Contracts are the arteries of business

If accounting is the life blood of business, contracts are the arteries. Contracts, whether oral or written, bind parties by agreements through which assets flow. There are vena cava contracts which supply the business with its essential funds, such as a property loan to a restaurant. Others are minor capillary contracts which perform limited support, such as an oral contract to sell a sofa at a 5% discount if it’s paid in cash.

The nearer a contract gets to the heart of a business, the more critical it becomes to certify the agreement in case of a dispute. A disagreement about the discount percentage on a sofa won’t bankrupt your business, but an interest rate spike on your property loan might.

If every agreement depended upon a written contract, the flow of business would be mired by the paperwork. What a business owner needs is a contract gauge to measure the risk of dispute and subsequent loss against the roadblock of a formal contract negotiation. Many factors could affect the business owner’s perspective, such as previous experience with the other party or the scope of the contract, but the bottom line rests on a single question, “If this were disputed, could it sink my business?”

The obvious business-sinking disputes involve agreements that could wipe out the total business assets. A loan to purchase space in a mall applies when your business is a clothing apparel store. Other agreements that could sink a business are those which, if disputed, could result in enormous liability.

I’m inclined to be suspicious of all agreements, oral or written, and enter into them only when I’m absolutely certain I understand what’s at stake. The only exception is oral contracts with people I’ve come to trust. This week’s reading affirms my suspicion and highlights the importance of plain dealing. Attempts to trick others into unfavorable agreements are likely to backfire, both in the annulment of the agreement and the backlash when customers realize you’ve tried to rip them off.

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