October 26, 2022
Learn how businesses can take the right steps now to avoid being caught out by inflation by making use of the information hidden in contracts
October 26, 2022
With Q4 well underway after months of economic upheaval, many companies will be focusing on 2023, planning budgets and looking for ways to minimise the impact of inflation on their business. However, headline inflation is an extremely blunt instrument, masking a huge range of price changes across the economy.
Ultimately, the true rate of inflation will vary company by company, driven not only by their cost base, but their contract base. Even within the same industry, some businesses will be shielded from price increases and others will see dramatic shifts.
Inflation is a constant concern for companies. If the prices of goods and services are rising too rapidly this can reduce the profits of businesses and cause it to be more difficult to stay competitive.
At the heart of this is the information buried deep in our contracts. Have we agreed a multi-year deal at a fixed price? Are price rises baked into renewals? If they are, are they linked to inflation and, if so, which measure?
Collectively, the answers to these questions dictate whether your cost base (excluding employees, of course) stays flat or goes up by 10%, 15% or even more.
So, with such challenges, what can businesses do to deal with the impact of inflation?
1. Structure your contracts: Divide your contracts into three categories – those with fixed prices, those with price changes baked in, and those open to negotiation.
2. Identify the problems: Identify the contracts with the biggest exposure to inflation. The most problematic will be those with index-linked rises built in. These are rare but could lead to unexpected bills next year. In general, contracts linked to RPI, which tends to run higher than the Bank of England’s preferred CPI – an effect that can compound over time.
3. Know your timeline: Understand when price rises, and automatic renewals kick in and when you need to give notice if you want to renegotiate. Set reminders for yourself so you don’t forget if deadlines are a few months away.
4. Negotiate: Now the real work begins. Armed with this information, and hopefully enough time to make a decision, you can open discussions with the suppliers who are going to move the needle.
Price hikes are coming, but your business doesn’t have to be caught off guard. Our contract infrastructure can help you anticipate and plan for price increases so that your business doesn’t take a hit. A big challenge can often be digging out the information in your contracts (some of which may be hidden). It’s normally buried across hundreds of Word and PDF documents, which are often not stored in the same place.
When the call comes from Finance for a detailed assessment, it means weeks of work for the legal team, which just isn’t practical. With the Robin platform, however, it’s possible to search and analyse this information in just a few clicks, exporting to Excel to share with other stakeholders like Finance or Sales teams.
What is the current rate of inflation?
At the time of writing, the rate of inflation was 9.6%.
How does inflation impact businesses?
Put simply, it becomes increasingly difficult to maintain profit. Two key factors are business costs (e.g. materials and services being more expensive), and the reduction in the spending of customers (i.e. impacting sales).
Does inflation impact all businesses?
Companies are affected by inflation in various ways. For instance, those who sell durable products are less affected by inflation than those which sell nondurable products. Since people aren't likely to purchase these products regularly, there's less need to increase prices to keep pace with the rising cost of living.
Non-durable items however are more prone to wear out, be consumed and therefore needing to be purchased more often. This is why businesses selling these products generally raise prices more frequently to keep in front of inflation.
How can inflation be a positive thing for businesses?
Surprisingly, there can be some benefits to inflation – there can be more demand (usually in the short term) when customers want to buy before prices go up.