Evaluate the strategies that a business can adopt during a recession

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Evaluate the strategies that a business can adopt during a recession

A recession, two negative quarters of GDP in an economy, is inevitably going to lead to a business getting less customers. Its overhead costs will be the same, but its unit costs will be higher because it will not be producing as many products but will still have these fixed costs. This will make the business less profitable in the short-term and so strategies must be implemented to try to improve the business’s short-term and long-term prosperity. Such strategies might include improving its cash flow position, downsizing, decreasing its costs, decreasing its gearing and managing its receivables and payables more carefully.

A strategy of improving cash flow will involve many aspects. They will need to decrease their fixed costs so that their unit costs will decrease and it will be easier to make a profit in the difficult economic climate. This may involve selling off excess machinery or ordering less inventories, or it may involve increasing its operational efficiency by holding less inventories and thus lowering its storage costs. Ultimately, improving its cash flow will enable the business to remain more liquid in hard times, where investors (e.g. banks) will be less financially lenient, in the way of loaning money to businesses, during a recession. Thus it is more crucial than ever for a business to ensure its best cash flow during a recession. Rickmers said it is only giving out about 14 per cent of its distributable cash flow because it is continuing its cash conservation efforts amid unresolved financing issues. Its charter revenue rose 29 per cent to US $38 million in the quarter. The constraints of this strategy are plentiful. If the business must take tight control of its cash flow then it will be rigid and less able to respond to sudden one-off increases in demand, and so miss possible greater profit (the opportunity cost). Another problem is that if the business is holding a lot of money the opportunity cost of holding this money is rife. They could invest the money on research and development or marketing for example, which would lead to greater long-term efficiency. Apple have done just this, bringing out the iPad in the depth of the recession. The product has provided much revenue for Apple – so their spending on research and development and development of the iPad has actually generated profit, increasing the profit of Apple and making it more competitive and better able to survive the recession. Focusing on liquidity without being careful to optimise their costs rather than blindly minimise them, therefore, could be seen as a form of short-termism, and disadvantageous to the firm. Also, the procedure of ensuring liquidity is not without its limits, as certain profit centres may decide to window-dress in order to remain favourable by central management. Therefore, if these inaccuracies were not accounted for, along with the invariable not totally reliable estimations of net present value, etc, the current ratio could be inaccurate and kept too low for healthy cash flow, threatening the business’s liquidity and ultimately its survival.

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A strategy of operational rationalisation could be undertaken. This could include capacity utilisation, reducing unit costs or possibly accepting a one-time offer. Capacity utilisation involves increasing the business’s output as a proportion of its total possible capacity (output). This could be achieved by either decreasing its amount of machinery, etc, or increasing its production scale. Increasing its rate of production may sound foolish in times of decreased demand, but if their product is income inelastic, the important issue for the business is not a decrease in demand but perhaps the availability of the product. If they could produce on ...

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***** This essay contains many good points and covers the ground fully. Most businesses look to reduce their costs and increase their sales at all times but it becomes more acute during a recession and the writer has covered the main points well.