42 Degrees - Business from a different angle

John Timpson, chief executive of high street shoe repair chain Timpson since 1975, admits that his business has almost come a cropper on both economic upturns and downturns in the past.

In the 1960s, after a few months of declining sales brought about by economic slowdown, the senior management of his company panicked and decided to start selling cheap shoes.

"It was a disaster, the last thing we should have done," says Timpson. "The turnover of our core shoe repair business declined by fifteen per cent in each of the next three years as a result." The drastic decision to change the business in the face of a slowdown caused irreversible damage.

Then, in the late 1980s, Timpson arranged a loan for £2m to acquire 20 new shops. But, just before he finalised the deal, he spotted a recession on the horizon and pulled out before it could bite. "Just as well. Otherwise we would have been saddled with huge interest payments on new shops that could not pay their way," he says.

In both cases, he admits that he made one of the oldest mistakes in the book. He thought, on each occasion, that the business cycle was different. It's always obvious in hindsight, but he claims there is something strangely mesmerising about fluctuations in economic activity that cause otherwise intelligent business people to forget about the lessons of the past and jettison the idea of managing the future wisely.

"Perhaps it's human nature, but when the economy is growing there is a tendency to feel that you can walk on water, so you over commit," he says. "When the downturn comes it can feel permanent so you start making cuts that can compromise the quality of your business for ever."

The upshot is that businesses tend to invest too much too late on the upturn. And, come the downturn, "You hand control to your finance director who cuts costs to produce profits that just aren't available." Both are damaging although, of the two, over-borrowing on the upturn is more likely to put you out of business more quickly, he adds.

It's not just businesspeople who get it badly wrong. Whenever there is an upturn in the economy, there are reports in the media that we are entering a new, golden age of steady, perpetual growth. And, when there is a downturn, there is always a rash of stories predicting the final crisis of capitalism.

Look at what authoritative American journal Business Week had to say about the boom of the late 1990s: "That old bugaboo of capitalism – the business cycle – has been tamed, according to today's conventional view. Rather than experiencing the booms and busts of old, the economy is on a steady growth path." It was, of course, wishful thinking, as the US downturn of 2001 demonstrated.

The British economy is now enjoying its longest period of continuous growth since the 1960s. This makes businesses particularly vulnerable to the same wishful thinking, warns Graeme Leach, chief economist at The Institute of Directors. "The fact that we have just had 40 quarters of continuous growth should not fool people into assuming the business cycle is dead," he says. "It could still destroy your business if not managed properly."

However, Leach does stress that he isn't predicting a slump: "This doesn't necessarily mean we are about to have a recession, just a slowdown. Better economic management and policy improvements mean the cycle probably isn't as extreme as it used to be."

Much of the difficulty in dealing with the business cycle lies in the fact that no two are identical. They have different durations and depths and can affect different sectors of the economy, which makes them very hard to read.

"Right from the very first records of economic activity, GDP (the total value of a country's annual output of goods and services) is shown to fluctuate over time," says Dr George Bratsiotis, of the University of Manchester Centre for Growth and Business Cycle Research. "Cycles do not occur with perfect regularity but neither are they completely random. The average duration of a cycle, from peak to peak, is five to eight years."

Another major difficulty is that GDP figures are themselves historic. Delays in data collection and processing mean that they are between two and five months old before they are published. "This makes it very hard to tell at any given moment whereabouts in the cycle you really are," says Dr Bratsiotis.

Economists suggest that you should look at all sorts of data, such as general business expectations, output, borrowing, consumer credit and the level of inventories. But the reality is that not every company has the time, resources or ability to deal with this sort of information.

And if you wait for two quarters of GDP figures you could be a year into the new phase of the business cycle before you react. Moreover, if your decisions take time to implement – say laying off workers or increasing borrowing – it could easily be another six months or so before they have any impact.

It is far better, says John Timpson, to rely on the evidence of your own business. "Public indicators are not only historic, they are unreal," he explains. "They might even be doctored for political reasons. As long as you are absolutely certain that any downturn or improvement in business does not simply reflect how your business is doing, your own sales figures can be your best early warning system."

He advocates only investing in the early stages of an upturn – that way your investments can bed-in before the economy changes. And, come the downturn, examine costs and trim fat, certainly, but never cut the important things that allow your business to operate. "It's better to take a short-term loss with a structurally sound business than make short-term profits on a business that has been cut to the bone," he concludes.