Winning a corporate contract can cost small businesses before they earn a cent

A R200,000 contract sounds like good news for a small business. But what if winning that job means finding R80,000 for stock, wages and transport before the customer pays?

For a small supplier, that can be the difference between landing a valuable customer and taking on work the business cannot afford to deliver. The problem starts before the contract is signed, with the cost of getting ready to supply a large company. There may be insurance to arrange, documents to prepare, equipment to hire or extra staff to bring in. If the business loses the bid, some of that money may be difficult to recover. If it wins, it still needs enough cash to do the job while waiting for payment. The contract's advertised value tells only part of the story. What matters to the owner is how much money must go out before any comes in, and whether the business can afford to wait.

Getting onto the supplier list is not the same as getting work

Large companies often ask prospective suppliers for company registration documents, tax information, banking details, insurance and other supporting records. The requirements vary by buyer and industry. Hulamin, for example, lists documents such as a company profile, CIPC registration certificate, tax clearance PIN, B-BBEE certificate or affidavit, proof of address and public liability insurance for its SMME supplier process. Registering does not guarantee an invitation to quote or a contract.

Government suppliers have a separate process through the Central Supplier Database, which collects and verifies supplier information for organs of state. For a small business, preparing these documents takes time. Some requirements may also carry costs. Owners should check what a specific buyer needs before paying for registrations, certificates or services that may not be necessary.

The bill starts before the first order

The cost of preparing to supply a large company depends on the type of work.

A consultant bidding for a professional services contract may need the right documents and insurance. A transport operator may need additional vehicles, while a food supplier could have to buy ingredients, packaging and equipment to meet a larger order. Insurance can be another expense. Some buyers require public liability cover or other policies before appointing a supplier. The premium depends on the business, the work involved and the level of cover required.

Then there is the owner's time. Preparing quotations, gathering documents, attending meetings and responding to procurement queries takes time away from existing customers. These costs can become a problem when a business pursues several contracts and wins none of them. Some preparation can be reused for the next opportunity, but other expenses may be tied to a particular job.

A R200,000 order can create a cash-flow problem

Consider a small packaging supplier that wins an order worth R200,000. It needs to spend R80,000 upfront on materials, wages and delivery costs to fulfil the order.

If the customer pays only after delivery and invoice approval, the supplier has to cover that R80,000 while waiting. It still needs money for rent, salaries and its other customers. These figures are illustrative, but the cash-flow problem is real for businesses that must pay their own suppliers before receiving payment from customers.

Before accepting a contract, the owner needs to calculate the upfront spending, check the payment terms and work out how long the business can operate before the money arrives. Where possible, the supplier can negotiate a deposit or payments at agreed stages. It is also important to establish whether a formal purchase order or signed contract is required before work starts. Beginning a job on a verbal promise can leave the supplier exposed if the paperwork is delayed or payment is disputed.

What if the business loses the bid?

A business might pay for insurance, hire equipment or bring in extra staff because it expects to win a contract. If the buyer chooses another supplier, those expenses do not disappear. Some costs, such as company documents, may be useful for future bids. Others, including extra stock, temporary staff or equipment hired for a specific job, may be harder to recover. SMEs should separate the expenses needed to qualify as a supplier from those that can wait until a contract is awarded. They should also ask the buyer about the procurement process and expected timelines before committing significant money.

An informal indication that work may be available is not the same as a confirmed order.

Calculate the cost before chasing the contract

Before pursuing a corporate opportunity, a small business owner should be able to answer four questions:

• What must I pay upfront? List the costs of documents, insurance, equipment, stock and extra staff.

• Which expenses can I use again? Separate ongoing business requirements from costs linked to one contract.

• How long can I wait for payment? Calculate how much cash the business needs to complete the work and cover its normal expenses.

• What happens if I lose the bid? Identify expenses that cannot be recovered and avoid committing to them too early.

Corporate contracts can bring repeat business and access to larger customers. But a big order is not automatically a good deal. For a small business, the better question is not simply how much the customer will pay. It is whether the company has enough money to deliver the work, cover its other commitments and remain in business until the customer settles the invoice.