It’s every small business owner, consultant and entrepreneur’s dream: A Big Contract for their Small Business.
What am I talking about? You know, that large contract from a prestigious client that sets you up for at least a year. It lets you pay off all the non-routine bills and buy a membership in the local “holier-than-thou club.” Your colleagues regard you with awe and admiration and your competition coughs and sneezes from all the dust you have kicked in their faces.
So you’re fortunate and your dreams come true and now you’re asking: how did this gem of a contract morph into the worse nightmare of my life?
I know. In the excitement of winning the contract, you forget to consider the cons and pros of delivering on the contract. Well, let me examine some of them for you.
Cons of a big contract for your small business
You need the cash flow and infrastructure to manage a really big contract
Depending on the nature of the contact, yes, you may be able to subcontract but that requires you to manage that relationship(s) as well as deliver on the contract as required. You also need to be able to pay your sub-contractors when they have delivered their part of the job, even if you have not been paid on your contract.
The bidding process can be long, complex and costly
I can tell you about this! Once, out of curiosity, I decided to initiate the process of going after a big contract. The specs were on a CD for which you had to pay US$50.00 and having bought it, I nearly had to hire someone to help me understand the requirements. And I hate to tell you that sometimes they have already selected a service provider, and putting the job out to tender is only to appear transparent.
A big business might negotiate you into the ground
You see, they have the power to do this and the bigger the contract, the bigger the discount they are looking for. Furthermore, they will sometimes want something redesigned which you have already agreed on – at no extra cost to them! WARNING: You had better upscale your negotiation skills…you will need them.
Your big customer demand more and better service
You were going along peacefully running items through your cash register and placing them in a plain plastic bag and handing them to your customers with a smile. Now that you’ve landed that big order, you now need to have bar coding on the items, inventory controlled tags as well, and they need to be shipped in a special way. The changes which you have to make to your business wipe out 75% of your profit on the contract.
The agreed payment terms may lead you to cash flow problems
Think about it. Your smaller customers pay in 25 to 30 days but this big customer wants to pay in 60 – 90 days. Moreover, your suppliers and your landlord will not wait this length of time to get paid from you. If you don’t have enough cash to pay your bills until you collect, you’ll need to borrow working capital or factor your receivables. Either option will add to your costs and cut your profit.
Now that you know some of what you need to think about before you go after that big contract, let them serve as a warning and not as a deterrent from your going after the big bucks. There are some benefits to going after that big contract for your small business.
Pros of big contracts for small businesses
It’s a yardstick of success
Don’t pretend you don’t know what I’m talking about. When you land a big client, all you little repeat customers or clients seem to fade into insignificance. When you can brag that you did work for “Big Mcguffie Inc” some people will not wait to find out what you did before they begin to spread the word about your success.
It can improve your bottom line
Yes…if you get it right, you will be able to buy your dream thingamajig, pay off your non-routine bills as well as increase your profits, when you land that big contract.
A big contract can work wonders for your reputation
When you successfully acquire and deliver on a big contract, the word that gets out is equally large and the reputation which you will gain will attract even more similar contracts.
It can improve your business operations
Just imagine that you have decided to do what is required to go after a big contract and to make as much money as you can from it. This may require you to examine many of your systems, hire new staff and buy new equipment. While this may be in the short-term, the benefits continue way into the future.
Steps to going after the big contract
Right about now, you’re asking yourself: Now that I have weighed the pros and the cons, how do I decide if to go after that big contract for my small business? The answer is in the numbers.
Know the cost involved in bidding
Start by looking at all the cost involved in bidding for and delivering on that big contract. Include your preparation time and that of your team. Also include the cost of acquiring and bidding documents and any part of the process you might have to outsource.
Determine what your cost of goods or inventory costs are if you’re supplying products
If the contract is for the supply of products, determine what your cost of goods or inventory costs are at different volumes. Know what the packaging and shipping costs would be as well. Be sure to include the hourly cost of the employees needed to pack and ship the goods and the actual cost of the packaging and labels.
Check on your manpower and equipment
Determine whether your company would have the manpower and equipment to get the big order out on time – and do it without interrupting service to your existing customers.
Put your cash flow under the microscope
Do you have the cash to satisfy a big contract and then wait 60 – 90 days for payment? If you have to borrow the money, check the interest rates to be sure it’s worth the while.
When you have all the numbers in front of you, then and only then should you answer the question: This big contract for my small business…is it worth the money?
Have you ever gone after a big contract? I would love to know. Just use the form below to let me know…