There are two types of businesses: those that have had tough financial times already, and…
A Large Contract Can Become a Large Problem
You’ve landed a large contract and you think that all your problems are solved, but the reality is they may not be.
It’s a bit like putting all your eggs in one basket. If you rely heavily on that one large contract, then you are putting your business at risk. For example, if you take on a large contract there are a number of things that can happen.
Firstly, you will need to put all or most of your resources towards fulfilling that contract. That means that you and your team are devoting most of your time to that contract.
Secondly, it may be that there is a change to the contract, and whilst you expected there to be three or six months’ work in the contract, the contractor might vary the terms and decide after a couple of months that they don’t have enough work for you, and either minimize and reduce the value of the contract and the time involved or terminate it early. This could mean that you suddenly find yourself without the income that you expected to have coming in over the next few months.
Thirdly, another issue that can arise when you have a large contract is that you may not have time for the smaller contractors or other projects or you’re going to have to try and fit them around the larger contract.
Those other projects may not get the priority and level of service that they’re used to, and you run a risk that you may potentially be damaging the relationships with your other clients or customers.
Not only that but when you land a large contract, and you believe that all your income requirements are solved for the next six months, you may well stop looking for new opportunities. You may, in fact, turn away opportunities that come your way, believing that you don’t have the capacity to handle them.
The downside of that, of course, is if the contract is cancelled early, you may find yourself in a position where you don’t have the income from the contract, but you also don’t have other work lined up because you expected the contract to continue on for another few more months.
It’s a big balancing act between having the work to keep everyone busy, whilst at the same time, still be out seeking new opportunities or working on how you can handle new opportunities that come into the business and at the same time keeping the existing contract under control and not turning away work that you may, in fact, need if the other contract doesn’t happen.
Now, the impact of all of that can be significant on cash flow. Particularly, if you’ve got a contract where you’re dealing with a big corporate. It’s not unusual for them to pay 45 to 60-plus days. Whilst you expect, and you may have agreed that they will pay your invoice in a timely manner, the accounts payable department in the big corporate may not have the same view and maybe under different instructions in terms of payment of invoices.
You may find that your large contract becomes a large problem while you pay your staff and other costs and overhead expenses for a month, two months, or more before you receive payment from them.
This is fine if you have a cash buffer, surplus money sitting in your bank account so that you can cover for delays in receipt of money. However, if your business doesn’t have a cash buffer, then the non-payment of that large contract will cause a cash flow problem.
On the other hand, if you had a number of smaller contracts over that same time period the chances are that some of them will pay on time, even though some may delay payment. These payment issues are always made worse over the holiday periods, which we’ve just seen with our December – January holidays. But it also does happen sometimes around the Easter period and often also around the end of financial year.
If you are contracting with the bigger corporates or government, you need to know whether they are trying to spend their budget before the end of the financial year or deferring your payment into next financial year’s budget.
Sometimes a large contract looks wonderful, and it does look like it may solve your cash flow problems, and your revenue problems, and the ability to keep your staff busy, but sometimes that large contract can become a large problem, particularly with your cash flow.
To see how well you understand how the cash flow is running in your business, check out the Business Barometer Quiz to see how well you pass the cash flow test.
“The opinions expressed by Smallville Contributors are their own, not those of www.smallville.com.au"
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