Week 6: Real World Applications 5

The vunerability assessment

Analyze the data for your client company’s industry and answer the following questions.

1. How much have sales in the industry declined in the recession? What’s the worst that has happened in the past?

During the actual recession the lowest point in decline was around negative 2%. Though their lowest point of sales occurred slightly after the recession and it reached negative 3.4%. This was their second to worst dip they have had in recent year, with the worst one occurring in 2019.

2. Does the industry go into recession before, at the same time, or after the national economy goes into recession? If earlier or later, how many months of difference is there?

Bank of New Hampshire’s recession occurs after the national economy by about a year.

3. Does the industry recover from recession before, at the same time, or after the national economy? Again, what’s the difference in months?

Just like going into a recession, Bank of New Hampshire recovers about a year after the National Economy does.

4. How long does the industry typically take to recover from a recession?

The industry takes about a year to recover from a recession.

Grappone

Bank of New Hampshire

Comptus

Building flexibility into the business

Read the client’s response to the questionnaire. How can your client build flexibility into the business? Refer back to the textbook, if necessary.

Referring to the book, 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. I would certainly feel unnecessary to pay a higher interest rate on a long-term bond when short-term bank debt is currently available at a lower interest rate. Paying fees for future flexibility is like buying insurance.

Graponne

Question	Response from the company
Recessions raise the risk of bankruptcy. Even less severe downturns can limit the company's growth prospects for several years. How does your company plan for a downturn?	Our liquidity is a major focus when we are preparing for a downturn as well as our inventory levels.  Cash is king in terms of getting through a downturn. You also need great relationships with your lenders – you hope they will stick with you when times get tough.

Bank of New Hampshire

Question

Response from the company

Recessions raise the risk of bankruptcy. Even less severe downturns can limit the company's growth prospects for several years. How does your company plan for a downturn?

The bank builds up loss reserves, conducts expense reviews, tries to maximize yield on assets, looks to sell less profitable assets, e.g. low yielding loans. The bank also conducts various annual stress tests and scenario analyses to identify potential problems that could arise during an adverse economic event. Corrective action is taken to mitigate these risks if the exposure is outside of acceptable ranges.

Comptus

Question	Response from the company
Recessions raise the risk of bankruptcy. Even less severe downturns can limit the company's growth prospects for several years. How does your company plan for a downturn?	Our staffing is very light, and we utilize outsourcing when we are busy. In a downturn we can return to in house production.