. You can also run a career that starts in a downturn, which is a completely different game from starting in a boom.