What motivates your desire to launch a business? Perhaps you'd like to freelance for yourself because your present job isn't fulfilling you or your household needs. Before beginning a new endeavour, regardless of requirement or choice, you should assess your abilities, knowledge and degree of risk tolerance. As a potential business person, you should know what to anticipate. It is important to remember and assess your firm's performance at each step, and do everything possible to maintain profitability and competitiveness. All the stages of the business cycle carry difficulties that business persons must overcome to safeguard their enterprises and new chances for development.
Did you know? Business cycles have shared features, and they impact multiple financial factors rather than just one economic activity.
The Concept of Business Life Cycle
A business cycle also referred to as a "trading cycle" or "economic cycle," is a progression of phases the economy goes through as it grows and declines. It is measured by changes in a nation's Gross Domestic Product, which keeps repeating itself. Business cycles exist in any country with a capitalist economy. These cycles of growth and decline will occur in each of these economies, but not necessarily simultaneously. Nevertheless, as a result of globalisation, business cycles occur throughout nations more frequently than previously. People can make choices depending on their analysis of the various phases of business cycle. The shareholders can take financial decisions, and authorities can make necessary policy choices.
Business Cycle and Its Phases
Economic cycles are like waves, which naturally move from higher to lower tides. It’s hard to predict business waves. They are similar to how waves might appear to rise quickly even while the tide is flowing out or appear lower whenever the tide is flowing in. Each long-term economic expansion is always followed by a period of economic contraction. A company cycle includes five distinct phases: launch, expansion, shake-out, maturity, and decline.
Every company starts with tremendous enthusiasm, introducing brand-new goods or services frequently. Earnings are modest during the initial stage but gradually rise. Businesses advertise their comparative edge and value propositions to promote their targeted customer categories.
In reality, the profit cycle falls behind the selling process, causing a gap between increasing sales and rising profits. The working capital is negative at the initiation phase. But it declines more than the profits, because initial costs were capitalised, which show up in its working capital.
Businesses boost their sales quickly during the growth stage. Companies begin to make money as soon as they surpass the break-even point, as revenues rise quickly. The profitability level is lower than sales, though, as the revenue cycle still runs behind the selling process. The cash flow eventually turns favourable during the expansion period.
Sales keep rising, but very slowly in the shakeout period. It can be either due to market dominance or the introduction of new rivals. During the shakeout period, sales hit the highest point. The shakeout stage sees a continued rise in sales but a decline in profits. With sales increasing and profits falling, costs increase significantly. Finally, cash flow rises and surpasses profits.
Sales gradually begin to decline as the company ages. Despite the declining cash flow, profit margins remain slimmer. Major capital expenditures mostly fall behind for most businesses as they mature, which causes cash inflow to exceed profits on the income statement. Nevertheless, it's crucial to remember that many companies remodel themselves throughout this period and invest in new opportunities and expanding markets. This enables businesses to extend their life cycles.
Sales, profitability and cash flow are all on the decrease in the last phase of the firm’s life cycle. At this stage, businesses realise that they can not extend their enterprises' lives through environmental adaptation. They eventually exit the market after losing their competitive edge.
Features of a Business Life Cycle
- Every firm, from the beginning to reaching its peak, follows the phases that make up the business life cycle. These phases might occur at the same time or in a sequence.
- Businesses must develop different strategies depending on where they are in the business cycle. Businesses in the startup stage follow a different set of rules than those in the maturity phase.
- Through this cycle, we see a gradual development of a business, and they are not forced.
- A firm attempts to transform an idea into a financially sensible form in its development phase. Certain business stages may last for several months or even a year, while others go on for decades.
- Business cycles are typical throughout all sectors, but their effects differ among businesses in similar industries.
How Do Governments Influence Business Cycles?
It is possible to change business cycles even when businesses move through phases in a progressive manner. Different stages of a business cycle can sometimes be controlled by modifying monetary and fiscal policy. It is the government that implements fiscal policy, while it is the central bank that implements monetary policy for their respective countries. Governments tend to lower taxes or increase project expenses when an economy is contracting, especially in a recession. As a result of these actions, customers have more disposable income to spend, which stimulates economic growth.
At the same time, the Reserve Bank of India will lower interest rates to end a period of struggle. Cash loans are simplified, which promotes expenditures and, ultimately, the economy. When an economy expands too quickly, governments implement budget deficit strategies that reduce expenditures and raise taxes.
Therefore, spending is slower because there is less money available. In order to implement a tight fiscal policy, the Central Bank would increase interest rates, making loans more expensive and spending less appealing.
Advantages of a Business Life Cycle
- Knowing the business life cycle stages enables different parties, particularly investors, to properly finance the company.
- Additionally, companies can embrace a different strategy depending on the life cycle phase.
Disadvantages of a Business Life Cycle
- Business slows down during different phases, which causes lengthier cycles.
- In specific business life cycles, like the maturity phase, job losses decrease earnings and drop stock values.
Business Cycle Example
Some relevant examples to illustrate business cycles are as follows:
The history of Coca-Cola and the development of its mysterious formula is mostly unknown. The brand appeared to already have the correct project in place in 1886, the year it was founded. After only ten years of production, Coca-Cola was available in every state. Although it is impossible to pinpoint the precise moment the brand achieved maturity, it is safe to conclude that this stage has occupied the majority of its existence up to this point. According to regulatory filings, Coca-Cola India, a major producer of beverages, had a 28.4% year-over-year fall in net profit to ₹443.38 crores and a 16.2% decline in operating revenue to ₹2,297.51 crores in the pandemic-affected FY21.
The business entered the marketplace for diet drinks for the very first time with Tab. After Diet Coke's peak, in 1963, due to Tab, Coca-Cola introduced the diet soda, Diet Coke. The beverage rose to prominence in the 1970s and the beginning of the 1980s, but lost steam as Diet Coke reduced Tab's marketplace position. In 2020, Coca-Cola withdrew Tab and other failed items. This withdrawal signalled the formerly famous diet drinks’ declining life cycle stage.
The business life cycle is a systemic model that depicts how a company develops and is a significant idea that has persistently been helpful throughout the ages. A business’s management must have a solid understanding of the business cycle. Various business cycles will contribute to distinct financial indicators for the company's current roster (earnings) and bottom line (profit margin). Consequently, these metrics are equally important for all parties involved, including banking institutions (who give loans to the company), clients, vendors, and others.
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