TIPS FOR MANAGING BUSINESS CYCLE DOWNTURNS
A business cycle is a sequence of economic activity in a nation’s economy that is typically charac6erised by four phases – recession, recovery, growth, and decline – that repeat themselves over time. Economists note, however, that complete business cycles vary in length. The duration of business cycles can be anywhere from two to twelve years, with most cycles averaging about six years in length. In addition, some business analysts have appropriated the business cycle model and terminology to study and explain fluctuations in business inventory and other individual elements of corporate operations. But the term “business cycle” is still primarily associated with larger (regional, national or industry-wide) business models.
STAGES OF A BUSINESS CYCLE
Recession
A recession – sometimes referred to as a trough – is a period of reduced economic activity in which levels of buying, selling, production, and employment typically diminish. This is the most unwelcome stage of the business cycle for business owners and consumers alike. A particularly severe recession is known as a depression.
Recovery
Also known as an upturn, the recovery stage of the business cycle is the point at which the economy “troughs” out and starts working its way up to better financial footing.
Growth
Economic growth is in essence a period of sustained expansion. Hallmarks of this part of the business cycle include increased consumer confidence, which translates into higher levels of business activity. Because the economy tends to operate at or near full capacity during the periods of prosperity, growth periods are also generally accompanied by inflationary pressures.
Decline
Also referred to as a contraction or downturn, a decline basically marks the end of the period of growth in the business cycle. Declines are characterized by decreased levels of consumer purchases (especially of durable goods) and, subsequently, reduced production of businesses.
Keys to successful Business Cycle Management
Business owners can take several steps to help ensure that their establishments weather business cycles with a minimum of uncertainty and damage. While there may be no definitive formula for every company, the approaches generally stress a long-term view which focuses on a firm’s key strengths and encourages it to plan with greater discretion at all times. Essentially, businesses are operating toward operating on a more even keel.
Specific tips for managing business cycle downturns include the following:
Flexibility
Part of the growth management is a flexible business plan that allows for development times that span the entire cycle and includes alternative recession-resistant funding structures.
Long-term planning
Consultants encourage businesses to adopt a moderate stance in their long-term forecasting.
Attention to Customers
This can be an especially important factor for businesses seeking to emerge from an economic downturn. Staying close to the customers is a tough discipline to maintain in good times, but it is especially crucial coming out of bad times. Your customer is the best test of when your own upturn will arrive. Customers, especially industrial and commercial ones, can give you early indications of their interest in placing large orders in coming months.
Objectivity
Business owners need to maintain a high level of objectivity when riding business cycles. Operational decisions based on hopes and desires rather than a sober examination of the facts can devastate a business, especially in economic down periods.
Study
Timing any action for an upturn is tricky, and the consequences of being early or late are serious. For example, expanding a sales force when the markets don’t materialize not only places big demands on the working capital, but also makes it hard to sustain the motivation of the sales people.
If the force is improved too late, the cost is decreased market share or decreased quality of the customer base. How does the company strike the right balance between being early or late? Listening to economists, politicians, and media to get a sense of what is happening is useful, but it is unwise to rely solely on their sources. The best route is to avoid trying to predict the upturn. Instead, listen to your customers and know our own response -time requirements.
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