Scarcity is the state of having less than what is needed and wanted. Small businesses’ most common scarce resources involve cash, time, customers, and talented employees.
Practical knowledge, coupled with management accountability for results, is how you protect your business from the pitfalls of running out of cash on your way to going out of business.
Scarcity means “restricted in quantity or availability.” It is the state of having less than what is needed and wanted.
The Economic Law of Scarcity for individuals argues that human wants are unlimited while available resources are limited, making it impossible for the non-one percenters to buy everything they want. As a result, the remaining 99% will always have unsatisfied wants since the resources needed to satisfy all wants are limited.
Scarcity is a foundational economic law impacting each of us personally. Scarcity exists wherever there is a gap between available resources and what one needs and wants. The larger the gap, the more people are forced to decide how to allocate resources best to satisfy basic needs and as many additional wants as possible.
The Economic Law of Scarcity refers to the shortage of resources in an economy. It is a law because an economic problem is always created when resource allocation is scarce. Similar to the Economic Law of Supply and Demand, prices increase when a supply shortage is caused by high demand. When scarcity is not an issue, then prices decrease as demand decreases
From a product and service pricing perspective, the law of scarcity calls for higher pricing as demand is high and supply is limited, fueling the perception of high value since it is harder to acquire. Scarcity affects the monetary value people place on goods and services they deem hard to find. You readily appreciate the principles of scarcity when trying to book affordable travel arrangements in high-demand areas of the world.
Similar to personal scarcity, scarcity in business arises by not having enough resources to do all that needs to be done to sell, produce, deliver, and support a product at a profit. A business owner battling scarcity is forced to decide how best to satisfy competing needs and wants by cleverly using their scarce resources.
Before overacting to a perceived scarcity problem, it helps to know whether you are dealing with a shortage or a scarcity problem. The easiest way to tell the difference is that a shortage is a market condition of a particular good at a particular price. In comparison, scarcity is a resource limitation that cannot be replenished. Over time, short supplies get replenished, prices return to normal, while scarcity problems must be addressed through disciplined decision-making and action.
Small businesses’ most common scarce resources involve cash, time, customers, and contributing employees.
- When cash is scarce, owners must make difficult allocation decisions concerning how best to put their cash to work to meet the business’s past and current unpaid expenses.
- When time is scarce, it means actions needing to get completed don’t creating bigger problems down the road because what needed to get done didn’t happen.
- When customers are scarce, sales suffer, and
- When the talent you need to get the work done is scarce, the work doesn’t get done, costing the business owner sales and profits.
The number one cause for business owners finding cash scarce and unable to cover the money they owe is because they haven’t managed their cash. Their previous cash distribution was not aligned with sales, causing them to spend more than their sales support. When cash flow is tight and erratic, the scarcity of financial resources creates unavoidable stress on ownership since they cannot afford to waste a dollar, let alone pay for anything non-essential in the short term.
A business struggling with cash is constantly trying to stretch its dollar so it can scrape by and fit the bare necessities in its tight budget. Again, the number one reason business owners get themselves in this position is that they aren’t disciplined at managing their cash flow.
Most failing small businesses run out of money before they run out of time. These owners fail to realize before they run out of both money and time is that the only way money is made is through the effective use of their time. If they and those they employ aren’t earning more than their time costs, they will never make the money they should. You solve for time scarcity by knowing what to act on and when. The BusinessCPR™ Management System helps you recognize what needs to get done and what doesn’t. When you stop wasting time on the insignificant, you will always have time to do what matters.
Customer scarcity is a function of not attracting and retaining sufficient customers. Too many small businesses rely on the “hope method” that people will come to them to buy what they have to sell. Reliance on this method is why customer scarcity is a never-ending problem. Couple the overreliance on your customers finding you rather than you finding them with overhead costs going unchecked, and you will have scarce cash resources to pay your bills. When this happens, you either have to reduce your overhead costs or learn how to market because all you will be doing in this scenario is working harder for less money. The 7-P Framework will help you dial in your business model, so you become better at getting more customers to buy from you.
Contributing to employee scarcity is a killer of small businesses not having enough employees. The most challenging scarcity problem involving employees is the failure to hold them accountable for their actions. Failure to connect how an employee’s actions contribute to results or fall short is a management failure. The contributions management process is used to help employees recognize where they are and aren’t contributing helps you stop paying more money than they contribute to the business. If you have talented people engaged in doing what needs to get done and still have a talent scarcity problem, then it’s time to execute your new hire process to attract the additional talent needed.
Unnecessary business mistakes often create any of the four most common scarcity problems in business. The good news is fighting through any scarcity problem creates hard lessons earned if you learn them. You know you have learned what you didn’t know when profits are earned, cash flows are improving, and cash reserves are growing.