Money Pitfalls of the Big Sale

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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Making the big sale is often the dream of a small business owner. Without proper funding, the dream can become a nightmare. When striking a deal, be prepared to avoid potential money-related pitfalls.

Extended Credit Terms

Companies with large purchasing budgets often leverage their status by establishing stringent conditions for vendors, including extended credit terms. For example, I’ve noticed that major corporations have introduced “net 90” credit terms, meaning that their vendors (that is, your business) must wait 90 days to get paid. Vendors are to place “net 90” on invoices rather than collecting payment immediately or according to more standard terms, such as “net 30,” requiring payment due within 30 days. These extended terms may cause a cash-flow crisis for your business.

Solutions: Verify customers’ credit-worthiness and discover their standard terms before getting too far in the sales process. Negotiate terms acceptable to your business prior to finalizing an agreement. If extended terms stand, then make sure that your business can pay its bills (including those relating to shipping orders for this large customer) while waiting for payment. Or consider selling your accounts receivable to a factor or similar agency in order to get cash quickly.

Costs to Ramp-Up Production

Unless your business has loads of unused capacity, you will need to expand in order to deliver product and projects on time. Overhead expenses may skyrocket for facility and equipment purchases, rentals, and renovations.

Solutions: Before landing the big sale, calculate your actual capacity on a weekly and annual basis. Knowing your full capacity will help determine whether your business can fill orders according to customer timelines. Based on this information, you can start the process of developing a plan to meet commitments, which may involve expanding your facility, renovating space for greater efficiency, hiring new employees, etc.

Rather than increasing overhead by expanding facilities and adding equipment, consider alternatives such as adding a second shift, placing work with a subcontractor, or sourcing globally. (These solutions may have their own pitfalls associated with quality assurance and timeliness, but may require less upfront investment.)

Expenses to Achieve Vendor Compliance

Buyers representing large companies may gladly close sales deals with your business but fail to explain the intricacies of compliance. Beyond achieving product specifications and quality standards, your business must comply with labeling, packaging, shipping, and reporting requirements. Designing and implementing processes to achieve compliance may be expensive relative to the value of the big sale. Failure to comply can result in chargebacks or customers’ deductions of the amounts from your invoices.

Solutions: Research customers’ vendor-compliance requirements prior to initiating sales calls. Evaluate the expected cost of compliance as well as the strategic value of instituting changes to your business. Access resources offered by corporate customers, such as online versions of compliance manuals, onsite reviews of work processes, support for system integrations, and free training.

Higher Payroll Expenses

You may need to hire more people to handle increased workload, especially if the big sale involves a project. Payroll expenses may increase dramatically including costs for employee benefits.

Solutions: If your business is delivering a creative service or project, negotiate interim payments at key milestones rather than a one-time payment at the time of project completion. Consider hiring temporary workers or contractors to increase flexibility and avoid benefit costs until you are ready to hire employees permanently.

Unexpected Costs Associated with Out-of-Control Scope

If your business struggles with defining scope for small projects now, these problems will become magnified with large projects. Even slight discrepancies between what your business intends to deliver and the expectations of customers can cause trouble, especially if you will be required to perform extra work for which your business doesn’t receive compensation.

Solutions: Address problems with scope and contract issues now. Get expertise in project management or hire someone to guide the development of defining scope with clients.

Increases in Inventory Purchases

If your business needs to acquire inventory well above normal levels, you may have problems paying for such large orders. At the same time, your vendor may not have the capacity to meet these expanded needs.

Solutions: Establish credit lines with vendors, or if credit is available now, begin conversations to determine if credit limits can be raised to accommodate large orders. If vendors can’t extend credit, then make arrangements to use a business charge card or line of credit.

Investigate alternate sources to confirm marketplace pricing, especially if you are uncertain that your current vendor is able to service your business at higher volumes.

Potential Loss of Sales

Delivering on commitments made to close the big sale may mean that resources are no longer available to service smaller accounts. As a result, total sales could remain flat. In addition, profit margins may decline if you negotiated lower pricing based on higher volume (though overall profits could still increase due to higher sales as well as greater economies of scale).

Solutions: Consider whether potentially lower margins are a valid trade-off for higher sales. Make sure that your business has the capacity to service all the accounts you intend to keep for a long time.

The pursuit of large accounts is a strategic decision that requires forethought and planning in all areas including finance and operations.