Recession

What it means

A recession is a period of economic decline in which GDP falls, companies invest less, unemployment rises and demand weakens. Two consecutive quarters of falling GDP are commonly called a technical recession, although economists also look at employment, industry and consumption.

A recession is part of the business cycle, in which periods of growth and decline alternate. Causes include financial crises, sharp interest rate rises, energy price shocks, pandemics or falling foreign demand, to which an open economy like Slovakia's is sensitive.

For businesses it means pressure on sales, margins and cash flow. Customers postpone purchases and pay more slowly, banks tighten lending and customers' credit risk rises. Yet recessions also bring opportunities: cheaper assets, available talent and weaker competitors.

How it works in practice

Preparing for recession starts in good times: a cash reserve covering several months of fixed costs, sensible leverage and a diversified customer base. A company dependent on one customer or industry is the most vulnerable in a downturn.

A scenario for sales falling by tens of per cent is useful: which costs can be cut quickly, which investments postponed and how long the company can hold out. In a crisis, short-term cash planning such as a 13-week cash flow forecast reveals problems in time.

It is important to watch customers' payment behaviour and act early: shorter payment terms, deposits, credit insurance or lower credit limits for risky customers. A bad debt hurts more in a recession because replacing it with new sales is harder.

What to watch out for

Across-the-board cuts, such as stopping marketing and laying off key people, can harm a company in the long run. When the recession ends, it lacks the capacity to grow and competitors who kept investing win market share. Cuts should be targeted.

With prolonged liquidity problems, the director's legal duties in the face of threatened insolvency must also be kept in mind. Delaying action in the hope of recovery can lead to the director's personal liability for losses suffered by creditors.