A manager needs to: A manager needs to know the series of steps they can make to cut costs to survive a recession.
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 |
Limit new hires and monitor your inventories closely.
Moderate steps are very similar to easy steps, however moderate steps just go farther in depth. Such as reviewing financing, capital spending, and unemployment rates.
Survival steps are more focused on keeping the company a float, rather than the long-term effects.
Many businesses will fall apart during a recession, but some businesses can use a recession to gain an advantage over their competitors.
A study made by McKinsey consulting firm stated that companies are more often to buy out their competitors when times are tough, rather than when the company is doing really well.
During a recession prices of goods tend to decrease, which makes customers “jump ship” from companies they may have been loyal to, just to spend less money. On the other hand, once the economy recovers, these customers are likely going to have the exact same mindset once you increase your prices back to a normal level.
Once the economy shows signs of rebounding, many people want to increase production rates to sell as much product as possible, however, it is important to keep in mind your production capacity coming out of the recession, and if your company can keep up with an increase of production.
During a boom is the most important time to get a company’s financials in check. Banks are very lenient with loans and conditions during booms and are the complete opposite in recessions, so it’s important to sign contracts in booms to prepare for the potential downturn.
Thinking ahead is the most important thing you can do as a manager or business owner. Being prepared for the inevitable downturns will put you ahead of your competitors.
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.
An account that shows how much money is owed to a company on credit.
profit maximization is when marginal revenue is equal to marginal cost. As long as your total revenue is greater than your total costs, you will be making profit.
Describe the characteristics of the following events briefly.
In the summer of 2004, Washington Mutual closed down 53 bank offices, and laid off 850 workers. This was terrible news for Washington Mutual and the employees, however many other banks in the industry saw it as an amazing opportunity. Many of Washington Mutual’s competitors began calling the employees who were recently laid off and offering them jobs at their company.
During the 2001 recession, the airline industry took a massive hit. The quality of customer service decreased drastically and the amount of complaints began to skyrocket. This was due to the fact that airline companies had to lay off many employees to keep the business alive, which costed them all in the end.