Understanding the Business Cycle

Business Cycle or Economic cycle is a term that refers to fluctuations in the production and/ or economic activity over a period running into several months or years in an entire economy. Such variations happen around a growth trend that is long term. It involves a shift between expansion or boom periods and recession periods. The fluctuations are generally measured using real gross domestic product. Business cycles are said to be a certain type of fluctuation that is found in the cumulative economic activity of various nations that have their primary work in business enterprises. A typical cycle consists of expansions and contractions in economic activity. The business cycles can vary anywhere from one year to even a dozen years.

The Business cycle of a company indicates specific economic activity that has a bearing on the company’s operations at any given point in time. During the life of a company four points of business cycles are possible – economic upturn, peak, economic decline and recovery. It is evident that economic upturn is the most coveted state for all companies because it is indicative of continuous business growth and future growth prospects too. In this period sales are high and earnings are healthy. The company has surplus and has better profits. It is in a position to pass on benefits to employees and acquire assets. A company that is wise always knows that “economic upturn” cannot continue forever and plans for the possible downtrend period. Economic peak is when the company is at the pinnacle with good profits but there is hardly any scope for growth.

In the period of decline a business has lost customers to competition or recession trends; it might have made a wrong diversification decision and so on – it faces losses. Recovery phase is when the company starts moving up the ladder again to regain the lost glory.