A manager needs to: Think ahead of time about the steps that you may have to take. Early consideration can help you grow the business. Reevaluate and limit capital spending. Reevaluate, freeze and layoff employments Limit or sell inventories Factor accounts receivable. Consider closing or selling money losing segments
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 |
When you notice a warning sign in the early warning system, you must review and update the contingency plan, and: limit new hires to vital positions, reduce or eliminate capital spending plans, monitor inventories closely, and set up credit lines if possible. The business should have considered selling accounts receivable by this time. This can help a company in temporary financial difficulties.
The moderately severe steps taken in a recession are not very different from the easy steps, but they are more detailed and with greater force Business managers should review employment, with a hiring freeze being the minimum policy, cut capital spending, and financing. Business manager should keep lenders fully apprised of conditions Times of economic stress show just how good or badly the company was managing in the up cycle. *If the company pays dividends, it is time to reconsider them.
Companies whose survival is at risk should consider bringing in a turn-around specialist. Expense reduction measures that are harmful in the long run may be the best for short-term survival. Capital spending needs to stop, and asset sales need to be considered. Employment must be cut as much as possible. Positions oriented for the future must be cut entirely. Sales personnel has to be kept, but maybe not the same as previous staff levels Keeping inventories lean, hoarding cash and delaying payments are even more important now. *In the end, it might be necessary to think if its best to sell the business, or whatever is left of it.
Recessions are bad for most businesses, but some companies can take advantage of a recession. Businesses that have prepared the best for a recession will have the best opportunities to make something good out of the recession. *Long term-contracts should be reviewed with an eye to renegotiation.
A recession provides several opportunities for businesses with cash or credit facilities. The most obvious is acquisition of weaker competitors. A business begins its scan of opportunities by looking inward at their cash and ability to finance a purchase or capital spending. A business should also identify market segments where they would like to be bigger when the recovery comes. Another opportunity is identifying and looking for distressed competitors, property and equipment, and talent. *Acquisitions should always be approached with cautiousness. Too many acquisitions are motivated by an ego rather than hard economics.
Prices often weaken during recessions, but businesses should be very hesitant to initiate price wars to build market shares. Predatory pricing is the name for price cuts which are meant to put a competitor out of business. In a recession, the companies with the biggest balance sheets will have a bigger possibility of doing this. New capital equipment is often purchased at bargain prices during recessions, but it is important to be cautious when doing this. The bargains might be in an industry that does not need additional capacity. The easiest sales opportunity in a recession is to watch for competitors exiting a business.
The recovery always sounds good. Sales are going up again, there is more and more optimism, and the light at the end of the tunnel is visible. However, these times are not easy.
Managing in a recovery always starts with making sure that you have enough capacity to expand production. Increasing sales will usually stress the company’s cash position. You should expect employee turnover to increase unless there has been taken significant steps to retain workers. Key employees might have to be recalled. A retirement or other reasons for leaving the firm might mean that it is not possible to turn production around on a dime. Other business issues can usually wait until the turnaround is well underway. Capital spending, research and development, and new marketing campaigns can usually be postponed until the company’s finances are on a firmer footing.
Good times are always great, both for high profits and market expansion, and to prepare for the inevitable slowdowns. Use the boom to get finances in order, including credit lines. Businesses should compare the least profitable sales price to the cost of the last few percentage points of production. Review the contingency plan for the next downturn. *Attitudes need to change in a boom. Managers need to treasure profitable sales now, and the substantial discounts might need to be lowered or removed.
Managing in a recession occurs a long time before and after the actual recession. The most important factor is thinking ahead about how to incorporate flexibility into the business. *Hopefully, sales turn around before the company enters survival mode.
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.
*Accounts receivable are the money that a company’s customers owe for goods or services they have been provided but not yet paid for. An example is when a customer purchases an item on credit, the amount owed gets added to the accounts receivable.
*Profit maximization is a process businesses undergo to make sure that the best output and price levels are achieved in order to maximize its return. Sales price, production cost and output levels are important factors that are adjusted by the firm to realize its profit goals.
Describe the characteristics of the following events briefly.
Washington Mutual went bankrupt and closed down 53 business banking offices, laying off over 850 workers. This did not happen during a recession, but it could have been and is a good example of what can happen during a recession. This was reported in the news, and competing banks immediately started calling on Washington Mutual’s competitors.
Lower-quality customer service or lower-quality products may result from staff layoffs at competitors. This happened to the airline industry during the 2001 recession. As they hit a depression for this industry, staffing levels were cut and customer service tanked. There were lots of complaints from late flights to delayed baggage or even missing baggage. The new discount carriers bucked this trend, and they picked up substantial market share in the process. At least three major Arline companies were close to filing bankruptcy protection, and it was not only due to the terrorist attack in the US in 2001.