Survival and Positive Growth during an Economic Downturn - Assignment Example

Survival and Positive Growth during an economic downturn Introduction: The purpose of this paper is to understand the implications of a business's survival during an economic downturn. Now, for the purpose of this paper, we have decided to keep the current financial crisis as the main backdrop as it has been the most hotly disputed topic at hand. In addition, it can help us ascertain mechanisms which would be most applicable to modern business conditions. Furthermore, we believe that ascertaining the type of recession is also an important factor for a business as the degree of economic deterioration will determine the mechanisms for survival that have to be implemented. Therefore, in this paper, we will first look at the type of economic recessions that are determinable and then we will try and extrapolate the mechanisms which can be implemented by businesses I order to cope with the downturn. We are also of the opinion that budgeting encompasses a major part of any business's planning and forecasting activities, and takes a doubly important role in the time of recession, therefore, we would like focus on that aspect of business in our paper by providing a case analysis of a business and its budgeting process in times of recession which would help it recover from the murky economic conditions. We believe that this portion of survival mechanism is as important, if not more, than any other mechanism of survival which we will discuss in this paper. Types of Recession: We will discuss three possible likelihoods of an economic crisis, especially like the one which is being suffered right now by the global economy: Economic Interruption: In the most favorable of circumstances for an economic recession is that this predicament would unravel in short span of time as was seen in 1998. A large of number of bankrupt firms and work-outs have beset the financial market, yet the market has been able to soak up these fatalities and stronger limits on credit has quickly been able to restore the credit reserve to its original levels. This outcome will be a small period of decreased growth, maybe a negative GDP in a quarter and numerous volatilities in the credit and the financial markets in the way. It is pivotal to note that the decline in stock market prices was nearly 20% in 1998 but the recovery was as fast and strong after the decline. [1] Conventional Recession: In this case, our framework is similar and in fact has some aspects influenced by the structure programmed by the Resolution Trust Corp; which was created in a bid to ascertain homeowners were not thrown out of their abodes as well as allow the balance sheets to restore to normal for all the banking institutions that are in place, similar to the actions of 1990 in the aftermath of the oil crisis at that time. The outcome was decreased growth for 2 or 3 quarters in the doldrums and a more profound unconstructive effect on the economy. A gold rush for the better assets in the bond market and the poorly performing equity market would ensue. Assets sensitive to interest rate i.e. with large asset duration would perform exceptionally well in this time period and a depreciation in dollar will increase the likelihood of better returns on investments made in other currencies. This is the most likely scenario in our opinion. [2] Recession like the one seen in Japan: The worst possible scenario and what we consider to be the more unlikely is the current is the one the global economy becomes a model of the Japanese economy of the past whereby the whole economy would keep struggling forward at a snail's pace all the while unaware of which assets are not profitable and which institutions have been contaminated completely. The result would be slow yet steady decline in growth for a number of years with a steady decrease in housing valuation, smaller spending by the population and national investments and businesses in jeopardy. Value of national assets would reduce gradually and the dollar would decline in value. Assets in currencies other than the dollar and investments which are based on a transfer of goods and services are best off in this case. [6] Survival during an Economic Downturn: The workforce in the present day and age is seeing changes which have not been witnessed before as people who are open to technological changes and advances have been able to ascertain new opportunities for themselves in this modern business set-up where anyone who stays still invariably lags behind due to the immense pace of technological changes whereas those who resist these changes are not yet aware to the realties of the changing fundamentals of modern society. During the times an economy is faced with a downturn, those who fight to resist or unwelcome the changes that have to be incorporated in order succeed in the testing economics are invariably the first ones who have to close shop due to the economic downturn. Here, we will try to look at the different mechanisms which have become part and parcel of combating economic downturn. [7] Combating the Change: Organizations or entities who vehemently combat technological changes or advancements are usually representatives of that group who want to remain in the comfort of familiarity i.e. in the conditions that they have grown accustomed to operate in with regards to their specific organizational tasks and activities. Suffice to say, they are the ones who aspire to maintain the status quo and prevent the equilibrium from shifting as best as they can. It won't be the most unconventional thing to say that or these people, familiarity never breeds contempt and in order to preserve their much appreciated and revered comfort zone, these said business professionals seek and acquire the assistance of politicians, unions or other bureaucratic organizations. Most of the people who belong to this category of people are those who attune themselves to specific skills of business practices in the early stages of their career, perhaps even in their youth, and they aim to run this course throughout their professional life cycle without having to change it a lot during the process. Most of the work they do is repetitive based on any scale demarcate-able by time i.e. hourly, daily, weekly or monthly, all the while waiting to be promoted to the next level by the system, rather the forcing the system to push them towards better titles. As with any other entity in this world, when these professionals resist the new changes that have to be incorporated into the system, their efficiency of conducting work starts to lag as newer and better systems come up for business procedures and with the course of time, these professionals become so out-dated that they actually become a liability and have to be removed from the system in order to sustain growth and expansion of the business. [8] Embracing Change: Contrary