United Bank & Trust Blog

Kenny Leonard

We are currently in one of the most protracted business cycles in modern history.  If you recall your macroeconomics class from college, a business cycle is typically characterized by four phases—recession, recovery, growth, and decline—that repeat themselves over time.

Economists note, however, that complete business cycles vary in length.  Historically, they have ranged anywhere from about two to twelve years with most cycles averaging about six years.  But, of these four stages, we seem terminally stuck in the 1st phase of this particular business cycle, namely the Recession.

RECESSION, you will recall from your ‘macro’ class, is that period of reduced economic activity in which levels of buying, selling, production, and employment typically diminish.  This is the most unwelcome stage of the business cycle for business owners and consumers alike – and particularly this one.  Now if we believe the economists, this recession had technically been going on since September 2007, and it ended sometime in October 2009.  Now, we are supposed to be in the 2nd stage, Recovery.

RECOVERY, also known as an upturn, is supposed to be the point at which the economy “troughs” out on a graph and starts working its way up to better financial footing, i.e. things are getting noticeably better and we are moving on to the 3rd stage, Growth.

Recovery may be the stage we are ‘in’, but don’t tell that to the average entrepreneur.  Even though many of the factors which indicate recovery are beginning to emerge, it certainly doesn’t seem like much of a recovery quite yet – at least to many of the small business people we speak with every week.  To them, ‘things are just starting to happen’.  Increased consumer confidence and investment of capital are among them, but as we are on the mend, many businesses are still struggling, working capital is being drawn down to dire levels, and many are struggling to maintain their business loans at current levels.

So before the Growth stage comes at us again, and everyone can breathe a sigh of relief, businesses need to reevaluate what they are doing now and what they plan to do in the future to ensure that they can continue to survive the remainder of the current business cycle as well as the next!

Small business owners can take several steps to help ensure that their establishments weather business cycles with a minimum of uncertainty and economic damage.  They need to develop strategies that work now at the bottom of the business cycle as well as developing those that work when we are well into the Growth phase of the cycle — which we all hope is sooner than later.

Specific tips for managing businesses during this business cycle downturn include the following:

• Long-Term Planning — Business consultants encourage small businesses to adopt a moderate stance in their long-range forecasting.  We often see pro-formas that are too far reaching, even for a Growth stage economy.  So, it is wise for businesses to temper their forecasts to this particular reality, and many have difficulty doing that.

• Flexibility — Developing a business plan that allows for appropriate development times in each of the four stages of a business cycle is critical. This includes structuring alternative recession-resistant funding structures and putting away retained earnings during the strong Growth stage to help weather the next Recessionary stage, which always follows.

• Attention to Customers — Staying close to your customers is a tough discipline to maintain in good times, but it is especially crucial coming out of bad times, like we are currently experiencing.  Having your clients asking their best customers what their future orders will look like in 2, 4, and 6 months can be a specific indicator of when their company can expect an up-turn in business. But during bad times, like these, those questions often go unasked.

• Objectivity — Small business owners need to maintain a high level of objectivity when riding business cycles.  Making operational decisions based on hopes, desires and emotion rather than a sober examination of the facts can devastate a business, especially in economic down periods like we are experiencing right now.  Asking your clients to ‘get real’ is extremely important but difficult for many bankers to articulate.

Timing – Timing any decision within a company during a stage like this is difficult, and often we see businesses looking to the economists, politicians, media and even the stock market for their indication as to when to ‘pull the trigger’ on large expense items, like ordering additional manufacturing equipment or increasing the sales force or support personnel.  However, expanding too quickly when the markets are not there places huge demands on working capital.  But, in contrast, waiting to make these decisions till the Growth part of the business cycle is in a full upswing may result in decreased market share or an eroding customer base.  Again, the best route may very well be to listen to your customers, learn what they plan to do and when they plan to do it and then time your response to spending on capital items and personnel around their decisions.  For small businesses, customers are ultimately their ‘business destiny’ and who they rely on regardless of what ‘others in the industry may be doing’.  So, to the extent that small businesses utilize their current (and new/future) customers as a resource rather than an excuse for their current failings is paramount to their continued success.

We at United Bank & Trust and United Structured Finance Company are here for you. Luckily the SBA programs provide a great opportunity for customers to extend their amortizations, reduce monthly debt obligations, and add new working capital when other banks turned off their willingness to lend. As a resource to our clients as well as your banker we are here to help you manage these phases.

Don’t hesitate to call on us.

Source: Jim Fliss, Zions National Real Estate weekly rate update