Cash flow
How to manage rising business costs and protect your margins
Rising costs create two problems: lower profit on each sale and more cash needed to deliver the same volume. A response needs to address both, without assuming customers will accept every price increase.
Quick answer
Identify which costs are rising, calculate the effect on contribution and cash, and test changes to pricing, purchasing or the product mix. Keep assumptions visible and update them with actual results. Borrowing can bridge an affordable timing gap but does not fix a structurally loss-making sale.
Key points
- Separate a price increase from increased purchasing volume.
- Model customer demand after a proposed price rise.
- Include the larger working-capital requirement in the forecast.
Identify the cost driver before choosing an action
Break changes into unit price, volume, waste and product mix. A larger energy or supplier bill can reflect more activity rather than a worse unit deal. Review contract terms and renewal dates as well as the invoice total.
Prioritise the costs with the greatest impact on contribution or cash. Assign an owner and a realistic date for any saving. Do not count an unsigned supplier negotiation as a confirmed reduction, or overlook implementation and cancellation costs.
Calculate how much margin has changed
Suppose an item sells for £100 and has £60 of variable costs, leaving £40 contribution before fixed costs. If those costs rise to £70, contribution falls to £30: a 25% reduction in contribution even though the selling price is unchanged.
A price rise to £110 would restore £40 contribution per unit in this simplified example, but total contribution also depends on how many customers still buy. Model demand, returns, competitor alternatives and contractual limits rather than assuming the same sales volume.
Plan the extra cash tied up in trading
Higher input prices mean more cash is needed for the same stock. If customer terms are unchanged, the business finances a larger gap before receipts arrive. Update stock, debtor and supplier assumptions alongside the profit forecast.
Consider stock discipline, better invoicing and agreed payment terms before adding credit. Maintain service quality and critical supplier relationships. Paying suppliers late without agreement may transfer the problem, not solve it.
Distinguish temporary support from unsustainable borrowing
A facility can help finance a measurable, temporary gap where repayments fit realistic cash flow. Compare suitable business loans, cards or other structures using total cost and personal exposure. Cheap business loans are not automatically cheap if they extend a deficit for years.
If price and cost changes cannot restore viability, seek qualified advice early. Keep a downside case for weaker demand and further increases. Set a review trigger rather than waiting until a card limit or overdraft is exhausted.
Build a small cost basket that reflects your business
Track a handful of material inputs using consistent units: cost per item, delivery, productive hour or service month. Record the relevant contract price and the actual invoice treatment. This makes a supplier increase visible without confusing it with higher order volume or a different product mix.
Weight attention towards costs that materially affect contribution and cash. A small percentage change in a major input can matter more than a large increase in a minor subscription. Keep the original baseline and explain changes so the comparison remains useful over time. Do not claim a saving from buying a lower-quality input without evaluating defects, returns and customer consequences.
Map when cost and price changes take effect
Some costs rise immediately while customer prices can change only at renewal. List the effective dates, notice requirements and contractual restrictions on each side. The lag can create a temporary cash requirement even where the eventual margin remains acceptable.
For illustration, a £1,000 monthly cost increase that cannot be recovered in prices for three months creates £3,000 of additional pressure before other effects. That is a scenario, not a reason to assume every customer will accept a later increase. Compare phased purchases, agreed terms and a realistic funding option where needed. Keep the duration explicit; an open-ended subsidy of every sale is a different problem.
Explain price changes clearly and track the response
Give customers accurate notice and observe the contract. Describe the commercial change without inventing regulatory requirements or blaming a tax measure that does not apply. Where appropriate, offer a different service level or product configuration rather than concealing reduced value.
Monitor retention, order size, cancellations and collection timing after the change. A price increase that restores contribution per unit may still reduce total contribution if demand falls sharply. Update the forecast using actual results and compare with the planned downside. Staff need a consistent explanation and clear authority for exceptions so an informal series of discounts does not undo the intended improvement without management noticing.
Set a trigger for a wider viability review
Agree which results require action: a minimum contribution level, a low cash threshold or repeated use of credit for ordinary bills. A trigger should prompt analysis while options remain available, not only when the bank account is exhausted. Assign responsibility and a date for reviewing the figures.
If pricing, purchasing and process changes cannot restore an affordable operating position, seek qualified advice early. Do not treat an offered facility as confirmation that every part of the business remains viable. Borrowing can buy time, but the plan must explain what changes during that time and how the debt will be repaid. An honest decision may involve reducing an activity rather than funding its losses.
Keep a short cost-pressure management pack
Bring together the cost basket, contract dates, margin calculation and rolling cash forecast. Highlight the decisions required this month and who owns each action. Keep confirmed savings separate from negotiations and planned price increases separate from customer acceptance.
After implementation, compare actual contribution and cash with the plan. If results disappoint, identify whether price, volume, timing or execution caused the difference. This prevents management from repeatedly using an old optimistic assumption to support new borrowing. A concise pack makes conversations with colleagues, suppliers and advisers more concrete without requiring a complicated financial model.
Common questions
- Should I increase every price by the inflation rate?
- Not automatically. Your cost mix, customer demand and contracts matter more than a single headline measure.
- Is a lower monthly loan repayment a solution?
- It may improve timing but can increase total cost and prolong exposure. Review the business’s operating position and the complete finance terms.
Sources
Sources were checked on 16 October 2026. A source check confirms what these publications said on that date; it is not a financial review of any product.
- How to create a cash flow forecast — British Business Bank
- Getting your business ready for finance — British Business Bank