Analyze the data for your client company’s industry and answer the following questions.
Comptus’ industry sales declined as much as -11.3% during the 2nd quarter of 2020. During the fourth quarter of 2008 while in the midst of the Great Recession, the industry sales went as low as -11.6%.
Comptus industry sales showed declining sales in the 3rd quarter of 2019 at -1.4 % before the recent recession hit during the second quarter of 2020, but showed sales at 0.2 % increase in sales at a decreasing rate during the second quarter of 2019. This was a full two quarters (8 months) in sales data before the national economy dipped during the 1st quarter of 2020 at -1.2 %.
Both Comptus industry and the national economy recovered from the most recent recession during the 3rd quarter of 2020. Comptus industry showed 2nd quarter sales of -11.3% but remarkable recovery in the 3rd quarter to 12.0%. The national economy hit as low as -8.5% in the 2nd quarter and quickly recovered to positive growth of 7.9% in the 3rd quarter of 2020.
Industry data only goes back to show recovery times from the 2007 recession and the 2020 recession where data recovery was very different. During the Great Recession, Comptus industry began declining in sales during the 1st quarter of 2008 and didn’t recover until the 3rd quarter of 2009. That is a staggering 21 months until recovery. During the 2020 recession, Comptus industry began its decline in sales during the 3rd quarter of 2019 and recovered significantly faster by the 3rd quarter of 2020, about 12 months, 1 year later. If we were to go by recent recession data, one could assume Comptus industry will take around 1 year to recover from recession and a worst case judgement the likes of the Great Recession of 21 months.
Read the client’s response to the questionnaire. How can your client build flexibility into the business? Refer back to the textbook, if necessary.
| 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. |
| 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. |
| 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. Comptus’ industry mainly focuses on the sales of Environmental systems and weather measuring instruments to other businesses. Creating flexibility for a company that focuses on selling to other businesses for their specific needs creates a unique situation for Comptus. “Relationships between vendors and customers need to be managed in the good times with an eye to survival in the bad.”- William Connerly made this statement in Businomics and it rings true for Comptus. Their industry is hit hard during recessions, so being prepared is crucial. Client relations is extremely valuable to this industry. Having the ability to keep a relationship when the going gets tough will only help Comptus; especially when vendors and businesses such as weather observatories require unique instruments that Comptus can offer. Another example of having flexibility is understanding proper capital spending. Making sure that you are not overspending when the market is doing well but not under spending can be a huge benefit for Comptus. Material prices have soared recently and it has caused many to limit spending. Having a proper supply of liquidity in when a recession hits especially when being able to pay off bills or debts. Comptus can plan for downturns by being flexible with liquidity and client relations so when tough times hit, they are well prepared. |
|+———————————————————————————————————————————-+——————————————————————————————————————————+