Business accounting and planning should take into consideration the effect of inflation on costs. Inflation is an essential consideration when a company manages multiple contracts that specify costs and revenues based on a level of inflation determined at the time of the contract signing. The escalation comes into play when the actual rate of inflation differs from the rate specified in the contract.
Contracts, especially for the supply of materials and for employment, frequently include an escalation clause. For example, an escalation clause could state that an employee’s salary will adjust based on periodic increases in inflation. The clause may require a company to give the employee an annual salary increase based on the actual inflation rate experienced in the economy. In the case of contracts relating to the supply of materials or other production factors, the escalation clause allows for price increases based on rising inflation.
Another application of the term escalation in a business context relates to increases in the cost of products, services and labor. This type of price increase also generally relates to inflation and accounting departments must consider this type of escalation when planning and preparing company budgets. This type of increase, however, can also result from outside factors, such as economic, political or social reasons that cause increases in the cost of products, services and labor.
The other common use of escalation in business relates to the broader definition of escalation. This term can also refer to raising the importance of some business-related activity or moving a task up to a higher department within the organization. For example, if one department realizes that a problem has become much larger and more involved than previously anticipated, the manager involved may escalate the issue to a higher department or person within the organization.
Because of the importance of managing the process of escalating a problem within the organization, many companies will define and implement specific procedures to manage this escalation process. This ensures that everyone within the organization has an awareness of the protocol and that the issue will resolve according to the escalation process. Because customer relations can represent a particularly sensitive, even volatile area for many businesses, businesses generally want to define escalation procedures for departments within the organization that deal with customers.
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