Many business cycles are anything but regular. They vary in intensity and length. Expansions and contractions of the economy, also sometimes referred to as booms and busts, are broad economic events that affect many industries and companies. The United States economy has experienced approximately 10 of these boom-and-bust business cycles since 1945.
Apart from macroeconomic cycles, every business is also changing. Over time, your company will go through various stages of the business life cycle, similar to the life cycle for the human race. “Parenting strategies that work for your toddler cannot be applied to your teenager” and the same goes for business. It will be faced with a different cycle throughout its life. What you focus on today will change and require different approaches to be successful.
Learn about the implications on cash flow source and financing sources that will differ at different stages of the business cycle
Don’t ignore the influences of fortune on your business. Wars, hurricanes, floods, and fires can all have powerful effects on your business. Wars, in particular, have a tendency to affect the entire economy, producing booms in their early years as government spending mushrooms and followed by the dampening effects of inflation and, later, recession as the economy cools down.
In general, a company with more years of operations (under the same promoter) may reflect that the company has survived many business cycles.
Where are you on the dolphin now?
There are 4 different phases described in Daniel’s Dolphin:
- Early Phase – Uncertain Growth: Mainly financed by equity (Promoter’s capital and/or venture capital’s money) & minimal bank debt (except venture debt financing)
- Rapid Growth: Increasing positive operating cash flow financed with increasing debt financing using bank loans
- Stable/Mature: Accumulated equity buffer with a good mix of debt and equity financing to support the entity’s growth
- Declining: Entity is loss-making and faces negative net operating cash flow and requires deleveraging to minimise the amplification of losses