Financial Analysis: A Controller’s Guide, Second Edition

Chapter 10. Business Cycle Forecasting

A company’s planning and operations can be severely affected by a significant change in the business environment, such as can be caused by the vagaries of a business cycle. This section describes the nature of a business cycle and how it impacts a corporation. Then, the various methods currently used for forecasting business cycles are noted, as well as several theories regarding why business cycles occur. Finally, the areas in which a controller can provide meaningful input to company management regarding the impact of business cycles on a company’s specific lines of business are explored.

Nature of the Business Cycle

A business cycle is a recurring series of expansions and contractions, involving and driven by a vast number of economic variables, that manifests itself as changes in the level of income, production, and employment. As will be described in the next section, these swings can have a profound impact on a company. A business cycle tends to be long-term in nature, and is very difficult to predict in terms of length or intensity. It is driven by so many variables, most of which interact with each other, that it is excruciatingly difficult to determine the exact causes of previous cycles and the timing of the next one based on those variables.

Although the exact causes of the business cycle are difficult to discern (see the Theories behind Business Cycle Forecasting section), essentially two types of variables cause business cycle changes ...