Both supply shock and demand shock are perceived as examples of economic shock. A supply shock is defined as a sudden change in the supply of a product or service that causes a noticeable economic effect. In contrast, a demand shock is a sudden unforeseen event (like COVID-19) that substantially increases or decreases demand for a product or service—this is typically seen as a temporary situation.

In either a supply or demand circumstance, one of the outcomes is an effect on the prices of the product or service. A positive demand shock will cause prices to rise as the demand increases while the supply lessens. Sectors such as transport and logistics are the most likely to be affected by demand shocks, and manufacturing and services are typically restrained by supply shocks.

One example of a demand shock is an economic recession period. In such a period, unemployment rises and the general population are unable to spend as much money as they previously could. The effects from demand shocks can last from a few days to several years.

Supply shocks are created by unexpected events such as natural disasters or acts of terrorism—or anything that reduces the economy’s capacity to produce goods and services at given prices. These types of events disrupt the typical supply chain and result in haphazard pricing.

A recent report revealed that 44% of small businesses cite inflation as the biggest challenge in the most recently completed quarter, with 88% of small businesses concerned about the impact of inflation on their operations. To mitigate the impacts of future supply and demand shocks, read on to learn how your business can become more resilient.

Coming in a close second of small businesses’ concerns are supply chain issues. Anecdotal evidence has shown that a lack of diversity can hugely impact demand shocks. For instance, the tourism sector would potentially be hit hard during natural disasters, so if businesses are able to diversify where their demand comes from, this would go a long way to mitigating future shocks.

To mitigate risk, businesses can consider diversifying vendors to improve supply chain resilience. Remember, when seeking different vendors, it is vital to take into account the entire flow of materials to avoid a detrimental impact on product pricing, quality, and availability. Similar to when you’d use an audit proposal template for impending business audits, conduct audits of potential vendors to ascertain suitability.

Forward-thinking businesses develop precise risk scenarios to stress test supply chains, checking for essential materials flow, and then proceed to integrate these results into overarching risk management strategies.

The world’s economy can sometimes come with uncertainties around every corner. As a small business owner, you may not have much time to delve too deep into your accounts, however, regular accounting checkups are essential to mitigate supply and demand shocks.

These checkups will make the difference between zero operations oversight to complete financial visibility.

To specifically address the current economic climate, it’s wise to focus on cash-related reporting metrics, such as:

Run regular creditors reports to keep an eye on the people or organizations to whom your business owes money. It’s important to know when your creditors’ payments are due so that you have the capacity to handle these payments in a timely manner.

A debtor days report highlights the number of days your business takes to collect cash from credit sales and is a solid indication of your business’s liquidity position. Debtor days have a huge impact on cash flow, and it’s in your best interests to keep on top of who owes you money to free up cash flow!

Your gross profit percentage report relates directly to how efficiently your business produces and sells products or services. Analyzing this report allows you to accurately forecast budgets and future expenditure, such as investing in virtual faxing services. Understanding your gross profit percentage rate also enables you to:

Stock turnover rates determine how quickly your business’s stock sells. Sometimes called inventory turnover, this metric gives a detailed overview of how many units you’ve sold and restocked in a set time period. Understanding your stock turnover rate enables better decision making around pricing, manufacturing, marketing, and investing in new stock.

A high stock turnover ratio implies a strong sales process, or not enough stock to meet demand.

The current asset ratio measures your business’s ability to settle short-term obligations and demonstrates to investors how well your business manages its assets. This report indicates real-time financial oversight, including assets that are cash or will be turned into cash in a year or less, and liabilities that will be paid in a year or less.

To manage supply and demand shocks in the form of rising inflation, many small businesses react by raising prices for their goods and services. Whether your business follows this route, it’s essential to manage operations such as how to account for inventory to prevent future supply and demand shocks.

In this era of uncertainty surrounding supply chains, your business must have intrinsic knowledge of what’s in stock and what needs replenishing. This means that you can be proactive and source new suppliers if necessary to maintain your optimal stock levels.

Procure-to-pay is a business process cycle handling procurement for goods and services, through to receiving procedures and accounts payable. A robust process for invoice matching, creating purchase orders, approving invoices, recording transactions, and generating reports aids business enterprise transformation by preparing your business for times of economic unpredictability.

Not only will a procure-to-pay system cut running costs and save time, but you’ll also receive transparent oversight of your business’s entire supply chain, enabling you to better evaluate your supply and demand cycles.

Maintaining a solid relationship with the right vendor is one of your business’s most valuable assets. Procure-to-pay systems offer supplier features to help establish and maintain vendor relationships. The benefit of these working relationships is to potentially incentivize the vendors to offer better deals, higher discounts, or longer-term contracts. A robust vendor relationship pays off in times of economic uncertainty.

Implementing intuitive technology is key to maintaining effective operations. As well as procure-to-pay systems, does your business have access to the valuable data sources necessary to drive business forward? Technologies such as big data and the internet of things are changing the path of logistics forever by reducing operational costs and providing enhanced monitoring over business strategies.

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Ensuring end-to-end visibility via a single integration platform is widely seen as businesses’ best defense against supply and demand shocks. A system that connects all of your operations’ ecosystems, including internal and external partners, protects against supply chain disruptions. By stress testing supply chains, monitoring essential vendor relationships, and implementing the best technology solutions, your business is best placed to survive periods of economic uncertainty through resilience strategies.

Now, more than ever, is the time to plan ahead by focusing on accurate, data-backed projections. This enables you to be proactive rather than reactive when handling your business’s finances.

Jessica Day is the Senior Director for Marketing Strategy at Dialpad, a modern business communications platform that takes every kind of conversation to the next level—turning conversations into opportunities using business vanity numbers. Jessica is an expert in collaborating with multifunctional teams to execute and optimize marketing efforts, for both company and client campaigns.