Bank Failure, Bankruptcies of American Companies, Inability to Get Loans - Coursework Example

 Table Of Contents Introduction 4 The present economic recession, termed as the Credit Crunch of 2009 is and perhaps will be more striking. Globalization has led to integration of companies all over the world. Organisations have taken a cue from the Global Commodity Chain model and went overseas, often to enjoy comparative advantages of cost. These moves have boomeranged now. Different divisions of the same company are facing problem for being based out in different countries (February Snowfall Cost British Airways £20m, April 2009) 4 Analysis of happenings 4 Occurrence of Hyper Inflation 10 References 13 February Snowfall Cost British Airways £20m, (April 2009), Sky News, UK, [Online] Available: http://news.sky.com/skynews/Home/Business/British-Airways-Job-Losses-Profits-Down-During-February-Snow-As-Passenger-Numbers-Continue-To-Fall/Article/200904115255103 [April 28, 2009] 13 Bibliography 13 Barr C., March 2009, Washington Plans For Big Bank Failure, CNN Money, [Online] Available: http://money.cnn.com/2009/03/06/news/dodd.fdic.fortune/index.htm [April 28, 2009] 13 Brimelow P., March 2009, First a Rally, then Hyperinflation? Market Watch, New York, [Online] Available: http://www.marketwatch.com/news/story/first-rally-then-hyperinflation/story.aspx?guid={F8CFE313-144B-4CFD-9EE7-BC2F4A4B9A63}&dist=TNMostRead [April 28, 2009] 13 Krasny R., April 2009, What the Fed is considering at this week's meeting, Reuters, [Online] Available: http://www.reuters.com/article/businessNews/idUSTRE53Q6KP20090427?feedType=RSS&feedName=businessNews [April 28, 2009] 13 Lipton E., April 2009, After the Bank Failure Comes the Debt Collector, The New York Times, [Online] Available: http://www.nytimes.com/2009/04/17/business/smallbusiness/17debt.html [April 28, 2009] 13 Pym H., November 2008, Is there a danger of deflation? [Online] Available: http://news.bbc.co.uk/1/hi/business/7736193.stm [April 28, 2009] 13 References 11 Bibliography 11 Introduction The growth potential of the core companies with a country largely impacts the economy. At the same time the economic health of a country instantly affects the companies working within it. The enterprises within a nation and the nation’s economy are two inseparable entities; one affects the other. Any economic downfall thus results in the poor health of the enterprises. And if the affected economy is the largest and in the world, the ill effects of the economic downturn is dissipated throughout the countries of the world. History has witnessed on such severe economic downfall in 1929, named Great Depression. The present economic recession, termed as the Credit Crunch of 2009 is and perhaps will be more striking. Globalization has led to integration of companies all over the world. Organisations have taken a cue from the Global Commodity Chain model and went overseas, often to enjoy comparative advantages of cost. These moves have boomeranged now. Different divisions of the same company are facing problem for being based out in different countries (February Snowfall Cost British Airways £20m, April 2009) Analysis of happenings Bank Failure There is a very low probability that the cash and cash equivalents of a company deposited with a bank gets dissolved. In fact banks always invest their money in short term investments which will give better returns than keeping the money idle in a current account. In addition to this, companies also use the fixed deposit facility. In the case that a bank might fail, business houses will get intimated in advance. The government of any country is expected to come to the rescue of the depositors in case the involving bank goes bankrupt. In addition to this, the banks are considered to be the safest option of parking savings in these turbulent times. The probable way out to the problem that bank might fail is rather subjective. Generally, a company has more than one official banking partner. In such a scenario, the deposits must be done with that bank whom the management thinks to be the most stable one. Another alternative is to have an excellent rapport with the board of governors of the bank concerned, so that a prior intimation can be got in case the concerned bank falls. Stock Market Crash A crash in stock market is seldom due to the action of a single company. Even if that is the case, the fall does not sustain for long. Only when the overall economic view is a gloomy one does the stock market crashed and taken painfully longer times to recover. This is attributed to the indirect chain reaction in which the spending of an average consumer goes down, affecting the performance of companies. As a company, prudence demands that short term investments in cash market be withdrawn with the minimum possible loss. Expectation and greed of higher returns might erode the entire capital. It is better to avoid the risks of the capital market and look for safer havens like bank deposits. This way is the safest option in the face of crisis. The company must sell off its position in derivatives and options. Trading in commodities must also be stopped. The purpose of all these recommendations is solely to ensure that at the end of the day the company does not lose valuable cash. The effects of similar incidents can happen to the employees of the company in consideration as well. This cannot be eliminated (because preference for stock market investments depends solely on the risk