By ITR Economics on Nov 26, 2018 4:04:38 PM
At ITR Economics, our unique four-phase business cycle is a reference that helps your company make the right decisions at the right time. This business cycle is the basis of our Trends Report™, and its phases are fundamental to providing you with appropriate and actionable Management Objectives™. Knowing what each phase of the business cycle entails is key, but there is more to it than that. How exactly should your business approach those Management Objectives as you enter new phases? Do you know the actions best suited for each phase, especially given that ITR is predicting an economic slowdown for the coming year?
The following information about Phase C, Slowing Growth, and Phase D, Recession, can assist businesses in navigating the upcoming downturn.
Phase C – Slowing Growth
Often, businesses are not aware they have moved into Phase C, Slowing Growth, until they have been there for a while. There may be chatter – "It feels like the business is slowing down,” or something to that effect – but firms will often lack the solid data to substantiate such chatter. A business that has been keeping track of its 12/12 rate-of-change, however, will know that it has hit its cyclical peak and should consider pulling certain levers: revisiting capital expenditure plans (cash is king right now!); dropping products that are not profitable; focusing efforts on products with higher profit margins; and evaluating vendors and pricing packages that could help reduce costs.
As your business is running above year-ago levels – i.e., still growing – such actions may seem counterintuitive. The above tactics, however, can help you finish this slowing growth phase more profitable than if you had just “let it ride."
Other key considerations for this phase:
- Know if your markets are headed for a soft landing or a hard landing
- Beware of linear budgets and ensure you are not in denial
- Stay on top of aging receivables
- Use competitive pricing to build a backlog to last through the coming slowdown
- Avoid committing yourself to long-term expenses at the top of the price cycle, but lock in revenue
- Go entrepreneurial and/or counter-cyclical
- If the cycle looks recessionary, cross train key people to prepare for workforce reduction
Phase D – Recession
No business owner likes being in Phase D, Recession. The word alone causes shudders! However, there are no "bad" business-cycle phases as far as ITR Economics is concerned. Each offers its own opportunities for better positioning a business. We challenge you to lead with optimism, rather than negativity or nervousness, during the down cycle. Here are a few reasons why:
1. This is the perfect time to generate ideas for new products down the road. When your business is growing – perhaps quickly – there are often too many projects going on for you to sit back and take a holistic look at the company. Phase D gives you this time back!
2. It also creates time for your company leaders to evaluate each of your departments and identify efficiency gains to be made.
3. Your team can spend more time crafting advertising campaigns, growing in creativity. Then, when you hit your cyclical low and transition into Phase A, Recovery, you will already have your plans in place and ready for launch.
While these ideas can help you lead with optimism, we have also provided a more comprehensive list of maneuvers that can be useful during the recessionary phase. Having this arsenal at your disposal should help you remain confident and project the positivity your management team will appreciate and follow during what for many is a nerve-wracking time.
- Use attrition to reduce the C players in your workforce
- Implement cost-cutting measures – don’t wait
- Introduce new, lower-cost products
- Use this time to develop new products or move into new markets to enhance position in Phase A
- Let inventory levels dwindle, especially B and C items (early D)
- Build inventory to have a short pipeline (late D)
- Reduce advertising
- Enter or renegotiate long-term leases
- Negotiate vendor and service contracts
- Tighten credit policies
- Consider capital equipment needs for the next cycle
- Develop programs for advertising, training, and marketing in preparation for Phase A
Fully understanding the phases of the business cycle can help you apply analysis and Management Objectives to your business in an optimal way. Have you found certain Management Objectives in the Trends Report especially helpful? Let us know. Or, if you’re looking to try it out, sign up for our free 90-day trial!