A business goes through varied phases of business cycle! Yes, a business cycle is a periodic yet irregular upward and downward moment in a financial activity of any business, which is measured by fluctuations in GDP (Gross Domestic Product) and even other macroeconomic variables.
The business cycle is also called a boom-bust cycle or an economic cycle. It is characterized by a boom in one period and a breakdown in the consequent period in the financial exercises of a business.
These tremendous fluctuations in the monetary activities are actually called phases of the business cycle.
A business cycle is normally categorized into five phases such as Expansion, Peak, Recession, Trough, and Recovery, which repeat themselves over the time.
Let’s discuss the aforementioned phases of business cycle in detail.
Expansion
Vital Phases Of Business Cycle That You Should Know
Expansion
In this phase, there is a growth in various economic factors such as employment, output, production, sales, profits, and demand.
An economic development raises the interest in both consumer goods as well as capital. Organizations put more resources into production and inventories to take a benefit of increments in sales and profit. A low risk in this phase of business cycle allows banks to loan capital for business expansion at low interest rates.
In this stage, due to an increase in investment opportunities, idle assets of organizations are used for different investment purposes. Therefore, the cash outflow and inflow of a business is equal.
This phase of business cycle continues till the financial conditions are ideal.
Thus, you can say that an expansion phase is a period when business activity grows and GDP increases until it reaches a peak.
Peak
Peak phase can be defined as a phase, in which the increase in a growth rate of the business accomplishes its maximum limit. In this phase, economic factors such as employment, production, sales, and profits are higher, but they don’t increase further due to a gradual decrease in the demand for different products and increment in the costs of inputs.
The increase in costs of inputs eventually prompts an increment in costs of the final product, while the income of general population stays constant. As a result, a demand for products such as homes, automobiles, jewelry and other products starts falling.
Recession
Recession
As discussed earlier in the peak phase, there is a continuous decrease in the demand for different products because of an increase in the costs of inputs. At the point, when the decrease in the demand of products turns out to be rapid and consistent, the recession phase of business takes place.
During this phase, product prices generally fall due to fall in the aggregate demand. An important feature of the recession phase is a fall in the rate of interest. With the lower rate of interest individuals' interest for money holdings increases.
Trough
During this phase, the financial activities of a business decline below the normal level and the increase rate of the economy almost become negative.
Trough
During this phase, the financial activities of a business decline below the normal level and the increase rate of the economy almost become negative.
In the trough phase, it becomes very difficult for borrowers to pay off their arrears. As a result, the rate of interest decreases and banks don’t prefer to loan the money.
Apart from this, a level of the financial output of a business turns out to be lower and unemployment turns out to be high. In this stage, numerous weak businesses leave the industry or rather dissolve.
At this point, the business economy reaches to the most minimal level of shrinking.
Recovery
Recovery
As discussed earlier in the trough phase, a business economy reaches to the lowest level. Once economy touches to the most minimal level, it happens to be the end of negativism and the start of positivism.
This leads to a reversal of the phases of business cycle. As a result, organizations and individuals begin developing a positive attitude towards different financial elements such as production, employment, and investments.
In the recovery phase, customers increase their rate of consumption, as they expect that there would be no further reduction in the costs of products, which increase the demand of products in the market.
Therefore, businesses are able to earn a specific amount of money. As a result, employment and investment by businesses increases. As this phase picks up force, a business economy again enters into the phase of expansion and the business cycle completed.
Thus, by understanding these phases of business cycle, you would be able to calibrate where your organization is and how to take it to the next step to drive the success of your business.
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