A manager needs to: a series of steps he/she can take to cut costs to survive recessions and 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 |
Some easy steps to take include reconsidering capital spending, slowing hiring, monitoring inventory closely, tightening credit terms and selling account recievables, and securing a larger credit line and getting long term debt.
Some moderate steps you can take are cutting capital spending entirely, stop hiring and start laying off production workers, monitor inventory closely and reduce unnecessary items, collect account receivables quickly and delay payments to vendors, stop paying dividends, and shutdown unprofitable operations.
Some survival steps you can take include cutting capital spending, consider selling assets to raise cash, monitor inventory closely and reduce unnecessary items, collect account receivables quickly and delay payments to vendors, stop paying dividends, and shutdown unprofitable operations.
It’s important to prepare for a recession in good times and get yourself in good financial footing so you can take advantage of recessions. In hard times, your competitors may suffer and have to go out of business giving them no choice but to fire their workers and lose customers. You can take advantage of your competitors by gaining their talented workers and acquire former customers who left the market. You also may be able to renegotiate long-term contracts with vendors.
A business first finds opportunities by looking at its cash and ability to finance a purchase or capital spending. Then they should identify market segments they want to be larger when the recovery after the recession begins. The next step is finding struggling competitors, property and equipment, and talent. During a recession, it can be easy to find talented, experienced employees for cheap.
Avoid price wars, which can be easily started during a recession. Look for competitors whose cutbacks have left their sales and service staffs undermanned and discouraged. Opportunities during recessions include locking in favorable pricing through long-term supply contracts in purchasing additional capacity from competitors.
During a recession, it is likely that a business has laid off many production workers. In recovery when sales start to rise, you need to bring back workers to increase production. During this time, everybody is competing for workers so it is important that managers reduce employee turnover by better training of first-line supervisors, offering hiring wages, inform employees of company’s benefits, and offer opportunities for advancement for employees. You can expect employee turnover to increase if no significant steps are taken to retain workers.
You must prepare for a downturn in a boom economy. You can use the boom to get the business’s finances in order, including credit lines. The boom is a good time to review the downturn contingency plan.
To successfully deal with recessions, managers need to prepare and manage before and after recessions. Being flexible as a business is very important as well as taking a series of steps to cut costs and spot opportunities to take advantage of reccessions.
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 amount of money that is owed to a company from its customers who have purchased from them on a line of credit. On the balance sheet, accounts receivable is listed as current assets.
To gain maximum profit, the firm owner chooses the level of output at which marginal revenue is equal to marginal cost, which is the profit maximizing rule. It is the maximum gap between total revenue and total cost.
Describe the characteristics of the following events briefly.
As stated above, there are many ways to take advantage of your competitors during a recession if you are prepared and in a good spot financially. Washington Mutual had to close down multiple business banking offices which lead to the need to lay off a large amount of workers. The banks competitors immediately took advantage of the downfall of WaMu and got in touch with their business customers. Competitors also called the workers who were being let go to try and gain talented, experienced workers. Competitors turned WaMu’s struggle into opportunities.
During the 2001 recession, staffing levels were cut and customer services significantly decreased in the airline industry. Because of complaints, lost luggage, and late flights, discount carriers gained significant market share.