Cascading Consequences

According to a Federal Reserve Bank of New York report, demand-side economic uncertainty and poor sales produce the greatest effects. Both factors can start a chain reaction that affects most every aspect of a small business. A major concern is that small-business owners most often do not have the financial resources to survive a prolonged decrease in demand. Credit options, which for many are limited, decrease even further as banks tighten credit guidelines and approve fewer loans.

Cash Flow Effects

Layoffs and Downsizing

Loss of business and sales revenue usually leads to across-the-board budget cuts. The first place many start is by reducing payroll expenses with a hiring freeze or layoffs. The result is fewer employees left to do the remaining work, which in turn decreases productivity. Productivity may decrease even further if remaining staff members start looking for other employment or become demoralized. Although downsizing does decrease expenses, it also limits the ability to pursue new opportunities and may increase customer dissatisfaction.

Prospects for Long-term Growth

References

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