business cycle

Examples of business cycle in the following topics:

• Interest Rates and the Business Cycle

  • Empirical evidence indicates that market interest rates rise during a business cycle and fall during recessions.
  • During a business cycle, the amount of goods and services produced in the economy increases because businesses become optimistic about future profits and invest in machines and equipment by issuing more bonds.

• Chapter Questions

  • What would happen in the market if a government imposes higher taxes on businesses?
  • How would the demand and supply functions for a bond market shift during a business cycle and during a recession?

• Answers to Chapter 8 Questions

  • Four factors are expected profits, business taxes, expected inflation, and government borrowing.
  • During a business cycle, both supply and demand for bonds increase and shift rightward.
  • Businesses and government supply more bonds because they can repay the bonds with cheaper dollars.
  • If a business issues bonds, then it demands money, i.e. loanable funds.
  • Thus, businesses and the government would borrow the cheaper funds from foreign investors.

• Calculating the Cash Flow Cycle

  • The cash flow cycle is also called cash conversion cycle (CCC).
  • There are five important intervals, referred to as conversion cycles (or conversion periods):
  • The Cash Conversion Cycle emerges as interval C→D (i.e., disbursing cash→collecting cash).
  • The operating cycle emerges as interval A→D (i.e., owing cash→collecting cash)
  • Its aim is also to study cash flow of business.

• Financing Life Cycle of the Firm

  • Firms progress through four stages of a developmental life cycle, each with their own funding needs.
  • Most businesses pass through a series of well defined stages based on their level of development.
  • From these observations came the four stage life cycle of the firm.
  • Methods of obtaining financial capital may be more or less suitable for a firm, depending on the current stage of its life cycle .
  • The source of the financing may depend on the perceived riskiness and growth of the business.

• Payments

  • If a business runs out of cash and is not able to obtain new financing, it will become insolvent.
  • So in business, "cash is king".
  • Cash payments describe cash flowing out of a business.
  • A company's objective regarding the cash disbursement cycle should be to increase the cycle time, or delay making payments until they are due.
  • This will increase the mail time, or mail float, within the disbursement cycle.

• Impact of Modifying Inputs on Business Operations

  • Accounts receivable is money owed to a business by its customers and shown on its balance sheet as an asset.
  • Commonly, a supplier will ship a product, issue an invoice, and collect payment later, which describes a cash conversion cycle.
  • Accounts payable will influence the current liabilities of a business, which will accordingly influence the liquidity of the business.
  • A major requirement for a business to continue its operations is for that business to maintain solvency.
  • Modifying accounts payable will drastically change the amount of cash-on-hand required for a business.

• Working Capital

  • Working capital is a financial metric which represents operating liquidity available to a business, organization and other entity.
  • Working capital (abbreviated WC) is a financial metric which represents operating liquidity available to a business, organization or other entity, including a governmental entity.
  • Debtors' management involves identifying the appropriate credit policies, i.e. credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence, return on capital.
  • Short-term financing requires identifying the appropriate source of financing, given the cash conversion cycle: the inventory is ideally financed by credit granted by the supplier; however, it may be necessary to utilize a bank loan (or overdraft).
  • Cash management involves identifying the cash balance which allows for the business to meet day-to-day expenses, but reduces cash holding costs.

• Identifying Varying Conditions

  • Identify the cash balance that allows for the business to meet day-to-day expenses, but reduces cash holding costs.
  • Identify the appropriate credit policy (i.e., credit terms which will attract customers such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence return on capital or vice versa).
  • Identify the appropriate source of financing, given the cash conversion cycle.

• Controlling the Components of Working Capital

  • Cash management: Identify the cash balance that allows the business to meet day to day expenses, but reduces cash holding costs.
  • Debtors management: Identify the appropriate credit policy, such as credit terms, that will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice versa).
  • Short-term financing (as well as long-term financing that comes due in the next year or operating cycle) is a CL.