A business cycle implies an economic cycle or a boom-bust cycle. This cycle indicates fluctuations in trade, production, and general financial activity. Let us see the impact of this cycle on the business in more detail.
What is the business cycle?
From a conceptual point of view, the business cycle is referred as the downward and upward movements of GDP levels. It implies the time period of contraction and expansion of economic activities under the long-term business growth trend.
The different business cycle phases show a wave pattern over time in regards to GDP. These cycles are recognized as four different phases such as peak, expansion, trough and contraction. Consulting a certified financial advisor will access the economy and its impact on the business and based on it guide you the things to do during financial cycle.
How does economy impact a business?
An expansion is categorized by improving economic growth, employment avenues, and increased pressure on prices.
“Peak” is seen as the highest level in the business cycle. This is the point where the economy produces maximum allowable output. Here employment is either at or higher full employment. Impact of inflation on prices can be clearly seen.
After the peak phase, the economy enters into a contraction phase where growth rate slows down, pricing pressures reduce and employment declines.
Impact on Business Operations
There is a simple example that shows how business cycle impacts business operations and how a business responds to such cycles. Let’s say ABC is a small sized business that offers construction services to people.
With the growth in the economy, people are keen to fix up their houses so as to sell them at a higher price. ABC company is in high demand. To fulfill the customer requests, the firm decides to pay the existing workers for overtime work or recruit additional workers.
New trucks and additional tools are brought to match with the demands of customers. Customers who are more willing to pay more will get their work done.
In this phase, besides hiring new technological tools and employing new staff and working for all seven days in a week, ABC firm is not able to keep up with customer’s demand. This results in exhaustion of the crew and reduction in the quality of work.
With the contraction of the economy, business starts to slow down for ABC. They realize that their business is not getting several phone calls that they used to get earlier. The owner cuts down the labor costs, overtime and weekend work.
This is leading ABC firm to lose out on a variety of jobs as their existing bids are very high. The company starts to search for new suppliers who can offer them with good quality materials at lesser price to become more competitive.
The building material firms begin to offer “deals” and discounts to contractors to make more sales. This increases the competition for work. Some businesses that showed up at the time of the expansion do not exist in the market.
To confirm the longevity of the livelihood, begin planning as well as managing the finances of your business before it gets too late.