Member Article

SMEs must plan to grasp lucrative contract opportunities

As the UK automotive and manufacturing industry experiences continued growth and order books strengthen, SMEs should ensure they have forecasting and working capital provisions in place in order to benefit from any potentially lucrative new contracts.

With the economic recovery underway and the manufacturing industry seeing a resurgence in business activity, especially in the form of new export orders, manufacturers are increasing productivity and expanding their roster of suppliers. However, whilst securing a new supply contract with a major manufacturer is a huge opportunity for SMEs, such activity can pose significant risks.

Margins in the automotive sector are notoriously tight and lead times can be lengthy, which can lead to working capital shortfalls for some businesses. This risk can be mitigated by carefully forecasting the impact of any new contracts on the business. Outlining other costs such as plant and machinery, parts and labour will allow firms to predict the financial outlay and if needed, seek additional finance.

There are a number of funding options available to SMEs looking to increase or supplement working capital. The key here is pre-planning, so that you can present your funders with realistic forecasts as well as up to date management information. This will show that you not only understand the financial and other impacts that growth is likely to have on the business, but also that the company has plans in place to service the contract.

Some of the contracts on offer represent a significant step for SMEs; increasing their turnover considerably. Businesses usually need support to assist with the increase.

Importantly, before signing a contract, firms must be sure to read the small print. Suppliers may find that failing to meet targets, or deliver on time, could result in financial sanctions that could negate the benefits of the contract as a whole. Ensuring that contractual requirements are realistic and achievable as well as being fully aware of what is required will help to prevent unexpected penalties.

While securing high-value deals with major manufacturers can obviously be hugely advantageous, it is important that businesses aim to diversify their customer base, as far as practicable, so that they are not overly reliant on one customer. If this isn’t possible, they should at the very least create a contingency plan, so that the firm understands the impact of losing a high-value contract. Of course, the ultimate goal is to find a way to make your supply invaluable, in order to establish a more secure working relationship.

It is currently a very exciting time for the UK manufacturing sector and there are many more contracts up for grabs than there were this time last year. However, firms must be sure to use their expanding order books as a tool to plan for the future while also mitigating against potential risks. Doing so will ensure that any potential cash flow problems are avoided and suppliers are able to fully benefit from new or growing relationships with customers.

Steve Horrocks is a corporate partner at accountancy firm Clement Keys

This was posted in Bdaily's Members' News section by Clement Keys .