Business Cycle - The Strategic CFO® (2024)

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Business Cycle

Tags:business cycle, economic cycle, indicator
By: Dan
July 23, 2013

Table of contents

See Also:
Efficient Market Theory
Economic Indicators
Economic Value Added
Supply and Demand Elasticity
Porters Five Forces of Competition

Business Cycle Definition

The business cycle refers to recurring patterns of expansion and contraction in an economy. It is also called the economic cycle. During the expansion phase of the cycle of business, the economy is prospering and growing. During the contraction phase of the business cycle, economic activity is in decline. Economists and other interested parties watch certain macroeconomic indicators to gauge the condition of the economy and to try to forecast changes in the business cycle.
According to this cycle, economic activity expands until it reaches a peak, then it contracts until it reaches a trough, and then it begins to expand again. Measure business cycles from peak to peak. Furthermore, the duration of an average business cycle is around five years. However, they do not run like clockwork – the durations of the individual phases as well as the entire business cycles vary widely. In the U.S., these cycles are measured and peaks and troughs are declared by the National Bureau of Economic Research (NBER).

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Phases of the Business Cycle

The business cycle consists of the four following phases: expansion, peak, contraction, and trough. During the expansion phase, also called the recovery phase, gross domestic product is growing, business activity is flourishing, and the economy is prospering. Expansion phases typically last around three to four years, but may be longer or shorter. The expansion phase ends at the peak, which is the high point of economic activity and the transition to contraction.
Economic contraction, also called recession, is often defined as two consecutive quarters of declining gross domestic product. During a contraction, business activity is slowing, unemployment is increasing, and the economy is struggling. A recession typically lasts about one year, but may be longer or shorter. The contraction phase of the business cycle follows the peak and continues till the trough. The trough is the bottom of the downturn, and represents the end of the contraction and the transition back to expansion.

4 Business Cycle Stages

1. Expansion
2. Peak
3. Contraction
4. Trough

Business Cycle Indicators

Economists watch certain macroeconomic indicators to gauge the condition of the economy. In the U.S., the Conference Board issues an index of several key economic indicators. There are three main types of economic indicators, including: leading indicators, lagging indicators, and coincident indicators.
Leading indicators considered predictors of economic trends. Analysts use these data to try to forecast changes in the business cycle. Examples of leading indicators include stock prices, building permits, average weekly initial claims for unemployment insurance and an index of consumer expectations.
Coincident indicators fluctuate simultaneously with the business cycle and reflect the current condition of the economy. Examples of coincident indicators include industrial production data, nonagricultural payroll data, and manufacturing and trade sales data.
Lagging indicators appear after the completion of economic trends and changes in the business cycle. Furthermore, they can be used to analyze the economy in retrospect or to confirm other economic data. Examples of lagging indicators include the following: average duration of unemployment, average prime rate charged by banks, and change in labor cost per unit of output.

Historic Data

To see historic business cycle data for the U.S., go to: nber.org/cycles

Conference Board Index

To see economic indicators issued by the Conference Board, go to: conference-board.org
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FAQs

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The CFO relies on the reporting generated by accounting and the financial controller to advise the CEO and board on the company's strategic financial direction. The controller and other functional specialists report to the CFO.

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“Key for the CFO is creating the financial flexibility to weather financial storms and exploit opportunities – everything requires funding.” There is then the need to ensure that there is alignment between management information, objectives, key performance indicators and incentives with the strategy.

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Preparing for a CFO interview requires a deep understanding of finance, strategic insight, and leadership qualities. It's not just about technical expertise; it's about demonstrating a vision for the company's financial future and the ability to lead teams towards that vision.

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What does strategic planning entail for a CFO? As CFO you're on a mission to haul the business from where it is today, to the brave new world of tomorrow. To do so, you're going to have to take a holistic approach that considers the market, your competitors, internal ongoings, and future goals.

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Does the CFO answer to the CEO? ›

Role and Responsibilities of Chief Financial Officers (CFOs)

The CFO reports to the CEO but remains one of the key personnel in any company. In the financial industry, it is a high-ranking position, and in other industries, it is usually the third-highest position in a company.

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The CEO is usually the highest-ranking member of a company. They typically lead the C-suite, which also includes a COO, CFO and CTO. Vice presidents may also report to the CEO.

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CFOs should use reporting and forecasting tools to make strategic, data-backed decisions, and provide level-headed insights based on a thorough understanding and analysis of the data. Additionally, it is important to focus on more than just numbers.

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One of a CFO's most important tasks is budget and cost management. They must ensure that the company has enough money to cover its expenses and make sound financial decisions when spending money. This involves: Forecasting cash flow.

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You can count on your CFO to help influence strategic decisions around pricing, assisting with any commercial negotiations, ensuring you have the right financial infrastructure in place to support the new opportunities, and defining what success looks like.

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The biggest challenge for a CFO is navigating the complex and often unpredictable financial landscape, which requires balancing short-term financial health with long-term strategic goals.

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How to be a successful CFO with seven skills

Analytical aptitude. Advanced analytics fuel decision-making, steer your company's growth curve, and limit instability. ...
Risk assessment skills. ...
Innovation management. ...
Leadership skills. ...
Strategic mindset. ...
Communication and collaboration. ...
Business intelligence.

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What are the habits of highly effective CFO? ›

Teamwork is key for the modern day CFO. As well as the ability to build their own team, highly effective CFO's must be able to work effectively with the management team of the business and develop relationships outside the business to provide a strong network of support professionals.

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What are the 4 P's of strategic planning? ›

With these management tools providing input in real time, organizations can quickly adjust course as circ*mstances present new opportunities or threats. A simple model made up of “Four Ps” can help companies create this advantage. These Ps are Perceptions, Performance, Purpose, and Process.

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What is the seven 7 steps of strategic planning? ›

Declaration of values, mission and visionAnalysis of the external environmentAnalysis of the internal environment Analysis of the current situationSetting goals and objectivesStrategy definitionFeedback and ControlThe rule is clear: planning is necessary!

Who is the boss of the CFO? ›

The CFO is one of an organization's most senior executives, forming part of the C-suite and reporting directly to the chief executive officer to help shape the company's financial operations and strategy, as well as managing accounting and day-to-day budgeting.

Who reports directly to the CFO? ›

Chief accounting officers (CAOs) and financial controllers are both accounting experts who report to the chief financial officer (CFO)—but these two roles have subtle, nuanced differences.

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Who oversees the CFO? ›

The CFO typically reports to the chief executive officer (CEO) and the board of directors and may additionally have a seat on the board.

Who is second in command to CFO? ›

The chief operating officer (COO) is the second-in-command of an organization. They are responsible for managing and directing all aspects of operations and depending on the organization this can include Finance, Human Resources, Marketing, Sales, Customer Service, etc.

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