A manager needs to know a series of steps he/she can take to cut costs to survive recessions. They also need to know how to spot opportunities to take advantage of recessions.
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 |
It is crucial to pay attention to the early warning signals because when a signal flashes, one must review and update the contingency plan. Other stps include limiting new hires to vital positions, reducing/eliminating capital spending plans, and monitoring inventories closely while setting up credit lines if possible.
The author states that Times of economic stree show how well-or badly- the company was managing in the up cycle. Moderately severe steps taken in a recession are similar to the easy steps but can and must be taken further. Managers must review employment, capital spending, and financing. Manager’s must keep lenders fully apprised of conditions. It is crucial to maintain relationships with financial partners even if news is not presented positively. Informing banks and loan officers of struggles because surprises can be punished more severely than well-anticipated bad news.
There are four major steps to be considered:
Companies in survival mode should consider bringing in a turn-around specialist. Expense reduction measures that are harmful in the long run may be necessary for short-run survival. Most importantly, sometimes selling a business can provide shareholders with more value than continuing until bankruptcy.
Recessions are bad for business, but come can use this as an advantage to their company. Using major companies financial and economic struggles as a purchasing opportunity can help small operating expense companies. Different companies have different opportunity, but firms who prepare for recession will have a better opportunity to take advantage of a recession.
Recessions provide opportunity for companies with cash or credit facilities. A great example is acquiring weaker competitors. Successful companies statistically make more acquisitions during bad times than good. businesses must find strategies that best suit their line of work. Acquiring talent in the fashion industry is an example of taking advantage of the job market.
Prices tend to weaken during recession but businesses must be wary to create pricing wars to build market share. Price sensitive customers will leave companies when the market tightens just as fast as they left previous vendors. Businesses must be careful with price cutting as there are laws in place to protect consumers. Antitrust laws protect individuals from these issues. Taking advantage of competitors weaknesses is an extremely valuable strategy. The saying: one persons loss is another persons gain is wildly true when strategizing for and after recessions.
This begins with ensuring capacity to expand production. Increasing sales tends to stress company cash positions. Businesses must expect employee turnover to increase unless significant steps are taken to retain workers.
Companies should use a boom to get finances in order along with credit lines. Comparing the least profitable sale price to the cost of the last few percentage points of production is important to protect costs form soaring. Lastly, manager’s should review the contingency pl;an for the next economic downturn.
Managing for a recession occurs well before and well after the actual recession. Thinking ahead and planning to create flexibility can protect the businesses cash and income. Reviewing the contingency plan when the warning sign flash is imoortant, adjusting them after the downturn is wildly important. ## Economic terms
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 money that a company’s customers owe for goods/services received but not yet paid.
Antitrust are laws that in the simplest form protect competition. These laws regulate businesses from creating monopolies. Having this free market competition benefits consumers by creating lower pricing on goods and services while also ensuring the creating of newer goods/services.
Profit maximization is the process company’s take that help create the best output price levels to maximize returns. Selling price, production costs are examples of what businesses can adjust to create profits.
Describe the characteristics of the following events briefly.
In 2004 Washington Mutual closed down 53 banking offices while laying off 850 workers. This led to other firms taking advantage of the business opportunity by reaching out to Washington Mutual customers. Other banks seized on the opportunity to hire the laid off loan officers. This loss became competitors gain.
Staffing levels were cut off and customer service tanked during the 2001 recession throughout the airline industry. Complaints of late flights and missing baggage soared during this time. Discount carriers took advantage of this trend by picking up large amounts of market share. This time created opportunity for prospect airlines who made a name for themselves during big name airlines recession woes.