How understanding the business cycle can help your financial planning

Expansion, Peak, Contraction, and Trough. Understanding the business life cycle can be a useful tool to help with your financial planning...

How understanding the business cycle can help your financial planning

Expansion, Peak, Contraction, and Trough… These phases are part of the business cycle, which shows the rise and fall of the economy in terms of GDP (Gross Domestic Product) and growth rate over time. It can be a useful tool to help with your financial planning as it helps to indicate when an economy is recovering or going through a depression.

Expansion

The expansion phase is the most desirable state of a business, because the economy is going through a recovery. Entrepreneurs are ambitious towards their goals and employment and business development can be expected to grow at an exponential rate. Businesses will spend more capital on employment and other expenses to scale with their demand. Investors are likely to allocate more capital to assets in order to increase their net worth. .

Peak

The highest level of the business cycle, the peak, is the result of overconfident investors and entrepreneurs when the business begins to grow out of control. Both companies and investors have been acting bullish and prices don’t reflect the real value of assets anymore. As the market is starting to get “overheated”, it is a sign that a contraction is coming.  

Contraction

In a contraction, business activities are low, confidence in spending more capital is now replaced by saving up in businesses and stocks where there is a guaranteed return. This is when the scaling back starts to happen; as the demand is low, businesses start to reduce production and employment, investors start selling stocks to protect their portfolios.

Trough

The bottom of the business cycle can be considered a happier place for entrepreneurs and investors as it means there is nothing to lose and business will only grow from here. Consumers start to regain confidence in the business as sales and activities start to improve, often stimulated by government policies or external lenders for extra capital for investment in the business. By restarting the business activities, the business expands and enters a new business cycle.

In order to determine which business cycle we are currently in, we have to know a few of the following variables, namely gross domestic product (GDP), interest rate, consumer spending or total employment rate. With this information, we could make predictions about government and banks’ upcoming policies, to aid investors to invest more or pull money out of the businesses.

Government and Bank Interference

As a means of stabilizing the market, governments and banks implement fiscal and monetary policies when the market grows or contracts exponentially. They do so by altering interest rates, making borrowing money easier or harder depending on the market trends. The changes in the interest rates will indirectly influence consumers and businesses to spend less or more, achieving a stable economic environment and business cycle.  

Impact on Business and How to Improve It

At different stages of the business cycle, different challenges come into play, such as recruitment during expansion, insufficient capital in peak, layoffs during recession, and financial assistance during trough. Each challenge requires a different set of inputs and can be improved by external funding and government intervention.

The business cycle is a natural order of high and lows observed in the business world and is natural for all companies to experience ups and downs during the cycle.

What is Zetl?

Zetl is Asia-Pacific’s first financing company for asset-light businesses. We help services businesses like recruitment agencies, consultancies, and tech-based startups manage their monthly operating expenses by providing growth, payroll, and working capital financing.

Zetl is headquartered in Hong Kong with a mission to finance the next generation of businesses in Asia-pacific. These are often young companies without a multi-year operating history that don’t have equipment, inventory, or property which they can use for financing. Zetl offers flexible financing solutions for them that are fully confidential, digital, fast, and require no personal guarantees.