Financial Management during Economic Downturn Essay

Financial Management during Economic Downturn - Essay Example However, during the period of economic downturn or recession, this task is little more difficult as financial decisions are not likely work out as planned by a financial manager. Planning is relatively a simple task as it basically needs only past data with information on how to relate them to future conditions. But, when it comes to realise that financial outcomes do not come out as planned, the firm's financial position gets affected adversely and eventually its existence. Keeping this in view the present paper attempts to discuss the problems that are faced by a financial manger during the period of economic downturn. The paper does not discuss the issue from the view point of any particular firm. Instead it presents the issue from a macroeconomic point of view taking all types of firms. Economic downturn or recession is an economic situation wherein the general economic activities experience a slow down. When the general economic activities of a country get affected by a recession, the country's economic progress and growth will surely be affected leading to low GDP; spending; employment opportunities; capacity utilisation; and individual and household income (Roland 2007). In fact, these variables are necessary to the economic progress and prosperity of a country and its business activities. In short, economic slowdown affects the business activities by low demand for goods and services, poor cash flow from customers and low lending by financial institutions in the economy. This will eventually result in unavailability of finance (log term and short term), less collection from debtors, unavailability of factors of production for enterprises in the economy (The United States Department of Labor 2006). These cause serious financial implications such as low profitabi lity and less growth to the shareholders, which threaten the smooth functioning of business operations. As a result, the individual financial manager should chalk out certain financial plans to revive his firm from economic slowdown. 3.0 Financial Manager's Role The financial manager's role is pivotal in a firm which runs through a tough economy leading to poor debt collection and credit availability. The responsibility of a financial manager in such a pathetic situation is to revive the firm to the earlier position. But it is a huge task and he needs to take and follow a proactive approach rather than reactive efforts. He should take initiatives right from financial planning and budgeting on the anticipation of economic slowdown at any time in future. Moreover, the plans and budgets are to be aligned to the actual happenings in such a way that there is no big gap between the two. The following sections will detail some of the important measures to be followed by a financial manager in times of general economic recession. 3.1 Cash flow Projections Liquid cash is an essential element for the smooth flow of routine business activities. Cash is needed for a number of activities right from purchasing stationery to payment of dividend to shareholders. Unless the firm has a level of cash enough to meet the daily needs, the business operations get affected and will adversely impact the flow of goods and services to the customers. This implies liquid cash is an essential asset, the absence of which will affect the normal operations and