Economic and Business Cycles

A few years back, a Captain for a major airline told me, “you’re most vulnerable when you’re flying fat, dumb and happy in bright blue skies”. He goes on to say, “the seatbelt sign is off, flight attendants are serving and people are moving about the cabin enjoying the flight and suddenly you hit clear air turbulence.”

This may be an analogy to what we are experiencing in today’s economy. Businesses are doing well, we are at full employment and spending is increasing in one of the longest growth periods in many decades. We are, in the Pilot’s terms, flying fat, dumb and happy. Business is good and looks like clear skies ahead. But although we may not see it yet, there is always turbulence ahead.

Business, like many other things has its’ cycles. This has been seen time and again. Are you prepared for the next cycle of change in the economy? Below, you will see the peaks and troughs in the US economy since 1980 from the National Bureau on Economic Research:
can be seen by the chart above, the peak-to-trough periods (economic downturn or recessions) tend to be shorter than the trough-to-peak periods (economic upswing), but recessions do hit and they will come. Just like air turbulence, the ride can become bumpy very quickly and very stressful, even if it is for a short period of time. We all hope the next recession will not be as difficult as the latest that troughed in June of 2009, but we can never be certain. Still even if recession periods tend to be shorter, that does not mean they can’t be harsh and it still takes time to recover from a trough. Are you prepared for the next cycle? Are you flying fat, dumb and happy? Pilots have a plan when they run into turbulence, do you have one for your business in anticipation of a recessionary period. Some issues to look at in preparation are:

Capital: Many businesses struggle or even go out of business during a recession and research shows us it is mostly due to running out of capital. Consider increasing your line of credit and establish new credit even if you don’t need them now. You may later.

Cash Flow: Increasing your company’s cash flow, critical in a downturn, can be made through a change in credit terms from your vendors and to your customers. For example, if your industry average is to pay suppliers in 45 days and you pay in 30 days, you are leaving money on the table. Conversely, better billing and collection practices as well as not being overly generous with terms will reduce your need to finance cash.

Suppliers: Determine if your suppliers are giving you their best deals. The laws of supply and demand may make it difficult to renegotiate during good times, but preparing for a recession and showing your critical suppliers that you are in this together may offer some long-term positives for both of you – as well as short-term positives to your cash flow (see above).

Expanding Markets: Consider entering new markets domestically or exporting to foreign markets. Spreading your markets into new regions will help soften the blow from your current market coverage. Recessions are like hurricanes – although they have a wide-ranging affect – not all regions are affected in the same way as we know very well here in North Carolina. During the trough in 2009, China’s economy grew around 6.7% (according to tradingeconomics.com). Australia, India, Poland, and Brazil also experienced growth albeit at lower levels. Much of sub-Saharan Africa avoided the recession as well.

New Channel Strategy: Consider alliances, partnerships, mergers or acquisitions, or even franchising your product. Alliances and partnerships might be a less capital-intensive way of growing the company without having to make an investment in new production facilities or inventory, thusly conserving capital critical in a downturn.

Employee Retention: Training in new skills, developing leaders, and obtaining support of your valued employees offers a business a leg up on the competition amid economic downturn. We will discuss this in greater depth in the future editions, but it is important to know that when you have a strong team of motivated, flexibly skilled and engaged employees, they will be instrumental in survival and strength in a recession.

The best time to prepare is now – formulate and begin executing your plan when the skies are clear and flying fat, dumb and happy. Pilots have a plan when they hit turbulence – do you? The North Carolina SBTDC is here to help. We have started a new initiative that works with mid-size businesses throughout the state to help plan and prepare for the turbulence that, as time has shown, is imminent.

 

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