Scaling a Business: How to Manage a Large Contract
Your small business is running smoothly, fulfilling customer orders, collecting accounts receivable and paying suppliers and employees with little or no hassle. And now you're in the running for a major contract that could mark a milestone in your company's development.
Landing that major contract may sound like the moment you've been waiting for, but before you seal the deal, you need to ask some important questions:
- Are you and your business ready?
- Do you have the production capacity and workforce to handle the demand, and adequate funds to invest in whatever resources you may need?
- Is your factory or office big enough to support this major increase in demand?
"New growth opportunities are not usually thought of as something that can hurt a business, but if a leadership team does not know how to handle the new contract, it can leave them worse off than they were before the new business," said Jason Burt, business coach and owner of Michigan-based Evolve Holdings Inc.
Make Sure It Fits your Company
Managing the new demand from a significant contract takes planning, and likely depends on your industry and specific business. The best time to assess your ability to handle the job, and to prepare for it, is before you win the big contract.
"Evaluate whether the contract makes sense for the business. Many small businesses get so excited about the financial possibilities of a large contract, they forget to ask the question of whether they should accept it or not," Burt said.
"Bringing on a contract that doesn't fit your core competency or is not part of planned growth can actually hurt your business more than it helps. Businesses must have a clear strategy and vision for their company," he said. That doesn't mean a company will never shift direction, he added, "but make sure you are doing it with the impact understood."
Karen Kiang, a City National Bank credit manager, suggests that business owners review details and logistics before accepting any new contracts to make sure they truly will be beneficial.
Will the contract generate extra profit — or will you be scrambling just to keep up with demand? Will it boost economies of scale — or require you to source more working capital and secure new equipment?
“Businesses need to really identify whether or not this is going to improve their profit margins, or actually contract them," said Kiang.
It's also important to consider exactly how big you want your business to become and how much capital you will need to get there.
“You don't want to take on too much when you know you don't have the capacity," said Kiang. “The worst thing a business can do is overestimate and then not achieve what they intended to with the first order," ruining the customer relationship.
Hermine Chobanyan, a relationship manager at City National Bank, recommends that a business look at its resources, assessing its headcount and capacity, and then determine what it needs to do to meet a big new demand. That could mean hiring more employees, adding new equipment to automate processes, and/or purchasing inventory and raw materials.
Small businesses sometimes get into trouble when they jump into enticing contracts too quickly, then find themselves scrambling to make them work, said Chobanyan, who noted that such missteps can be avoided with expert advice and support from a team of professionals, including an attorney, a CPA and a banker.
“A lot of times you'll see businesses are very ambitious when they get new projects," said Chobanyan. "It's important for businesses to manage their growth and have sustainable growth," rather than expanding too fast.
Plan In Advance
Nicole Auyang, who manages business banking for City National Bank, noted that bankers should be consulted up front, so they can help business owners anticipate that increased demand in advance. Unfortunately, that doesn't always happen.
For example, an engineering firm might need a short-term loan to start a new development project, but often, "we get these requests after the fact, where they're scrambling for capital," she noted.
If the new contract makes sense, Burt suggests that you create a plan — and it might not include handling all the new demand by yourself
"Not all new business has to be brought internally 100 percent for success. If you are thinking long term, this contract should only be a stepping stone for potential future business," Burt said. "I often talk to companies about minimizing the risk — and yes, margin — by partnering with other companies to help meet the new contract needs."
Burt also urges business owners not to jump in right away.
"I tend to be a risk-taker, but I always caution my clients about the amount of risk to take on during fast-growth periods. Spending lots of money on new equipment for capacity, or hiring lots of new employees, may seem like the only way to accomplish the goals in front of you, but there are other options," he said.
"Overtime is not fun, but it can be a good short-term countermeasure to handle a capacity constraint. Outsource some activities where it makes sense. Using other companies to open up capacity internally is another great way to meet the needs long term. Think of how your company will look after the contract has come through your organization," Burt said. "You don't want to burden your company with extra expenses if things move back to normal."
While submitting a bid or negotiating with a potential client, you might want to touch base with suppliers and staffing agencies to make sure you'll be able to have materials and people in place to ramp up production if you secure the contract.
The UPS Store and Inc. cite several areas to evaluate when pursuing major clients, suggesting you consider and solve any potential problems first. Besides fulfillment, they recommended that you look at your accounting procedures, HR operations, customer service and training, among other areas.
Once a business calculates what it needs to do to fulfill a new contract, the owner can explore the company's options, including managing any capital needs.
Your company's specific requirements will determine what type of financing to seek. A medical or technology company might decide to lease equipment, while a wholesale distributor would likely look at a term loan to expand inventory, according to City National Bank's Chobanyan. A business owner might benefit from an equipment loan.
Banks prefer to see business owners seek a line of credit before they might need it, rather than waiting until they're "in the hole," said Auyang. “Even if you don't have to use it today, it's good to have it in place for tomorrow."
Once you've landed the contract, it's important to "execute at the highest level," Burt said.
"You just won this great opportunity. Make sure the new client is happy at all costs. If this is a big opportunity for your organization, and this is a part of the long-term growth of the company, then treat it that way," he said.
"Obviously all companies must worry about profitability, but if this is about long-term growth, don't be so focused on short-term cost and margin that it forces you to perform poorly," Burt said. "Always meet the customer's expectations first, then worry about how to increase your profitability."
This article is for general information and education only. It is provided as a courtesy to the clients and friends of City National Bank (City National). City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the article with no obligation to update or notify of inaccuracy or change. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.
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