appetite of an individual), however can be reduced. In this order, training and counseling session can be arranged for the employees of the company. For investors in the company’s stocks, certain public announcement that would restore investor confidence might be resorted to. In addition to this, constant monitoring of stock price by analysts would be helpful to predict (though not always) whether a crash is approaching. Mortgage Problems Assuming that the company is into real estate business, the problem of falling rentals is a grave concern. This will not be an easy one to solve, given the current financial scenario. A feasible alternative will be to put up the available space on rent. In this way, the company can actually earn something, however insignificant. In order to avoid the doldrums of falling real estate prices, the company can be proactive in estimating the future price and design the strategy accordingly. This problem is actually one of those that gave birth to the current scenario. It would also require sufficient expertise to tackle this disturbance. The problem will be best tackled if the company can get access to a bailout scheme by the government. Inability to get loans The assessment of the effects of unavailability of loans to buy house or car or education, it can be best analysed by assuming the company in question operates in the financial services industry. The recession had its worst effects on the financial services industry. Since the main mode of business of a company into financial services is to provide loans, this problem will jeopardize the very existence of the company. A rise in defaults will aggravate the problem only. To curb the menace of shutdown, the priority will be to make the collections of default payment the main objective. This will require building a dedicated and robust collection team. If the company is unable to do so, it might well outsource the collection part to factoring agencies. It is predicted that the problems currently faced by the financial services industry will take time to fade away. Considering this, the company might shift to another business activity. Though this is difficult to achieve in current scenario, it perhaps the only way out. The company can also pain to resort to cost cutting and survive somehow, but nobody knows how dark this phase is going to last. This translates into the fact that the company will be knowingly taking a route that has probabilities of hurting. Bankruptcies of American Companies One feature of the recession is the closing down of American companies. Apart from small business, the names of Merill Lynch and Lehmann Brothers appear in the list of bankrupt companies. This phenomenon will have multiple effects. If the company in discussion has exposure to the assets of Merill Lynch and Lehmann Brothers, those are sure to be written off as bad debts. The fall of major banking players has further instilled fear in the mind of the bankers. This means that firms will have a tough time in procuring any kind of loan. A tighter situation will be where banks refuse the grant of overdraft facilities and hike the fees. Such an action is sure to produce rippling effect on the working capital of the companies. The way out to this ailment will be to reduce cash conversion cycle. Extension of credit to customers must also be done with due diligence. At the end of the day, there must be sufficient cash reserve for the company to pay the short term creditors and ensure that the daily operations are maintained smoothly. Another way to combat the reduced supply of financial assistance from banks will be to forecast business requirements and demand for the next few quarters. Inventory management is another tool in the hands of the mangers to reduce unnecessary tying up of funds in stocks. A company is expected to shift to inventory management techniques like Just in Time and Economic Ordering Process to have the optimum level of inventory at any stage of operation. Mass unemployment Mass unemployment is a distinctly visible effect of the recession. This has mainly happened due to economic downturn where decreased aggregate demand has lowered production; this has reduced the demand for the factor of productions. The worse part of the story is that this decrease in demand has been spiraling in nature; as result unemployment figures have rise. Companies have been forced to cut down cost. Terminating employment is the easiest way to do and hence has been done accordingly. Striking down workforce is going to have a detrimental effect on the image of the company. More than this, the company runs the risk of losing efficient assets in the process. The company has very little option to act upon in this aspect, if the operations are spread across different locations, some of the excess workforce can be shifted to other locations. Inter departmental transfers might serve the purpose as well, but there will always a concern regarding the ability to perform in a different vertical. The best alternative among all of this which will be financially sustainable as well is to reduce salary across board. This measure, if implemented cautiously, will serve the dual purpose of retaining back employees and yet allowing company with reduces wage bills. Cities going bankrupt The proposition of cities going bankrupt has actually happened with the fall of Iceland. This is particularly dreadful to companies who have their operations in the cities or countries that have gone