The business cycle is important for business owners because the ups and downs in the economy affect the ability of a business to stay afloat financially. Changes in the business cycle are measured against long-term trends.
This article offers an introduction to why managers and business owners need to understand the business cycle and a list of six questions that business owners should consider regularly to keep their pulse on the business cycle. Following changes in economic factors such as supply and demand in the local, regional, national, and global economies is essential for sound business planning.
According to Dr. William B. Conerly in “Businomics,” managers need to know two key things about the business cycle. First, “The manager would like to know when downturns—and upturns—in sales are coming.” For example, in an economic downturn, sales may drop and potentially hurt company profits. Second, “Managers would also like to know when their costs are going to rise or fall.” For example, inflation may cause the cost of goods to rise, resulting in the need for the company to raise the prices for its customers.
If you are a manager, you need to acquire an elemental understanding of economics to assist you with studying changes in your market and in the economy in general. What kinds of questions can you ask yourself to guide your monitoring of the economy? Just waiting for the news media to draw your attention to significant changes in the business economy may not be enough to protect your company.
Here are six questions about the relationship of your company to the business cycle to consider:
1. How have my business costs changed over the last four quarters? If you look at your costs over time for supplies, labor, services, and so on, you can identify trends either upward or downward based on fluctuations in the economy. Decreasing costs may increase your profits, whereas increasing costs may decrease your profits without adjusting your prices.
2. How have my sales been for the last year? Just like studying cost trends, you can study sales trends. You should know on any given week or month how your products are selling overall and how the major categories of products are doing. If you have a flagship product, you might need to prepare more detailed sales figures for that product.
3. How can I decrease my expenses to create more profit? Deciding whether you need to decrease expenses is a difficult issue. If you are hit with an economic downturn, you may be forced to cut your expenses quickly. Knowing when to trim the overhead of doing business is a skill that you build over time.
4. How have my profits changed in the last year? Because your costs are always changing, you can choose not to view profits as fixed amounts and study their trends upward or downward from quarter to quarter and year to year. You can study profits as a percentage of total sales for a constant measure of profit trends over time.
5. Do I need to increase the amount of savings for my business? Savings is an important consideration. Just like many households, many smaller businesses have nominal savings. Often smaller businesses rely upon credit to get cash when needed. If you set the amount you will save out of your monthly or quarterly profits as a percentage, you can adjust that percentage based upon changes in the economy.
6. Do I need the ability to borrow more money to support my business? Sometimes your business will be short on cash. For example, if you spend a lot on purchasing inventory and then you have a drop in sales, your business may take in less money than you were counting on to meet all monthly expenses. The ability to borrow as much as you need for unforeseen economic changes is crucial for keeping the company solvent. You can study your business to determine how much available credit your business might need to climb out of a monetary hole when changes in the business cycle hurt your financial position.
There are many other factors to consider when you study your business activities in relation to the fluctuating economy. The foregoing six questions serve as a starting point for exercising your business mind constantly about the business cycle. The more you study the trends of your business, the better you will become at making strategic moves to adjust business activities such as spending, saving, and setting prices.
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