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We here at Derek Madden believe that winning a major customer can be an important milestone for an SME, but a large contract is not automatically a profitable one. Before signing, businesses should look beyond the headline value and understand the impact on margins, cash flow, working capital, resources and risk. A contract that significantly increases turnover can create financial pressure if the underlying terms are not properly assessed.

1. Calculate the true profit margin

A contract worth €200,000 may look attractive on paper, but revenue alone tells you very little about its financial value.

Before signing, calculate the expected gross profit and contribution margin. Include all costs associated with delivering the contract, including materials, labour, subcontractors, transport, software, insurance and any additional overheads.

It is also worth considering whether taking on the customer will require additional employees or equipment. These costs may not appear in the initial quotation but could materially reduce the eventual return.

Ask yourself:

• What will it cost to fulfil the contract?

• What gross margin will it generate?

• Are all associated costs included in the pricing?

• Could costs increase during the contract period?

• Is the margin sufficient to justify the resources involved?

A large contract with a weak margin can consume significant management time and working capital while contributing relatively little to the bottom line.

2. Examine the payment terms carefully

One of the most important financial considerations is when you will actually receive the money.

A contract may generate substantial revenue while leaving the business waiting months for payment. This can create a significant working capital requirement, particularly where the business must pay employees, suppliers and subcontractors before receiving payment from the customer.

For example, a business could agree to a €300,000 contract but need to spend €100,000 or more on delivery costs before receiving a substantial proportion of the customer payment.

Review the proposed:

• Payment terms

• Deposit requirements

• Invoice dates

• Credit periods

• Milestone payments

• Retention arrangements

• Late payment provisions

Consider whether the payment structure matches the cash requirements of delivering the work.

If the contract requires substantial expenditure upfront, negotiate payment milestones where appropriate.

3. Stress test the contract

Financial projections often assume that everything goes according to plan. Businesses should also consider what happens when it does not.

Before signing, run several scenarios.

What happens if costs increase by 10%? What if delivery takes longer than expected? What if the customer pays 30 days later than anticipated? What if additional staff are required? What if the project generates more work than originally expected?

These scenarios can reveal whether the contract remains financially viable under pressure.

This is particularly important for SMEs because a major customer can represent a significant proportion of annual revenue. A problem with one contract can therefore have a disproportionate effect on the wider business.

Stress testing does not mean expecting the worst. It means understanding how much financial room the business has if circumstances change.

4. Assess the impact on your existing customers

A major contract can create an opportunity cost.

If your business has limited staff, production capacity or management resources, taking on a large customer could affect your ability to serve existing customers.

This matters financially because existing customers may already provide strong margins and reliable payment patterns.

Consider whether the new contract could result in:

• Existing work being delayed

• Overtime costs increasing

• Additional recruitment

• Reduced customer service

• Lost opportunities elsewhere

• Greater reliance on subcontractors

• Management becoming focused on one customer

A contract should therefore be assessed in the context of the whole business, rather than as an isolated sales opportunity.

Growth is valuable when it strengthens the business. Growth that creates dependency or pushes existing profitable work aside deserves closer scrutiny.

5. Review the financial and contractual risks

Before signing, examine the financial consequences if something goes wrong.

Pay particular attention to clauses relating to termination, penalties, warranties, liability, service levels, price increases and changes in scope.

A contract may also impose obligations that are not obvious from the headline price.

For example, a fixed-price agreement can become difficult if costs rise during the contract period. A contract with extensive service requirements may require additional employees or technology. A termination clause could leave the business with costs that cannot easily be recovered.

It is also important to consider customer concentration.

If one contract would account for a large percentage of your turnover, ask what would happen if the customer reduced its order, delayed payment or terminated the relationship.

A strong customer relationship can be valuable, but excessive reliance on one customer creates financial exposure.

Look beyond the headline contract value

Major contracts deserve more analysis than simply asking, “How much revenue will this generate?”

The better questions are:

How much profit will it generate?

How much cash will we need to deliver it?

When will we receive payment?

What resources will it require?

What happens if costs or delivery times change?

What financial exposure are we accepting?

These questions can help identify problems before a contract is signed.

For Irish SMEs, financial visibility becomes particularly important as contracts become larger and operations become more complex. A business may have the capacity to win a contract without having the financial capacity to deliver it comfortably.

Taking time to assess the numbers before committing can help protect margins, preserve cash flow and ensure that growth actually strengthens the business.

If you would like to discuss your business, contact us by email fiona@maddenco.ie or visit maddenco.ie.

Disclaimer

This article is based on publicly available information and is intended for general guidance only. While every effort has been made to ensure accuracy at the time of publication, details may change and errors may occur. This content does not constitute financial, legal or professional advice. Readers should seek appropriate professional guidance before making decisions. Neither the publisher nor the authors accept liability for any loss arising from reliance on this material.