I have worked with a lot of MSMEs, and, over time, I have noticed that many business owners share a common thought process.
Growth, growth, and more growth via sales, customers, and expansion. While all this is important, the one thing that often gets overlooked is “slowdowns”.
Businesses don’t grow in a straight line. They move in cycles. And if you don’t identify the phases of the business cycle you’re in within the business cycle, even the best decisions can lead to unexpected outcomes.
Let’s understand all about the business cycle…
In simple terms, a business cycle is the ups and downs in the economy. So, what is meant by business cycle fluctuations? It moves through phases like expansion (growth), peak (highest point), contraction (slowdown), trough (lowest point) and recovery (getting back on track).
The period for these highs and lows is so irregular that predicting their behaviour has become an extremely tough exercise, even for the experts!
Now, you might be thinking, “That’s for big companies. It is not for me.” But the truth is, every business has its ups and downs, which are natural phases of the business cycle.
As a business owner, knowing which business cycle stage you are in to capitalize on favourable conditions and when to stay cautious during downturns can help you improve financial planning and strengthen your business with better capabilities to face market changes.
Here’s how –
When you know whether the market is growing or slowing down, you can adjust production and stock accordingly. Thus, you stay safe from stock wastage or any sudden demand.
If the economy is strengthening, it is a good time to fully implement the new branch, purchase new equipment, or launch a new product.
Otherwise, it is best to cut down spending during the slowing phases.
Growth periods give you a good opportunity to hire, while slow times may warrant caution.
Understanding the cycle helps avoid the stress of having a major overstaffing issue or rushing to find help for a sudden peak in business activity.
During growth times, you can start saving. This means when the market begins to dip, you have something to rely on. This also provides support in managing loans and credit.
If you understand the business cycle, it helps you stay ahead. Instead of simply reacting to changes, you can get ahead and make better decisions on where the economy is heading.
It’s easy to see the benefits of understanding the cycle. But turning that knowledge into a repeatable process needs a framework that manages your finances, stock, and team, no matter which phase of the cycle you’re in.
Knowing the different phases of the business cycle is important for strategic planning.
Your business is in that growth phase where the economy is booming. This phase of the business cycle is also known as a business cycle expansion.
Everything seems to go right. Sales increase, consumer buying confidence is high, and people tend to spend more.
This is when a business plans investments to buy new equipment, hire more employees, and expand. To put it simply, this is a good time for business.
Economic Conditions In This Phase
In the peak stage, your business and the economy have reached the climax of the cycle. In this phase, everything is performing at its best, but it’s also when things are about to begin slowing down.
As I said, the economy can’t grow forever, and at the peak, you start seeing signs of this.
Economic Conditions In This Phase
After the peak comes the declining phase of the economy, which is an important part of the boom and recession cycle. This phase is where pressures are felt most by business owners, as sales decline, hiring freezes, and keeping the business running become challenging.
Economic Conditions In This Phase
The trough is the lowest point of the cycle, the most difficult phase. In this phase, the economy is at rock bottom, and recovery seems far away.
The trough indicates that the worst has already passed and that recovery is on its way.
Economic Conditions In This Phase
The recovery of the business cycle begins once the trough is passed. Slowly, things start to move in the right direction.
Businesses gradually resume hiring, consumer buying confidence returns, and demand grows again. This is the right time for you to resume investing in the new growth stage and the next expansion.
Economic Conditions In This Phase
I always remind business owners, “You can’t control the cycle, but you can prepare for it.” After all, these shifts are not random. They are an integral part of what we call the business cycle.
Let’s break it down in simple characteristics of business cycl so that you understand exactly what influences this business cycle and its phases.
Consumer demand is one of the strongest forces that create the business cycle. The more people buy, the better the economy. When they stop, businesses feel the slowdown.
When consumers are confident, they have steady incomes, and when they see borrowing or credit as easy, then they buy more.
However, if jobs are uncertain or prices are going up, they hold back. This affects you directly in terms of sales, especially if you’re selling to end consumers.
Business investment patterns change depending on how optimistic or pessimistic business owners feel about their sectors.
If they feel good about their business, they might buy some new machinery or expand with some new products or hire.
Your gut feeling is creating trends in the economy at this point, but so is that collective gut feeling of other business owners.
Interest rates can be viewed as a kind of remote control for business activity. When rates are low, it is cheaper to borrow and to grow.
When rates rise, borrowing becomes pricey, and both consumers and businesses tend to slow down. Therefore, it’s important to stay updated on bank-related news.
New technologies or innovative ways of working can help an economy grow and become more productive. But sudden changes in raw material prices or supply chain are harmful to production and direct costs.
These supply-side effects matter a lot, too.
Some are beyond our control, like COVID-19, a natural calamity or even a global war. This affects everything from supply chains to customer buying patterns. All these events are catalysts or dissolved triggers that worsen a slowdown.
In this case, prices rise very quickly, and people tend to buy less. The government might also raise interest rates to control inflation again. Inflation eats up your margins and customer behaviour.
The government can create booms for the industry through a reduction in taxes or an increase in expenses, which is a form of control of the trade cycle. But in the same way, if the government reduces expenses or increases taxes, it can lead to a slowdown in growth.
The business owner has to know whether the economy is growing or slowing for better planning.
You can think of it as checking the weather before stepping out. These indicators are often visualized on a trade cycle diagram
Here are six key indicators to watch for:
The total value of everything produced in the country.
Rising = good times, and falling = slowdowns.
More jobs mean more spending by everyone.
Rising unemployment means more challenging times.
If people are spending more, the business cycle usually improves.
If inflation is too high, costs go up, which means a possible sales downturn.
When interest rates fall, it is time to spend. When interest rises, it is time to save.
Are any other businesses around you busy or slowing down?
So, What Should You Do With This Info?
Don’t just focus on one number. Evaluate the changes happening over the past months. Are they increasing or decreasing?
Follow news on business, and read up on updates from your sector, plus monitor your sales. Sometimes your gut feeling, backed by day-to-day activities, is your best indicator.
It’s tough to predict exactly when these ups and downs will happen. However, it is better to be prepared by knowing the business cycle fundamentals: what drives them, how they are measured, and how the government reacts.
The more equipped you are with this knowledge, the more confidence you will have in making smart moves in business.
All you can do is stay aware and stay flexible
None can destroy iron, but its own rust can! Likewise, none can destroy a person, but their own mindset can.
Former chairperson of the Tata Group
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