Struggling with supplier price increases?

Supplier price increases can quickly put pressure on margins and cash flow, particularly where customer pricing has already been agreed.

Understand the real financial impact

Convert the supplier increase into pounds.

If you spend £500,000 a year with a supplier and prices rise by 8%, that could add £40,000 to annual costs. Then consider which products, services and customers are affected and what this does to your gross margin.

For example, a business with £1m of sales and £600,000 of direct costs generates £400,000 gross profit at a 40% margin.

If direct costs rise by £36,000, gross profit falls to £364,000 and the margin reduces to 36.4%.
Recovering £36,000 restores the lost gross profit. Restoring the original 40% margin would require sales of £1.06m.

Understanding this distinction gives you a clearer basis for pricing and negotiation.

Strengthen your position with suppliers

Speak to suppliers about what is driving the increase and whether there is scope to improve the wider arrangement.

This could include volume discounts, longer-term pricing agreements, consolidated orders, payment terms, delivery frequency or minimum order quantities.

Where practical, maintain relationships with more than one supplier. Alternative suppliers give you a genuine benchmark for price and terms and create competitive tension when negotiating. If another supplier can offer better pricing, credit terms or delivery arrangements, that information can strengthen discussions with your existing supplier.

Splitting spend between suppliers can also reduce dependency on one source and improve supply-chain resilience.

Make customer price conversations work harder

Where customer prices need to increase, explain why. Providing context around increases in materials, freight or other direct costs helps customers understand the reason for the change and can make the conversation easier. For larger customers, this can also be an opportunity to look at the wider relationship.

A customer may be prepared to commit to greater volumes, a longer contract or additional products and services in return for a slightly lower percentage increase.

For example: Current annual spend: £40,000 Price increase: 8% Annual spend above £55,000: Price increase: 6% Annual spend above £70,000: Price increase: 4.5%

The customer receives a commercial benefit while the increased volume could produce a stronger overall gross profit for the business. The figures need to be modelled before agreeing the deal so that any concession is supported by sufficient additional value.

Look for upsell and purchasing opportunities

There is also an upcoming change that will be relevant to some companies receiving expenditure credits. The Government has announced plans to amend the definition of augmented profits used to determine whether a company falls within the quarterly instalment payment regime.

The same discussion can highlight products or services the customer currently buys elsewhere. Where you can provide these efficiently, bringing more of their spend into the relationship may support a more favourable pricing arrangement while increasing the overall profitability of the account.

It is also worth reviewing your own purchasing.

Larger or consolidated orders, fewer urgent purchases, alternative specifications and changes to delivery arrangements can all reduce costs. Supplier increases can also highlight customers or products where margins were already under pressure. Reviewing profitability by customer can identify where pricing needs attention first.

Keep an eye on cash flow

Supplier prices may increase before revised customer pricing takes effect. Higher stock costs can also tie up additional working capital, particularly where larger purchases are being used to secure better supplier terms. These changes should be reflected in your cash flow forecast.

Any volume-based deal should also take account of the additional stock, labour, delivery and credit required to service the increased sales.

Getting more from a difficult pricing conversation

Supplier price increases affect purchasing, pricing, margins and cash flow. Understanding the financial impact gives you a stronger starting point for negotiating with suppliers and customers.

There may also be an opportunity to improve the wider commercial position through alternative suppliers, better purchasing terms, increased customer volumes, longer commitments or additional sales. The important thing is to know the numbers before entering those conversations and understand which outcome produces the best overall return for the business.

How can Oldfield help?

If supplier price increases are putting pressure on your margins and you aren’t sure where to start or how this actually applies in your individual situation, speak to the Oldfield team. We can help you understand the financial impact, review customer and product profitability, model different pricing and volume scenarios and understand the resulting cash-flow requirements.

Reach out here or speak to your usual Oldfield contact if you would like help assessing the options available to your business.

Please note: This article is for general information purposes only and was correct as at the time of writing and does not constitute financial advice. The appropriate approach depends on the circumstances of the business. We recommend seeking advice tailored to your position before acting. 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.