The end of the sales cycle is a mess, let’s be honest. For most small businesses the sales team is incentized to close deals as fast as possible. The finance team is often left holding during with the impact of contract management on financial management. Which usually isn’t a great impact. One of the critical areas in which contract management significantly influences financial management is in the data capture and handover process. When we zero in on sales contracts, the cause of this becomes obvious, data is more often than not trapped in legal contracts and not structured for use after the handover to finance teams. This article will delve into the ways contract management influences financial management and how businesses can leverage this relationship to their advantage.
What’s The Impact of Contract Management on Financial Management
When it comes down to the quote to cash cycle of how leads move through a process to become closed won deals, invoiced and paid customers contracts sit right in the middle. In particular the data that sits in contracts. If you’re looking to produce any kind of scalable contracting for you customers you need to be aware of the impacts of not handling this data correctly.
When it comes to the impact of contract management on financial management there are a number of ways that it can negatively effect how you get cash in bank. It can also negatively effect how your finance team manages their revenue recognition and reporting. Let’s have a look at how some of these impacts can manifest.
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1. Revenue Recognition and Forecasting
One of the primary impacts of contract management on financial management revolves around revenue recognition. A well-managed sales contract will clearly define the terms and conditions under which revenue should be recognized. Most importantly when it will start to be recognized. For businesses that operate on a deferred revenue model or involve multi-stage payment systems, such as those in the software as a service startup industry, understanding when and how to recognize revenue is pivotal.
Moreover, by managing contracts effectively, companies can have a faster handover to get things like PO numbers from customers and procurement portals set up for billing. This will help with improving your cashflow and cashflow forecasting reliability. This forecasting ability is crucial for financial planning, ensuring that there are no unexpected liquidity crunches, especially for bootstrapped companies and ensuring that capital is available for reinvestment or other operational needs.
2. Contract Risk Management
Every contract, especially sales contracts, carries built in, inherent risks. These can range from non-payment by a client to more complex contractual disputes over product quality or delivery terms or the liability clauses that you agree to. Financially, these risks can lead to unexpected costs or loss of revenue.
By actively managing sales contracts, companies can identify potential financial risks in advance and plan for them. For instance, clauses pertaining to penalties for late payments or mechanisms to address disputes can be incorporated into the contract. With these preventive measures in place, businesses can mitigate potential financial losses or even turn them into revenue opportunities, like earning from late payment penalties. Another place you can look to mitigate risks is with the service level agreements in your contracts. Ensuring that your development team have a strong understanding of what these are and the penalties of breaking them will help to reduce risk.
3. Cost Containment
In the realm of SaaS sales contracts, there’s a direct link between contract management and cost containment. Efficient contract management ensures that all deliverables, timelines, and payment terms are clearly defined. This clarity helps in avoiding any unplanned expenditures or costs due to misunderstandings or ambiguities.
For example, if a sales contract for a product stipulates after-sales service for one year, but the terms are not clearly defined, the company might end up bearing costs for services that weren’t originally factored into the contract’s pricing. This situation can result in increased costs and decreased profitability. Effective contract management eliminates such ambiguities.
4. Enhancing Client Relationships
While this may not directly sound like a financial impact, the truth is that strong client relationships have long-term financial benefits. A well-structured sales contract that is transparent and fair to both parties will undoubtedly enhance client trust. In the long run, this trust can translate to repeat business, client referrals, and more robust revenue streams.
There’s also something to be said about the way that your sales team transitions a contract to be billed by the finance team as part of the customer experience. Especially when you’re dealing with sales contracts for small businesses where the buyer and the bill payer are the same. In this case you want to make sure you create a seamless end to end experience. Even the post sales invoicing is part of the customer experience.
5. Compliance and Regulatory Adherence
Today’s businesses operate in a world where compliance and regulations can have significant financial implications. Especially in sectors like finance, healthcare, or technology, non-compliance with contractual obligations can result in heavy penalties.
By ensuring that sales contracts adhere to the latest regulations and industry standards, companies can avoid potential financial pitfalls. Effective contract management plays a critical role here, keeping businesses updated about any compliance-related changes that need to be reflected in the sales contracts.
6. Operational Efficiency
Lastly, streamlined contract management leads to operational efficiency, which has a cascading effect on financial management. By reducing the time and resources required to draft, review, and administer contracts, companies can allocate these saved resources to other profit-generating activities.
The connection between your sales team and finance team can cause a lot of friction in your business. The impact of contract management on financial management, especially in the context of sales contracts, is undeniable. From revenue recognition to risk mitigation, the benefits of effective contract management permeate various aspects of financial management. As businesses look to strengthen their bottom line in an increasingly complex business environment, paying attention to the intricacies of sales contract management can offer them a competitive advantage.
