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Why good relationships are vital as inflation bites

Author: ICAEW Insights

Published: 05 Sep 2022

As costs rocket on the back of inflation, maintaining cordial and constructive relationships with business contacts in your supply chain is of paramount importance.

Top-quality customer and supplier relationships will be essential for helping mid-market companies navigate the UK’s inflationary climate, according to Grant Thornton Restructuring Partner Chris Petts.

Published on 18 August, the firm’s latest Business Outlook Tracker polled a sample of 616 mid-sized business clients on how they are coping with the current economic conditions. In the near term, almost all of the companies in the study sample said that they have seen costs rise across every part of their business.

In a statement, Petts says: “The pace of change in costs has been extraordinary. It’s hard to believe that inflation has risen from 3% in August last year to over 10% today. Before the pandemic, the greatest uncertainty for British business leaders was the fallout from Brexit but, since the first national lockdown, rapid, unpredictable change has become a constant.”

One of the key responses that Grant Thornton has seen among its clients is the frequency with which they are reviewing and reassessing costs. Petts explains: “Annual reviews are no longer sufficient. Businesses are, in many cases, having daily discussions with both suppliers and customers about pricing. Set prices are being replaced with cost-plus prices, which ensure the customer pays the supplier cost, plus an agreed margin.”

He notes: “These regular conversations highlight the need for businesses to have excellent customer and supplier relationships and communications. This agility and collaboration enable quick response to change and help to maintain stability in the supply chain.”

Personal touch

So, what can companies do to maintain quality in those relationships? If everyone in a business network is going to be contacting everyone else so often, and everyone wants to remain cordial and get properly paid, there are clearly significant incentives to be seen as great to deal with.

Petts tells Insights: “It will be harder for some businesses than others – and will work best between customers and suppliers with longer, more established relationships. But trust and transparency are essential, supported by a personal touch. It’s important to be open about expressing your concerns. 

“Pick up the phone to the FD of your main supplier and say, ‘Look, I know you’re having to put up prices for the fourth time in six weeks. But can we work something out to mitigate how much I’ll have to pass on?’”

Petts notes: “In construction, some of the smaller businesses on our radar are actually showing their customers letters they’ve received about price rises from their suppliers. So, they’re providing written proof of the sorts of pressures they’re under and saying, ‘This is why I need to pass these costs on to you.’ It’s a bit of a cultural shift for a lot of businesses – but I know a few clients who have started to do that, and it’s working quite well.”

One encouraging aspect of the current mood, Petts says, is that there are high levels of empathy and understanding because everyone is facing the same challenges. However, he points out, it is still vital to strike the correct tone in business communications.

“Instead of sending brusque emails to your customers telling them that your prices have gone up, make considerate, pre-emptive phone calls: ‘In the next hour or so, you’re going to get an email from us, and I just wanted to explain in advance what you’re going to see and why.’ Then, make it clear you’re happy to have a follow-up call after they’ve read the email. If you’re demonstrating the right behaviours, that will be appreciated.”

Most crucially, any owner with concerns to express to customers or suppliers must ensure they don’t stew in them. “There’s no time like the present,” Petts says. “It’s better to have a frank conversation now, rather than wait two weeks and regret not having it sooner. That will help you make a more informed decision on what the art of the possible looks like.”

Securing payment

Amid this swirl of tactful communications and dynamic pricing, then, what should be the role of accountants? “We will be particularly useful for providing an independent voice of challenge or counsel,” says Petts. “There will always be a fear among clients of passing on price increases. There are good reasons for assuring them that the wider circumstances are beyond their control. But we can also play a role in helping owners and FDs bounce around ideas about what their business’s correct pricing should be.”

ICAEW Head of Business Simon Gray says the bigger and more complex your supply chain, the more important it is to have conversations as often as feasibly possible. “Some sectors I work with closely, including manufacturing and construction, typically run projects over extended periods of time – building a house can take 12 months, or even longer. You usually price at the start of a contract – but as costs are now moving so fast, there’s more complexity around where in the supply chain rises will land.”

If you’re a small business, this will be particularly important, because you may not have much in the way of cash reserves, Gray adds. “Communication is vital on two fronts. One is access to supply. Earlier this year, some businesses in those two sectors anticipated difficulties and bought materials in bulk, thereby pushing up prices. 

“The second is securing payment. Late payments are of increasing concern,” Gray warns. “But if you’re communicating well with a customer in your supply chain, and your competitor is not, you will likely have a better chance of getting paid. Those who shout loudest – and politest – often have the advantage.”

For support on these matters, seek a free consultation from ICAEW’s Business Advice Service (BAS). For further insights, visit our Manufacturing Community and Construction & Real Estate Community.

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