Your flour just went up 20 percent. Now what?

The invoice arrives and the flour line is 20 percent higher than last month. Nothing else moved. Now you have to work out what that does to your prices, and the honest answer is: far less than you fear on some products, and more than you think on others.

The instinct is to put 5 percent on everything and move on. That is the one answer guaranteed to be wrong on every product you sell, because a 20 percent rise on one ingredient never becomes a 20 percent rise on anything you make.

Every figure below is a ratio. Substitute your own currency.

Step 1: find every product the ingredient is actually in

You will write the obvious list from memory, and it will be short. The ones you miss are where the ingredient sits a layer down: flour is in the sponge, and the sponge is in the tiered cake, the cake pops, the crumb topping and the trifle. It is in the roux in a savoury filling.

Do it in two passes, in this order.

1. Every recipe or sub-recipe that names the ingredient directly.
2. Every product that uses any of those recipes, at any depth.

The second pass is the one that catches people, and nobody does it reliably from memory past about a dozen products. If your recipes nest, the ingredient's footprint is everything downstream of it, not everything you can picture.

Step 2: the rise on the invoice is not the rise on the product

Three things sit between the supplier's percentage and yours.

The ingredient is a share of your raw materials, not all of them. If flour is 40 percent of what a loaf costs in materials, a 20 percent rise on flour is an 8 percent rise in that loaf's materials. If flour is 4 percent of a decorated cake's materials, the same rise moves that cake by 0.8 percent.

Raw materials are a share of your total cost, not all of it. Labour, overhead and your per-order fixed costs did not move because the flour did. On a labour-heavy product they are most of the cost, which is why a decorated cake barely notices an ingredient shock and a plain loaf feels all of it.

Overhead amplifies, if you allocate it as a percentage. If overhead is a percentage of materials plus labour, one unit of extra materials becomes one unit plus the overhead charged on it. At a 15 percent overhead rate, every unit of extra ingredient cost is 1.15 units of extra total cost.

Here it is on two illustrative products, indexed so raw materials equal 100 units, overhead at 15 percent of materials plus labour, each carrying 10 units as its share of fixed monthly costs. The figures are invented to show the mechanism; what matters is the gap between the two columns, not either column on its own. If you have not broken a product down into those four lines before, the costs most bakers forget when quoting walks through building one.

	Plain loaf	Decorated cake
Raw materials	100 (flour is 40 of it)	100 (flour is 4 of it)
Labour	25	200
Overhead at 15%	18.75	45.00
Fixed cost share	10	10
Total cost	153.75	355.00
Cost after flour +20%	162.95	355.92
Cost increase	+5.98%	+0.26%

Same shock, same day, same invoice. One product needs a 6 percent price move and the other needs a quarter of one percent. A factor of more than twenty.

Step 3: why a flat percentage is the wrong answer

Put 6 percent on everything and you have overcharged the decorated cake by roughly twenty times its actual increase, on the products customers scrutinise hardest. Put 2 percent on everything and the loaf, where the increase actually landed, covers about a third of it: you have quietly cut the margin on your highest-volume line and raised it on the ones that did not need it.

A third failure is easy to miss. If your sizes are priced on a deliberate ladder, a flat percentage on each rung produces prices nobody would publish, so you round them, and the rounding is where the ladder breaks. Reprice a ladder as a ladder: fix the base rung on the arithmetic, then rebuild the rungs above it.

Step 4: reprice, or absorb, deliberately

Hold your price and the increase comes out of your margin. The size of the hit is easy to compute.

The loaf above, at a 40 percent margin, sells for 256.25 against its 153.75 cost. The 9.20 increase divided by 256.25 is 3.6, so its margin falls from 40 percent to 36.4 percent. The cake loses 0.16 of a point, which rounds away to nothing.

To hold the margin instead, the price must move by more than the cost did in absolute terms, because your margin sits on top of the increase too.

