Timing of the business cycle can make the difference between boom or bust, cash rich or cash poor. It is that simple and that important. Businesses that fail to anticipate a business cycle peak are apt to forecast continued growth even when the knowable future would say otherwise.
In this case, forecasting growth means the consumption of resources, and all-important cash, in preparation for a future that never comes. The resources are not put to maximum use, and the cash is gone – just as business slows and cash flow slows, receivables lengthen, and inventory turns (if applicable) slow. So, the cash is gone just when it would come in handy to cover fixed expenses, strategic marketing plans, and ongoing employee training programs. The misalignment with reality can both lengthen and deepen the downturn.
Anticipating a business cycle low allows the prepared company to get ready for increased levels of activity well in advance of competitors. Marketing and sales programs that are right for an expanding economy are in place and ready for implementation. Inventory is aligned with customer demand, which keeps the sales pipeline wide and short while your competitors are talking delays and backlogs. This preparedness provides for increased market penetration. Spending cash at a trough results in an increased return on that cash as the business benefits from the positive trend in the economy. Firms that are slow to invest in themselves will be playing catch-up to leaders like your firm, and they will receive a minimal ROI, if they receive any at all.
Knowing where you are, and knowing where you will be, allows your firm to gain market share and increases the value of the company.
Additional Resource: Budget Planning Checklist