Tip of the Week: Identify cycles to position your business
Nov. 2, 2010 at 6:02 a.m.
The concept of cycles is an old and reliable predictor. Things happen in cycles and for business there are four.
Businesses caught in the day-to-day grind of covering cost and making payroll have little time to look at key indicators, and suddenly they can face enormous pressure from very predictable forces.
These indicators come in the form of economic, industry, business and cash-flow cycles. I addressed the cash flow cycle in an earlier tip, so let's learn about the value of the other three.
The recent economic woes are the trough of an economic cycle. These cycles are common throughout history, although their length and timing can vary. The most recent cycle contained an unprecedented period of prosperity.
The severity of these cycles has more to do with political manipulation of natural markets and new innovative "Gold Rushes" than natural shifts in consumer buying patterns.
Junk bonds, DOT.COMS, energy and housing have all been a catalyst for get rich schemes. Predictably, one can assume that when a market behaves with the above normal characteristics, that adjusting consequences are soon to follow.
The key to surviving is to see the "bubble" and adjust to its future consequence.
My own experience of this type of cycle began with the inflation of the late 1970s and early 1980s, triggered by the 1973 oil crisis, the 1979 energy crisis and government spending policies. This business owner with a seemingly growing business was suddenly overexposed with high investment in cost of goods, expensive working capital and a rapidly declining cash flow.
The more recent housing market was clearly outperforming its real value and hence another "bubble." Invest time in recognizing the up-and-coming "bubble," and understanding its future impact on your business.
They will be easy to spot by following the excitement of the get rich crowd, observing political manipulation of certain markets and using common sense in business investment decisions.
Industry cycles are another matter entirely. These cycles are part of a natural progression of industry from birth through sustainability, growth, maturity and ultimately reinvention or succession. Reinventive strategies are influenced by technology, market shifts and consumer demand. Knowing where your industry is in its cycle can help you plan growth or contraction strategies for your business.
Because these cycles span many years, a business can see a trend of decline or growth valuable to their business planning strategy, and perhaps even a transition strategy.
A recent review of a client's industry cycle validated the actual behavior of their current market and predicted future expectations based on recurring patterns during 30 years. If you suspect growth or shrinkage is imminent, review the industry cycle first.
Business cycles? Every business has one. In short, it's the ebb and flow of sales. Certain periods of a year expectedly produce more sales than others, and those others are spent managing cash flow with working capital until the next rise. They look different from business to business and market to market. For the farmer it's the growing season; the retailer it is the periods around major events; and for the majority of service businesses its early spring to late fall.
Business cycles have a strong influence on cash flow cycles and establish the baseline for working capital or revolving loan strategies. The value in learning your business cycle and other cycles mentioned is predicting when investing in assets and people will lead to profit, and when divesting in assets and people will mean survival.
For assistance in identifying these cycles or other issues impacting you business, contact the University of Houston-Victoria Small Business Development Center.
Joe Harper is director of the University of Houston-Victoria Small Business Development Center.