At a 40 percent target, every unit of extra cost needs 1.67 units of extra price. The percentage rise in price matches the percentage rise in cost, but the amount does not. Add exactly the cost increase to the price and you have absorbed the margin on it while telling yourself you repriced.

Four rules that make the decision quick:

• Reprice when the required move is bigger than the smallest step you would publish. If the arithmetic says 0.26 percent and your prices move in steps of a couple of percent, repricing is noise. Absorb it and note the date.
• Absorb only with a date attached. An absorbed increase nobody revisits is a permanent margin cut that no one ever decided to make.
• A single product can justify its own price change. If the ingredient is a large share of one product and that product is a large share of your volume, move that one and leave the rest alone.
• Below cost is not a repricing problem. If a product already sold for under what it costs to make, the increase is not the thing that needs fixing.

A useful floor while you are in there: at or above target is fine, below target but above half of it is worth watching, below half your target means the work is barely paying for itself and below cost means every sale loses money and volume makes it worse.

Step 5: the backlog you have already sold

Orders you accepted last month are priced at last month's price and will be baked at this month's cost. That gap is real cash, it is bounded and you can size it in five minutes: accepted-but-unbaked orders multiplied by the per-order increase.

The part that surprises people is that reporting will not show it. Order lines normally carry a cost snapshot taken when the order was written, so an order taken in March and baked in May reports March's cost. That is correct for your books, because it keeps history stable and stops one supplier price change rewriting last year's margins. It also means your margin report flatters the backlog until the backlog clears.

Set a changeover date and be specific: quotes issued before it hold the old price to their stated expiry, quotes issued after it carry the new one. Then honour that exactly, including the ones you would rather not.

Step 6: telling customers

• Change on a date, not gradually. A drifting price looks like something you hope nobody notices.
• Say it once, in one sentence. "From the first of next month, our sourdough is X." No apology and no essay about the supply chain. A long explanation reads as an opening bid and invites negotiation.
• Never itemise your costs to a customer. It turns your price into a debate about your suppliers, which you cannot win and should not be having.
• Tell standing-order and wholesale customers first, individually. They are on an agreement in spirit even when nothing is in writing, and finding out from a shelf label is how those relationships end.

Then measure what actually happened, because the fear beforehand and the outcome afterwards are rarely the same size, and only one of them gets written down. Three things make that measurement honest.

Count units, not revenue. Revenue rises on its own when the price does, so revenue will tell you the change went well even in the weeks you were losing customers. Units sold is the only figure that answers the question you asked.

Compare like weeks, over several of them. The same weekday against the same weekday, for at least three or four weeks. A single quiet week after a price change proves nothing about the price, and the week immediately after is the least representative one you will get.

Watch the products you did not move. They are your control. If the lines you repriced and the lines you left alone both fell by about the same amount, you are looking at a slow month, not a reaction to your price. If only the repriced ones fell, you have learned something real.

Write the date of the change next to the numbers. A price change with no date attached turns into a permanent, unresolvable argument about whether it worked.

Before the next invoice arrives

• Which three ingredients are the largest share of your materials spend? Those are the only ones whose price you need to watch weekly.
• For your top five products by volume, what percentage of total cost is raw materials? That tells you in advance how exposed each one is.
• What is the smallest price step you would ever publish? Anything below it is not a repricing decision.

Write those three answers down once and keep them somewhere you will find them again. None of them move often, and together they turn the next invoice from an afternoon of arithmetic into a five-minute check.

The first tells you which supplier emails to open properly and which to file. The second, product by product, tells you in advance which lines will need a price move and which will not: where raw materials are a small share of total cost the product can absorb almost any ingredient shock, and where they are most of it, it can absorb almost none. That is the same divergence the two-product table above shows, computed before the invoice arrives instead of after. The third is the filter that stops you repricing noise, and it is the one most people have never decided.

Software helps here mostly by turning step one from an afternoon into a query. ibakepro, for instance, recomputes the stored cost of every product downstream of a changed ingredient price and flags each one whose margin has drifted off target, while deliberately leaving the price you publish where you put it until you move it. The decision stays yours. It should.