Managing the Business Cycle – You Can’t Stop Pedaling!

Isaac Newton taught us that anything that goes up must come down. So, why should businesses be any different? Managing the business cycle is one of the biggest challenges that entrepreneurs and their senior management team will face. And the reality is that it will never go away.

In today’s global economy, the impact of any macroeconomic event travels at the speed of light. The Federal Reserve sneezes, and boy, the rest of the world catches cold in next to no time. The blood pressure levels of many a CEO mirror the changing patterns in oil prices and stock market indices. This is where the skill in managing the business cycle spells the difference between success and doom, and separates the men from the boys. “Beating the Business Cycle” by Lakshman Achuthan and Anirvan Banerji listed in the Professional and Technical books section provides greater insight.

For an entrepreneur, it is very important to learn this lesson early on, lest he or she is forced to learn it the hard way. Let us discuss some of the common tactics that are used by masters of the art of managing the business cycle.

The first thing to do is anticipate. Many a conglomerate has been caught flat-footed by an “unexpected” recession. Sure, macroeconomic developments in far away continents might seem of no relevance, until you scratch the surface. Businesses are highly interwoven these days, and therefore negative repercussions spread far and wide, quickly. If you don’t have an advanced degree in Economics, leave the number crunching to someone who does. Ensure that your business forecasting techniques do take into account such developments.

Managing the business cycle invariably starts with realigning capital expenditure. Having anticipated a downturn, most conservative business heads might cut back on new capital investment. On the other hand, proactive thinkers actually increase capital expenditure prior to a recession, in order to gain a first mover advantage when the economy recovers. Of course, this depends on the business you’re in – for example, this tactic is favored by real estate companies. Likewise, the decision to acquire or sell a company must also be timed accordingly. The temptation to buy is strong in good times, but comes at a price. At the micro level, you will also need to manage cash flow differently.

To stock or not to? Inventory management is tough enough as it is, but approaches the complexity of rocket science closer to a recessionary period. Not cutting back production in anticipation of a downturn and therefore being saddled with stagnating inventory is a cardinal sin… but so is being caught unawares by surging demand in times of economic recovery, and having no product to sell! Particularly in the case of businesses that make seasonal products, or even those with a high degree of obsolescence, the inventory decision is make-or-break.

Don’t cut advertising. No, that’s not a typo error, we mean what we said. The reactive way of managing the business cycle is to freeze promotional activity. Tell yourself repeatedly that advertising is investment, and not expenditure, till you start to believe it. Advertising demand goes down during a slack season, and so do rates – which means, you get more visibility at a lower price.

Reassess your human resource needs – by that we don’t necessarily mean downsize. Your employee headcount may well fluctuate in accordance with the business cycle. However, do remember, that during off season, the labor pool is in spate! If you have been struggling with finding the right people, it may be a good time to redouble your efforts during a recession. Not only are you likely to find a wider selection of candidates, you can probably hire them at a lower cost.

While macroeconomic events have a far reaching impact, they can also bring about unexpected opportunities. Managing the business cycle is no mean task, and yet, there is hardly anything that is more critical.