In this article, Senior Consultant, Carl Taylor, looks at various ways to deal with supplier price increases and the effect these could have on your business.
You could do nothing and absorb the increases without making any changes, but it wouldn’t take long before you see a significant dent in your profitability.
Take a sample situation where a company is turning over £4m at 35% Gross Profit (GP). If all your suppliers put their prices up 10% (for the sake of this example) your 35% GP could suddenly become 29%, losing your business £240k GP, (which means you lose £240k NP). So doing nothing is not really a sensible option.
|Purchases||(2,400,000)||10% price increase → (2,640,000)|
|Gross Profit %||35%||29%|
What can you do?
Speak to them Face to faceEven if the current economic climate is not a challenge for your business, it is for many, so a face-to-face meeting with your suppliers to discuss the situation will be helpful.
A frank and open conversation is the only way forward - be transparent about your own situation, and how much you could put your prices up to customers. As a compromise, ask the supplier to share the difference, rather than making you take the whole knock.
Use the price increase to negotiateIf the supplier is unable or unwilling to reduce the rise, then there may be other areas where you could negotiate something of value to your business, for example:
- Better credit terms
- Early settlement discounts if you pay early
- Faster / more flexible delivery
- Get quotes from alternative suppliers
Finding an alternative supplier could be time consuming, but if there is a way you can secure the same product from an alternative supplier at the same price, or better, it’s definitely worth considering.
Be sure though to research any potential new supplier thoroughly, before agreeing to work with them, and be confident that they can deliver the product on the terms suggested.
Put your prices upIf you try all of the steps above and there’s no improvement in the situation, then you may have no alternative but to implement your own price increases, to offset the increase in your costs.
While no-one wants to pass increases onto their customers, sometimes there is no choice. Look at the situation carefully. Is there a way for you to absorb most of the increase with any increase in costs to your customers being kept to a minimum? It’s the least likeable option, but one that every sensible business should be willing to consider.
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Please note: This article is provided for information only and was correct as at time of writing (28/02/22). Any lists and details provided above are not exhaustive and are not intended to be full and complete guidance. No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted.