When you think of joining the business world, you must understand that you will have fluctuations. Sometimes the business will be booming, and at other times it will decline.
These upward and downward cycles in business are referred to as the economic cycle of a business. Many factors affect this cycle which could be both exogenous and endogenous.
The economic cycle is affected by both supply and demand, which means not everything is in your control. You might make hot items that sell out at Christmas, but come April, you’ve got nothing going on. Let’s get into the cycle.
What Is the Economic Cycle?
The economic cycle, also called the business cycle, is the fluctuation of growth and decline.
A business cycle length is a period that contains a single contraction and boom in sequence. Such fluctuations involve shifts ranging from relatively rapid economic growth times to relative decline or stagnation.
It has got four stages namely; expansion, peak, contraction, and trough. In the expansion stage, the economy is under rapid growth, production increases and interest rates are low.
When growth is at maximum, the cycle hits its peak. However, there are some imbalances that this peak growth produces which need to be corrected. As the correction takes place, the growth cycle takes a downward direction.
As the growth rate slows or contracts, prices stagnate and employment falls. The growth cycle keeps decreasing until the economy hits the trough or its lowest point and begins to recover again or the cycle continues.
Boom
When the business cycle is in its boom stage, there is an increase in consumer spending, business confidence, investments, and profits.
At this stage, there is a lot of money in circulation and consumers feel the urge to spend the lots of money that they have.
Since people are spending more, there is an increased demand for goods which leads to prices also going higher and the economy grows too.
Consequently, there are increased employment opportunities because goods are in high demand and people must make more to meet the demand.
Businesses that depend on consumer spending will enjoy high demand for their products. Such businesses are called ‘cyclical’ businesses like restaurants, overseas tour operators, home builders, retailers, and more.
Their fortune is closely connected to the economic growth rate. At this stage, businesses should save as much as possible to save the situation during the recession and depression stages.
Recession
At this stage, there are decreasing levels of consumer spending and confidence. Consequently, businesses make lower profits since people are not buying like they were during the boom stage.
There is a decreased rate of investment and employment levels also decline. Businesses reduce on stocks and generally business starts to decline so does the economy.
Businesses need to cut costs to survive this stage. Also, don’t employ more people or buy more stock now. Another way businesses survive this stage is to maximize on the clients that you already have.
Instead of looking for more yet you have limited resources, focus on impressing the already existing customers. Ensure they stick even in hard times like these when business is low.
Also, focus on more marketing, don’t cut the marketing budget but rather maintain it.
Depression
A prolonged period of recession leads to a very weak consumer spending and confidence. Investment also declines greatly, businesses make little to no profit and hence some businesses close at this stage when they fail to keep up.
This leads to increased levels of unemployment and prices start to fall even deeper. This leads to a decline in GDP and deflation.
This is when most businesses close down save for a few that are prepared for it by saving and paying bills during the boom stage.
You can also take on another job to pay for business expenses. Governments can help businesses by lowering interest rates and taxes.
Recovery
Just like its name, this is the recovery stage-when things start to get back to ‘normal’. Consumers start to spend again, businesses make some profit and a ray of confidence starts to form and they start to but stocks and invest.
However, unemployment takes some time because demand must be high so there is a need for more production. Also, employment will largely depend on investment.
Businesses shouldn’t rush to buy more stock or spend the little profit.
Last Remark
The economic cycle is what the government uses to determine the growth of the economy. It is measured by the increase and decrease of the GDP of a nation. This will affect your business, so be on the lookout for the stages.
