Posted by Asako Tsumagari on 16 Sep 2007,
A Fortune 500 multinational corporation just signed on to buy 100,000 widgets from your small business. Shall we toast to champagne? Hold on to that cork, my dear friend! Actually, this may become your nightmare of all nightmares if you’re not careful.
In the blogshere, you’ll find plenty of articles teaching you how to catch that big name customer. You’ll find tips on how to do cold calls, customize your product, prepare your sales presentation, etc. What’s harder to come buy are caveats about why entrepreneurs need to take great care when serving a big name customer.
Caveat Venditor
Some of the more obvious reasons for caution include the following:
- A big customer can quickly withdraw from your business mid stream if your competitor catches on and provides a better offer. If you had already made an investment to beef up production for your big customer, you may run into trouble as your blunted revenues cannot cover your fixed costs.
- A big customer may request a tight contractual arrangement requiring, for example, their option to return excess inventory. This would transfer their business risk to you.
- A big customer may request special product customization. For example, a large retailer like Wal-Mart or Costco may ask for a unique jumbo-sized package that you are restricted from selling through other channels. Given the potential sales volume, this customization sounds worth it. However, for your single-minded small business, this could create complexity in operations that can wreak havoc on your base business.
When Getting Paid Could Still Spell Bankruptcy
There’s one other key risk, which I believe is worth mentioning in and of itself. Expect a slow payment process.
Many big companies have a payment cycle of 60 to 90 days. Moreover, many provide payment at the end of the month. So, assuming a “90-day” cycle, if you were to produce and ship 100,000 widgets to the customer on March 1st, you would not receive payment until June 30th. That’s actually 120 days. Forget the fact that your terms are NET 30. It won’t likely happen.
What is wrong with 120 days? Well, many things can happen to your small business during this period. Your suppliers and staff may demand payment from you, for one. But your cash will be stuck in the account receivables. I’ve seen some small business run on the verge of bankruptcy due to this phenomenon.
What’s worse is that big companies may fail to deliver the payment on time even after 120 days. With automated payment processes, their accounting system may not always jive with the exact language of your invoice. If your invoice is missing their purchase order number, for example, payment may not go through. So your invoice bounces back through the system to the purchase order originator, delaying your payment another month. Then, possibly, as your invoice goes through the process again, the customer they do not have your tax ID number logged in their system because you are a new supplier. Again, count on bouncing another month away.
Big companies will pay you, eventually, so don’t worry about that. They’ll even pay interest or penalty fees for delays, if you agreed upon them in your contract. But that’s not the point. Your account receivables is stuck for 5-6 months. Meanwhile, your base customers (your “bread and butter”, don’t forget them) cannot place good-sized orders because you may not have the cash to buy inventory. If you decide to borrow money to build inventory and then find out that your big customer is returning significant excess inventory, you may find yourself on the way toward bankruptcy.
The Bottom Line
So if you are a small business owner who receives a large order from a big name customer, make sure you take a close look at your cash situation. Run scenario analyses to see what risks you may encounter. Do due diligence on the customer to know their complete reputation. They may a great reputation and brand as a company, but what is their reputation as buyer? Check to see you have a contingency fund to survive the worst case scenario.
In short, realize that taking on a big customer is a calculated risk, with its opportunity and uncertainty. With that said, slowly sip your champagne.
See more practical business tips.
Comments for "The Big Customer Nightmare for Your Small Business"
17 Sep 2007 at 08:21 PM
Hi Asako - Great post, and it’s good that you’re making businesses aware of these risks, as many don’t realise how risky it can be to deal with big businesses.
I’ve had experiences with large businesses that took over a year to pay, and some who have avoided payment altogether. So, we are avoiding large contracts altogether for Kwik Fix until we become more established.
18 Sep 2007 at 04:55 PM
So true Asako,
Unfortunately, slow receivables are an issue, whether you provide goods and services to a large corporation, or to a private party.
Combine a tight cash flow, and slow receivables, and you can get “turned upside down” very quickly.
With the economy tightening, I think we will see more businesses struggling financially, due to uncollected receivables.
It’s great that you are alerting your readers to this issue. It could save many from financial ruin.
19 Sep 2007 at 12:16 AM
Thank you, Catherine and Barbara, for sharing your experiences.
One of my great mentors always tells me learning when to say no is the key to success for entrepreneurs. Sometimes, we have to say no to a big customer.
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