Increasing Your Prices as Costs Rise

warehouse

Supply Chain Disruptions and Tariffs Impacting Many Industries

By James Bailey, CPA & Angela Ketterl, CPA

Businesses in many industries are struggling with rising prices of raw materials and goods, as they resist raising their own prices during the COVID-19 pandemic. But business owners must be realistic about the impact on their bottom lines if they continue to absorb price increases without passing them on to customers.

In short, it may be time to raise your prices. You don’t want to have negative margins every time you sell your products or services.

Rising prices up and down the supply chain have hit multiple industries since the COVID-19 crisis started nearly one year ago, including retail businesses, restaurants, automotive shops, manufacturers, and service industries. In some cases, prices on raw materials and goods have shot up as much as 30%. While most increases have been smaller than that, they still add expenses for which most businesses did not budget.

Factors Driving Increases

When the COVID-19 pandemic hit in the first quarter of 2020, supply chains around the world were disrupted. Industrial machinery, automotive parts, raw materials used in a wide variety of industries, and completed goods used in U.S. manufacturing and service industries all slowed down or stopped moving internationally as warehouses and manufacturing facilities were shut down to contain the virus.

Over the past six months, U.S. businesses have burned through the supplies they had on hand and expanded their list of suppliers to keep their businesses going. But when they went back out to the supply chain to replenish their shelves, suppliers had raised their prices and, in some cases, started charging for shipping, which used to be free.

Moreover, while supply chains internationally have, for the most part, started operating again, many are not at full capacity.

In addition to the COVID-19 disruptions, U.S. tariffs on goods from certain countries, including China, continue to push up prices on a wide variety of raw materials and goods.

Price Resistance

Despite the rising cost of doing business, many business owners are reluctant to raise their prices, especially while the pandemic is still ongoing. They know their customers, and they know when they will meet price resistance. In some cases, business already has dropped off significantly – as in the case of restaurants and retail outlets – so owners don’t want to jeopardize the business they still have by boosting prices. Some are burning through cash reserves to cover their additional costs and hoping the situation will turn around in the new year.

But it’s essential to know how long you can hold out on raising prices before your business is in real trouble. Business owners who are holding the line on price increases as their own costs are rising should focus on three strategies:

  • Reforecast and review your budget with updated information on your costs for raw materials and supplies, as well as your revenues. We can help you build “what if” scenarios forecasting three months, six months, and 12 months of data that will help you make the best decisions for your business.
  • Review your pricing strategy by product offering, service offering, or menu item (in the case of restaurants). Do your prices support the cost of raw materials and goods, as well as your overhead, labor, and profit margin? If not, a price increase may be necessary.
  • Communicate with your customers. Tell them you know times are difficult for everyone and that you value their business, but you must implement a small price adjustment to keep your business healthy as the “pandemic economy” continues. Thank them for their understanding and continued loyalty to your business.  
    • Alternatively, let your clients or customers know if you have chosen not to increase prices with the commitment that we are all in this together.  A bit of goodwill and this act of transparency can go a long way in boosting customer retention and loyalty. 

Tax Planning

There’s nothing like “found money” at a time like this, and a key provision in the Coronavirus Aid, Relieve and Economic Security (CARES) Act may enable you to realize a tax refund from a previous tax year, which could help minimize any price increases you must implement. The CARES Act restored bonus depreciation for certain qualified improvement property. The provision is retroactive, so business owners who made certain improvements to their property during 2018 and 2019 may be able to file amended tax returns and realize a tax refund.

Contact your Adams Brown advisor to discuss pricing strategy and how it can keep your business as healthy as possible in the current economic environment.