Why big is not always beautiful

Without careful management, the excitement of winning a large contract can quickly turn to despair for small businesses.

Signing up customers is rarely straightforward, so getting a large company on board early in its development can be a real shot in the arm for a start-up business in particular. High profile contracts can be seen as validation of the business model and act as a catalyst for other companies to sign up.

But taking on a contract that accounts for a large percentage of a small company’s turnover creates a number of risks, both operational and financial.

Don’t hold yourself back

One of the main risk factors is the business’s ability to finance the contract. Small businesses can be reluctant to raise external finance, which may limit their ability to secure large contracts in the first place as well as their capacity to manage such contracts. Trading only within working capital can hold a business back from achieving its growth targets.

Cash flow management is still important of course – any small enterprise with a number of large contracts that gets the payment scheduling wrong will go out of business.

It is always worth discussing the implications of large contracts with your bank. Some companies schedule regular financial briefings with their bank on the basis that they might be more willing to cut the business some slack if they know what it is doing.

No time to sell yourself short

Financial controllers play a vital role in ensuring that contracts are priced at a level that is profitable and that no single client becomes dominant in terms of percentage of turnover.

The business owner should sit down with staff to work through the requirements and openly discuss how they will manage problems. If the contract requires additional staffing and resources, the company needs to consider whether these can realistically be put in place in time.

Once a contract is up and running, there is a temptation to move on to the next piece of business. However, by arranging ongoing reviews to allow the business and the customer time to review progress and identify issues, the business will get an insight into any other opportunities and be well placed when the contract comes up for renewal.

Make sure the numbers stack up

A large company will probably want to know how a smaller supplier will manage the additional financial requirements generated by the contract, especially if they will not be receiving regular payments.

Economies of scale may come into play, but in some situations the unit cost of production may increase for larger contracts, while the business may also have to implement new quality standards or move to new premises.

The up-to-date financial data available to users of cloud-based accounting packages such as Big Red Cloud will make it easier to assess the potential impact of a large contract and determine whether it is economically viable.