A large order will allow you to increase production volumes and thus lower unit costs. You look forward to an increase profits. But will there be any increase in profits?
Here are some of the things that stand in the way of increased profits when big sales are made:
- the selling prices you quoted were lower than your usual selling prices. In arriving at the lower selling prices you probably took into account the lower unit costs you thought you would achieve through increased production volumes. This means that your product margins will lower than your usual margins.
- the cost of providing the product to the big customer is not just the unit cost of production but also the overhead costs associated with servicing this customer. Big customers can be very demanding. The attention they demand may reduce the time you have available to service your other customers which in turn could cause you to lose their business.
- when dealing with a big company they have the power in the relationship. Part of being awarded the contract will mean that you sign their terms and conditions. And every one of those conditions will favour them – not your business. If you’ve been given a large order and your big new customer later orders less there’s not much you can do about it. Sue them? They have expensive lawyers - and you probably can’t afford the fees you’ll have to pay to succeed against them. If you’ve already placed orders to fulfil their orders you may have to carry stock for a while thus incurring holding costs which will reduce your profits.
- while most large companies are good about paying on time some are not. Having to wait another month for payment could cause you to have a severe cash flow problem – and even if your bank increases your overdraft facility the interest you pay will reduce your profits. In addition, big companies can fail, so if a large company that owes you money goes bust it could also force your business into liquidation.