What it means
For non-finance managers, understanding slippage is vital because it represents a hidden cost in business operations, investments, and supply chains. While budgets and forecasts rely on estimated or quoted prices, the real world moves quickly.
When you buy or sell assets, currencies, or even raw materials, the time delay between making a decision and final execution can cause the price to move against you. This variance eats into your projected profit margins without any change in your operational efficiency.
In financial trading, slippage occurs during high market volatility or low liquidity, where orders cannot be filled at the exact desired price. In everyday commerce, a similar concept applies when suppliers adjust quotes due to delays in purchase order approvals.
If your business takes days to sign off on a bulk purchase, the supplier might raise prices before the transaction completes. Monitoring slippage helps managers assess the true cost of execution friction and delays.
Minimising slippage requires speed and precision. In financial markets, using limit orders rather than market orders can prevent trades from executing at unfavourable prices.
In procurement, locking in contracts quickly and maintaining strong supplier relationships helps keep quoted prices stable. Recognising that the price on paper is rarely the exact price you pay allows managers to build realistic buffers into their financial forecasts.
Imagine ordering a taxi through an app when surge pricing is about to kick in. You see a fare of $10, but by the time the request connects, traffic worsens and the fare jumps to $12.
That extra $2 is price slippage.
In practice
Real-world examples
Example 1
An entrepreneur budgeted $10,000 to buy shares in a supplier company. Due to market delays, the order filled at $10,250, resulting in $250 of unexpected slippage costs, or 2.5% of the budget. The entrepreneur now places limit orders so that the price cannot drift beyond a set level.
Example 2
An SME ordered 1,000 units of packaging material quoted at $5 each. Approval delays took two weeks, and the supplier raised the price to $5.20, creating $200 in cost slippage. The owner now asks suppliers to hold quotes for 30 days.
Example 3
A retail firm planned to convert $50,000 into euros for inventory. Market volatility during the transfer caused an unfavourable exchange rate shift, adding $400 in currency slippage. That is a cost of 0.8% on the amount converted, which the firm now builds into its purchase budgets as a small buffer on every foreign order.
Think of it
Imagine ordering a taxi through an app when surge pricing is about to kick in. You see a fare of GBP 10, but by the time the request connects, traffic worsens and the fare jumps to GBP 12. That extra GBP 2 is price slippage.
Formula
Calculation
Slippage per Unit = Executed Price - Expected Price (for a purchase, a positive result means you paid more than expected)
Slippage Percentage = Slippage per Unit / Expected Price x 100
Example: You expected to buy shares at $50 each, but due to delays the order was executed at $52. Slippage per share = 52 - 50 = $2, which is 2 / 50 x 100 = 4%. On an order of 100 shares, the extra cost is 100 x $2 = $200.
For a sale the logic reverses. If you expected to sell at $50 but the order executed at $49, you received $1 less per share, so on 100 shares the slippage cost is $100.Case study
Seen in the real world
This is a fictional, illustrative scenario. BrightView Retail, a mid-sized homeware distributor, planned to acquire a bulk shipment of seasonal goods. The initial quote from the overseas manufacturer was $40,000. However, internal approval processes at BrightView took five working days.
During this window, foreign exchange rates shifted unfavourably and raw material costs increased. When BrightView finally submitted the payment and order, the manufacturer processed it at a total cost of $42,400. This created $2,400 of unexpected slippage, or 6% of the quote. Because the finance team had not budgeted for this variance, it directly reduced the projected profit margin for the seasonal product line.
To prevent future losses, BrightView updated its procurement policy. They introduced expedited sign-off thresholds for orders above $10,000 and began using forward contracts to lock in exchange rates. These changes helped the company eliminate similar execution variances in subsequent quarters, protecting their profit margins.
Watch out
Common mistakes
- Assuming the quoted price in a system will always be the final transaction price.
- Ignoring small amounts of slippage, which can add up significantly over many transactions.
- Failing to account for market volatility when trading assets or foreign currencies.
Questions
People also ask
Is slippage always a bad thing?
Not always. Positive slippage can occasionally occur if the price moves in your favour during execution, meaning you pay less than expected or receive more.
How can I reduce slippage in my business?
You can reduce slippage by speeding up internal approval processes, using limit orders for financial transactions, and locking in supplier quotes with firm contracts.
Does slippage only happen in the stock market?
No. While common in financial markets, slippage happens in any scenario where there is a time gap between pricing agreement and transaction completion, such as supply chain procurement.