Finance

What Is a “Financial Cycle” and How Does it Affect Your Business?

What Is a “Financial Cycle” and How Does it Affect Your Business

Many things influence the health of a business.

The environment in which a business operates has an impact on its activities, including sales, profits, and growth.

A business that’s performing well might experience difficulties as a result of changes in its operational environment.

Things like war, economic recessions, climatic changes, and politics, among others, have a direct bearing on business operations and may determine a business’ profitability or otherwise.

The financial cycle of a business is another factor that has an impact on a business.

It has a direct influence on business activities.

It, therefore, determines productivity, sales, and profitability.

 

What is Financial Cycle?

For the record, a financial cycle is the full span of business activities over a given period.

During the period, the business faces upturns and downturns.

A downturn is characterised by a decline in business activities, while an upturn refers to an increase.

A few years ago, the examination of a financial cycle was more historical than analytical.

Things have since changed, though.

Nowadays, experts focus their pronouncements on financial cycles on a systematic analysis of the economic activities of a business.

The analysis leads to further questions.

  • What’s the influence of a financial cycle in a business?
  • What’s the effect of the same financial cycles taking place at the same time in two or more different markets?
  • Are there measures a business can take to have better control of its financial cycles?

Another question that some people are left asking is the difference between a financial cycle and a business cycle.

Although the financial cycle and business cycle are used interchangeably in some quarters, knowing the difference between the two is essential for a better understanding of how one influences the other.

Well, the business cycle refers to the production period through to a product’s release to the market.

The period can be anything from a matter of weeks to months, depending on the product or service.

On the other hand, the financial cycle is more long term.

Because it centres on the strongly established funding, systems, and processes of a business, it could be eight years or more. In a financial cycle, moving from a downturn to an upturn and vice versa takes a long time.

 

How Financial Cycle Affects Your Business

Your business activities such as production, sales, purchases, and marketing, are part of its financial cycle.

During a financial cycle, a business experience an increase in the number of employees, compensation of workers, production volume, and sales as signs of a business boom.

Then there are periods when most of these activities decline significantly, indicating a proportionate drop in business.

Financial cycles determine your business activities. For example, a decline in the production of goods or services, resulting from large dividend payouts or diversion of investment, will impact on the performance of your business.

 

What Is a “Financial Cycle” and How Does it Affect Your Business

 

Controlling The Impact of Financial Cycles on Your Business

We know that a financial cycle has an impact on the activities of your business. I

t can be influenced by the environment, meaning it doesn’t have to be about your internal business activities always.

Your business can undergo a severe economic downturn as a result of financial turbulence in your country.

If there is a recession, for example, your business would be affected regardless of how you cushion it. It’s, however, advisable that you take measures to lower the impact of such changes on your business as possible.

Below are a few of the ways to control the impact of financial cycles on your business.

 

1. Regular evaluation

Nothing is constant when it comes to running a business.

Things change.

To be on the safe side, conduct regular evaluation of your business and that of the environment.

In case you see something that can cripple your business, have it addressed immediately.

 

2. Make use of statistics

Instead of doing things because they worked for somebody, focus on using actual figures to make your business decisions.

Where there is a need for debt management, reach out to a professional debt collection agency.

 

3. Thoughtful investments

Every business goes through difficult times.

As a business owner, you should cushion your business by making well-thought-out investment decisions.

Making the right investments protects your business even at a time when your principal industry is greatly affected by external forces.

From the look of things, you can help your business wade through financial crises by making the right decisions.

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