Contracts are at the heart of every business, no matter what size. Discover everything you need to know about contract management for your small business in this explainer.
From hiring new employees to making a deal with your supplier, contracts are used frequently in small businesses, and without the appropriate tools in place, they can act as a bottleneck for growth. But what can you do to avoid this?
This post explores everything you need to know about effective contract management for small businesses, from why you need it to how to establish one. Keep reading!
How important are contracts in small businesses?
PwC estimates that the average organization has between 20,000 and 40,000 contracts. Whilst these numbers differ considerably between small businesses and larger companies, it is no secret that contracts play a critical role in businesses of every size, including the SMEs that make up the majority of businesses operating today.
Many small businesses have a habit of carrying out transactions and agreements informally to reduce cost, time, and burdens on resources. However, the risks associated with conducting business without contracts are huge, especially for businesses that are just starting out.
The broad purpose of a contract is to formalize commercial relationships and prevent costly legal action by ensuring that all parties are on the same page and keep to the rules. Without these legal agreements, your small business could be vulnerable to all kinds of risks.
That’s why, for the reasons we are about to discuss, contracts are critical for small businesses:
1. Contracts ensure compliance (and prevent disputes)
As a small business, the last thing you want to fork out for is the cost of going to court. That’s why falling on the wrong side of the law is a small business’ worst nightmare. From improper licensing to bad hiring practices, there is a landmine of legal issues facing small businesses, and small business owners will need to tread carefully to avoid them.
Contracts will help your small business remain compliant since the legal agreements will lay down exactly what you can and can’t do, as well as the penalties you could be facing if you fail to do what is expected of you by law.
2. Contracts help you track your obligations
Within a small business, most employees will be spread across different functions, with various different responsibilities to fulfill. As a result, it can be especially difficult to keep on top of what needs to be done and when.
Fortunately, contracts can help small businesses keep track of their duties since business contracts will outline the rights, responsibilities, and obligations of each party - all in a single document!
3. Contracts help you grow and protect your assets
Small businesses are usually not resource-rich. As a result, the time and money that a small business does have should be treated as a precious commodity - and protected at all costs.
Contracts are also an opportunity to increase revenue, as they are used to close new deals and extend existing ones. With McKinsey & Company estimating that at least 90% of annual revenue is held in contracts, capturing this revenue is a strategic imperative for small businesses - and contracts hold the key to this.
4. Contracts ensure you get paid
The Federation of Small Businesses revealed that 84% of small businesses have fallen victim to late payments, whilst figures from Bacs Payment Schemes estimate that the total amount owed to small-to-medium-sized enterprises (SMEs) in late payments sits at roughly £14bn, affecting over a third of small businesses.
As many small businesses know all too well, cash flow is critical to keeping your business afloat, and delayed payments can jeopardize your success, or worse, cause a small business to fall into debt.
Contracts are designed to ensure that you do get paid, and on the terms originally agreed.
Why is contract management important for a small business?
Given how important contracts are for small businesses, and how often they are used, it makes sense to pay attention to how effectively you manage them.
A successful contract management solution can transform the way your business operates, resulting in an increase in deals and more efficient use of your time. There are a few reasons for this:
1. Centralized records
One of the biggest benefits of contract management for small businesses is the ability to more efficiently store and manage contracts online, in a secure and central place.
Leasing a generously sized office space is often out of the question for SMEs, which makes storing hard copies of contracts in one central location a real challenge. What’s more, many businesses have moved towards a paperless office anyway in a bid to keep mess and fuss to a minimum.
Online contract management software is a fast and efficient way to securely store contracts and legal documents in a single, centralized place. Unlike physical storage solutions which are vulnerable to loss and destruction, contract management solutions store documents indefinitely, and behind multi-layer passwords.
With Juro, you can organize and query your contract data in real time, thanks to our data-rich repository. Juro incorporates a flexible data layer, which means contracts and metadata are live synced and you can query contract data at any point. This makes it significantly easier to audit contracts and ensure contract compliance.
See how this works in the video below 👇.
2. Contracts empower your teams to collaborate
There is an increased need for collaboration within small businesses. With low numbers of staff, people will naturally be expected to chip in where they can. Even when your business begins to scale, there will always be a need for collaboration across departments, as contracts affect all business areas.
