A manager needs to monitor:
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.” |
How vulnerable a company is to a recession or a downturn in sales. The more vulnerable your company is, the more your company needs to plan and prepare for a decline. To determine the vulnerability of your company, you can look at the magnitude and and timing of the slowdowns using the data from the company’s industry.
A 1-2 page plan that all company’s should have in place for when a recession hits considering options for the worst case-scenario.
All business managers should build flexibility into the business before a recession hits; there are many ways to do this. It’s important to prepare, take in all considerations, and put yourself into a situations you are able to get out of. Many business decisions affect the flexibility of the business in the future. All business decisions should be made with keeping how it will affect the flexibility of the company in mind.
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.
Explain 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 agreement between Canada, US and Mexico to classify industries based off their economic activity
additional cost as a result in increasing production by one unit
A larger retail store can buy in bulk and the average cost of goods is lower. This makes them able to offer lower prices than their competitors.
Capital Goods
Goods that last longer like machinery, equipment, and tools are examples of capital goods. These goods are also used to make other goods.
Assets- Liability = Equity How much share an indiviual has of something.
long term loan
An amount of money that is borrowed from banks. The borrower incurs a debt that will have to be paid back with interest in a specific amount of time.
a flexible loan that financial institutions offer to individuals. This includes an amount of money accessible when needed. Interest will be charged on the borrowed money that must be repaid at a later date.
a form of short-term financing used by large companies to repay debt
Describe the characteristics of the following events briefly.
The author uses this as an anecdotal example to explain the danger of inflexible labor contract. Elaborate.
This Program wanted more flexibility in it’s labor rules to increase productivity and came to an agreement to pay workers who were not needed. This program depended critically on a forecast of future sales that weren’t accurate. As a result, they had to continue producing cars even when there was low demand. The company suffered from the inflexible labor contract and it shows why being flexible as a business is very important because forecasts aren’t always accurate.
The author uses this as an anecdotal example to advocate for smaller modular investment in stages. Elaborate.
With electricity costs rising, it caused individuals to have to cut back on electricity. This negatively effected the Electricity Utility industry, having excess capital equipment. This led them to find a way to be flexible and lower their costs. They switched from larger generators to smaller generators to become more flexible as a business.
The author uses this as an anecdotal example to advocate for borrowing with staggering maturities. Elaborate.
The Penn Central Railroad was financing a large percentage of it’s operations using commercial paper. Later, during the recession of 1970, freight traffic lowered resulting in Penn Centrals revenue and internal cash flow to lower. This made their creditors unwilling to lend the funds of $82 million dollars of commercial paper in fear that they would not be able to pay them back. Using bonds could have saved the Penn Central Railroad from bankruptcy because creditors would not have been able to stop financing them. When financing with bonds, it’s important to make the maturities staggered as multiple bonds due in the same year which could possibly during a recession could damage your business.