A manager needs to: know a series of steps to cut costs in order to cut costs during a recession. He must also know how to spot opprotunities to take advantage of a recessson.
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 |
The easy steps to take when you believe an impending recession looming start will reevaluating capital spending. The next easy step to take is to slowing the hiring process and evaluate how “lean” your staff is. It is also important to tighten all forms of credit.
As a recession looms even larger it is important to cut back on spending even more. This can be done by eliminating the majority of capital spending, as well as holding off on none essential repairs. It is also essential to pair this with a hiring freeze while only laying off employees that are hard to replace.
If a recession is threatening a companies survival that every cost cutting measure is implemented. First, capital spending not only needs to be stopped, but assets may need to be sold off. Next all non-essential employees need to be laid off, with the exception of the sales team. This should all be done with the intention of keeping inventory/staff lean, hoarding cash, and even delaying payments.
While it is essential that any company stay afloat, as soon as a companies survival is ensured it is important to rebound before competitors. A quick rebound could be a smaller companies big break, such as what happened to AirTran.
The first step in revitalizing a company is identifying what opportunities have emerged due to the recession. This is especially true for larger companies that use the economic downturn to devalue potential assets allowing them to be acquired at a cheaper price.
The first step when evaluating a pricing change is to consult the antitrust laws. Next it is important reevaluate sales strategies based off the changed landscape of the market. It is important to capture as much of a recently failed competitors market share as possible. It is also important to avoid price wars.
When managing a companies recovery it is important to not get too giddy when rushing to increase sales. It is important to slowly ramp back up production by rehiring members of the production staff. It is also important to never expand beyond the companies means, as it could lead to loss of future sales.
It is important to not get too ambitious during a boom. While a boom is a perfect time to invest in capital spending, it is more important to clean up all outstanding debts and put the company in a favorable position come the next recession.
The best way to deal with any recession is to have a comprehensive contingency plan that includes both the good times and bad. This can be done by creating as much flexibility your finances as possible.
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.
Accounts Receivable is the amount that a company is due to receive from debtors.
Profit Maximization is done by determining the optimal price, input, and output levels that will lead to the highest total profit.
Describe the characteristics of the following events briefly.
In 2004 Washington Mutual shut down 53 offices and laid off 850 workers. This led to a boom in the rest of the business as their competitors were able to snatch up the employees that had been laid off. This also led to an influx of new customers as they needed banking services. ### The case of the airline industry during the 2001 recession (page 164) The collapse of the airline industry in 2001 led many airline companies to face hardship. AirTran was one of the few airlines to blossom from others collapse. Because of smart financial planning prior to the recession AirTran was able to grow their fleet of 46 aged aircraft with 76 new aircraft. This is a great example of a company using a recession to their advantage.