Contract Process for Small Businesses

The A to Z of Small Business Contract Process

Your small business depends on contracts at all levels – from your vendors to your customers, partners, and staff. However, you don’t have an army of expensive lawyers you can call when something goes wrong. You need to understand the contract process yourself and make sure your company is following best practices when it comes to contract management.

Small Business Contract Risk

There is a wide range of contracts drawn up at your company and you don’t need to be an expert in all of them but as a business leader, you should know at least:

  • What your company is responsible for procuring, producing, enriching, or disposing of.
  • The costs and any variances – for example, penalties for late delivery.
  • Any requirements you’re agreeing to for how the work should be completed.
  • What remedies are specified in the contract for things likely to go wrong.
  • Who on your team is responsible for drawing up, negotiating, and storing the contract.
  • When there are clauses added that your fulfillment or legal teams have not approved.

The costs of failing to manage contracts can be more than the contract itself. Your contract risk exposure is the sum of the default contract’s price, plus the money your company spent on the goods or services produced before default, plus the cost of any resulting legal action. That doesn’t account for the cost of disposal of unwanted goods, the opportunity cost of tying up your business on an unprofitable task, and the reputational cost of a sour business relationship.

contract risk exposure formula

For example, imagine your small business was a salad producer. You create individually packed salads from local ingredients. An order comes in for 8,000 salads with a new recipe. It is a trial run for a new customer – a small supermarket chain in your area. You take time procuring the right ingredients, set up relationships with producers, wrangle shipping, and run an expensive marketing campaign inviting the supermarket’s shoppers to try your product.

The first crates of packaged salads are being loaded into refrigerated trucks when the customer calls. They received the advance product you sent and say the packaging is wrong.

By the end of the call, you are in dismay. In your contract with the customer was a clause that you would use PLA117 biodegradable clamshells to pack your salads. That detail was never passed on to fulfillment, which organized for your regular single-use plastic clamshells.

As a supermarket committed to sustainability, they won’t sell your salads – even for a discount – and your contract is torn up. Now you have 8,000 salads that have a shelf life of just a few days and 20 refrigerated trucks on the lot, but no customer.

How can you avoid this nightmare scenario? By developing good contract process practices at your company, supported by foolproof workflows and easy-to-use tools.

Best Practices for Small Business Contracting

When it comes to contracts, it’s the little things that matter for small businesses. Experts say it’s frequently a technicality (like the packaging specification) that small businesses overlook because they don’t have the resources for a fine-line review. Sometimes, it’s an edit that is suggested by the vendor or customer that seems reasonable to the point of contact at your company but that was never considered by your legal support, fulfillment, or operations teams.

Both issues are solved by a good contract process, guided by contract management software (or contract lifecycle management tool – CLM). CLM tools like Anapact create a single, searchable place to record communications about all contract functions. They standardize and manage contract workflows and role permissions, store a library of approved contract clauses, and enable streamlining through contract automation. They provide a fast, affordable way to manage contracts according to best practices.

Many small businesses don’t have the ability to hire experts to manage their contracts but they still need to mitigate the risk of the multitude of contracts that govern their day-to-day work. As a business leader, you can empower your team to make good contract management decisions by supporting them with the right tools. Then you can spend less time worrying about technicalities and more time enjoying your salad days.

Anapact is an enterprise CLM that was built for your small business. Get a demo!