Where Are You in The Economic Cycle?

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Imagine that you had a map that showed you where you were in an economic cycle? Then imagine that you had a list of ideal management actions to take for each phase of the cycle. How much would that be worth to you?

Brian Beaulieu recently spoke at our annual gathering of Vistage groups in Northern Ohio. He updated us on the “what” phase of the business, or economic, cycle each major sector of the economy was experiencing. Most of the US is in “Phase C”. What does that mean to you?

In his book, Make Your Move: Change the Way You Look At Your Business and Increase Your Bottom Line, Brian, with his brother Alan, identifies four phases within each business cycle:

  1. Phase A — “Advancing”. The economy is on the upswing, advancing toward better days.
  2. Phase B — “Best”. Business conditions are booming.
  3. Phase C — “Caution”. The economy is still growing, but at a slower pace. Phase C is the most profitable phase of the business cycle, but it is also time to become more conservative in your planning.
  4. Phase D — “Danger”. This is the downward stage. People are depressed. It is time to keep the powder dry and be ready for action!

Next, it’s important to understand certain terms used and the calculations behind them:

  • Rate-of-change is the percentage change of a number in a data series to a preceding number in that data series. The top number represents how many months are being compared. The bottom number is the time interval. Alan and Brian use 12 months. Their whole theory of the economic business cycle is based upon rate-of-change calculations. Here are some specific examples of the most common rates-of-change:
    • 1/12 (One over 12-If you compare a particular month’s sales to the same month of the previous year, you are using a 1/12 or, one over 12, comparison.
    • 3/12 (Three over twelve)-Three over twelve is a 3 month period compared to the same 3 month period in another year.
    • 12/12 (Twelve over Twelve)-The twelve over twelve depicts the sum of activity for 12 consecutive months compared to the same twelve month period for the previous year.
    • Moving totals-Moving totals are the sum of a monthly data for a particular number of months. The latest month is added to the series while the latest month is dropped. Here is an example of a 3 month moving monthly total (3MMT) and a twelve month moving monthly total (12MMT) rate of change:

dataprep

Here is a graphical representation of an economic cycle:

Screenshot 2015-11-04 13.54.04

If you would more information on rate of change , watch this ITR video. Or, if you would like to calculate your rate of growth, please contact them.

In one of my most recent meetings with my CEO members, they calculated where they were in the business cycle. Almost all of them determined that they were in Phase C, just as the ITR indicators show for most US business sectors.

Once you know what phase you are in, what’s next? For businesses in Phase C of the business cycle, the Beaulieus advise:

Plan for Potential Downturn

  • Concentrate on cash & balance sheet.
  • Begin work force reductions.
  • Set budget reduction goals by departments.
  • Reduce advertising.
  • Cut training.
  • Deemphasize commodity priced products & services.
  • Weed out inferior products.
  • Avoid long-term purchase commitments late in Phase C.
  • Decrease inventory.
  • Identify & overcome competitive disadvantages.
  • Make sure you and management teams are not in denial.
  • Watch Accounts Receivable.
  • Increase the requirements to justify capital expenditures.
  • Evaluate vendors for strength.
  • Manage backlog through pricing & delivery.

To manage the entire business cycle, the Beaulieus offer these top 10 rules from Make Your Move:

  1. Realize that your business and that of your customers and clients are subject to the influences of cyclical change.
  2. Develop objective means of measuring changes in your company’s rate of growth.
  3. Always know what phase of the business cycle your company is in and whether it is in the beginning, middle, or end of that phase.
  4. Understand where each of your markets is in the business cycle and if it is leading or lagging.
  5. Develop and learn how to use a system of leading indicators to project your company’s future.
  6. Develop a culture within your company that understands that change is a continual process and is dedicated to keeping your company evolving with your markets.
  7. Ask yourself on a regular basis, “What don’t I know?”
  8. Find markets that are relatively acyclical or impacted to a less than-average degree by business cycles.
  9. Understand that your personnel will tend to resist change and that you must be prepared to lead with certainty and clarity.
  10. Be willing to quickly adapt your business practices and procedures in accordance with changes in the business cycle and your markets.

When you recognize what Phase of the economic cycle your business is in, you have insight into the future and can take specific steps to manage it. Don’t be blindsided because your business is on an upswing or be shocked when it goes into a tailspin! You wouldn’t make a long trip, without a map, so why take the same chance with your business?

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