The COVID-19 pandemic dealt a body blow to most of America’s small businesses. The economy went into recession as lockdown and stay-at-home measures were implemented across the country. Fortunately, things are better now. But the recovery hasn’t been uniform.
Financial experts and economists refer to the turnaround as a K-shaped recovery.
But what is a K shaped recovery?
In the following sections of this post, we’ll address the question, “what is a K shaped recovery” and tell you the impact it could have on your business. We’ll also provide you with a few tips on how you can protect yourself from its adverse effects.
The shape of recoveries
In the past, recessions have usually been followed by V-shaped or U-shaped recoveries.
- A V-shaped recovery describes an economic graph that plunges downwards and then climbs quickly back up again like the letter V.
- A U-shaped recovery is much the same except that both the recession and recovery stretch out a little longer.
But the COVID-19 recession has been different, with a new letter being used to describe the return to normalcy. We’re now in the middle of a K-shaped recovery.
What is a K shaped recovery?
Until recently, few people had come across the query, “What is a K shaped recovery”. However, the COVID recession has led to wide usage of this term.
There’s a reason that the letter K is being used in the context of the current recovery.
The two arms of the letter K indicate the different paths that separate sections of the economy are taking.
One arm is going up; the other is going down. This represents certain sectors exhibiting rapid growth while others continue to decline steeply.
Here’s an image that explains this term:
🔺 If you take a close look at the image above, you’ll see that some businesses are recovering (represented by the arm pointing upwards), these are technology and large-cap firms.
🔻 On the other hand, others are declining (represented by the arm that points downwards), these are small businesses.
If you think about it, this is precisely what’s happened over the last year. People made the shift to the online world. It wasn’t safe to shop at brick-and-mortar stores or meet your friends at a restaurant. So, customers started shopping from their phones or laptops.
Firms like Amazon, Zoom, DoorDash, and SnowFlake were among the biggest beneficiaries of the coronavirus pandemic.
Companies with a digital presence saw an increase in sales and profits.
Many small businesses, on the other hand, got the short end of the stick. As demand dried up, large numbers of small firms shut down. A May 2021 report from the World Economic Forum points out that 34% of America’s small businesses are still closed due to the COVID-19 pandemic.
The origin of the term
The term “K-shaped recovery” has been popularized by Peter Atwater, who’s an adjunct lecturer in economics for the College of William and Mary and the University of Delaware.
Atwater, who is also the founder of the research firm Financial Insyghts, provides an easy-to-understand answer to the question, “What is a K shaped recovery?”
“It’s the term I use to describe the clear economic divide that has been exacerbated by the pandemic. What I saw as early as the end of March last year was that for people who were able to pivot to working from home, their confidence immediately began to rebound. For everyone else, it was not getting better, and in many cases–particularly for those in the hospitality and travel industry–it was getting worse.”
And he goes on to spell out the impact on small businesses.
Atwater points out that big corporations found it easy to raise money to expand operations or help them ride out the crisis. But small firms had a difficult time raising cash. Many of them were denied credit as banks and other financial institutions tightened lending policies.
Now let’s get back to the question, “What is a K shaped recovery” specifically in the context of its impact on small businesses.
How does a K-shaped recovery affect my small business in the US?
As we mentioned earlier, small firms have borne the brunt of the damage done by the COVID-19 pandemic. In September last year, Suzanne Clark, President, and CEO, U.S. Chamber of Commerce, provided an insightful answer to the “What is a K shaped recovery” question. Here’s what she says:
“Depending on where you sit in the COVID economy, business could be booming or on the brink of bankruptcy.”
Which are the industries that are booming in the COVID economy? The sectors that have reaped the benefits of people staying indoors are:
- Tech firms
- Online retail
- Software services
But companies associated with the following industries have been at the receiving end:
- Offline entertainment (as opposed to online entertainment companies like Netflix)
- Food services
Of course, the four sectors listed above aren’t the only ones to feel the negative effects of the pandemic. A McKinsey report titled, Which small businesses are most vulnerable to COVID-19–and when lists several other parts of the economy that have felt the negative impact of COVID-19. These include educational services, arts entertainment and recreation, transportation and warehousing, and retail trade (especially apparel).
However, the news isn’t all bad. If your company is struggling with the ill effects of the pandemic, there are several things you can do to alleviate the situation. We’ll tackle this in the next section.
How can I prepare my business for the effects of the K-shaped recovery?
Remember that in business, CASH IS KING!
So, the first thing you need to do is keep your finances in order. Ensure that you have enough money to meet your fixed expenses, and don’t forget to keep a buffer. A loan is, for many businesses, the perfect way to strengthen a business, even during tough economic times.
And while you monitor your funds, it’s important that you learn to eliminate wasteful expenditure.
It’s also essential to manage your personal finances carefully.
Of course, these aren’t the only steps you should take. It’s also vitally important to find ways to boost your sales.
How can you do this?
There’s a simple answer to this question (but the implementation of this idea will require a concerted effort on your part).
Invest more in digital tools.
If you don’t already have one, start building a website today. It’s the first step in establishing your digital footprint.
You may be surprised to know that it doesn’t cost much. You can build your business website with less than $1,000.
If you don’t want to hire a website designer or a developer, you could consider using a website builder. This is an online tool that allows you to create a website even if you don’t have coding skills.
It’s essential to have an online presence for your business.
James Manyika, chairman of the McKinsey Global Institute, a research organization, says that digital investments are necessary for success. He points out that even within the same sector, “the variations between the most and least digitized companies were huge.” So, if you own a business that has an online presence and is active on social media, your chances of success are much higher.
A recent survey of 2,000 small businesses across the United States and seven other countries found that a vast majority of firms were in the process of increasing their digital presence.
Daniel-Zoe Jimenez, AVP, head of digital transformation & SMB research at IDC, the company that conducted the survey, says:
“Small businesses are realizing that digitalization is no longer an option, but a matter of survival.”
Overcome the K shaped recovery
The K-shaped recovery brought about by the COVID-19 pandemic has led to a decline in business for many small businesses. However, it’s possible to prepare your company for the post-COVID world by conserving your cash and adopting a digital mindset.
We invite you to subscribe to the Camino Financial Newsletter to receive more management tips and information on ways to strengthen your company. Our motto–No business left behind–guides our efforts to provide you with the resources you need to increase your firm’s sales and boost its profits.