2/9/11

10:47

Page 1

www.thetimes100.co.uk

Decision making across the business cycle

Curriculum Topics
Boom
Downturn
Recession
Recovery

Introduction
CIMA, the Chartered Institute of Management Accountants, is the
worlds leading body for management accountants.
Management accountants can provide management information
and insights as well as financial data to help managers make
decisions. However, CIMA qualifications are not just for
professional accountants. CIMA members may work across any
part of an organisation, not just in finance. CIMA training helps any
worker to develop quantitative, analytical and strategic thinking
and build business and management skills. These include:
performance management analysing data for use in business
decision making
cost leadership applying accounting techniques to plan and
budget as well as formulating business strategy to create
wealth and shareholder value
project management identifying and managing the risks of
certain actions and communicating appropriate information
across the organisation.
CIMA has 183,000 members and students in 168 countries with
many holding senior positions in businesses around the world.
However, CIMA qualifications are accessible to a wide range of
people. There is no need to have a degree to start CIMA studies you can take up studying whilst in work or after leaving school. The
CIMA Certificate in Business Accounting provides a solid grounding
in the basics of management accounting, business and finance,
preparing members to progress to the professional qualification.

Management accountants: Financially

qualified business leaders who interpret
financial information to make business
decisions.

www.thetimes100.co.uk

Value chain: The successive increases

in value represented by the linked stages
in the making of any product (goods or
services).

Management accountants are playing important roles during the

difficult times which the UK economy has been experiencing.
Between 2008 and 2009 there was a fall in production and
consumer spending. Economic performance has continued to be
poor. During these hard times it is essential to have a good
understanding of how to make important decisions to get the
economy growing. Research has shown that the organisations
with the best prospects of emerging successfully from a recession
are those which balance cutting costs to improve operating
efficiency with continuing to invest in developing their competitive
position. This means understanding what drives revenue, cost and
risk across the organisations value chain. Financial measures
alone cannot describe this adequately. To ensure the sustainability
of a business, delivering financial results has to be balanced with
other qualitative measures of performance.
Strategic decision making is a key role of managers. Strategic
decisions have long-term and company-wide impacts, so
businesses must respond to changes in the environment in which
they operate. Contingency planning can allow firms to deal with
unexpected events. Management accountants are skilled in these
areas and are able to advise decision makers on how to maintain
financial control and stability. They have a vital role to play in
ensuring firms remain competitive, even during difficult times.
The case study illustrates how management accountants
support business decision making during all the stages of the
business cycle.

Strategic decisions: Decisions that are

part of an organisations plan for
achieving its central objectives.

Contingency planning: Advance plans to

cope with unlikely but significant events.
Business cycle: Series of upturns and
downturns in economic activity over
time.

CIMA | Decision making across the business cycle

37

GLOSSARY

39639_CIMA

39639_CIMA

2/9/11

10:47

Page 2

www.thetimes100.co.uk

GDP growth

Quarterly % change

2
0
-2
-4
-6
-8
2006
Q4

2007
Q2

2007
Q4

2008
Q2

2008
Q4
1q

The business cycle

Gross Domestic Product (GDP) is the value of all the goods and
services produced in an economy over a period of time. When
GDP rises, economic activity is increasing. This is called economic
growth. The level of activity fluctuates over time. Periods of high
growth are followed by periods of slow growth. Sometimes the
economy experiences negative growth when there is a fall in GDP.
These fluctuations are known as the business cycle.

Output
of UK
businesses

Potential
Growth
Boom

Actual
Growth

Boom

2009
Q2

2009
Q4

2010
Q2

4q

The illustration shows economic activity in the UK between 2006

and 2010. Although the business cycle follows a pattern, the
changes in activity are not regular or predictable. It is difficult to
assess the duration of any part of the cycle or how extreme the
booms and recessions will be. Management accountants can help
organisations to develop suitable strategies to cope with the
business cycle. For example, during the 2008-9 recession, CIMA
evaluated the situation and warned companies against knee-jerk
reactions to problems, such as trying to manage just by
cutting costs.
Management accountants are equipped to take a longer term
view. They understand that some costs are necessary to support
the long term growth of business. The management accountants
role is central to understanding, managing and even anticipating
the impact of the phases of the business cycle in order to manage
its effects.

