Accounting for Unpredictability: How to Prepare for Sudden Price Increases
Business is going well – margins are healthy, revenue is steadily growing. But then… your supplier increases prices by 20%.
Everything changes. Your margins could be completely gone. You might have to lay people off. And potentially, it could even push you into bankruptcy.
Unless you’re prepared. But how? Let’s dive in!
The Impact of Sudden Price Increases
If only prices remained constant… but they don’t. In fact, they fluctuate all the time, and sudden price increases can profoundly affect your business. This is something businesses should think about, frequently.
Take Apple. In 2018, escalating trade tensions between China and the US led to tariffs on crucial components. This sudden hike in raw material costs directly impacted Apple's manufacturing costs, its margins, and therefore the business as a whole.
Why Preparing Is Important
A business of the size of Apple does not get affected that easily, but most of us are operating at a different scale. For smaller businesses, a price hike of “just” 20%, can have negative effects that ripple throughout the entire business.
Preparation is crucial – it can potentially save your business from unexpected threats.
Step 1: Outline Different Scenarios
First, it’s important to understand the whole situation. What’s happening? We are talking about a sudden price increase – but what’s the root cause? This can be many different things. Maybe there’s a disruption in the supply chain or maybe the supplier wants to increase their margins.
Although you can’t fully predict price cost increases, you can outline different scenarios that might play out in the future.
Step 2: Calculate How It Will Affect You
Now that we have the different scenarios, we can move onto the next step by calculating how each scenario will affect us. Keep it simple – “If the supplier increases its price by 20%, how will that affect us?”
Step 3: Prepare Plans
The scenarios from step 1 come into play again here. Because we have the different scenarios outlined, we can create plans about what to do – a playbook, so to speak.
See yourself as the defensive coach on a football team – you see the formation of the offense (or in this case; you see a scenario play out) and you already know what steps to take because of your defensive playbook.
Let’s say scenario A is increased costs for the supplier. Maybe their wood costs have increased. What can you do to decrease their burden, so you can buy for lower prices again?
Step 4: Extend Your Playbook
Things don’t always work out the way we plan them. Warren Buffet said it best: “You can make plans, but you can’t predict the future.” The best thing to do is to have a plan B ready at all times.
What happens if there is no way we can lower the prices of our supplier again? Maybe there are alternative suppliers that can bring us better business. Again, have a plan for all scenarios. Extend your playbook.
Step 5: The Outcome
And then, all you can do is wait… Prices might increase tomorrow – or they might never. Follow the news and trends and try to recognize potential changes early. This helps you anticipate best when changes or increases do eventually happen.
Key Takeaways
Let’s recap:
Outline different scenarios
Calculate the impact of each scenario
Develop plans for each situation
Have a plan B
Stay informed and adapt
With these 5 steps in mind, you maximize the chances of coming out on top in times of financial adversity. Sleep well knowing you’re well-prepared!
