Most SMEs realise that securing a large contract can make a massive difference to a firm’s bottom line; increasing turnover and potentially, driving up profits too. After all, servicing a large number of small customers is unlikely to be as profitable as delivering a large chunk of work for one major contract. This is due to factors such as the costs associated with administering accounts and chasing payments, as well as other economies of scale.
However, large contracts can also bring risks, particularly if the business becomes overly reliant on a single piece of business. This dependency could put pressure on businesses to accept terms of business that may not be favourable or to alter tried-and-tested processes in order to fulfil challenging customer demands.
One of the main areas of risk is cash flow disruption. For example, if a key customer decides to put pressure on their supplier by requiring them to agree to late payment terms, this could force the business into a position where it is laying out large amounts of cash up front to deliver an order, while waiting longer to receive payment. This can become a financial pinch point and reduce the amount of cash the business has to meet payroll, overheads and other costs.
The best way to minimise this risk is to ensure that early contract negotiations with all new customers are managed carefully. Concerns about contract terms should be raised proactively and, if necessary, compromises agreed at an early stage – for example, it may be possible to agree a schedule of interim payments. It may also be wise to check the customer’s credit history. Clearly, some bosses may be concerned that this type of negotiation could impact negatively on their customer relationship, but can they really afford not to take this approach?
Read more about business risk:
- 10 tips on risk management and cost control for growing businesses
- The top 5 global business risks
- How much risk can you take?
Financially-speaking, there are precautions that businesses can take to ensure that its cash position is protected. In particular, it may be wise for business owners to consider putting in place alternative sources of finance that they can draw upon as necessary.
For example, invoice finance offerings can be helpful to businesses seeking flexible finance to fund their growth plans. It can provide finance equivalent to the value of any unpaid invoices within 24 hours. As a secure form of asset-based finance, businesses are often pleasantly surprised to find they have access to more funds than expected because they are calculated based on the debtor’s ledger rather than its balance sheet.
This type of finance is particularly suitable to businesses concerned that cash flow problems could arise due to late payment. Effectively, it gives the business access to a pot of finance that they can draw down as and when needed, and if the finance is not needed, it remains unused.
When considering finance options, some bosses express concern that if they start using invoice finance, they could become reliant on it. However, this is unlikely as modern invoice finance arrangements are designed to empower business owners; giving them control over their own cash flow, with the aim of becoming self-funded in the future. For example, invoice finance can be used tactically to meet the company’s short-term needs; helping to meet the costs of a recruitment programme or facilitating investment in stock or machinery.
Of course there are other types of finance that can help a business to grow. Crowdfunding and peer-to-peer lending are increasingly popular and can help to import expertise. However, it is important to select the right fund to approach and in some cases, investors may require some degree of business control.
With the right forethought, it is possible for business owners to put in place financial arrangements that are designed to minimise risk, while leaving them firmly in control.
Meanwhile, corporate risk appetite and sentiment have faded in the face of weakness in emerging economies and global equity markets, suggested Deloitte’s CFO survey.
By John Atkinson is head of commercial business at Hitachi Capital Invoice Finance.
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