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For Better Strategic and Financial Planning, Use the Business Cycle

Since I joined the team at ITR Economics, my background in the asset management industry has positioned me as the in-house point person on financial matters. This article is for those readers who are involved in financial planning and budgeting for their companies.

We find that professionals in these roles, regardless of sector or industry, share a core set of related questions. These questions might center on staffing levels and when to hire, whether to increase capacity, when and under what payment terms to make machinery purchases, or when to lock in raw materials costs.

Although they sound disparate at first, most of these questions boil down to one underlying theme: when and how to implement strategic decisions.

Ultimately, the solution lies in understanding the business cycle and knowing where your company, your industry, and the macroeconomy are in that framework. At ITR Economics, we divide the cycle into four distinct phases based on rates-of-change. Strategic decisions that would advance your business during one phase may be inappropriate during a different phase.

Expansions, for example, are often undertaken when growth rates are at their highest and firms are feeling the pinch of capacity constraints. However, implementing these projects at the peak of the business cycle is often a sign of overexpansion. The expanded capacity may come on line just as growth rates begin to decline. Equipment purchase agreements or loan terms and their attendant payment schedules can then create cash-flow problems, further compounding difficulties.

Your understanding of cyclical trends should empower you to proactively look ahead to what is coming next, not limit your view to the present. 

The trough of the business cycle - when growth rates are low or even negative - can be an effective time to initiate capital improvements, though it may seem counterintuitive. There may be more downtime for both your workforce and machinery; you can dedicate time and attention to equipment installation or related training requirements without detracting from needed production.

With your improvements in place when recovery or accelerating growth trends return, you will be able to hit the ground running and stay ahead of competitors. Additionally, the efficiency gains that result from these improvements often yield greater cost savings, likely to be a major benefit during the back side of the next business cycle.

There are many different forms that these capital projects may take. Automation, for example, can be implemented to either replace human workers or to increase the productivity of a smaller number of workers.

I will discuss automation in the companion recording that follows this article. I will also cover how you can use the business cycle framework to analyze the labor market (including when to hire and the importance of retaining existing talent), commodity prices, global industry trends, and more. If you are responsible for these strategic or financial decisions and have found this article helpful, you can access the recording by clicking the button below.

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Lauren Saidel-Baker
Economist and Speaker