Have you had challenges with supply shortages in recent months?
How many supplier price increases have you had recently?
Feedback from our clients tells us that this is a key challenge facing many manufacturers, importers and distributors across the UK right now.
The combination of supply shortages, commodity price volatility, and increased container shipping costs have all accumulated into a major headache for many businesses. Add in a dose of additional import duty on some goods caused by Brexit, and you have a perfect migraine.
The question is, how should you manage the financial impacts and win?
The cost of doing nothing
You could do nothing, and let this wave of cost increases go quite easily without doing anything, but it won’t be long before you see a significant dent in your profitability.
Take a sample situation where a company is turning over £4m at 35% GP. If all of your suppliers put their prices up 10% (for the sake of this example), and you pay an average of 3% duty on imports due to Brexit, and freight inwards increases by 20% due to container shipping cost increases your 35% GP could all of sudden become 26%, and you lose £329k GP (which means you lose £329k Net Profit).
| £ | £ | |||||
| Sales | 4,000,000 | 4,000,000 | ||||
| Purchases | Minus | 2,300,000 | 10% price increase | Minus | 2,530,00 | |
| Duty | Minus | 3% duty on purchases | Minus | 75,900 | ||
| Carriage and freight in | Minus | 115,000 | 20% increase in freight in | Minus | 138,000 | |
| Carriage out | Minus | 200,000 | Minus | 200,000 | ||
| GROSS PROFIT | 1,385,000 | £329k reduction in Gross Profit | 1,056,100 | |||
| Gross Profit % | 35% | 26% | ||||
Not only does this reduce your net profit by £329k, but it also erases around £1.8m off your business value, not to mention potential cashflow impacts.
Clearly, there is a lot at stake here, so we need to react in the right way to win.
Here’s 5 key points to address immediately:
Get to grips with where you are right nowReview your top-selling products – get up-to-date costing (don’t go by historical costs – they’re probably already out of date), and current sales prices, what is your current gross profit?
Be courageous with your pricingAs much as you’d like to maintain the status quo on your pricing, the impact of not increasing prices will be significant. It is essential that you pass on the increase in cost prices to your customers.
If you need to increase stocks, back it up with a cashflow forecastIn some situations where supply is uncertain, there might be no other choice than to increase stock levels to maintain customer service levels to your customers. If you’re going to do this, don’t do it blind – make sure you put together an accurate, prudent cash flow forecast so you know exactly what the cash flow impact of your stock increase will be.
Find alternative suppliersMake sure you’ve got at least 2 suppliers for every key product. This will reduce your reliance on any one supplier, and spread your risk.
Use any supplier price increases as an opportunity to negotiateUse supplier price increases as a lever to negotiate something of value to your business – if prices are going up, ask for something in return, even if it feels small, for example:
- Better credit terms
- Priority on delivery
- Better communication
- Early settlement discounts
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