As the country is rocked by soaring inflation, energy pricing and logistical challenges, is your business ready to recover from the financial backlash?

In basic terms, inflation is the overall increase in how much we pay for every day good and services. This is of course somewhat subjective as the target market for each product or service may vary considerably due to societal variations such as age, rationality and availability.

However, what we can take as more of a given is that inflation impacts all of society and the sectors within it. Businesses are also experiencing a general fall in the purchasing power of cash.

Taking a look at the recent situation between Heinz and Tesco, we saw the potential for inflationary discord impacting trade. This is when the manufacturer is keen to pass on additional costs but the purchaser is reluctant to accept price increases in a bid to maintain customer loyalty.

There is little doubt that all areas of business are facing these same issues. Passing on costs to customers can be difficult but the impact of not passing on significant costs may be critical.

We must consider the long term impact of standing costs that are far beyond your budgeted forecast. Energy costs are likely to substantially rise again in October whilst fuel costs appear to be increasing week on week.

So what are the recovery mechanisms?

Understand your price pressure points

• A deep dive review into your costs base will help identify areas of weakness. Once you can more accurately predict where your price pressures are likely to occur, you can begin to plan for how to mitigate.
• Where you have them, take a look at your existing contracts and the likelihood is that previous agreements/contracts may contain some kind of pricing adjustment mechanism.
• In a stable economy we might expect any such clauses to be on a 3-month cycle. A review of these could potentially give you the opportunity to push through raw material, logistics and energy costs adjustments.

Communicate with suppliers and customers

• Be prepared for difficult conversations – both ones you instigate and those coming from suppliers and customers alike. Your suppliers will no doubt need to pass on costs. It is also likely that you and your customers will push back against any price increases.

Negotiations are key

• Understand and be prepared to know your base lines – both forward and backward through the supply chain, what is the maximum and minimum you can reasonably accept?
• This will largely be dependent on your margins but give some thought to profitability across all product ranges where you may be able to offset some of the cost against different lines. This is obviously more difficult if you have a limited product line but it may be a point of negotiation up the chain with your suppliers and be reflected in their flexibility.

If you wish to discuss any of the issues raised in this article, please don’t hesitate to get in touch.