Boom

Recession
Time

There are four stages of the business cycle:

Boom this is when the economy is growing quickly. Demand
in the economy is high and consumer spending grows.
Business production increases to keep up with the demand.
Downturn growth starts to slow down. Consumer spending
begins to fall and businesses invest less in capital equipment.
There is uncertainty about the future of the economy.
Recession a continued downturn in economic activity can
lead to a recession. Demand is low and firms may struggle
to survive.
Recovery GDP starts to rise again as consumer spending
increases and businesses produce more goods and services.

A boom is a sustained period of strong economic growth. During

this time confidence in the market is high. This leads to high levels
of demand and consumer spending. Businesses increase their
output and may be working at full capacity. It is during this phase
that existing businesses tend to increase their spending on new
capital. Many new firms also start up.

The business cycle has numerous impacts on organisations.

These include:
changing demand affecting profitability
fluctuating staffing levels requiring recruitment or redundancies
the need to alter production levels relative to demand
the capability to expand or rationalise operations as necessary.

38

2010
Q4

CIMA | Decision making across the business cycle

www.thetimes100.co.uk

2/9/11

10:47

Page 3

www.thetimes100.co.uk

Due to the level of business activity during a boom, employment

levels are high. This makes it more difficult for companies to
attract and employ staff. They may need to offer higher wages to
attract quality workers.
The boom can be an exciting part of the business cycle for
organisations. However, high levels of demand, plus the increasing
costs faced by firms, can lead to high inflation. Inflation is the
name given to the rise in the general level of prices. In addition to
this, there is an increased risk of overheating. This is a situation
where businesses are not able to meet the high demand for goods
and services. Boom periods therefore need to be as carefully
managed as the other stages in the business cycle.
CIMA encourages a balanced approach to managing the business
cycle. The focus should be on long-term business growth rather
than short-term profits. Management accountants can advise on
how to make the most of the investment opportunities afforded by
a boom, whilst assessing and managing the associated risks. In a
buoyant economy there is less perceived need or incentive to
control costs. However, inefficiencies can become problematic.
Management accountants will also have a role to play in ensuring
the business remains efficient. For example, by keeping business
processes lean, streamlined and continuously improved, costs will
be controlled.

Michael Tan is a Supply Chain Operations Director for

Agilent Technologies in Malaysia. His business grounding
with CIMA has allowed him to focus on achieving greater
efficiency in the company. His efforts have reduced lead
times by 32% over the last year.

Downturn and recession

A downturn is a slowdown in economic activity. High levels of
inflation in a boom can lead to businesses becoming
uncompetitive. Inflation increases uncertainty as rising costs and
prices are difficult to predict. In order to try to control demand
when inflation is high, the government can increase taxes. In
addition to this, the Bank of England can raise interest rates.
These actions encourage saving and discourage spending. The
result is that economic activity begins to decline.
A downturn can lead to a recession which is defined as when there
are two successive quarters of negative economic growth. During a
recession, demand in the economy is low and markets shrink.

Inflation: Increases in the general level

of prices.

www.thetimes100.co.uk

Lean: Processes that minimise waste

and increase efficiency.

There are pressures for businesses to reduce costs, which can lead
to increased unemployment as companies lay off workers. The
resulting higher unemployment means people have less money to
spend, thus contributing to the downturn in the economy. Some
businesses may have to close down. In 2009 a number of wellknown businesses closed in the UK, for example, Woolworths. Other
businesses reduced the number of outlets or stores they operated.
During a recession, the Board of Directors of a company needs to
consider various options of managing lower revenues and therefore
profits. In most businesses there are inefficiencies and instances where
the costs of unprofitable customers or products are covered by other
profitable ones. Management accountants can provide analysis to
help focus on core profitable activities and identify where costs can be
cut. They may provide detailed figures relating to options such as
making redundancies, closing offices, shrinking capacity or even
selling off assets like machinery and buildings. Evaluating the
outcomes of these different sorts of analysis could include:
comparing different degrees of activity, e.g. to cut costs by
10% or 20%
analysing the benefits or impacts of various options, e.g. what
is the effect on profits of cutting back costs? How much cost
saving would result from losing 5% of employees?
assessing impacts on stakeholders, e.g. how will customers feel if
the range of products is reduced or delivery times affected?
However, the problem in making cutbacks is that it reduces the
ability of a business to respond when the economy takes an
upturn. The company may then have to invest in new machinery
and equipment or try to regain skilled employees. Management
accountants may also help identify opportunities for immediate or
future growth during a recession. Good deals may be available at
this time. Investment in equipment or acquiring another business
during a recession is likely to be cheaper than during a boom. This
can put a company in a strong position to deal with increasing
demand when the economy begins to recover.

