A bigger customer comes along.
The order is good. The work is regular. The margin looks worthwhile.
Then procurement sends through the terms.
60 days.
Your staff are not waiting 60 days.
Your subcontractors are not waiting 60 days.
The fuel card still gets paid.
Suppliers may want seven, 14 or 30 days.
If you are buying materials for the work, that money can leave the business before the job has even started.
This is where a good customer can create a very real cashflow problem.
For a business in Horsham VIC, particularly one doing commercial work, supplying products or servicing larger organisations, the question is not just whether the customer is worth having.
It is whether the business can afford to carry them until they pay.
“The job makes money, so why are we short?”
This is one of those things that sounds contradictory until you look at the dates.
Say a customer gives you $80,000 of work.
You expect to make a decent margin.
To deliver it, you need $32,000 in materials, $18,000 in wages and another $6,000 in freight, subcontractors and operating costs.
That is $56,000 going out.
You finish the work, raise the invoice, and then the 60 day clock starts.
Meanwhile, normal business expenses keep coming.
So yes, the job can be profitable.
And yes, the same job can leave the bank account looking worse for a while.
That is not an accounting mystery.
It is simply the gap between doing the work and getting paid.
Bigger customers can push the cost of their payment terms back onto you
Larger organisations often have standard payment processes.
You may not get to choose the terms.
The customer might say 30 days.
Another might say 45.
Another might insist on 60 days from invoice.
Some pay from the end of the month rather than the invoice date.
The difficult part is when those terms are treated as though they cost the supplier nothing.
They do cost something.
If your business has to fund wages, materials and operating costs while waiting for payment, your money is tied up for longer.
The customer may be an excellent account.
They may pay every invoice.
But you still need enough working capital to carry the gap.
That needs to be part of the decision about whether the work stacks up.
Work out what the terms actually mean in dollars
Before saying yes to a larger commercial customer, put the payment terms beside the costs.
Not the annual contract value.
Not the total revenue.
The actual weekly cash movement.
If the new customer adds $20,000 a week of costs and you may wait eight weeks from starting the work to receiving the first payment, the business could be carrying a significant amount before the cash starts coming back.
If another job starts during that period, the requirement gets larger.
If an existing customer pays late, it gets larger again.
This is why simply saying “we’ve got enough cash to do the first job” can be misleading.
You need enough cash to keep doing business while you wait.
You do not have to accept every payment term without a conversation
Sometimes the terms are fixed.
Sometimes they are not.
There can be room to ask.
Can materials be paid upfront?
Can a deposit apply?
Can the first invoice be raised earlier?
Can the job be billed in stages?
Can larger orders have different terms?
Can a new account start on shorter terms until a payment history is established?
If the customer is asking you to carry a lot more cost than normal, there is nothing unreasonable about understanding whether the payment structure can change.
They may say no.
At least you know what you are agreeing to.
That is better than discovering six weeks later that the business is effectively funding the customer from its own operating account.
Christmas makes long payment terms worth looking at now
A 60 day term can look very different once November and December are involved.
If work is completed and invoiced in November, the cash may not arrive until January.
If invoices are raised in December, payment may move further into the new year depending on the customer’s terms and payment process.
At the same time, your own business can still have payroll, supplier accounts, tax commitments and normal operating expenses.
There may also be annual leave or a short trading period over Christmas.
This is why the timing matters now.
It is easier to look at a new customer in September or October and decide how the business will fund their terms than to wait until January and wonder why there is $150,000 sitting in debtors and not enough cash in the operating account.
Before borrowing, see what can be fixed commercially
Not every cashflow gap needs another loan.
Sometimes the first step is improving the way the business gets paid.
Invoice as soon as the work allows.
Do not leave completed jobs sitting for a week because somebody has not got around to billing them.
Make sure purchase order numbers, timesheets and other documents are right before the invoice goes in.
Find out whether a larger customer has a set payment run.
Know who approves the invoice.
Follow up before the due date if the amount is significant.
If customers regularly pay later than the agreed terms, use the date they normally pay when forecasting cash rather than pretending every invoice will land exactly on day 30.
Supplier terms are worth looking at too.
If a new customer is going to materially increase purchasing, speak with the key suppliers before the orders build.
There may be more room available on the supplier side than you expect.
A slightly longer supplier term or staged delivery can sometimes take pressure out of the gap without changing the customer arrangement at all.
Where finance can fit
If the business still has a gap after looking at payment terms and supplier arrangements, there are different ways it may be approached.
If the business has already completed the work and has eligible commercial invoices waiting to be paid, debtor or invoice finance may be worth looking at.
That can be relevant where the problem is not whether the customer will pay, but how long the business has to wait.
Lenders will usually look at things such as the customers, the invoices, debtor concentration, payment history and the underlying transactions.
If the cash is needed earlier, before an invoice exists, the discussion may instead be around a working capital facility, line of credit, overdraft or business loan, depending on the business and lender.
If the main cost is eligible stock or a supplier purchase, trade finance may be relevant in some situations.
If the new customer requires another ute, truck, machine or piece of equipment, that asset can also be looked at separately rather than automatically using working capital to pay cash for it.
The point is not to throw every finance product at the problem.
It is to work out where the cash gets stuck.
There is also a point where the customer may simply be too expensive to carry
This does not get talked about enough.
A big customer is not automatically a good customer.
If they demand low pricing, long payment terms and a large amount of your capacity, the contract can look impressive while putting pressure on the rest of the business.
You may also become heavily dependent on one account.
Then if that customer takes longer to pay one month, the effect is felt everywhere.
Payroll.
Suppliers.
Tax.
Your ability to take on another job.
That does not mean long payment terms are always bad.
Plenty of businesses operate successfully with customers on 30, 45 or 60 day terms.
The difference is that they have built the cashflow around those terms rather than being surprised by them.
Questions business owners actually ask about this
“The customer is good for the money. Why would I use finance?”
Because credit risk and cashflow timing are different things.
A reliable customer may still take 45 or 60 days to pay. The issue may simply be whether your business wants to carry all of that cost from its own cash.
“Can invoice finance work if the customer always pays, just slowly?”
Potentially, for eligible B2B invoices. Whether it suits the business depends on the customer, invoices, concentration, cost and lender requirements.
“Should I just price the longer terms into the job?”
That is a commercial decision. The important thing is recognising that longer terms can have a cost rather than treating 30 and 60 day payment terms as financially identical.
“What if the customer says their terms are non negotiable?”
Then you can assess the work based on the terms that actually apply. That may mean using more working capital, changing the price, changing supplier arrangements or deciding whether the job is still commercially worthwhile.
“When should I look at finance if the work starts before Christmas?”
Before the cash becomes tight. If the order, contract, supplier costs and customer terms are already known, the likely gap can be reviewed before the business is relying on a particular payment arriving.
A Broker’s Observation
One thing I would want to understand with a larger customer is not just how much work they are giving you, but how much of your cash they are going to use while they are on your books.
If they pay in 60 days and your business has to pay most of the costs well before that, there is a price attached to carrying them.
Sometimes the business can manage that from its own cash.
Sometimes better terms can be negotiated.
Sometimes finance can help bridge the gap.
But I would want that worked out before the account gets large enough to put pressure on everything else.
A customer can be profitable and still be expensive to fund.