Management of Recession

Preface:

Since last so many years we are habituated with management of progression liberlization,intigration of business to world economy and so on. We have never expected, that we have to do exactly the reverse in the days to come. The recession will going to stay for more time than we expected and the progression will begin at the end. The trend may follow a ziz zac tendency in the economy where we face recession in some period and progression in some period in the same year and the fluctions are depend on numerous factors which are not in our hands. To mange our business activity in this trouble whether we should understand the basic of management of recession.

Budgets:

Our Budgets earlier are based on projections where we were expecting growth of certain percentage of our business. In this we increase our spending side on the basis of targets to be achieved in the growth. The motto will be spend more sell more, earn margin , and turnover margins. These budgets have no doubt has some basis of actual data available for earlier period but its utilization in projections is minimal as the growths are far bound and fast so that the actual of earlier period loose its relevance at a very early stage. The theme was we spend first to earn next.

In the management of recession, we have to do exactly the reverse. The motto should be first to retain the actual, or accept ten to fifteen percentage downtrend in the budgets. The theme should be earn first to spend next.

The Exercise:

The budgets in recession should be of short tenure maximum period of the budgets will be of one quarter only. The quarterly budget then spread to monthly basis to analysis the data and access the situation quickly and correctly.

The Basic Assumptions in recession management budgets:

The Realization:

The realization will get longer i.e. if in the previous quarter our realization will be of 30-45 days on average basis (actual of previous quarter), we have to assume the realization will be of 45-60 days.

To realise the dues in the actual we have to offer more discounts say by 5-10% more than the actual, thereby to cut our margins.

And, the decision will be depend on our requirement of funds on month to basis and may be announced at the start of the month only.

The Payments:

Though, the realization will be slow, we may have to pay early or at the most on due date to keep our creditworthiness or needy requirements. Wherever possible, we can also try to extend the credit period by marginal time say from 30-45 days to 40-50 days.

The Expenses:

The expenses consist of fixed and variable in nature. The variable expenses can be budgeted on the basis of % of sales/purchase/variable applicable for the respective variable based on actual.

In recesses ion management though the sales, purchase are projected less we may not able to reduce the expense budget on salary, commitments on advertisements, commissions, discounts etc, in directly propionate to the variables of its i.e. purchase, sale etc. In such a situation, these values should be calculated in two heads of expenses one the expenses allowed as per the variable and sustention cost, or retention cost, and this costs
should be treated as fixed cost. This theory can be explain in an example as under:

                Actual             Budgeted

Sales         100                      90

Salesman     10                        9 variable part
salary
                                               1 fixed/sustention/retention cost.


The fixed cost/retention cost of incurred now will get compensated against the incremental cost, whenever the recessionary trend will reverse. Say after one year in reversal of trend,

                 Actual              Budgeted

Sales         100                        110

Salesman     10                          10
salary
                                                 1 recovery of retention cost.

These are such type of expenses, which if retain will give you the first opportunity in reversal trend to earn more.

The assumption that the most of the expenses will be static irrespective of its variable unless they are directly in propionate to its variable will help to survive comfortably in the recession.

The Capital Expenditure:

The decision on capital expenditure will be taken wisely. In recession trend, there will be no requirement of incurring capital expenditure as the existing capacities holds good for downtrend requirements.

The assumption that, no capital expenditure is required to be budgeted and incurred till the recession trend is reverse will hold good and reduce the additional strain in the budgets.

Existing capital expenditure currently in hand, the same should be budgeted only up to single/first stage of completion.

The Budget only lifeline:

The assumption that, spend only if budgeted in advance. There is no leverage and zero percentage tolerance for the spending outside the budget.

The Budget:

The example. FUNDS
Quarter 31.12.11

Payments                       Receipts

Fixed cost:                      Sales:
Interest on loans        Cash Sales
Statutory dues       Drs.Of 45-90 days.
Retention cost

Variable Cost:            Other funds:
Variable of sales     Committed receipts.
Variable of funds
Variable of Purchase

Cost of Purchase:
Cash purchase
Crs. For 40-50 days.

Surplus for next Qtr,
(Must in recession
trends to save for)

Total                               Total

The budget be prepared for the months of April, May, June, and then consolidated in quarterly budget taking in to account the quarterly expenditure or expenditure not fall in particular category. The funds budget inrecession will not take in to account cash bank op. cl. Balances as these will help in uncertain contingies.

The Budget:

The example: HEADS:        (Monthly consolidated quarterly)

Conclusion:

1 The timely budgets are must in recession management.

2 The assumptions should show revised downtrend only.

3 The Surplus in budget is must, there will be no place for deficient financing in recession management.

4 The Bank Balances etc should be at five percent at least to take care of uncertain and emergency contingencies.

5 There is no scope for capital expenditure of any nature till the recessionary trend is reverse.

6 There should be one hundred percent adherence to the budget if missed provide and then spend, any leverage will be hazardous.

7 Do not hesitate to retain the existing cost but additional cost commitments has no scope in recession.

8 Be realistic in budgeting, and assumptions and emotional/imaginary/ wishful thinking has render no help to the business.

9 Accept than argue the actuals, insists on retain and hold then loose out and dream.

10 Accept that recession is reality and management of the same is only option.


CA Satish Badve
badveco@rediffmail.com