As a cash management CFO (one focused on managing cash as tightly as possible), I found the article written by Norm Brodsky in response to a question from an entrepreneur intriguing. I’ve heard similar issues. I once had a prospective client who ran a medical transportation company and had an 8-figure contract with the Veteran’s Administration. However, he had not included any cost increases in his contract and his firm was hemorraghing cash. He was using another profitable company to fund all the losses in this profitable one.
We told him he had to immediately renegotiate the contract. Any self respecting cash management CFO would have said the same thing. The government wanted a reliable entity. If he suddenly went belly up after servicing the government 2.5 years into the 5 year contract (and apparently, doing an excellent job), the VA would be in the unenviable position of having to find an alternate with no notice. For him, the situation would be worse. He would have lost millions over the years and now be unable to get another government contract as a significant shareholder of any entity doing business with the government. The same thing Norm stated in his advice applies here. Per Mr. Brodsky, “he could avoid such problems by inserting a simple clause in his customer contracts that would allow him to increase the price if his material costs rose.”
If you have a contract that’s underwater (losing money), re-negotiate ASAP! If you are considering entering into a contract that has a fixed price based on variable material costs, including gasoline if you are a transportation or related entity, then, as above, PLEASE insert the clause about increasing prices when material costs rise. Just some friendly advice from a cash management cfo.