August 21, 2018

Mr. Business: How Companies Crumble (Bad Economies)


By Telford Aduda

Economy has been defined by scholars as the state of a country or region in terms of the production and consumption of goods and services and the supply of money. A given economy is the result of a set of processes that involves its culture, values, education, technological evolution, history, social organization, political structure and legal systems, as well as its geography, natural resource endowment, and ecology as main factors, and all the factors affect the economy in one way or another.

There are three types of economies in the world today; market-based economy, command-based economy, and green economy.

A market-based economy is where goods and services are produced without obstruction or interference, and exchanged according to demand and supply between participants.

A command-based economy is where a central political agent commands what is produced and how it is sold and distributed.

A green economy is low-carbon, resource efficient, and socially inclusive.

The bigger question maybe, does the type of the economy you are in really matter? In my own opinion, like a coin, the only thing that matters in economy is the two sides; whether it is good or bad for you.

Growth is always viewed as essential for a good economy. Opinions may differ on the factors necessary in a strong economy. However, the libertarian point of view prioritizes individual economic freedom; low taxation, they argue, allows people who make more money to spend it on what they want.

A bad economy can bring a vast array of effects to both large and small businesses. Since it can take a great deal of time for an economy to recover, businesses that were affected at the start of the downturn will likely endure the negative effects of the bad economy for a longer period of time.

As revenue and profit decline, the stock price of a manufacturer will also plunge, coupled with the fall or loss of dividends. This will likely be a common scenario among large companies during the economic depression. Their shareholders, as well as the board, will likely become frustrated with this situation and will tend to make changes in the company’s management team.

Low revenues caused by a bad economy will force companies to pay their bills and debt either slower or late. The affected companies’ late or delinquent payments will lead to reduced valuation of their debt, bonds, and ability to obtain financing. In the long term, a company will experience bankruptcy if their debts are not serviced and can’t be repaid as agreed upon in a lending contract.

Such companies always lay-off some employees as part of the cost-cutting strategy. However, because of increased workload coupled with longer work hours, employees develop low morale. Work will be harder, yet wage increases will become impossible.

Because of the company’s cost-cutting measures, the quality of their goods and services will be compromised. This will lead to the reduction in the desirability and sale-ability of its products and services, thus leading to a variety of repercussions (such as closing of plants, discontinuation of poorly performing brands or products).

And that is only the tip of the iceberg. Could this be happening to your enterprise?

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