A Sharp recession sends firms
A Sharp recession sends firms into receivership while some emerge stronger than ever. Discuss the factors which may determine the effects of a sharp recession upon a firm All businesses go through a recession; these are often due to cyclical changes, which a business goes through. The business cycle consists of a sequence in which a recession is followed by a recovery, which leads into a boom. However if a business goes into a receivership this means the banks take control and often sell bits of the business.
When a businesses is booming there will be a downturn leading to a recession which sometimes lead to business losing out al together and this is when they go into receivership. When a business goes through a recession the period of the business cycle is usually slow in growth or stagnation. It Isn’t easy to predict what will happen in the economy and at what stage the business is going to experience the different aspects of a business cycle (Boom, Recession, Recovery).
So sometimes business are caught out and hit hard by a recession, and can lead to them going out of business. Many businesses rely to much on the government to smooth out problems such as the economy but they find economic forecasting difficult and they sometimes are predicted wrongly. Changes in the economy are important in determining the survival of a business. The importance of government policies and economic policies keep the economy running smoothly but sometimes this goes wrong. I will now discuss the factors, which can lead a business having a sharp recession.
A recession is a period in which demand is growing more slowly than before, so that large numbers of businesses find they are selling less than they expected to. Factors, which can affect the sharp recession, can be a rising unemployment, which means skill shortages within a business. The workforce is cut down and people start to lose trust in the business and feel like they are going nowhere in the specific market. The rising level of unemployment internal to a business such as the business losing employees can affect the level of output, which the business is producing.
As well as the external decrease in level of unemployment the business will find it hard to employ people to fill in people who are on maternity leave for example. Gloomy expectations spread negative vibes throughout businesses when going through a recession this leads to de-motivation of staff and they fear the worst. (Fear of losing there job). A recession starts with falling sales, which means the businesses concentrate on market research. Another business may be rivalling the business with a competing product. E. g.
new mobile phone brought out with a camera rivals the old simple mobile phone that a business may be producing. All the customers want the latest phone. Customers may also be price sensitive as rival businesses may be producing the same product at a cheaper price. This may be sending a business into a sharp recession and their reputation can be affected. Cuts are made during recessions such as cuts in employment (already mentioned) little use of capital equipment and cuts in output and sales all contribute in sending a business into a sharp recession.
Also businesses lose their market share if they are in a highly competitive market e. g. mobile phone market a company producing only simple mobile phones lose their market share because customer interest goes elsewhere and other rival businesses have moved the market of mobile phones onto another level. The rising costs that a boom consists of in time discourages growth, They reduce profitability. The government in time then feels the need to damp down the economy and increase interest rates, which put people off spending on consumer goods and luxuries.
People who have to spend more on their mortgages can’t afford to spend on things, which are a luxury to them (Clive and his curry). Businesses that take out loans and other financial investments, their calculations are less favourable because of the rising interest rates; banks charge higher fees when the business pays back the money. All this means more money being spent on long term liabilities and a decrease in profitability as the business is spending more while receiving a cut in output and sales falling. The demand for all sorts of products falls during a recession making the recession sharper.
E. g. higher mortgage rates mean lower demand for houses so the building society is affected and means they lose profitability. Sometimes even letting their employees go so a cut in their income means less money to spend on luxuries. When demand falls reduced incomes cause demand to fall further and some sectors will be affected more than others and cause a much sharper recession. E. g. Consumer durables such as cars and carpets will fall sharply in a recession because these are luxury items and usually paid over finance in the form of loans etc…
Businesses in the chocolate market won’t feel the recession as bad because chocolate consumption is largely unaffected. Inflation, interest rates, taxes and subsidies are all factors which contribute largely to a businesses business cycle and can lead to the economy going into a recession than stabilising out and recovering. Factors such as what market the business is in affects how hard and how sharp the recession is for a business, e. g. the Oxo cube is in the food market, demand for that product may not fall at all because people may want to use the product to spice up cheap food items when incomes fall.
Heavy machinery goods and luxury items will be affected sharply. May be so bad that they cannot survive a recession and put into receiver ship. How well a business prepares and if they can predict when a recession will occur can affect how well they deal with the recession and may soften the blow and the recession won’t be so sharp. The business however would have had to experience a recession and survived it in order to predict when it may occur so it has experience under its belt.
Businesses who have a wide product range may also not be so affected by a recession because they won’t be so affected by demand because they have a wide product range. This means they aren’t heavily relying of products, which experience variation in demand in a cycle to make profits. Summary: The past doesn’t always predict the future and businesses find it very difficult to forecast when a recession may come about. I have already discussed that some businesses can survive a recession quite easily and the different factors which can benefit them and soften the blow of a recession.
Others find it an impossible task as I have explained because of economic factors such as taxes and interest rates for example. The unpredictability on the business cycle means that it justifies and emphasises the importance of contingency plans in worst-case scenarios and can prove valuable in recovering from a recession. A firm can think about the changing customer tastes and producing the next boom instead of relying on the government and economic problems to smooth things out.