A manager needs to:
Managers have 4 steps through the business cycles. The first step is where managers assess the company’s vulnerability to a recession. Next a manager must sketch out a contingency plan for dealing with a recession. This will insure your company is prepared ahead of time and knows what to do during downturns. Managers after to make life easier during a recession should build flexibility into the company’s day-to-day operations. Lastly, managers should develop an early warning system for identifying incoming downturns. As you can see being a manager is all about consistently being prepared to change how the company functions based on the economic conditions they are facing at the time.
Table of possible options in a contingency plan
| Expecting a downturn | During moderate downturns | During severe recessions | |
|---|---|---|---|
| capital spending | reevaluate | cut entirely or almost entirely | not only cut entirely, but consider selling assets |
| employment | slow hiring | freeze hiring, layoff generic production workers | eliminate future-oriented positions (e.g., R&D), keep sales personnel though not at previous levels, cut all other staff areas to the maximum extent |
| inventories | monitor closely | monitor closely, review for unnecessary inventory items | the same as the left |
| account receivable | tighten credit terms, set up a factoring (selling account receivables) relationship | collect as rapidly as possible, on the payment side delay to the extent possible | the same |
| financing | secure a larger credit line, delay payments to vendors, get some long term debt | consider stop paying dividends, keep good relationship with banks by disclosing the company’s condition early and fully | the same |
| lines of business | shut down unprofitable operations | the same |
During this stage one of the most important things to take into consideration is to act but be aware that overacting can also hurt you in the long term. This is also known as emotional decision making. During this stage a company should try to save on capital spending. But, you should not cancel plans when the cost will result in more than it if you were to cut its spending(associated with big projects already in progress). Another area of the company that should be assessed is inventory. This is important because many times at the beginning of a recession you will see a drop in needed inventory or a rise in inventory price. This needs to be watched in case of changes that could affect your company. Managers should also sell receivables also called “factoring”, this way you will have cash ready for a further downturn. Lastly, it is important to extend credit line, try to delay debts, or get long term debt if your company needs to. Since this could be the last time lenders will be willing to do such things.
Moderate steps are to be taken once the recession starts to accelerate and is when greater force is taken. During this time capital spending should be cut entirely, or almost entirely. While a hiring freeze should occur and layoffs may be necessary. Employee’s that will mainly be affected are production workers. This is because as production level declines production workers must be cut. In order to maximize cash flow during this time all accounts receivable should be collected as rapidly as possible. Inventory must continue to be monitored as during this time it becomes increasingly more important.
Survival steps are taken during the worst part of the recession and are most important because during this stage of a recession for a company it is very easy to go bankrupted. Since this is so important it is necessary to hire a turn around specialist, who specializes in helping companies get through a recession. The first step a company must take is capital spending needs to be stopped and asset sales needs to be considered. Employment must be cut as much as possible, therefore everyone who isn’t critical is cut. Sales personnel will be kept but, most likely not at previous staffing levels. Lastly, steps taken in earlier parts of recession are even more important now and must be taken.
During a recession while it may seem everything is going to be bad there are certain positions where it could be advantageous. One example of this is in the case of Air Tran. Air Tran during the beginning of the recession had lowered operating expenses. Due to this increase in cash and bigger companies selling planes at discounts this allowed them to buy many new plans at fraction of the price. This purchase would have never happened without the recession allowing for a very advantageous position for Air Tran. During this time it is also important to re-negotiate long-term contracts because credit companies/lenders will be willing to offer better deals for your company during a recession. Lastly, you should look to long term contracts during this time. Since times economically are bad it is very possible to get long term deals for leases and suppliers.
During a recession there are many opportunities to take advantage of the bad economic times people and companies are in. For example several opportunities arise for a company with cash or credit facilities. During good times it is actually seen that these companies have less acquisitions and more during bad times. To do an opportunity scan a company must first stop and look at cash and ability to finance a purchase. After doing and overview of the companies finances it is important to try and invest in target market segments that will be larger after the recession. Other opportunities can include buying out weak competitors. Although this will be difficult since companies won’t want to sell til lenders force them to. Lastly duringn this time since employment and staff are being cut by companies it is much easier to find talented employee’s at a cheaper wage.
Prices during a recession are eventually weakened significantly because people become much more price sensitive. Predatory pricing is also high discouraged since once competitors are out of business your prices will be increased again. This sounds fine but this eventually puts you at risk for new comers that will lower prices again and steal all the price sensitive customers back. During a recession new capital equipment can be bought at a discount due to the bad economic times your competitors or sellers are seeing. It is important to know how bad a company needs to sell parts of the company. If a company starts to layoff sales workers this can be a sign that significant deals can be made in your companies favor. Otherwise when companies go have to sell this can help your company make big investments at a fraction of the price.
During this time sales are starting to rebound which is a good sign. But, During this stage of the business cycle there is another set of problems that can occur. Increasing sales usually stresses the company’s position. First managment must make sure capacity is ready to expand with production. Secondly, employers need to higher wages, inform employees of benefits, and offer new opportunities/advancement. These efforts are to combat employee turnover which will start to occur because of increasing employment opportunities. People with worsened cash positions during the recession can see further worsening during this period. This is important to since it is possible for a business to also go bankrupt during this period of the business cycle too.
During a boom your company will experience high profits and market explosion/expansion. It is important to try to not get carried away since a boom will never last forever. Capital spending at this time will be increased since cash flow is high enough for your company to make investments. During a boom you must get your finances in order since this is a time when you will have the most spending flexibility. Managers and productions workers will be at max capacity at this time sometimes causing problems keeping up with massive amounts of orders. Lastly, during a boom it is important for a company to review contingency plan for the next downturn.
I have learned that managing for a recession is done before and after the recession occurs. It is first important to plan ahead and input flexibility into your contingency plan. During the recession it is most important to protect cash and follow each step as the recession gets worse. It is important to do everything you can ahead of time and during the recession to avoid survival mode since at this stage your company is at great risk for being liquidated/sold/bankrupted.
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.
Money that is owed to a company your company for its products or services.
Economic policy and laws that are made to avoid monopolies or monopolistic actions by companies. Other wise these laws are made to make sure smaller business have a fair shot at being competitive.
Short run or long run process by which a firm may determine the price, input and output levels that will lead to the highest possible total profit.
Describe the characteristics of the following events briefly.
During this time Washington mutual closed down fifty-three business banking offices, otherwise laying off many workers. This didn’t happen during a recession but it gave competitors the opportunity to take employee’s that they needed for there company at a much lower wages. Not only did this increase available employees but it allowed for opportunity to take every part of the company being let go including loan officers. This is an example of an opportunity that could arise due to a recession and must also be taken advantage by competitors.
Air Tran during the beginning of the recession had lowered operating expenses. Due to this increase in cash and bigger companies selling planes at discounts this allowed them to buy many new plans at fraction of the price. This purchase would have never happened without the recession allowing for a very advantageous position for Air Tran. This is an example of how a company can take advantage of recessions. Without the recession of 2001 big airplane companies wouldn’t have been selling there planes at discount. Therefore Airtran took this as an opportunity to evolved and they did just that by going from having 46 aircraft to after the recession they had 76 planes.