to those whom we have already earlier, the business professional who fall under this category i.e. who wholeheartedly and appreciatively accept any new system or technological changes that take place in the business setup, are usually those who find their kicks by taking risks and pushing the envelope all the time. They belong to the group of innovators who are always seeking to create better business practices and aim to harness every single opportunity that comes their way which is usually founding in changing existing practices of conducting business. These professionals are the clear leaders in efficient market practices and are also quite amazingly the market leaders in undertaking extremely daft and stupid business decisions from time to time. This, however, is not as big a worry as one perceives because trail and error offers the only way that can create these said blunders and help identify them and also ascertain the ways that actually are applicable and useable in modern business practices. The casual observer does not recognize increased efficiency of these people, they remember their blunders. The person who depends on proven methods can't understand how blunder's get promoted ahead of those who maintain the status quo. [3] Budgeting for change during recession: The basic steps of the budget may vary from business to business. In some businesses, the responsibility of creating a special budget for an extreme economic condition i.e. economic downturn or economic boom, this responsibly could be only subscribed to the finance department in some businesses whereas other businesses would be have this responsibility demarcated to a special taskforce which could constitute personnel from different departments. Either way, the importance of the creation of a budget in these special conditions is pivotally important for businesses in the global economic setup. Regardless of what specific mechanism is issued for the ascertaining of a budget for change, it is pivotally important that every department be made aware of the budgeting process, especially in times of economic excess. It is important for the finance department to work with the external factors that are also affected by the same external environment in order to ensure developing an accurate budget and find out the budget as a standard against which evaluation takes place. Budget planning requires the following activities: [9] Find out long-term goals. What should occur in the business over the next five or ten years Develop a budget plan. What sources for revenue generation are important in development of the budget What are the categories of expected outlays Budget analysis should include which reports Which budgeting method finds out projecting revenues and outlays [10] Project revenue based on all applicable causes. How much revenue will be available from different external and internal sources How will an increase in the product prices or the offered terms of credit have on the overall figures of revenue, especially in the current economic conditions where demand for the product is decreasing across all sectors of economics What are other revenue sources such as interest on bank deposits, food refunds, sale of surplus equipment and other miscellaneous items [11]. Estimate outlays carefully Estimating outlays for the year is the most critical step of the budgeting process. An exact estimation is impossible; the error variance must be minimized at all times. The minimization becomes most important in these times of economic recession as exchange rate swings can really adversely affect the profitability of the business. Creating a consolidated budget It is important that the business create budgets for itself not merely in the parameters of time but also in parameters of scope i.e. the consolidated budget needs to be prepared which would encompass all the activities of the business in order to conduct a worst case sensitivity analysis which will help the organization best understand its financial position during these testing economic times. [4] Assessing the Budget Regular assessment of the budget is necessary for control purposes. Monthly preparation and assessment of working budget reports is necessary. For example, comparing costs with the budgeted number for a given category may reveal trends or deviation from the standards. [5] Corrective Action and Budget Adjustment The finance department of a business system must stay in control of the budget and adjust as necessary. Budgeting at the end of the fiscal year is a viable option as discovering errors early on determining solutions is the correct way to go. When the budget analysis suggests insufficiencies, the financiers should carefully examine both the revenue and outlay side of the budget. Possible questions to ask when considering whether to increase revenue are: If we increase product prices, will the benefits offset the possible decline in demand Plans to increase demand for the product What are the levels of customer satisfaction [12] Possible questions to ask when considering the outlay side of the budget are: Have we analyzed the cost of conducting business according to categories of outlays How does this product cost in comparison to other substitutes of this product. Does financial management include the staff of service Do they have an understanding of cost controls to the success of the business If there is a need to lessen costs, are the declines made in less value addition [13] Conclusion: Economic downturns are part and parcel of every business cycle i.e. every business which plans to sustain itself in the market for the long haul will have to manager itself through economic downturns. Therefore, it is essentially important that business managers know how to appropriately deal with an economic downturn and also know the strengths and weaknesses of their business because it is easy to ride a crest but the real test the ability to ride the troughs. Budgeting for change is a pivotal part of this process as it provides the mechanism which could allow any business to alter itself with abundant ease and also aid in fostering the growth of the organization; for sustenance during economic downturns is one thing which is usually easily managed by capable managers, however, growth during economic recession provides a much more difficult obstacle, which can only be ascertained through these implements of intricate management. Bibliography: 1. Deloitte & Touche Investment Advisors LLC (2007) "The Subprime Mortgage Crisis: Where Are We Headed" 2. Lohr, Steve. 2008. "Echoes of Japan's 'Lost Decade' in Ailing U.S. Economy." International Herald Tribune, February 9-10. 3. Webb, Robert L. (2003) "Survival During An Economic Downturn" Goose Creek, South Carolina, USA, Available at http://www.motivation-tools.com/workplace/survival.htm [Accessed April 9, 2009] 4. 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