A manager needs to monitor: Asses the business’s vulnerability to a recession.
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. | | | | | - relationships with vendors and customers | | | - take-or-pay contracts | | | - the goodwill piggy bank | | | - a customer profitability analysis system | | | - hiring | | | - labor contracts | | | - leasing real estate | | | - capital spending | | | - smaller modular investment in stages | | | - financing | | | - equity, bond, bank loans | | | - paying a fee for a stand-by line of credit | | | - make sure that the maturities are staggered with at least two years between maturities | | | - commercial paper vs. bond | +————————————————————+————————————————————————————————————————————————————————————————————————————————————————————-+ | 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.” | +————————————————————+————————————————————————————————————————————————————————————————————————————————————————————-+
Ask how vulnerable is our company to a recession? You want the sales data for the company however this can be difficult because its often not available or unreliable. Instead often the national data on the company’s industry is used. Once we have this data it is then assesed against the GDP data.
A plan designed to help a company take the needed steps if a future event takes place. The author talks briefly about it but lets us know we will go over it in much more detail in chapter 7
In order to build flexibility into your business, you must first learn to trust your employees. If you want to provide flexible work hours or let them work from home, do you trust the fact that the work will get done on time? To build trust, get to know your employees on a personal level. You also must let uneccesary employees go in a good economy oppeosed to a bad one your company will have enhanced flexibility and it is far kinder to your employees. You also must build a good vendor and customer chain so you have variety and different choices in god times and in bad, also different types of contracts and methods of payment can be used.
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.
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.
The standard which is used by federal statistical agencies in classifying business establishments for the purpose of collecting, analyzing, and publishing statistical data related to the U.S. business economy, it was also developed by the U.S. Economic Classification Policy Committee (ECPC), Statistics Canada, and Mexico’s Instituto Nacional de Estadistica y Geografia, to allow for a high level of comparability in business statistics among the North American countries. it uses a hiararchical structure. You can find a company’s or industry’s NAICS code by going to the Census Bureau’s North American Industry Classification System page. NAICS codes are used for many purposes, but one of the most important is that the Small Business Administration uses them to set size standards for particular businesses to be considered “small” in order to qualify for various small business-related programs.
Marginal cost is the cost added by producing one additional unit of a product or service.
The cost advantages that enterprises obtain due to their scale of operation. These are typically measured by the amount of output which is produced per the unit of time. Decrease in cost of unit per output enables an increase in sale.
Goods that are used in producing other goods, rather than being bought by consumers.
The value that would be returned to a company’s shareholders if all of the assets were liquidated and all the company’s debts were paid off. One can also see this as a degree of residual ownership in a firm or asset after subtracting all debts associated with that asset.
A type of security under which the issuer owes the holder a debt, and is obliged depending on the terms to repay the principal of the bond at the maturity date as well as interest over a specified amount of time. These are often used by governments in times when they need lots of money such as warbonds in ww2.
A sum of money that one or more individuals or companies borrow from banks or other financial institutions so as to financially manage planned or unplanned events. In doing so, the borrower incurs a debt, which they have to pay back with interest and within a given period of time.
A flexible loan from a financial institution that consists of a defined amount of money that one can access as needed and repay the money amount either immediately or over time. Interest is charged on a line of credit as soon as the money is borrowed.
The short term, unsecured debt issued by an institution who wants to raise capital needed for a short amount of time. It’s an alternative to having to go through the effort and cost involved in getting a business loan.
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 with this 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 program depended mostly 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. The Electric Utility Industry in the 1980s and 1990s experienced 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 other options to be energy-efficient. This weakened the sales of electric companies. They learned it is better to have slightly more expensive facilities that are heavily utilized than highly efficient plants that sit non utilized and in idle.
The author uses this as an anecdotal example to advocate for borrowing with staggering maturities. Elaborate. Penn Central was financing a sizeable portion of its operations with commercial paper. The recession of 1970 lowered freight traffic and then after the revenue and then the internal cash flow of The Pen Central railroad. Overtime, the railroad went bankrupt due to them not being able to repay their debt. if they used bonds, then the creditors wouldn’t have been able to pull the plug on all of their financing.