bankrupt. The economic pandemonium associated with this incident will have multiple effects. Sales will drop down as an initial effect. Consumers will lower their spending and the maximum proportions will be directed towards essential items. Depending on the proportion of revenues earned from the bankrupted city, the effects will vary. Bank lending will halt, which can signal the advent for potential threat of financial loss. If the company has its production facilities in the unlucky city, the entire business operations become uncertain. The results of this puzzle is sure to last for quite some time and will affect all facets of the business. The only way to escape from this problem lies in accurate forecast. Proper business analysis and market survey can be of significant help in providing valuable insights regarding the demographics and socio political status of the city. In case the recession has already spelled doom before company officials could realize, the first action would be to prevent spread of panic. Investors; confidence in the company must be restored. The rescue act should phase out operations from the affected area to where things are better. Employees must be taken care of. Efforts need to directed in regaining lost investments. It needs to be understood the company cannot perhaps recover everything that has been lost; the more can be done, the better. Occurrence of Hyper Inflation The occurrence of a hyper inflation looks bleak at this juncture. In case such an incident happens, prices will spirally move higher and might go beyond measures of control. This will affect the companies in a sense that price of raw materials will move northwards, forcing them to raise the price of finished goods and services. This will lead to a price war and ultimately the company with better resources will win. In another effect, there will be imbalances in the exchange of different currencies depending upon their relative demands. Companies will have changes in foreign revenue earnings which will in turn affect their consolidated financial statements. To prevent the loss from overseas earnings due to skewed exchange rates, companies can resort to hedging techniques where they can purchase currency forward and futures that will ensure cash flows. As an advanced measure, the companies can also swap their currency under the supervision of a competent authority. We grow it, they use it In the case of the government increasing the money supply to combat the effects of inflation, there will be baneful effects on the economy as a whole. The increased supply of currency will make it weaker in relation to other currencies. This will hit the valuation of the currency globally. More units of the currency in increased supply can be had for the same amount of foreign currency than earlier. There will be a shift in the bargaining power against the country where supply of currency has increased. The company which is in the country with increased monetary supply will face similar consequences. It will have to face greater competition from abroad. Valuations of the company will be hit as well. Proper financial measures that would maintain competitiveness of the firm uniformly all across its countries of operations needs to be implemented. Deflation Deflation is said to occur when the general price level falls continuously. This might result in postponed of demand by consumers. It is actually difficult to break this jinx since this has a lot to do with the mindset of the consumers. As a result of this, companies can see their sales drop and costs remaining same, profits will drop as a consequence. Financially, companies must be able to predict their capacity utilization and the demand will accuracy. Ordering should be done cautiously so that occurrence of wastage is minimized. Proper measures to ensure that the company is able to service the debt and other financial obligations must be taken care of. These measures should help the company to see through the lean phase, even if it cannot earn significant profits. References February Snowfall Cost British Airways £20m, (April 2009), Sky News, UK, [Online] Available: http://news.sky.com/skynews/Home/Business/British-Airways-Job-Losses-Profits-Down-During-February-Snow-As-Passenger-Numbers-Continue-To-Fall/Article/200904115255103 [April 28, 2009] Bibliography Barr C., March 2009, Washington Plans For Big Bank Failure, CNN Money, [Online] Available: http://money.cnn.com/2009/03/06/news/dodd.fdic.fortune/index.htm [April 28, 2009] Brimelow P., March 2009, First a Rally, then Hyperinflation? Market Watch, New York, [Online] Available: http://www.marketwatch.com/news/story/first-rally-then-hyperinflation/story.aspx?guid={F8CFE313-144B-4CFD-9EE7-BC2F4A4B9A63}&dist=TNMostRead [April 28, 2009] Krasny R., April 2009, What the Fed is considering at this week's meeting, Reuters, [Online] Available: http://www.reuters.com/article/businessNews/idUSTRE53Q6KP20090427?feedType=RSS&feedName=businessNews [April 28, 2009] Lipton E., April 2009, After the Bank Failure Comes the Debt Collector, The New York Times, [Online] Available: http://www.nytimes.com/2009/04/17/business/smallbusiness/17debt.html [April 28, 2009] Pym H., November 2008, Is there a danger of deflation? [Online] Available: http://news.bbc.co.uk/1/hi/business/7736193.stm [April 28, 2009] Stock Market Crash, No Date, Economy Watch, [Online] Available: http://www.economywatch.com/stock-markets-in-world/crash.html [April 28, 2009] Read More