---title: “Week 6: Best Practices 5” subtitle: “Ch5 Planning for a Downturn: Venerability and Flexibility” author: “Place your name here” date: “2022-09-17” output: html_document: toc: yes editor_options: chunk_output_type: console —
A manager needs to monitor: All Managers are effected by recessions since they will be the ones responsible for preparing the company for the recession. It is important for managers to know the majority of the time the economy will grow. Considering this during times of growth it is important to prepare for a recession with a plan. When creating your companies plan managers need to monitor a company vulnerability to a recession, sketch out a contingency plan for a rec, and build flexibility into day-to-day operations.
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. |
| 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.” |
Overall the goal of a vulnerability assessment is to determine how much a recession effects them and when the recession will be in effect for their sector of the economy. When planning for a recession a company must ask the question, how vulnerable is our company to a recession? Next a companies chief financial officer will decide what gets cut first and will be a key player in getting a company through a recession. Throughout this assessment human resources is used as the one to implement future steps taken. How these decisions are made are very important because it is important to make educated decisions based on the right data. Past information about a company s past interactions with recessions could be useless since the cyclical pattern that company may have been in could have changed drastically to present day. It is much better to look at national data on a company’s industry to analyze decisions. ## The contingency plan After the vulnerability of your company is assessed it is important to make a contingency plan to figure out the actions you will take. Your plan must be put into place far in advance to allow for more flexibility. This is important because it is best to start doing things to prepare ahead of time. If you are to just prepare for the day of the recession you are bound to be in a lot of trouble. This plan also factor in when times are good to allow you to be more aware of when it is okay to make more investments in the company. Once your contingency plan is written out it is important to never let it sit an constantly improve upon it as times go by. this will make you more prepared in the future for a downturn.
Building up flexibility is a very crucial part of planning for a recession since this is where your options for dealing with difficult times is examined. One important example of this is when looking at take or pay. This is when a certain amount of materials are bought in exchange for a specific payment. This is important since this form of getting resources is not flexible at all since prices don’t change over time. This can cause you to buy product at a higher price than your competitors causing you to have a disadvantage, last thing you want during a recession. Another example of a flexibility killer is unionized companies. Unions fight for employees not employers. Many times unionized companies, such as GM, run into problems because of this because being unionized requires them to keep a certain amount of employee’s, level of staffing, and fights for unemployment benefits. Unfortunately what this can cause is you paying employee’s to not work. This can especially be seen at GM were they pay $1.4 billion every year for people not to work. It is important to improve relationships with customers and vendors when times are good. This means you should pay vendors during good times always on time to make sure that in bad times they can trust you. This may be especially important in a situation were your company needs material but can’t afford to pay for it out right. If your payments have always been on time the trust between you in your vendor may be good enough where they will give you a deal or credit. It is also important to improve your relationship with customers since you need to know which customers make you the most money. Knowing which customers make you the most money will allow you to focus on keeping them and getting rid of others that make you very little.
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. This shows how important it is to start planning ahead of time since simple budget cuts may not be enough to keep a company running during a recession. Recessions are part of running a business therefore you can not simply ignore them. If a company chooses to not plan for a recession there options for what they can do will be much more limited and it will take away flexibility from a company.
Explan 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.
System that has information on your businesses industry and the category your business exist in.
The change in cost of producing one or more unit to accommodate another customer.
The more a company outputs the less each average unit cost.
goods that are used in producing other goods.
The amount left over after subtracting liabilities, which is then spread out to the legal owners of a firms equity,
A bond represents a promise by a borrower to pay a lender their principal and usually interest on a loan. Bonds are issued by governments, municipalities, and corporations.
An amount of money loaned out to a borrower at an interest rate which is too be payed back with interest at the end of a certain point.
an amount of limited credit given to a borrower to use at any time.
unsecured form of currency that pays a fixed rate of interest and is to be used for short-term investments.
Describe the characteristics of the following events briefly.
Unions fight for employees not employers. Many times unionized companies, such as GM, run into problems because of this because being unionized requires them to keep a certain amount of employee’s, level of staffing, and fights for unemployment benefits. Unfortunately what this can cause is you paying employee’s to not work. This can especially be seen at GM were they pay $1.4 billion every year for people not to work due to contracts with unions.
During the 1980s and 1990s the electric utility industry saw that making large investments was not seen as effective as making small investments. During this time power companies preferred for large billion dollar power plants. They were seen as having much lower operational costs than smaller plants. Over time the electric utility industry saw that these bigger plants were not being fully utilized. This caused the industry to switch to smaller plants because smaller plants have far less error because they are made in two years oppose to 10. This makes them a much better option for electric utility industry since they are much more flexible. ### The Penn Central Railroad in 1970 Penn central railroad shows the effects of using short-term bank debt instead of a long term bond. This effect is seen because penn central decided to finance a large portion of its operations with commercial paper. Shortly after this though the recession lowered Penn’s central revenue and internal cash flow drastically. Penn thus couldn’t afford to pay off its debts and caused Penn to go bankrupt. If Penn had used bonds the difference is they still would have been financed. The author uses this as an anecdotal example to advocate for borrowing with staggering maturities. Elaborate.