Matthew Parker works for Topshop/Topman which is part

of the Arcadia Group. He has completed the CIMA
Professional Qualification. He describes his CIMA
qualification as a commercial toolkit that enables him to
break information down and make the most profitable
investment decisions. By comparing the likely costs and
revenues of different activities and products, Matthew is
able to identify ones that are most likely to lead to higher
and sustainable profits.

GLOSSARY

39639_CIMA

Interest rates: The cost of borrowing

money expressed as annual percentage
rates on the amount borrowed. Rates
vary according to the amount borrowed,
timescale and risk involved.

CIMA | Decision making across the business cycle

39

2/9/11

10:47

Page 4

www.thetimes100.co.uk

www.cimaglobal.com

Scott Egan is the Commercial Director at Norwich Union

Insurance. He is responsible for identifying new business
areas which may be important to the business in the
future. He also drives mergers and acquisitions in order to
continue Norwich Unions growth.

Management accountants are able to explore every way to reduce

the impact of a recession, without resorting to impulsive decisions
which may harm recovery. For example, they might consider
particular human resource strategies. The introduction of flexible
working or reduced hours can ensure skilled staff are still available
for the recovery. The CIMA Professional Qualification provides
skills and support for human resources specialists.

Management accountants can provide an assessment of what the

expected returns might be on these new ideas. For example, they
can use investment appraisal tools to:
determine how long it will take to pay back the cost of setting
up a new production line
analyse which opportunities will yield the best results
consider which ideas have most strategic long-term value.

Rhiannon Rymer is a CIMA-qualified Strategy Analyst at

Lloyds TSB. Her work focuses on evaluating data to
assess where income will come from now and in the
future. She looks for opportunities during all stages of the
business cycle, including recessions, to identify where
Lloyds TSB has the potential to grow income.

Recovery
The term green shoots is used to refer to the first signs of
economic recovery. During a recession, businesses and
consumers lose confidence. Green shoots appear when
consumers start to spend a little bit more. Businesses respond
perhaps after a short time lag by producing more goods and
services. They will start to invest in new machinery. More jobs will
be created or reinstated. Unemployment will start to fall.

Conclusion
The CIMA Professional Qualification is relevant to many different
industries. It covers key skills not just for management
accountants, but for managers at all levels working across a
company. CIMA training enables management accountants and
managers to make sound strategic decisions. This understanding
and skill helps managers to work effectively in complex times
across the whole business cycle, managing through boom,
downturn, recession and recovery.
CIMA qualifications are particularly attractive for young people
entering the workplace for the first time. This is because they
provide highly respected training that can lead to jobs with real
prospects in many sectors. A CIMA qualification encourages
learners to think strategically. CIMA-trained management
accountants can make a real contribution to a business.

GLOSSARY

Human resources: The business

function responsible for the deployment,
training and development of people as a
strategic resource within an organisation.

40

1. Using examples, describe what is meant by strategic

decisions.
2. Explain the four stages of the business cycle. Include
their causes and effects.
3. Analyse how a recovery in the economy occurs. What
part can managers play in securing a recovery at a
company level?
4. Evaluate the alternative actions that management
accountants could employ in each stage of the
business cycle to keep the business strong.

Infrastructure: The basic services,

systems and investment goods that
enable a modern economy to function,
e.g. roads, railways, electricity and
water supplies.

CIMA | Decision making across the business cycle

www.thetimes100.co.uk

QUESTIONS

The cause of recovery may be due to government actions such as

reducing taxes, increasing investment in the economy or perhaps
by improving infrastructure. For example, in 2008 the
government temporarily reduced VAT from 17.5% to 15% to
encourage greater consumer spending. Increased investment,
either from within the UK or from other countries, can also prompt
recovery. A rising confidence in the economy leads to increased
business activity and more spending by consumers. Although
some uncertainty will undoubtedly remain, businesses are more
likely to consider investment at this time. During the downturn, a
company may develop new ideas but be reluctant to put them
into practice because of the falling level of expenditure in the
economy. Once the recovery starts, it is time to try out these ideas.

The Times 100 and Wilson and Wilson Publishing Ltd 2011. Whilst every effort has been made to ensure accuracy of information, neither the publisher nor the client can be held responsible for errors of omission or commission.

39639_CIMA