You landed that big contract to be a supplier with a major corporation. Congratulations! However, before you open the champagne and start celebrating, you should take a look at your B2B target customers and ask yourself whether adding the big contract to your customer base is really a good thing for your business.
Although the big contract you just signed could mean bigger profits for you, it also may end up causing bigger headaches, and it could ultimately put you out of business if you don’t have a sound strategy in place.
Dangers of Delinquency
Big businesses have an even bigger tendency to be late with their vendor payments. With such large volume, this could spell disaster for your accounts receivable and your cash flow.
According to data published by the credit bureau, Experian, larger companies with 1,000 employees or more are much more likely to be seriously delinquent on vendor payments. “Seriously delinquent” is categorized as a payment that is 90 days late or more.
As of November 2009, large companies were behind on about 23% of payments. This is a larger percentage than any other group, including small business delinquencies.
What’s worse is that big businesses don’t always have a good excuse. Sometimes it may be due to a dispute about an invoice, but oftentimes, it is just because they can be late and know they will get away with it. Keeping cash in their own bank accounts helps them earn interest, while your accounts receivable turnover ratio goes through the roof.
Deep, Dark Dependency
If you have a major corporation as one of your main customer base clients, how will your business survive if it does not pay the money that is owed you? Your customer base should always include a diversity of clients. Should you depend on one big client to meet most of your income goals, your business could be in big trouble.
Say, for instance, that you have 10 clients. Two of them are larger corporations that combined provide 60% of your small business revenue. If both of those companies are continually delinquent on paying invoices, you have a serious cash flow problem. Accounts receivables, although still an asset, is not liquid unless you can collect on them.
In addition, diversification protects your business should you lose the contract, or if the major company goes bankrupt. Losing a big business contract could ultimately mean the end of your small business if you do not have a variety of target customers to replace the hole left by a lost big business contract.
Complicated Vendor Agreements
Big corporations generally use boilerplate vendor agreements with all vendors, regardless of size, and these contracts are typically not in your favor. If you should get a contract with a big target customer such as Wal-Mart or Home Depot, check your agreement carefully. Many small businesses fail to read their agreement and miss important steps they need to take to simply get paid.
Big business contracts can be a healthy addition to your customer base and your accounts receivable. However, you must carefully consider the source for what is expected of you, how you will collect on accounts receivable, and how you will deal with the loss of revenue should the big client fail to pay.