A manager needs to know the steps that your business should take when a recession or growth slowdown occurs.
Table of possible options in a contiengency 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 |
This is when the start of a downturn occurs. You want to take these easy steps to help your company endure it. You need to first review the contingency plan set in place and update as needed. It is to early to start laying people off, but one step is to slow down new hires and instead involve overtime hours. You should review administrative staff to create a lean operation. Carefully prune administrative staff during this time. Next you should monitor inventories closely after the company perceives weakness in the sales chain. Lastly you should reduce capital spending plans and set up credit lines if possible. All these steps will help to endure the downturn if things begin to get worse.
This is the next step after the easy steps. These are very similar but just taken a step further. As a business you need to take these steps to have a chance of surviving this downturn/recession. You need to review management and think about lay offs, capital spending, and financing. Lastly it is very important to keep lenders fully apprised of conditions.
These are the steps that no business manager hopes they get to, and are the “do or die” moments of the business. When the recession gets this bad you have to throw all future concerns are out the window and you are just trying to survive month to month. First you need to stop capital spending and consider asset sales. Next employment needs to be cut as much as possible as harsh as that sounds you have to make hard decisions in order for your business to withstand the recession. Third, Sales personnel needs to be kept yet cut down and you may consider cutting all of your marketing staff. Lastly, you need to keep inventories lean, hoard cash, and delay payments. If all else fails you should consider selling the business to make anything good out of the situation.
While most companies look at the time of recession as a time to survive others use it as a time to improve their business and make it stronger. Sometimes a recession can lower prices for a business to expand and become bigger than before. The strongest companies take advantage of these times and work to improve their competitive position.
A recession provides several opportunities for a company with cash or credit facilities. One is acquisition of weaker companies. The best firms seem to do less acquisitions during good times than they do during bad times. You can look to expand to different geographical areas. During these times you can find distressed competitors, property and equipment, as well as talent. You can purchase assets at a cheap rate and even acquire competitors. Identifying oppurtunities during this time can leave you pockets dry during harsh times, but once things recover you will be stronger than before.
Prices are due to weaken during a recession but with this you have to be careful when jumping into pricing wars with competitors. It looks good to build market share, but these customers will leave you when the market tightens just as quickly as they came. New capital equipment can be purchased during this time at a low price, but this will be at a time the industry does not need additional capacity. You should be looking for competitors whose cutbacks have left their sales and service staffs undermanned and discouraged to attack.
Managing in the recovery stage is hard but it helps seeing that light at the end of the tunnel. Sales start to rebound and optimism in your business grows. As sales start to come back it can sound amazing, but you have to think about the production of these products and if you can get back to where you were quickly. Raw materials need to be purchased, inventories need to be accumulated, employment needs to be regained. Maintaining that strong relationship with the bank is very crucial for recovering. You should predict your sales increase based on past rebounds and run a financial simulation to find out your cash needs.
Now managing in a boom you can’t get too excited and expect this to last forever. A strong business uses this time to get their finances in order and to review their contingency plan for the next downturn.
Managing in a recession is tough, but the planning should happen well before the recession and well after the recession. The most important component to this si thinking ahead about how to bring flexibility into your business.
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 owed to a company by its debtors.
Antitrust was implemented for the sole purpose to protect competition and rather promote competition. These laws are in place to prevent monopolies.
A process that businesses go through to ensure the best output and price levels in order to maximize returns.
Describe the characteristics of the following events briefly.
In 2004 Washington Mutual shutdown offices and layed off a ton of employees. This resulted in an opportunity for their competition as they reached out to Washington Mutauls previous customer as well as hiring their employees that were laid off.
As the industry hit a depression in 2001 staffing levels were cut and customer service tanked. Complaints came due to late flights and missing luggage. The new discount carriers took this as an opportunity and pciked up large amounts of market share. This allowed lower level airlines to make a name for themselves while big name airlanes were struggling.