A manager needs to monitor:
Managing through the Business Cycle
| Steps | Description |
+============================================================+=====================================================================================================================================================================================================================================================================================+ | Assess vulnerability to the recession | “How vulnerable is our company to recession or a slowdown in sales?” Assess the vulnerability in terms of magnitude and timing of slowdowns in sales using national data on the company’s industry. Businesses with a long history needs to be cautious about using its own past to predict future recessions. The best gauge of vulnerability is often national data on the company’s industry. Identifying which component of gross domestic product is included in a company’s sales can help keep the business in tact and prepare for upcoming recessions.|
| Sketch out a contingency plan for dealing with a recession | It’s an one or two page plan, which can lead a manager to build flexibility into the business. |
| Build flexibility to cut expenses | A company needs the flexibility to cut costs in difficult times. A manager can build flexibility in the business by considering the following areas.
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| Develop an early warning system. | In 1940, the Battle of Britain began as 2,400 Luftwaffe aircraft attacked England. The Royal Air Force had only 900 planes., yet they successfully defended their country from the Germans. They key to their success, was radar. The early warning system is “radar for business.” |
Businesses with a long history needs to be cautious about using its own past to predict future recessions. The best gauge of vulnerability is often antional data on the company’s industry. Identifying which component of gross domestic product is included in a company’s sales can help keep the business in tact and prepare for upcoming recessions.
Consistency is the greatest value to look for in early warning reports. It ensures that the person preparing the report has not selectively chosen the most optimistic, or the most pessimistic, indicators. A standard economic report forces the entire management team to look at information that may be contradictory to the boss’s preconception and the business can only benefit from this.
Some companies enter into Take-or-pay contracts with vendors. The vendors then supply a certain amount of material and in exchange, the company agrees to either buy a specific amount or to make a payment to the vendor. This contract has advantages, but it can limit the buyer’s flexibility. The obvious options for increasing financial flexibility are issuing equity, long-term debt, or paying a fee for a stand-by credit line. It may feel like an unnecessary expense to pay a loan commitment fee on a line of credit that will never be used.
Preparing for a recession starts with understanding the vulnerability in a business. Then come the sketch of contingency plans and the additions of limited flexibility to the operations.
A company that learns in its contingency planning that it has limited options for cutting expenses may spend a year adding flexibility wherever it can.
Explain each of the following terms in your own words. The author explains the terms in the textbook. If necessary, you may also Google the term on the Web. Good resources include:
Explain the terms in your own words briefly.
The standard used by Federal statistical agencies in classifying business establishments for the purpose of collecting and publishing statistical data related to the U.S. business economy
Divides total costs by the total number of units. It can be different from average costs. Thinking “at the margin” often leads to better economic decision making than thinking about the averages.
As input increases, the average cost of each unit produced falls. One factor that leads to this is fixed costs can be spread over more units of output.
Physical asses that a company uses in the production process to manufacture products and services that consumers use.
The capital of a firm, after deducting any liabilities to outsiders other than shareholders. Fairness plays a role in equity since economists are interested in how systems of taxation work.
An interest-bearing security issued by companies and the government. These are used as an alternative route for issuers to raise capital to selling shares or taking out a bank loan,
A certain amount of money loaned at an interest rate by a bank to a borrower for a certain period of time.
A flexible loan from a bank that consists of a defined ammount of money the borrower can asses as needed and is payed back right away or over time,
An unsecured form of promissory note that payes a fixed rate of interest.
Describe the characteristics of the following events briefly.
The author uses this as an anecdotal example to explain the danger of inflexible labor contract. Elaborate.
The idea was that the excess labor would be temporary, then sales rebounded sufficiently that GM would need all of its workers at a higher level of productivity. This pro- gram depended critically on a forecast of future sales, which includes both a forecast of the market and a forecast of GM market share. When the forecasts proved to be overly optimistic, the company lacked the flexibility to cut expenses.
The author uses this as an anecdotal example to advocate for smaller modular investment in stages. Elaborate.
This business had declines in demand growth. First, it took providers awhile to see the effects of price hikes on consumer demand. After a few years of high electrical prices, people used insulation and used other options to be energy-efficient. This weakened the sales of electric companies. They learned that it’s better to have slightly more expensive facilities that are heavily utilized than highly efficient plants that sit idle.
The author uses this as an anecdotal example to advocate for borrowing with staggering maturities. Elaborate.
Penn Central was financing a large portion of its operations with commercial paper. The recession of 1970 lowered freight traffics and then the revenue and internal cash flow of the railroad. Overtime, the railroad went bankrupt since they could not repay their debt. if they used bonds, then the creditors would not have been able to pull the plug on their financing.