Principles of Business Decisions

By:

Suresh T SI PG M.Com

Business Cycle or trade cycle refers to the recurring ups and downs in the level of economic activity which may last for several years.

Business Cycle

Indicators of Business Cycle

(A) Production• During recovery and prosperity periods

agriculture and production index will shows an upward trend

• In boom at its peak• During recession the rate declines• In depression at its least

(B) Unemployment rate• Heavy demand for labour during recovery

and prosperity stages• In boom least unemployment rate During

recession the rate declines• In depression the unemployment rate shot up

(C) Income level and consumption• Due to increase in employment during the

recovery and prosperity periods there will be an upward trend takes place in per capita income level and level of consumption

• During recession and depression the rate declines

(D) Rate of inflation• A tolerable rise in the rate of inflation during

recovery and prosperity stages• The inflation will become intolerable during

boom period• The inflation will show a downward trend during

recession period

(E) Investment• During the recovery and boom periods there

is optimism all around• The amount of investment shrinks in time of

recession and depression

(F) Fiscal policyFiscal policy measures (Expenditure and taxation policy) are designed by the Govt in such a way as to encounter the evil effects of different phases of business cycles

(G) Monetary PolicyThe central bank makes appropriate changes in monetary policy( Policies relating to money supply and interest rates) to suit the requirements of different phases of business

(H) Stock market indicesThe general feeling of optimism and pessimism of investors in a country are clearly reflected in the movement of stock market indices

Use of Business Cycles in Business Decisions1) Demand Forecasting

• During boom and recovery periods firm expects high demand

2) Inventory Management• During boom hold more inventories and during

depression comparatively low inventory

3) Pricing Decisions• During boom periods the firm can charge more price

compared to depression stage

4) Business Expansion • Its apt time for the business to expand its activities

during the boom periods

5) Marketing Decisions• The firm should use aggressive marketing strategies

during the depression periods to maintain the profit

Effect of Cyclical Fluctuations on Business Firms

1 On Production High demand during recovery and boom periods

Less demand during recession and depression

2 On Sales and Profit High sales turnover in recovery and boom periods

Decline trend during depression

3 On Factor Price Rise in factor prices during recovery and boom periods

Price diminishes and cost of production reduces during depression

4 On Investments Huge demand, some times run out of stock

Working capital(stock) may be blocked up

5 On Cost of Fund Raise in rate of interest during recovery and boom period due to demand

Low arte during depression

6 The degree of competition

Stiff competition during boom periods

Most firms will be loss makers in depression period

Measures to minimise the effect of business cycle on firms

It is not possible to completely avoid the evil effects of business cycle, business firms can at least minimise its effect.

However the economists suggests that business firms should adopt following measures to minimise the effect of business cycle

1. Preventive Measures2. Curative Measures

Preventive measures

These include safeguarding against swaying away with the waves of expansion, so that the recession may be minimised

a)Investments (balanced debt equity

mix)

b) Inventory( Avoid over production

during boom period, JIT )

c) Products( Diversify products So risk

can be reduced)

Curative Measures or Relief Measures

Business cycles cannot be avoided. Relief measures are to be undertaken to deal with the problems arising from recession and depression

a) Pricing (Flexibility should be the right

strategy, adjusted to increase demand.)

b) Costing(control wastages and reduce costs)

c) Product (Focus on quality of the product)

Controlling Business Cycle

1.Monetary policy

A.Change in bank rate • Boom :- Raises the bank rate to curb money supply• Depression :- Reduce rate to increase money

supply

B. Open Market operations• Boom :- Sells securities and takes

away the disposable income from people

• Depression :- buys securities to give more money in the hands of people

C. Change in Cash reserve Ratio• Boom :- increases CRR to reduce

the lending capacity• Depression :- decreases CRR so the bank can increase lending

D. Change in Statutory Liquidity Ratio• Boom :- increases SLR to

reduce the credit giving• Depression :- decreases SLR so the bank

can increase its credit

2. Fiscal Policies

A.Taxation Policy• Boom :- increases tax rate and additional taxes to take away excessive purchasing power

• Depression :- reduces tax rates to enhance purchasing power

and increases demand

B. Public Expenditure

• Boom :- Govt reduces its public

expenditure• Depression :- increases expenditure on pubic work

Business Forecasting

A forecast is a statement about the future value of a variable such as demand.

Business forecasting is an estimate or prediction of future developments in business such as sales, expenditures, and profits

Methods of Business Forecasting

There are mainly two methods of business forecasting,

1.Qualitative Methods

2.Quantitative Methods

Qualitative Methods

Executive

Opinion

Approach in which a group of managers meet and collectively

develop a forecast

Market

Survey

Approach that uses interviews and surveys to

judge preferences of

customer and to assess demand

Delphi

Method

Approach in which consensus

agreement is reached among a group of experts

Sales Force Composite

Approach in which each salesperson

estimates sales in his or her

region

Quantitative Methods

Time-Series Models

Time series models look at past patterns of data and attempt to predict the future

based upon the underlying patterns contained within those data.

Associative Models

Associative models (often called causal models) assume that the variable being

forecasted is related to other variables in the environment. They try to project

based upon those associations.