The Business Cycle and Your Business

Closely related to working capital is the business cycle. In general, the business cycle is the same for all businesses. For you, however, the timing and issues are different depending on what industry you are in. I want you to learn about the business cycle because it is the rhythm of your business cycle that undermines all of your decisions.

The business cycle keeps time for your company. The pace of your business cycle will determine how much working capital you have. Like a carefully engineered machine or a finely synchronized orchestra, your business cycle is influenced by everything you and all your employees do.

The business cycle is a closed system that really begins when you purchase raw materials or something to resell. If you are in the service industry, then you are buying labor or maybe expertise.

Lets look at the business cycle of Claire’s Chocolates. On Friday, Claire places an order for 200 pounds of dark chocolate at $3.35 per pound. The delivery comes in Monday morning and Claire is ready to make her weekly supply of fresh hand-made chocolates. All week, she single handedly makes and sells the chocolates in her shop. By Friday evening when she locks the doors she has sold every pound of chocolate. In fact, she can not even open the store on Saturday because she is out of chocolates.

Claire checks the register and discovers she has earned $1,398 because she sold all 200 pounds of chocolate at $6.99 per pound. Wow! She takes the money to the bank. Let’s take Claire’s weekly activity and apply a business cycle perspective.

On Friday, Claire placed a chocolate order incurring $670 in current liabilities because she put the 200 pound chocolate order on her supplier charge account. Come Monday she converted the $670 worth of raw dark chocolate to hand-made chocolates. She then sold the hand-made chocolates, further converting the $670 from raw chocolate to shelf inventory to cash.

By Friday, what started out as a purchase order to the supplier was turned into cash for Claire’s bank account. How? All by the business cycle. It is remarkable how it all happens so quickly. But you can also see where the pitfalls lie.

Does Claire get to keep all of the cash she made? Of course not. Claire still has to pay off the $670 she owes her chocolate supplier. And Claire has other expenses too – electricity, plastic wrap, boxes, refrigeration. Still, if we were to pause the business cycle of Claire’s Chocolates on Wednesday we could calculate her working capital.

To keep this illustration simple, let’s pretend the only thing in Claire’s business cycle is the 200 pounds of dark chocolate. Realistically, she is making and selling all varieties of chocolates.

So on Monday, if we calculate the working capital, we get current assets of $670 for raw chocolate inventory. But Claire also has a current liability of $670 for the same raw chocolate. By Monday afternoon, however, Claire has moved the raw chocolate into a shelf ready hand-made chocolate inventory. Due to the added value, her inventory is now worth $866.

Claire now has $866 minus $670, equaling $196 in working capital. By Friday, when Claire has converted all of her chocolates into cash she will have $1,398 minus $670, equaling $728 in working capital. Then Claire gets to decide how to use the working capital.

The key to managing your business cycle is velocity – keep things moving. Like Claire, you can convert your inventory to cash rapidly by operating efficiently. When your inventory sits around, your business cycle is stalled.

A common business cycle problem for many small business owners is the final step where you book your sales. Small companies spend so much time on operations and customer service that they never get around to doing the billing.

If you do not get to your invoicing then your business cycle is stalled. Jump start your cycle and keep things moving so you can bring in cash to fuel your growth to make more cash.

Real Estate Market: The Quintessential Business Cycle

The United States, Canada and all other modern industrial economies experience significant swings in economic activity. In some years most industries are booming and unemployment is low; in other years most industries are operating well below capacity and unemployment is high. Periods of economic expansion are typically called booms; periods of economic decline are called recessions or depressions. The combination of booms and recessions, the ebb and flow of economic activity, is called the business cycle. But of all the industries contained in the economic basket of goods and services, real estate market is the one that serves as an indicator and prognosticator of times to come.

Real estate is particularly susceptible to the ups and downs of the economy simply because it is a big ticket industry. The purchase of a single-family dwelling, the sale of a condo, the lease of industrial or office space – all these are transactions involving big dollars. One of the key insights of business cycles is that many economic indicators move together. During a boom, or expansion, not only does output rise, but also employment rises and unemployment falls. New construction and prices typically rise during a boom as well. Conversely, during a downturn, or depression, not only does the output of goods and services decline, but employment falls and unemployment rises as well. New construction also declines but – and real estate is the exception to the rule – prices may very well continue to rise in real estate even during downturns, though usually more slowly than during booms.

In many ways the term business cycle is misleading. “Cycle” seems to imply that there is some regularity in the timing and duration of upswings and downswings in economic activity. This could not be more farther from the truth, especially in the real estate industry. Booms and recessions occur at irregular intervals and last for varying lengths of time. For example, economic activity hit low points in 1975, 1980, and 1982. The 1982 trough was then followed by eight years of uninterrupted expansion. For describing the swings in economic activity, therefore, most modern economists prefer the term ‘economic fluctuations’.

