Business Cycle

Many business cycles are anything but regular. They vary inintensity and length. Expansions and contractions of the economy,also sometimes referred to as booms and busts, are broad economicevents that affect many industries and companies. The United Stateseconomy has experienced approximately 10 of these boom-and-bustbusiness cycles since 1945. They’ve varied in length from theabbreviated six-month contraction that followed the five-yearexpansion from 1975 to 1980, to the 106-month expansion thatspanned the 1960s. The characteristics of economic cyclesinclude:

• Fluctuations tend to affect durable manufacturedgoods more than services.
• Wholesale and industrial prices tend to beaffected more than retail prices.
• Short-term interest rates track and amplify thecycles, moving in an exaggerated manner along with theeconomy.

Don’t ignore the influences of fortune on your business. Wars,hurricanes, floods and fires can all have powerful effects on yourbusiness. Wars in particular have a tendency to affect the entireeconomy, producing booms in their early years as governmentspending mushrooms and followed by the dampening effects ofinflation and, later, recession as the economy cools down.

Some random events can be beneficial to some businesses. Aroofing company, for example, could see a boom in businessimmediately after a destructive hailstorm strikes its service area.It doesn’t pay to structure your business around hoping fordisaster, but you should be ready to swing into action when randomevents create extra demand for your products and services.

Much effort has been expended trying to develop ways to predictthe turning points of business cycles. Few things are widely agreedupon, however. For example, falls in stock prices, profit marginsand finally profits are generally seen as precursors of downturns.However, even experts disagree on the timing of these so-calledleading indicators. It may be weeks or months after a stock marketcrash before the economy begins to show signs of receding. Thenagain, it may never happen. And there are many other indicators,such as housing starts, interest rates and price indices, thateconomists look to for help tracking and forecasting changes inbusiness cycles.

The Conference Board Inc., a private, nonprofit New York Cityresearch organization, produces a monthly report that looks atrecent figures on employment, income, prices, costs, inventoriesand many other factors. One of the most interesting features ofthese reports is the index of leading indicators, which is anattempt to peek at the near future of the economy. The leadingindicators include average weekly hours worked by manufacturingemployees, unemployment claims, new orders for consumer goods,building permits, interest rates and an index of consumerexpectations. Unfortunately, because of difficulties in the timelycollection of all this data, it is subject to revision for somemonths after a report has been released. Therefore, the “forecasts”of an upcoming recession are often made after the recession hasarrived.

In general, economic forecasts aren’t perfectly reliable.Neither, of course, are the hunches and intuitions ofentrepreneurs. However, taken together and applied carefully inview of what you know about your particular industry and company,economic forecasts can help you to prepare for changes in thedirection of the economy before or soon after these changesoccur.

Business cycles are also affected by seasons of the year,holidays and other recurring events. Bathing suits and sunscreen,for example, sell well in spring and summer, poorly in fall andwinter. The opposite is true of coats and gloves. Less well-knownexamples include fast-food outlets and other restaurants regularlysuffering sales declines in the winter and boosts in the summer,especially in northern climes. Don’t underestimate the potentialeffect of seasonality. Cooler maker Igloo’s sales during June, itsbusiest month, are 10 times higher than those in its slowestmonths.

There are many things you can do to smooth out seasonality–andyou should do some or all of them if you want to grow steadily.Seasonality is a management challenge; it makes it harder for yourcompany to grow when you experience wide swings in demand. Ifseasonality is causing you problems, think of ways to generatesteady sales. For example, one mail order flower company gets asmuch as 40 percent of its revenue from a flower-of-the-month-clubprogram, which helps smooth out the seasonality of thisbusiness.

One of the best-known examples of the power of seasons onbusiness is the year-end holiday sales boom that packs half theyear’s sales into a few months for many retailers. But the timingof holidays is even more sensitive than it may appear. Holidaysthat don’t occur on the same calendar date each year may havedifferent effects on business, depending on when they actually takeplace. Easter is a good example. It may occur during a broad spreadof weeks in March and April. If it’s early, retailers in the Northmay be hurt because they’ve displayed swimming suits that don’tappeal to shoppers who are still wearing their winter coats. Ifit’s late, on the other hand, retailers have to be ready to supplysummer tastes in goods along with their Easter displays.

Highly seasonal businesses must avoid the tempting budgetingshortcut of taking the projection for first-year sales and dividingit by 12. If you have wide-ranging changes in cash flow needs, thatkind of budgeting error could sink you. So enter sales and cashneeds on a monthly basis, taking into account the expected effectof the seasons on each month. Otherwise, planning for cycles islargely a matter of recognizing that they exist. This may mean notassuming that the current good times will go on forever. Plan fortougher times by limiting the costs you add to your business. Inparticular, be wary of paying higher recurring expenses such asrent.

Entrepreneurs tend to take on unnecessary expenses when timesare good, but this can sink you if a recession strikes. Look outfor overly lavish expense accounts, over-reliance on high-pricedprofessional advisors, products that don’t carry their weight, andeven marginal customers you’d be better off without. Trimming thesecosts when times are good will help your profits now and may makethe difference between success and failure when the cycle turns theother way.

Also think twice before adding expenses that may be hard to cut,or even cost more to cut than they do to keep. Chief among thesecosts is people. It can be emotionally as well as financiallypainful to lay off workers in the event of an economic downturn.And the costs for severance pay, unemployment insurance,outplacement and retraining may also be steep. Remember: Even ifyour income statement and balance sheet are strong now, you have topractice cost containment to be ready for the next recession.