What is a ‘Financial Cycle’ and How Does it Affect Your Business?
When it comes to business, economic ebbs and flows are part and parcel of the everyday running of the business. Figuring out how to anticipate these movements has become a core requirement, not just in the regular operation of the company, but also in its ability to survive these changes, and certainly to thrive in the long term. These predictions are made using tools and methods that have been devised by those with an in-depth knowledge of the workings of economies and their movements over time.
One of the most common tools used in the forecasting of business trends and outlooks is the financial cycle. This concept has to do with the observation of stagnation and growth within an economic environment which then governs the actions to be taken to remain afloat.
What Exactly is a Financial Cycle?
By definition, a financial cycle is the observation and recording of the movement of the economy that covers the periods between prosperity or growth and slumps or recessions. Financial cycles are also referred to as economic cycles or business cycles. They take specific ranges of time into clusters to ease the study of economic activity, thus enabling the formation of predictions. These ranges of time were often established with a specific facet or focus in mind, for example, the business cycle for a particular commodity would span up to 7 years while one that focuses on technological trends would cover a longer period.
How is a Financial Cycle Established?
The establishment of a financial cycle is dependent on several factors. These include:
- Overall public spending
- Established interest rates
- Gross domestic product (GDP)
- Employment numbers
For all of these factors, with interest rates as the exception, higher numbers tend to indicate the upper position of a cycle while declining figures signal that a period of recession is approaching. Understand that different factors may have different levels of influence over your financial cycle i.e your business may be more susceptible to macro-economic factors such as GDP.
Financial cycles are also cyclical, with each cycle comprising of four stages that point towards different periods within. The stages follow the order below:
- Expansion: Where growth is noticeable and significant. This can happen at a rapid pace, bringing with it increased activity through all sectors of the economy.
- Peak: It is at this point where the growth that was observed during the expansion period hits its highest levels.
- Contraction: Once a peak has been experienced, a slowdown will occur; often as a natural counter to the expansion that has taken place.
- Trough: This is the lowest level of the cycle and will be signaled by stagnant activity. The onset of a trough will often lead to an upturn, thus bringing about growth and expansion once more. This starts the cycle again.
How Financial Cycle Affect your Business?
With relation to the ups and downs of the financial cycle, understanding and anticipation are vital. If you can have an idea of what is expected, then you can weigh and make prudent decisions that will maintain the health of your business, even in times of low economic activity.
Take note that having the know-how that enables you to read and interpret financial cycles, in general, does not paint a full picture. You must go the extra mile in understanding the inner workings of the specific sector into which your business falls. Having this knowledge will enable you to identify the type of cycle that you must observe to have the best chance of gaining results that are a closer reflection of your position.
Having intimate knowledge or insight into financial cycles can also help you to see the different stages of the cycle as they begin to occur. This will give you an edge on the running of your business as you seek to make adjustments accordingly so that your practices either help to mitigate the adverse effects of a trough or enhance the gains derived from an expansion or peak. The financial cycle can also be a useful tool in the management of your business’ debts; be it adding on to them, or making the effort to lower them as much and as fast as possible.
Call a professional today to educate you and to consult with on the intricacies of financial cycle analysis. In the business environment today, having this comprehension could be what sets you apart from your competition when hard times come about. Embracing the understanding of financial cycles could very well be the key to ensuring that you get to enjoy the results evidenced by the longevity and endurance of your business.