4. Analyse how a company can adjust both its variable and fixed costs during economic downturns.
Some of the cuts will not change and will be constant it doesn't matter if activity increases or decreases, in the given at least choice of change of movement. And the expenses which will not change are called the Fixed Expenses. Example of a fixed expense: The rent of a shopping mall which will be constant it doesn't matter if the sales goes up or down by any percentage.
Salaries of the shop assistants of a store which cannot be change but in some of the cases like if the store is performing well than there are chances of the salaries of shop assistant which can be increased and they can see some hikes in their salaries, if it's the case of economic downturns salaries will remain same but will not decrease if the sales are increased or decreased by some percentage. And these expenses can only be seen in the th short term and instantly but not in long-term. In another scenario if the business is running good and there are chances for the firm owners to increase the space in the shop and recruit some more shop assistants and if the shop is large there will be high fire insurance etc., inappropriate costs when it is included in the analysis this what the mistake made by people often which relates to the miscalculation of the total amount which differs the inappropriate cost which in fact that's It is particularly easy to make this mistake when dealing with fixed costs that are stated on a per unit basis. Because of which fixed costs looks and it appears as the variable cost.
In other case the it's totally differs at the variable cost will differs as activity changes. Suppose a shop needed more shopping bags that are used in the shop, then it could well be that an increase in sales of ten percent may see ten percent more shopping bags used. Similarly an increase of ten percent of sales, if all sales are despatched by parcel post, could well see delivery charges increase by ten percent. Some expenses could be part of fixed and part variable. Suppose that because of an increase in sales of ten percent, telephone calls made increased by ten percent. With telephone bills the cost falls in two parts, one for the rent of the phone and the second part corresponding to the actual number of calls made by the company. The rent would not change in such a case, and therefore this part of telephone would be fixed whereas the calls part of the expense could increase by ten percent. This means the effect that the effect of a percentage change in activity could have a more or less percentage change in net profit, because the fixed expenses may not change.
Variable Cost:will change in the way proportion differs in the level of an activity. For example, the power supplied to an electric train. This cost changes with the number of trips and how long the trips are taking for the journey.
The activity base is the item or event that causes the subjecting of a variable cost. Its not hard to think of the activity base in supplies of units produced, but it can be more than that. Commotion can relate to labour hours they worked, units sold, customers served, or other such as unit drivers or cost drivers. For instance, a worker at subway will uses a new pair of disposable gloves for each customer served, no matter how many sandwiches are being sold. Therefore, disposable gloves are variable and key on customer count. But, the material used for making sandwiches is a variable that is tied to the number of customers denied sandwiches. Some customers have don't want any, some will have one, and others like to have many. So, each variable cost must be considered independently and with careful attention to what activity drives the cost.
Fixed Cost: This is the cost that does not differ with the level of sales. The fixed costs remain the constant it doesn't matter if sales increase or decrease. Example of Fixed Cost is lease payment. If you are leasing a building at £3000 per month, then you will have to pay that amount each month, it doesn't matter how your business is doing.
A high level of fixed costs increasesoperational gearing.
Costs which are not fixed are variableorsemi-variable.
From a psychoanalyst point of view, accounts do not always provide enough information to differentiate fixed and variable costs, which is needed for building an abstraction representation of a financial decision making situation. In some areas cost of items sold can be assumed to be variable (e.g., for a retailer, whose cost of sales is the cost of buying the items sold.).
Accountants call variable costs, which is approximately the same as what economists call low run variable costs. From that point of view of financial modelling, costs seems to be fixed only over a few range of conditions: if you are a manufacturer who wants to increase production 15% you can be able to increase the production with your existing factories, and by paying only for the increased consumption of raw materials, whereas if you want to double production you may need to twice as many factories so all your costs double.
Economic Downturns: Adownturnis a deterioration of business or economic activity. And it is related to a refuse in astockmarket,economic cycle, or business profits. Mostly Industry, market or corporation are referred to a downturn, but generally it refers to a economic conditions at large. A bear market is normally referred to a major downturn in a stock market. An economic downturn may be a part of or come first at a largerrecession, however a downturn does not necessarily proves long-lasting negative growth. Some may think downturn a correctionto normal operating levels of business, the techbubbleburst in the late 1990's which was a rapid increase in equity market followed the downturn after a decade-longbullmarket had led to unusually high stock valuation. There are four stages in an economic cycle which are as follows, Boom, Recession, Slump and Recovery. If you haven't heard about the economic downturn or recession in the present time than you must be living a pretty secluded life everywhere you go, in fact, whether it's in your living room watching the news, or a dinner party you're likely to hear about the word Recession or Economic Downturn.
Here are the few points you have to remember about the economic downturn.
The Economy is a Wave: The universal economy is like wave far from being a straight line or even a tender curve. On regular intervals it will fall into a furrow, but that furrow is always followed by a crest. This, in a nutshell, is the downturn- the point at which that waves from the peak of a crest, to the bottom of a trough.
It's all about investment: When it is said that economy is in a downturn, what it's really mean is that people who have to invest in business and business with money are trying to hold onto their cash, instead of investing because of the panic that they have if they invest at this time of recession they will not see any profit, they have to wait for long or they will lose money as this affects liquidity, and means that business which are undercapitalized, or have poor cash inflow, starts to suffer. It's then that we start see companies going under, job losses and price hikes, as the economy struggles to right itself, without any significant cash injection.
