Financial Statements Can Determine Layoff Probability

By Author: Tynika Stevens
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A Financial statement is a company’s resume with reflect the financial activity of the business. There are four key elements that are part of a financial statement. These elements are the balance sheet, income statement, statement of retained earnings, and a statement of cash flow. A balance sheet reports a business’ net equity, assets and liability. An income statement states a business’ expenses, profits and income over a specific period of time. A statement of retained earnings documents the fluctuations in a business’ retained earnings over a period of time. The statement of cash flow states a business’ operating, investing, and financial cash flow. All these elements of a financial statement are used to judge the financial profitability and activity of a business. A positive or negative financial statement can determine if a company is in a strong or weak financial position.

The function of a financial statement is to reflect the financial weakness or strength of a business. Internally, it is used by a business to make financial decisions such as hiring new employees or layoffs. When businesses ...
... are financially struggling they look to cut cost and the fastest way to cut costs is to eliminate employees. Today in a struggling economy, employees are regarded as costly liabilities, and businesses and governments are trying to reduce those liabilities as much as they can. When the recession of 2007 begun more than 8 million Americans have lost their jobs. According to the government, of those job losses, 700,000 stem from layoffs at just 25 companies. According to the National Bureau of Economic Research, mass layoffs occurs when at least 50 initial claims for unemployment insurance are filed against an establishment during a consecutive 5-week period. During the most recent recession, employers took 3,059 mass layoffs actions in February 2009 involving 326,392 workers. During the same period, the unemployment rate rose to 10.0 percent.

The auto industry felt the pain of the recession. U.S car sales dropped from an average 16 million a year in 2005 to 11 million in 2009. General Motors was especially hit hard, forcing to cut tens of thousands of workers. The largest layoffs came in February 2009, when the company let go 50,000 people, almost 20% of its workforce. During the credit crisis of 2008, Citigroup was forced to cut 50,000 jobs as part of a plan to knock down expensed by 20%. The bank was reeling from subprime mortgage losses that had driven its stock down from $35 to under $4 in less than a year. Circuit City slowly succumbed to pricing pressures and competition from both competitors’ Best buy and Walmart. It begun with aggressive layoffs in 2007 and completely shut its doors in 2009, bringing a total layoffs to more than 40,000 after it closed 567 stores.

A business’ financial statements are a direct relationship of how well a company is performing and if they are in a position to hire new employees or layoffs. Another alternative for businesses to cut costs is by sending as much work overseas where the wages are far lower and where the regulatory is much simpler. Today, most large corporations only want to have as many U.S. workers as absolutely necessary. In a world where labor has been globalized, some corporations shell out massive amounts of money to American workers when they can save paying lower wages to workers overseas. In the old days, a person could go to college, get a good paying job with one company for 30 years and retire with a nice pension. Unfortunately for today’s generation, corporations do not have the same loyalty, when a company reaches a financial hurdle; one of the easiest and fastest ways to cut costs is to eliminate its employees.