A study by Hitachi Capital published in early summer revealed that almost half of SMEs had turned down work due to “unreasonable demands”, rather than because they felt unable to deliver the work.
The main reasons cited were contracts that were priced too cheaply, unfair payment terms or with unreasonable and unrealistic requirements on such things as completion dates.
The findings support research carried out two years ago by the FSB (Federation of Small Businesses) that found that half (52%) of small firms had been stung by unfair contract terms with suppliers, costing nearly £4 billion in the previous three years.
But it takes considerable courage and clear thinking for a SME to walk away from potential new work, especially in an uncertain economic climate like the current one.
What to consider when making a decision to decline contracts
Companies need to preserve their reputations and their ethics and therefore this should also be taken into account when assessing the merits of a new order.
If the potential new client is trying to impose an unrealistic time constraint on completing the order, accepting the work and then being unable to deliver could rebound in damaging its reputation with existing clients. It can also be expensive if penalties are imposed by the client.
There may also be ethical considerations that are part of a business’ identity that could be compromised by the demands of a new client. If, for example it is a local prepared food manufacturer that sources ingredients through the Fairtrade scheme, pressure from a potential new customer for an unreasonably low price could force it to source cheaper ingredients that would compromise its ability to support Fairtrade. This would not only compromise the SME’s own ethics but potentially its reputation with existing customers.
The practical considerations include costs involved and capacity to deliver.
SMEs should set prices at a level that is viable, both in terms of purchasing raw materials and covering manufacturing costs at a level that ensures a reasonable profit. It makes no sense to accept an order that would compromise this. This would apply also to unreasonably lengthy payment terms leaving the business to carry the costs of fulfilling an order for some time before being paid.
Ideally, when approached by a new customer, a business should issue a contract stating the terms and conditions it expects to be met if it is to accept the order. It could include the requirement for a deposit, say 30%, to be paid at the start of the agreement, perhaps if appropriate an interim payment and another on the date on completion.
Credit risk should also be taken into account as few SMEs can afford to lose money due to customers going bust or simply not paying, leaving the SME to incur the huge financial and time costs involved when chasing payment from determined non-payers.
While inevitably the potential customer may try to negotiate to modify terms, if they prove obdurate then it would be better to walk away.
Another issue that could affect costs and ultimately whether a business decides to pursue a new order is the often lengthy and complicated process, including many pages of form-filling and supporting evidence that is often involved in tendering for public sector contracts.
Again, a careful analysis of the costs involved in the bidding process, the time involved and the attention demanded of staff away from what they would otherwise be doing will give some idea of whether it is worth pursuing.
Ultimately a lot of this is about bullying and the bottom line is that no SME should allow itself to be bullied into complying with unreasonable demands.