Inflation breaking the vicious cycle 2

Inflation: breaking the vicious cycle

Inflation: breaking the vicious cycle

October 10, 2022

Inflation is skyrocketing. We are now seeing the highest levels since 1975 and there seems to be no end in sight. Recovery measures are expected to curb inflation and limit the decline in purchasing power for consumers. But those actions will in turn lead to higher costs for entrepreneurs due to increases in interest and salary costs. And that in turn will reduce margins and profitability. All the more reason to maintain profitability. That is the only way to break the (seemingly) vicious cycle.

Flexibility in sales pricing

Make sure your sales pricing can shift along with extreme cost increases. For instance, stipulate that price increases in raw materials and in the production process can be passed on in long-term agreements with your customers. Additionally, be sure to limit the validity period of your price lists. Depending on the volatility of raw material prices, you should also adjust your sales prices more frequently. Of course, not all prices can be increased just like that. But don’t be afraid to push the boundaries. Differentiate the pricing if necessary.

Purchasing hedges and bundling your buying power

A number of commodities are subject to daily price fluctuations. Some examples include steel, oil and soya. Locking in a strong purchasing position can help cover any potential price increases. But what if prices fall again? Then, this kind of arrangement can be detrimental. What is the wise choice? Purchasing hedges at the order level gives you more certainty about the amount of profit contribution per order. It prevents surprises, both positive and negative. Matching sales orders with purchase orders gives you peace of mind and is recommended if possible. Another good way of curbing price increases is by bundling your purchasing power. Large players in the market often gain a considerable advantage when it comes to purchasing.

Profitability and scaling down costs quickly

Don’t just think from a revenue and market share point of view. More importantly, think in terms of profitability. What revenue is contributing to the fixed cost structure? Is the contribution and strategic importance nil? Then divest the revenue. Divesting revenue or scaling down business units is easier if there is a high degree of flexibility in the cost structure. Variable costs that breath with business activities make a company more future-proof. This allows you to react more quickly to developments in the market.

Dare to make decisions

Taking a few appropriate measures will help you maintain your profitability. This does require making tough decisions here and there. But it will ensure that you can survive this period of extreme inflation. Can we help you in this? Then please be sure to get in touch with your dedicated contact person or one of our recovery advisors as listed below.

forensics recovery advisors

Frank Driessen | +31 (0)40 240 9438 | fdriessen@joanknecht.nl

Ronny Buiting | +31 (0)40 240 9415 | rbuiting@joanknecht.nl 

Max Broekhuizen | +31 (0)40 240 9479 | mbroekhuizen@joanknecht.nl



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