All businesses, Governments, Not-for-Profits, men and women have to deal with what is known as the Business Cycle if they are going to make any sense of what is happening to the country’s economy, company fortunes (or lack of it), Donor willingness to help out every now and then or why the feeding allowance is no longer what it used to be!
The Business Cycle is how Economists measure the movements in the output of goods and services in an economy, putting together all the outputs from businesses, government, households and other contributors to the economic landscape (The Gross Domestic Product – GDP). The measure takes into account inflation and gives the measure in real terms. The current Nigerian Business Cycle is a Recession – in real terms, when the outputs of all goods and services in the economy are contracting (in a decline).
These cycles fluctuate between expansion (increase in the outputs of goods and services) and reduction (recession/depression). The cycles come and go, they are never permanent but can last for indeterminate periods depending on measures taken individually and collectively to deal with them. During economic expansions (boom periods) governments, households, and businesses put something aside as a buffer for the next Business Cycle. A boom period is generally followed by a recession just as day surely follows the night and the other way round.
The United States National Bureau of Economic Research has estimated that there has been about 11 Business Cycles between 1945 and 2009 affecting the Global Economy. Recessions are somewhat a way an economy corrects for anomalies in the business environment. Each cycle is estimated to last an average of 69 months (5 ¾ years) or a little less. In the interim a contracting Business Cycle takes its toll on the Stock Exchange, commodity prices, real household incomes and the costs of doing business generally.
Understanding the way Business Cycles behave will help the Entrepreneur in planning when to expend or conserve resources or put strategies in place to deal with the one in which his company is currently operating. That many were blindsided by the current recession in Nigeria is putting it very mildly. If the next Business Cycle is going to be of any use to you and your company then this is the time to look ahead and plan accordingly.
This will affect what you call your investment horizon; is it for the short-term (less than 5 years) medium term (5 to 7 years) or long term (7 years and above)? A company’s investment horizon is very important because it has been our experience that many businesses are under capitalized (little or no Owner Equity) and rely a lot of the time on Suppliers and Customers for that aspect of their business financing. Of course those sources of funding can be erratic and unreliable. Banks ought to be the fall back position for long term funding, sadly this has been very scarce in the Nigerian economy.
The onus is on all business owners to give their companies a chance to survive in any Business Cycle by first understanding what it is then plan and execute accordingly.
