Rising fuel prices: is it time to introduce a fuel surcharge in your business?

Rising fuel prices is it time to introduce a fuel surcharge in your business

Recent global instability has resulted in surging fuel prices throughout Australia and the world. With no end in sight to these price increases, a larger number of businesses are introducing fuel surcharges (often referred to as fuel levies) as a method to limit the impact on their margins and profits.

 

Should you apply a fuel surcharge?

Where fuel is a major expense in your business, introducing a fuel surcharge will help offset increasing fuel prices, by passing some or all of the price increase onto your customer.

Failing to introduce a fuel surcharge could lead to an unexpected hit to cash flow and the bottom line.

If applying a fuel surcharge, it's critical to communicate this very clearly to your customers, especially the reasons behind it (even though they are obvious) and the methodology behind it. Most customers will understand that it’s unreasonable for your business to absorb such a huge increase without passing on an increase, but in any case, it's always better to over-communicate this type of information.

 

How to determine a surcharge?

There are a variety of ways to calculate a fuel surcharge, whether it be on a cents per km or a % based. Whatever you choose, ensure the method aligns with the operations and processes of the business.

Businesses should aim to both correlate it to the increase in the business’ costs, and above all, ensure that it is able to be clearly communicated to your customers.

This is easily done by showing the surcharge as a separate line on the customer invoice. This provides full transparency as to the reason behind any service cost increases to the customer.

 

How to set up a fuel surcharge in Xero?

The fuel surcharge component charged to customers should be allocated to its own revenue account, with GST charged on the surcharge. This allows both the customer and business to easily track the fuel surcharge component of invoices.

 

Are you registered for Fuel Tax Credits?

Fuel Tax Credits provide eligible businesses with a credit for the fuel tax (excise or customs duty) included in the price of certain liquid or gaseous fuel used in plant and equipment, and certain vehicles.

If significant fuel is purchased for use in the business (other than for motor vehicles), then you are likely to be eligible for fuel tax credit claims. Ensure you are not missing out on these credits as they can add up to a significant amount if your business is using a lot of fuel.

 

Do you have a cashflow forecast?

In addition to helping create financial stability, budgeting your future cashflows provides some oversight and comfort on whether your business will be able to operate profitably into the future. It can also show you the potential impact of events that may be out of your control but nevertheless are still likely to occur. One of these events is the potential continual rise of fuel prices.

A cash flow forecast would allow businesses to build in a fuel surcharge, along with estimated increases in fuel prices, enabling businesses to see the financial impacts such scenarios would have on the bottom line of their business.

 

Contact Link Advisors for assistance implementing a fuel surcharge for your business or claiming fuel tax credits. We’re also experts in the building of budgets and cash flow for business owners, so let us know if you need assistance to model the effect of increasing fuel prices and a fuel surcharge in your business.