A manager needs to monitor: The first step in planning for an economic downturn is assessing your companies vulnerability to a recession. This can be done by evaluating other companies in the industry as well as the timing of the economic downturn compared to overall market. The next step is for the CFO and other executives to create a contingency plan. This should be done when the economy is in a boom so the increased revenue can be used to midigate the impact of an economic downturn. It is also important to maintain as much flexibility going into a downturn so you do not get caught with bad contacts that you will still be forced to pay out on.
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.
|
| 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.” |
Before being able to create an accurate contingency plan, it is first essential to get an accurate assessment of where the company is truly at. The CFO can do this by comparing similar companies in the same industry during previous economic downturns. ## The contingency plan It is important to come up with a contingency plan not only to allow yourself more time to take the necessary steps, but create a plan without allowing the panic of a recession skew decision making. ## Building flexibility into the business As business cycles happen so frequently it is important to not always take the most lucrative contract, but the one that will allow for the greatest flexibility. This should be done to maximize profits in the good times while allowing downsizing during bad times. ## Summing Up
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 North American Industry Classification System is an attempt to standardize industry across the largest trading partners in North Amnerica. ### Marginal Cost A margin cost is essential for optimizing production throughout any industry. This is done by calculating the cost of producing one unit. ### Economies of Scale The Economies of Scale is a way of measuring the cost saving benefits of producing a product at scale. For example if a company wants to reach a certain price point for their product they may be forced to bulk order materials in order to keep material costs down. ### Capital Goods Capital goods are sold to be used ot produce other consumer goods instead of selling directly to the consumer. ### Equity Equity shows ownership of different portions of a company. ### Bond When a company or a country goes into debt they can issue debt securities in the form of bonds. This bonds then need to be payed back with interest to the purchaser. ### Bank Loans Bank loans can be obtained for verity of reasons from a personal bank loan for a car to a small start up raising initial funding. ### Line of Credit A line fo credit is a flexible loan from a financial institution. ### Commercial Paper Commercial Paper is any unsecured form of promissory note with a fixed interest rate.
Describe the characteristics of the following events briefly.
The job bank program was a program created by Ford and Chrysler during Detroit’s auto boom. In order to loosen the labor rules imposed by the workers union, Ford and Chrysler agreed to guarantee wages for workers who were “no longer needed” during economic downturn. This was an extremely poor decision by the auto makers due to their to inability to adjust to economic downturn.
The electric utility in the 1980’s and 1990’s suffered from several industry wide concerns. The most pressing of these is the incredible foresight that goes into determining their capacity. Since power plants take years to build can can not be easily downsized, this makes it extremely difficult to optimize energy production. A result of the extremely slow moving market is consumers will often adjust their energy needs by the time capacity is increased of decreased.
The Penn Central Railroad collapse is a textbook example of the risks of no diversifying their financing. Their complete reliance on short term loans without being able to refinance lead was the leading factor in their collapse.