A Vicious Circle: The problem with a downturn, and the reason that it can take years to recover or it might take decades, is that by the time these signs-layoffs, destruction and more, become clear, it's a little too late already. There will be more unemployed people by that time who will spend less money. Retail and other industries will often end up in closures and more job losses. Banks and other, squired by the hope of more debt, are also closing up shop, and waiting it out. People who are already in trouble can't turn to them.
“Woolworths Group plcwas one of the British company that was one of the famous shops on high-street. Woolworths which had all most 800 branches was the main venture of the group. Woolworths were the leading stockists of all most all retail items and clothing too selling Ladybird children's clothing,Chad Valleytoys and theWorthIt!value ranges. And they were the UK's leading supplier ofCandyking"pick 'n' mix" sweets. It was also named as "Woolies" by the UK media and the general public.
The trading of shares in Woolworths Group plc was suspended on 26 November 2008 and the Woolworths entered administration entered administration on 27 January 2009. All 807 stores were let to closures by the administrators Deloitte & Touchebetween 27 December 2008 and 6 January 2009 leaving all the stores in high-street empty and losses to nearly 27,000 jobs. It was thought that Sainsbury's, Asda, Tesco, the Co-op and discount chain Poundland were interested in picking up some of the retailer's prime stores. The main reason for the closure of Woolworths is the company was in debt of nearly £385 million.”
How Woolworths tried to boost their sales through stockpile control:
During the economic downturns Woolworths tried most of Retail stores can boost their sales revenue during the holidays through account control. Controlling account is most important during a recession when consumer spending is low. For many low scale retail businesses, the holiday period is one of the most important sales periods of the annum and can factually make or break the business.
If the business stocks up with too much stock, they can involuntarily cut into any income that they make due to costs associated with too much stockpile. Here are some of the steps to have enough stockpile, but not too much, without reducing the sales revenue, even in economic downturns. In terms of Woolworths the difficulty was so high and on top the company was in debt, before the demise of the UK Retail giant everything was on sale liquidation of company's stock and almost all products were 70% off. In that way all the stores across the UK all stock were sold
Time Required: Uncertain
This is how the process flows:
- Developing a holiday sales conjecture.The holiday period forecast will be different from normal seasonal sales forecast in a year because most of the people shop during holiday times and some festive season. If most of sales occurs during the holidays. The normal sales forecast should be done many months, or as much as a year or two, before to the holiday season because in the holiday season it all becomes busy.One of the major foundation of the business is forecasting
- Respond to changing economic times for your company.If the economy is in a downturn, than you have to compromise with your sales forecast to recompense.
- How much have your sales been down during the year?How much sales of your company went down, mainly your direct opponent sales? You can have a look at the records for theretail industryin broad. You have to get more detailed information on your opponent broken down more specifically, Than you will get a clear picture of your company's performance in the current economy. If you look at this type of data, it will help you adjust your sales forecast.
- Analyze the sales for your own company during the economic changes that have occurred.Try to figure out actually what has happened to your sales during the economic downturn? Do you sell a product or service that is especially sensitive to a change in economic climate? Is yours a luxury good that people can do without or people who are from middle-class can't afford? If so, you may experience a large change in sales. On the other side, if you sell a item or service that is a necessity of the most of the common people that your company might do some good business in the economic downturn. Based on these issues, you can make another adjustment to your holiday sales forecast.
- Take a look at what types of merchandise you carry.If your company sells services and not products, then your merchandise or stock on hand is different than the merchandise for a company that sells products. Whatever type of company you own, you have to alter your stock on hand to meet your altered sales forecast. Until and unless your business sales move counters to the economy, then they are probably lower than usual if the economy is in a recession.Do you expect your sales to continue to be lower during the holiday season? If so, adjust the amount of stock that you have or you will carry. Don't forget the 80/20 rule. About 80% of your sales come from 20% of your merchandise and the stock which is there in your hand.
- You do not want to have stockouts.Even though you don't want to carry too much of your merchandise, you also don't want to carry too little because you will stockout. Stockouts result in a loss of customer believe and the disappointment of the customer. The problem with inventory management is that you have to cope with how much merchandise to carry so you won't be stuck with outdated merchandise but you won't stockout. All issues are associated with costs.
After applying all the strategies Woolworths were not able to stand on that resulted in closure of the stores and then permanently closed as they couldn't face the economic downturns. On 5 December Woolworths bothrecorded their greatest single day takings of £27million, and axed 450 head office and support staff jobs.
closing-down salewhichstarted On 17 December 2008 administrators announced that all 807 Woolworths stores would close by 5 January 2009(later changed to 6 January), with 27,000job losses.Deloitte's Neville Kahn also said that it was not very clear that how much of Woolworths' debt wouldbe paid. At the last stage of the sale most of the items were up to 90% discounts, and almost all stores sold their stock and all most all selling their fittings and fixtures too.Closures were criticised by Ardershir Naghshineh, former chief executive of Kingfisher, Woolworths former parent company , a current shareholder of Woolworths. Almost all the stores were closed in phases, and The stores were closed in phases, and the last two closing days were moved back a day in order to sell more remaining stuff to easiness logistics of closing. On 27 December 2008, 207 stores were closed followed by more 37 closed on 29 December than another 164 were shut down on 30 December and finally all remaining 400 stores were closed between 3 January and 6 January 2009.