With floating price clauses in uncertain times – FINANCE

The numbers speak for themselves: the price expectations of the Ifo Institute in Munich have reached a new all-time high. In April, they reached their highest level since 1991. More and more companies plan to raise prices in the next three months. Price expectations were particularly high in wholesale, followed by retail and industry. In another study by the institute, 75 percent companies have complained of bottlenecks and problems with the procurement of pre-products and raw materials. According to the Ifo Institute, the overall business climate is suitably pessimistic.

Price increases are burdensome for businesses

Responsible people in companies are faced with record prices of raw materials and materials. This applies to electricity and gas, but also to raw materials such as plastics, wood and magnesium. In addition, there is a very long delivery time – if the raw materials are at all available at the desired time. Logistics costs are also rising drastically at the moment. Sometimes the shortage of containers resulted in price increases that were almost eight times higher than the pre-krone level. Even if things have improved somewhat, freight costs on some overland truck routes are still very high.

Price increases can have drastic consequences for businesses. Orders are delayed, planned sales are pushed into the future. However, running costs and investments continue to increase and these can now be much higher than calculated. The consequence can be serious liquidity problems.

Firms can protect themselves with sliding price clauses

One solution for dealing with the current price level is to draw up contracts with existing and new customers; this includes the recalculation of orders adapted to the new cost situation. It is advisable to include a moving price clause in the contracts. This is a clause that allows the price to be adjusted at the time of delivery.

This makes sense if the contract is concluded well before the completion date. This is advisable, for example, for mechanical engineering or drive technology companies that produce individual customer solutions. However, producers of other high-quality and costly goods and services also benefit from this agreement. In this way, the producer protects itself against soaring raw material prices. If no agreement is reached and the calculation has already been carried out, the company has to bear the increase in the price of the raw material – a previously profitable order can quickly become a loss-making business.

Subsidies on maintenance costs may also be an option

Inflationary subsidies may also be a response to rising costs. This adjusts the purchase price according to the price increase and the calculated profit. Depending on the order situation and the economic situation, this can make a decisive contribution to the company’s stable liquidity.

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According to the Ifo Institute data, many companies plan to raise prices in the coming months. However, implementation is only possible if customers also accept such price adjustments. This may vary by industry; In addition, you should take into account the company’s position in the competition and what the customer structure looks like. Therefore, companies that need to raise prices to be profitable should enter into a dialogue with their most important customers.

Talking to banks or guarantors can also be helpful. It is advisable to use trained experts who can support you in legal matters, for example, when checking and renegotiating credit agreements or collateral.

Corporate planning in scenarios as a “stress test”

There are other levers that safeguard liquidity. Firms need to identify possible reorganization and restructuring measures. Responsible Persons should create updated product calculations at an early stage and analyze important KPIs. They then assist in making the necessary decisions about structural adjustments. Careful and prudent planning is important here, and it should be rather conservative in uncertain times. Scenario calculations can also be helpful in testing the resilience of corporate planning as a kind of “stress test” for companies.

Dr. Maximilian Pluta is the Managing Director of PLUTA Rechtsanwalts GmbH and PLUTA Management GmbH. Lawyer, business graduate and tax advisor, he manages the reorganization and restructuring business area.

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