As small business owners, we tend to be so focuses on the day-to-day operations we can forget that the world around us has a real impact on how our business performs. What other countries political decisions, economic drivers, supply chain interruptions, trade decision have a real impact on our business. These forces drive global business cycles up or down. The force behind the ebbs and flows of the business cycles is in economic terms a result of supply and demand imbalance.
Take for example the recent shift in housing construction completion times and construction costs. These are directly related to two things, firstly, the decision of governments in Australia to subsidise various forms of construction such as new homes, and renovations. Secondly, this caused an increase in the demand for builders and materials. Under normal circumstances, the supply of builders and materials is in relative balance, as the industry generally has forward projections of material requirements and the necessary material to complete the projects.
By providing generous subsidies, prospective homeowners and renovators brought the decision forward to meet the program requirements relating to completion time. This increased the demand for both building tradies and building materials. This threw out the industries supply/demand framework (increasing the demand for building tradies required to complete the projects in time).
Under normal supply/demand movement, a lack of supply, increases the price of the service/product consumers are willing to pay. Those that can’t pay will delay purchasing, and those that can pay the increased price to continue with the purchase.
Couple with this problem, is the supply chain interruptions caused by the covid-19 pandemic causing building materials to also be in short supply, causing the price of materials to increase for the same reason. Therefore, the cost of construction over the last 8 to 10 months has increased.
From a small business perspective, this increase will place pressure on small construction companies profit margins, as they grapple with locked in building contracts and escalating material and employee costs.
From a strategic planning perspective understanding the way supply and demand works will reduce financial risk by a considerable margin, as a well structured risk management plan (mitigation stategy) could have identified an opportunity to lock in supply contract both for labour and materials prior to the forced escalation caused by government driven demand and material supply shocks.
A way to assist in reducing this risk is to conduct a comprehensive analysis of the business identifying potential financial and performance risks, assess the current financial situation and plan mitigation strategies to reduce risk exposure.
A good takeaway is look to the global and local political environment to understand future potential risks. Good luck.
The Accidental Manager 