Business planning usually revolves around decisions related to the specific markets in which a company operates, but economy-wide trends can have a significant impact on all businesses. The business cycle is a pattern of economic booms and busts exhibited by the modern economy. Business cycles are important because they can affect profitability, which ultimately determines whether a business succeeds.
The business cycle is made up for four phases: booms, downturns, recessions and recoveries. During booms, the economic output increases quickly and businesses tend to prosper. Eventually, a booming economy reaches a peak point where economic growth rates start to fall, leading to an economic downturn. Downturns lead to periods of economic stagnation or decline called recessions. The point at which economic growth rates begin to increase again is called the trough of the business cycle; a period of economic recovery follows the trough and leads back into an economic boom.
The business cycle has major implications on the total level of employment in the economy. During periods of economic growth and prosperity, employment tends to be high because businesses need more workers to meet demand and expand their companies. On the other hand, economic downturns and recessions tend to be characterized by rising unemployment, cuts in worker hours and cuts in worker pay.
One of the primary reasons the business cycle is important to businesses is that it can have a significant influence on consumer demand. High levels of unemployment and underemployment mean consumers have less money to spend on products and services, which tends to reduce consumer demand. Low consumer demand leads to lower sales for businesses, which shrinks profits and increases the chances of suffering losses. Companies that suffer sustained losses may be forced out of the market.
Overcoming economic downturns and recessions is one of the biggest challenges of sustaining a business in the long-term. During economic recoveries and booms, conditions are ripe for new businesses to enter the market, but downturns and recessions typically result in a culling of weak businesses. Surviving the sluggish business cycles typically revolves around cutting costs, increasing efficiency and drawing on resources saved during periods of prosperity.