The weaker the cash flows, the lower is the importance of enhancing productivity to cost-of-capital improvement. Management often faces quick decisions concerning its workforce, including the growth outlook for its products and services and the various product lines within the company's markets. If the free cash flows are absent, layoffs hopefully can provide a bridge to a turnaround.
Corporate executives are initially reluctant to cut staffing levels, especially it they sense that demand will be restored within a reasonable period of time, even if current levels are obviously mismatched with output and cash flows.
The workforce and productive capital and plant can be set once current and projected operating and free cash flows are reasonably estimated; it would be imprudent to match workforce and plant with units of production or revenues if the entity is not capable of generating long-term free cash flow.
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