Effects of cyclical fluctuations on business firms are given below:
The effect of cyclical fluctuations on business firms may sometimes be good and sometimes bad. While certain effects produce favourable consequences and certain effects produce adverse effects.
During revival and expansion, demand increases, selling prices rise more rapidly than costs, profits increase and individual manufacturers and merchants generally feel happy.
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However, even revival and the commencement of expansion produces a few ill-effects. Gradually there is increase in raw material prices, labour costs and rents. The rate of interest also goes up.
Later on when the situation becomes more difficult, the evil of cancellation develops. The businessman finds that his customers are refusing to take goods which they have ordered and that there is a decline in the volume of orders.
As far, the later stages of expansion are concerned, business concerns are confronted by much more severe competition.
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Prices are maintained with difficulty. Collections are slow while at the same time banks and trade creditor’s press for the settlement of their claims.
The decline in prices which is characteristic of the period of recession usually finds merchants and producers with large inventories that depreciate, materially in value with time. Thus excessive inventories are usually made up of finished goods rather than raw materials.
As this period is characterized by liquidation, the individual firm is compelled to sell his goods at a loss in order to meet his obligations.
This may result in either bankruptcy, shutting down or operation at a reduced rate; all involving at least a sacrifice of profits and possibly necessitating the carrying on the business at an actual loss.
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During contraction, these difficulties are likely to continue. One of the most important reasons for financial loss during such as period is found in the continuation of fixed charges of all kinds.
It is seen that during this period, the individual concern try to reduce the direct costs by the discharge of labour and the reduction of purchases of raw materials but most of the elements of overheads cost cannot be so reduced. The firm is also obliged to operate below capacity which is contributory to the financial loss.
The above analysis makes it clear how an average business unit is made to feel the ill effects of the business cycle.
As the cycle in its major movements lies quite beyond the control of the individual manufacturer, it simply tries to avoid the evil effects by adopting his operating programme to change in external condition with an increasing knowledge of business cycle on the part of the manufacture in general this process of adoption is being followed more widely.