A manager needs to monitor: His company 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.
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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.” |
“How vulnerable is the company to a recession?” is a question every manager needs to ask themselves. How will a downturn in the market change our economic situation and how prepared is the company to take that hit. All of this goes in to the basis for setting up contingency plans for the company. Looking at the company’s history can be some what useful but the industry data is often more practical to use to gauge the weaknesses of the company.
The contingency plans are set up to protect the company in case of a recession, or at least prepare it for the incoming economical hit.
A business flexibility is being increased or decreased with every decision it makes. This means that every decision has to be made with the understanding of its repercussions to the flexibility to the company.
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.
NAICS is the standard system used by the Federal statistical agencies to classify business establishments for collecting, analyzing, and publishing data related to the U.S.
It is the added cost of adding one more unit/service.
Money saved by increasing the level of production.
Goods that are being used to produced other goods.
How much money the company would amount to after liquidating and paying of all its debts.
A bond is an for of IOU, you borrow money to someone/something for a certain time period.
An amount of money loaned from a bank with interest.
The line of credit is how much money someone is allowed to borrow.
Is an unsecured promissory note issued by a firm/company to try and raise funds for a shor time period.
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.
At the time General Motors commanded a huge amount of the workforce within the auto industry. General Motors tried to be more efficient in its workforce by buying out some workers and keeping the best ones, leading to a lot of people not agreeing to the terms and instead riding out the bank to get their money. Leading to workers not working but still getting paid. This made it almost impossible for General Motors to have any flexibility in their prices because they could not change the labor costs. Leading them to unnecessary hard financial times.
The author uses this as an anecdotal example to advocate for smaller modular investment in stages. Elaborate.
People had a hard time adjusting their electric usage in the short-term but not their long-term. The biggest problem was the preference on electricity. At the time the most favorable was electricity from power plants with could produce a lot of energy with a very low maintenance cost. Though it could produce a lot of energy, it instead produce more than the consumers could use and therefore lead to a period of slow growth of sales. Instead, new smaller generators were built to accommodate the consumers better.
The author uses this as an anecdotal example to advocate for borrowing with staggering maturities. Elaborate.
The Penn Central Railroad was using commercial paper to finance itself. But due to the recession in 1970 the freight traffic was lowered, thus leading to Penn Central’s revenue and cash flow doing the same. This lead to a lot of creditors getting scared that they were going to lose their money. They then made Penn Central pay back all the money they had borrowed leading to Penn Central going in to bankruptcy. If Penn Central had borrowed money through bonds they would have made it through the recession, which ended in 1971. By just making sure that they did not have to pay back all of their loans at the same time could have saved them too.