Over the years I’ve worked with a number of clients whose big dream has been to sell to one of the major retailers. It’s not a dream I always encourage. Sadly this week we’ve seen my caution vindicated as the impending demise of an established retailer, British Home Stores, will leave many small businesses severely out of pocket.
According to reports in the Daily Telegraph a store fitter from Leicestershire, a ribbon maker in Nottingham and a lighting manufacturer in Dorset are just some of the small businesses affected by the collapse of the chain. No doubt these businesses were thrilled to win the contract with BHS but now that triumph could be about to turn into disaster.
When a business goes to the wall it’s creditors rarely receive more than a tiny fraction of the money they are owed. So if, for example, BHS owed the ribbon maker £5000 and when the dust settles creditors get a payment of 10p in the £ then the said ribbon maker would get just £500! When Peacocks went to the wall a few years ago suppliers received less than 1p in the £ so our ribbon manufacturer would have got less than £50 of the £5000 owed. That’s not enough to pay for the raw materials let alone staff and overheads. What’s even worse is that the payment won’t be made for months or even years which can have an even more devastating effect on cashflow.
Can I afford the big deal?
Before you go for that big customer think carefully about what it will mean for your business. Take off those rose tinted specs and look objectively at both the advantages and disadvantages. The following questions should help:
- What size of order are they likely to place?
- How will I fulfil that order? Will I need extra staff or to outsource production? How will this affect my costs?
- What impact will this order have on my ability to meet my existing customers’ needs?
- What will happen to my cashflow? Consider that you’ll probably need a big upfront investment in raw materials and will have to pay your staff, and probably suppliers, several months before you get paid (major companies often take 60-90 days to pay their bills).
- What will winning this order do to my reputation? Would it lead to more new orders from other customers? Will it put my business on the map? Will it allow me to scale my business rapidly?
Let your head rule your heart
Before you dash headlong into this wonderful opportunity take some time for the basics. Do your due diligence. Is that big name solvent? BHS has been losing money for seven years. There comes a point where even a well known brand can no longer sustain its losses so take care before you take a big risk.
Get a lawyer to check that the contract gives you as much protection as possible. Ask an accountant to check that your figures work. Remember that if you have to pay interest on a loan or overdraft to finance this deal your invoices will need to cover this. Be realistic about timescales, if the retailer doesn’t pay you for 90 days and you had to buy in raw materials 12 weeks before you invoiced that’s at least 6 months worth of interest. Do your prices cover this? The big retailer will drive a very hard bargain. They should, they have to make a profit too. Before you enter negotiations be really clear about what your absolute minimum price can be and stick with it, if the retailer won’t pay it walk away. I’ll say that again, walk away, you are not in business on their behalf!
Be careful about sale or return deals which many retailers want to enter into these days. If your product doesn’t sell what will you do with all the returns? Can you afford to wait for payments linked to sales? Do you trust the retailer a) to give you accurate sales information b) to promote your products where they are likely to sell?
Consider the worst case scenario. If you lost this contract or the retailer collapsed could your business survive?
Manage the contract
If you’re anything like me you’d much rather have fun fulfilling the contract than spending time invoicing and managing finances and the contract. Herein lies ruin! Invoice regularly (note to self!) and monitor payments so that you are on top of your cashflow. Chase payments as soon as they become overdue, if a business is having cashflow problems they usually pay the people who shout loudest and most often first.
Monitor your fulfilment of the contract so that you pick up any problems before the retailer does and put them right… fast. Work on your relationship with the retailer so that you have due warning if they are thinking of any changes to your contract. If all is working well you may be able to use this contract as leverage for another one but take care.
Don’t put all your eggs in one basket.
However solid the retailer, however good your relationship with the buyer it is dangerous to place too much reliance on the one customer. Retail has never been more challenging. Your star customer might be taken over or it may decide to refocus its business and pull out of the area you are supplying. Your buyer may leave and her replacement might want to bring in his own supplier. Spreading your risk will leave you in a better place to survive these challenges.
So before you get out the champagne to celebrate that big deal just take time to reflect and ensure that you’re not drinking it from a poison chalice.