Contract management systems encourage this collaboration in a few, important ways. For example:
- By establishing robust approval procedures
- By implementing a tool for comments
- By providing a contract repository that’s easy to navigate.
3. Put data protection first
It would be a big mistake to assume that data protection rules don’t apply to small businesses. Data protection for small businesses can be daunting, but security is important for businesses of all sizes and sectors, and taking a pro-active approach is essential.
Fortunately, the best online contract management systems empower businesses to store and process data securely more effectively. At Juro, we have strict data security provisions built into our software that make safeguarding client and employee data effortless, such as encryption and two-factor authentication amongst other things.
4. Gain valuable insights
Many SMEs are yet to recognize the wealth of valuable information they could be extracted from their contracts, such as:
- The contract clauses that cause the most friction
- The time spent managing different types of contracts
- Contract end and renewal dates
- The cost per transaction
Even if they do see the value in collecting this data, managing contracts on excel can be an arduous task, and one they simply don’t have time for. How long have you already wasted scanning contracts for pain points and key terms?
Contract management helps small businesses overcome this hurdle and begin tracking the contract data that matters. For example, Juro captures and preserves metadata to enable teams to search for and extract data on the best contract metrics, saving them precious time and resources.
5. More scalable
Your business may be operating on a small scale now, but what happens when you begin to grow? If 10 contracts per month suddenly transition to 500, a bottleneck in legal is the last thing you need. If scaling is the goal for your small business - why not prepare for it?
When scaling, small businesses could benefit from a wide array of contract management features, including:
- Faster processing and creation: Most contract management platforms offer templates, which eliminates the need for in-house lawyers to draft masses of contracts from scratch. Instead, these templates can be edited at scale and by other departments that have been enabled to self-serve.
- Searchability: When you store and manage digital contracts online, you can quickly and efficiently search for contracts, sift through their terms and follow a detailed audit trail. This popular contract management feature can deliver you the information you need for thousands of contracts on demand.
In short: an effective contract management system will enable your company to seamlessly increase the volume of contracts you create, without needing to expand your legal team or break the bank.
6. Greater flexibility
Traditional, hard copy contracts are notorious for getting lost, becoming damaged, and lacking security. Within the digital age where business owners and in-house lawyers often work on the go, messing around with offline contracts is simply not feasible anymore.
Browser-based contract management has transformed the way small businesses manage contracts by enabling them to review and sign legal documents whilst on the move, ensuring businesses can close deals and capture revenue wherever they are.
Who manages contracts at a small business?
In most small businesses, an in-house lawyer will typically ‘own’ the contract process. However, if your business is still in its infancy, you may find yourself without a legal department, in which case contract management duties will usually fall to the Chief Financial Officer, the Chief Operating Officer, or even the CEO.
This means that important contracts will often be passed back and forth between different individuals and departments, many of whom will not have a legal background or any experience managing contracts. Yet, they will regularly be working with different types of contracts on a regular basis, such as:
- Commercial lease agreements
- Consulting agreements
- Service agreements
- Employment offer letters
- Sales contracts
- Data processing agreements
- Letters of intent
This is yet another reason why contract management systems are so useful for SMEs, as they make the contract process more collaborative, accessible, and easy to use - even without experience.
How can a small business manage its contracts more effectively?
Let’s recap. We’ve discussed how small businesses manage contracts regularly, and that, given limits on their time, money, and resources, they could really benefit from streamlining their contract management process. Great. But where do they start?
With contract management systems, of course. Contract management software aids small businesses in the creation, negotiation, signature, renewal, and auditing of contracts, without the need for multi-versioned Docx and PDF files scattered across shared drives.
Contract management software like Juro will streamline the contract lifecycle, enabling small business teams to sign and manage contracts in a more efficient way.
Check out our case study on how Tempo uses Juro to streamline its contract process.
Manage your contracts better with Juro
Juro is the preferred contact management software for small businesses, according to G2 reviews.
Juro offers an all-in-one contract automation platform that helps small businesses to agree and manage contracts in one unified workspace. Offering a wide range of flexible plans to suit businesses of all sizes, Juro can help transform the way your business handles contracts.
If you're ready to get started with contract management software for your small business, hit the big green button below.