Understanding Business Cycles

Changes in economic indicators have presented a tool for tracking each season or cycle. What is constant is that these cycles come with their own peculiarities.

Life functions in cycles and it always moves us through cycles from childhood, adolescent, teenage years, youth and then adulthood. In the world of business, cycles also exist.

Depending on how you choose to look like it, the commonest version is that it has a birth phase, mid/growth stage, maturity / later stage, and the recession stage. This cycle moves within any business’s life cycle and it eventually circles back to begin again.

Changes in economic indicators have presented a tool for tracking each season or cycle. What is constant is that these cycles come with their own peculiarities.

Business Cycles And Their Peculiarities

Birth / Early-Stage Cycle:

This cycle takes two forms: The first is the actual birth of a new company. Companies at this stage will not be in the stock market and typically depend on angel investors or other private equity investments to start.

An investor can, consequently, invest his or her funds privately. It is a period of high risk and the investor can lose everything, but it is also a period of very low valuation making it extremely affordable to get a good amount of shares in the company.

However, the early-stage cycle could also refer to the period after a recession. A period where the company has gone from a negative period to a positive one.

Growth/ Mid-Stage Cycle:

This is where the company commences its growth phase and it is on that can take a very long period of time. This is where the company seeks additional financing. This is where the company gains market share, gets stronger in fighting off challenges, increases its output or efficiency of operations and so on.

Maturity/ Late-Stage Cycle:

This cycle is characterized by a peak balance period. This is the point where the company reaches a level of maturity in the business. It attains peak performance and the rate of growth slows down. The risks involved reduce little and it becomes a formidable source of consistent economic contribution.

Recession phase:

The recession stage is where things take a slump and profits are on the decline. This is the stage where investors generally take a few losses and the company seeks out ways to find their feed again. It could mean rebranding or divest into new product lines. The goal is always to get back on track.

For the investor, this also provides another avenue to understand the changes within the business.

Broadly, companies quoted on the stock market fall into 1) an emerging stock which is a company that has not attained its growth potential, or 2) a mature stock that has grown fast and stabilized.

Beyond volatility in the market coming primarily from growth stocks, there is also the truth that the business cycle of any company is also a core determinant of its performance over a short period of your time.

This is why a company in its growth phase can suddenly outperform the market. This is why the investor who can bear in mind the cycle of the company in his or her portfolio allocation will have more understanding for decision making.

While all businesses are different, past records will show you that there is a certain pattern or trend that you can see in different areas.

Written by Lawretta Egba.