Just as there is no regularity in the timing of business cycles, there is no reason why cycles have to occur at all. The prevailing view among economists is that there is a level of economic activity, often referred to as full employment, at which the economy theoretically could stay forever. Full employment refers to a level of production at which all the inputs to the production process are being used, but not so intensively that they wear out, break down, or insist on higher wages and more vacations. If nothing disturbs the economy, the full-employment level of output, which naturally tends to grow as the population increases and new technologies are discovered, can be maintained forever. There is no reason why a time of full employment has to give way to either a full-fledged boom or a recession.

Business cycles do occur, however, because there are disturbances to the economy of one sort or another. The quintessential cause of recessions and booms in real estate is monetary policy. The central banks – either the Bank of Canada or the Federal Reserve Bank in the U.S. – determine the size and growth rate of the money stock and, thus, the level of interest rates in the economy. Interest rates, in turn, are a crucial determinant of how much firms and consumers want to spend. A firm faced with high interest rates may decide to postpone building a new factory because the cost of borrowing is too high. Conversely, a consumer may be lured into buying a new home if interest rates are low and mortgage payments are, therefore, more affordable. Thus, by raising or lowering interest rates, the central banks are able to generate recessions or booms. This is the reason why keeping a close eye on interest rates is so crucial in the real estate market.

Four Ways to Break the “Busy” Cycle

Question for you… On a scale of 1-10, how busy would you say you are?

With so many conveniences to make our lives “easier” it seems more and more I hear exhausted people talk about how busy they are and how they don’t know if they can manage it all.

When I talk with parents, sometimes I ask, “what do you do for fun?” The eyes go blank. There is a long silence. The clients almost seem stunned. I often hear them say they have no idea what they do for fun because they can’t remember the last time they had time to do that.

Author Edward Hallowell asserts “we don’t know how to not be busy.” Interesting.

I have a bold claim: you do not have to be so busy. Sure, there will always be seasons when circumstances require a hectic pace. But, if this is the constant state of your life, if you can’t remember when you weren’t running ragged, then you might want to do some soul searching. Often the busy schedules that make us crazy result from our own choices.

Let’s take a look at some actions you can take to make progress and bring some much-needed space back into your daily life!

1. Check your thinking.

Do you feel you have to be busy to be important? Would you be embarrassed to tell someone you read a book, took a walk with your partner, and actually took a nap over the weekend? In modern culture, we’ve made it a bit of a status symbol to busy. Hmmmm…

Does that create what you want?

2. Get clear on what matters to you.

We all have things that are at the core of who we were made to be, better known as our “values.” Deep relationships, achievement, family, adventure, freedom, generosity, etc., are examples of such values. If creating space in life is important to you, much benefit comes when you get clear on your priorities. The ironic thing is that most people are running so fast, they don’t take the time to even consider what they really want in life. No wonder the stress level intensifies when the schedule reacts to the many opportunities and choices that bombard every day. Create space, get clear on your values, and move forward in the strength that comes from that clarity!

3. Learn to say “no.”

I can almost see your face contorting. Saying “no” often seems worse than nails on a chalkboard. We fear what people will think. We feel guilty. We think our child will never make it in the world unless they participate in all of these “opportunities.” How will they ever excel if they don’t get started now?

Let me encourage you to reread #2. Get clear on what matters to you.

Once your values are clarified, the most powerful step toward breaking the busy cycle is saying no to commitments that don’t line up. One example of how we apply this in our family is that our children only participate in one activity at a time. Yes, we want to develop their skills, but we also highly value time together as a family. We are confident that their talents can develop in ways other than organized activities full of time commitments that bog down all of the space in our life. This is just one example of how we apply our values in our home. There are certainly many other, and different, ways this principle plays out.

I love seeing the relief in those I work with when they decline something. They are often amazed at how easy it is. The world keeps spinning. The weight from their shoulders lifts. They experience a deeper peace. Life expands.

4. Say yes to what matters most.

This is the FUN part. Imagine what life will feel like when you fill your days with the things that are of greatest importance to you and your family! When you clarify values and say no to things that don’t line up, you can begin to say yes to things you cherish with confidence! Great joy and peace come to those who align their lives with the things that truly matter. Example? Does it matter that you are a life-giving, joy-filled person in this world? Then making time to do something fun for yourself might actually make it into your schedule. And when you’ve said “no” to some other things, the space will actually be there.