The vunerability assessment

Analyze the data for your client company’s industry and answer the following questions.

  1. How much have sales in the industry declined in the recession? What’s the worst that has happened in the past?

In the recession in 2008-2009, the industry dropped nearly 12% in sales. There was a significant decline in 2005 that was about 12.5%.

  1. Does the industry go into recession before, at the same time, or after the national economy goes into recession? If earlier or later, how many months of difference is there?

The industry declined in January 2008 to about January 2009. The recession began shortly after in February 2008 to March 2009. The national economy goes into recession about one month after the drop in the new car sales industry.

  1. Does the industry recover from recession before, at the same time, or after the national economy? Again, what’s the difference in months?

The industry recovered in January 2009 about two months before the national economy recovered in March 2009.

  1. How long does the industry typically take to recover from a recession?

The recession in 2008-2009 lasted slightly longer while the industry sale lasted slightly shorter. It takes a couple years for an industry to truly recover from a recession.

Grappone

Bank of New Hampshire

Comptus

Building flexibility into the business

Read the client’s response to the questionnaire. How can your client build flexibility into the business? Refer back to the textbook, if necessary.

The book states that issuing equity, long-term debt, or paying a fee for a standby credit line are apparent choices for enhancing financial flexibility. Paying a loan commitment fee on a credit line that will never be used may seem unnecessary. Paying a higher interest rate on a long-term bond when short-term bank debt is accessible at a lower interest rate may seem uncomfortable. Paying fees for future flexibility is a prudent decision. All business decisions affect flexibility in the future so it is important that all business decisions are made with an understanding of how much flexibility is gained or lost. Relationships with lenders should also be managed in good times.

Graponne

Question Response from the company

Recessions raise the risk of bankruptcy. Even less severe downturns can limit the company's growth prospects for several years.

How does your company plan for a downturn?

 Our liquidity is a major focus when we are preparing for a downturn as well as our inventory levels.  Cash is king in terms of getting through a downturn. You also need great relationships with your lenders – you hope they will stick with you when times get tough. 

Bank of New Hampshire

Question Response from the company

Recessions raise the risk of bankruptcy. Even less severe downturns can limit the company's growth prospects for several years.

How does your company plan for a downturn?

 The bank builds up loss reserves, conducts expense reviews, tries to maximize yield on assets, looks to sell less profitable assets, e.g. low yielding loans. The bank also conducts various annual stress tests and scenario analyses to identify potential problems that could arise during an adverse economic event. Corrective action is taken to mitigate these risks if the exposure is outside of acceptable ranges.

Comptus

Question Response from the company

Recessions raise the risk of bankruptcy. Even less severe downturns can limit the company's growth prospects for several years.

How does your company plan for a downturn?

 Our staffing is very light, and we utilize outsourcing when we are busy. In a downturn we can return to in house production.