A customer suddenly wants three times their usual order.
The margin is attractive. The work is there. The customer is established and the order could lead to more business.
The problem is that the business has to fund almost everything before it gets paid.
For a Dandenong business, a large customer order can create a very specific type of working capital pressure. More materials may need to be purchased, production may have to increase, extra freight may be required and staff hours may rise.
If the customer then pays on 30-day or 60-day terms, the business can be carrying a substantial amount of cash for weeks.
The order may be profitable.
The cash timing may still be difficult.
The bigger the order, the more money leaves first
A normal customer order may fit comfortably within existing cash reserves.
A much larger order can change the equation.
Suppose a business normally receives orders worth around $25,000 from a particular customer.
The customer then places a $120,000 order.
To fulfil it, the business needs:
$55,000 of materials or stock
additional production labour
packaging
transport
possibly overtime or casual staff
The customer will pay 45 days after invoicing.
That means the business may need to fund a large portion of the job before receiving any cash from the sale.
If several other customers are also being serviced at the same time, the pressure can become significant.
Revenue is not the same as available working capital
A $120,000 order can make the sales pipeline look stronger immediately.
But the bank account does not improve until the customer pays.
Before that happens, the business may be using cash to fund the customer’s order.
This is one of the reasons growing businesses can appear strong on their profit-and-loss statement while feeling increasingly tight in day-to-day cash flow.
The larger the order book becomes, the more money may be tied up in:
raw materials
stock
work in progress
wages
finished goods
unpaid invoices
Growth often increases the amount of working capital the business needs before it increases available cash.
Ask how much cash the order needs before asking how profitable it is
Margin matters.
But cash requirement matters as well.
Before accepting a large order, it can be useful to calculate the peak amount the business will need to fund.
For example:
Materials and stock: $55,000
Additional labour: $14,000
Freight and delivery: $7,000
Packaging and other costs: $4,000
Total pre-payment cash requirement: $80,000
If the business has $100,000 available, using $80,000 to fulfil one customer order may leave very little room for normal operations.
That is when a profitable order can start putting the rest of the business under pressure.
A customer deposit can reduce the funding requirement immediately
Before borrowing, the business may be able to change the commercial terms.
A deposit from the customer can reduce the amount of cash the business has to provide itself.
For example, a 30% deposit on a $120,000 order brings $36,000 into the business before production begins.
That can materially reduce the working capital requirement.
Depending on the customer and contract, the business might also negotiate:
progress payments
staged invoicing
payment on dispatch
shorter terms for unusually large orders
separate payment for materials
partial payment before production
Not every customer will agree.
But large or unusual orders can justify different terms from the customer’s standard arrangement.
Supplier terms can also shift the timing
The business may have another lever on the purchasing side.
If suppliers normally require payment within 14 days, the business could ask whether larger orders qualify for different terms.
Possible arrangements might include:
a deposit with the balance later
30-day trading terms
staged supplier payments
larger account limits
direct delivery to the customer
payment linked to specific milestones
Improving customer terms at one end and supplier terms at the other can substantially reduce the cash gap.
External finance can then be assessed for whatever requirement remains.
Working capital finance can support the production stage
Where cash is needed before an invoice exists, invoice finance may be too late in the cycle.
The business may need funding to purchase materials, manufacture goods or cover labour before anything can be billed.
In that situation, working capital finance may be worth considering.
The funding requirement can be linked to the cost of fulfilling the order rather than simply borrowing an arbitrary amount.
A business may not need $120,000 because that is the sales value.
It may need $70,000 or $80,000 because that is the amount of cash required before the customer begins paying.
Understanding that distinction can reduce unnecessary borrowing.
Invoice finance may become relevant once the order is delivered
The cash-flow problem can change once the goods have been delivered and the invoice raised.
At that point, the business may have completed its obligations but still be waiting 30, 45 or 60 days for payment.
Where eligible business-to-business invoices are involved, invoice or debtor finance may help release part of that cash earlier, subject to lender requirements.
For some larger orders, the finance strategy may therefore have two stages.
Working capital helps the business fulfil the order.
Invoice finance helps shorten the wait after invoicing.
Whether that structure is appropriate depends on the transaction and the business’s broader position.
One large order can interfere with every smaller customer
Concentration of cash can create another problem.
If most available funds are committed to one large customer order, smaller profitable jobs may become harder to accept.
A business might have to delay:
replenishing normal stock
buying materials for other customers
replacing equipment
increasing staff
paying suppliers promptly
The large order can therefore create an opportunity cost.
It may be profitable by itself while reducing the business’s ability to service the rest of its customer base.
That is why protecting some working capital can be strategically important.
Customer quality matters when finance is supporting the order
A larger order can make businesses excited about the revenue.
The payment risk deserves equal attention.
Before committing substantial cash, it can be worth considering:
how long the customer has traded with the business
whether previous invoices have been paid on time
whether the customer is asking for unusually long terms
whether the order can be cancelled
whether the goods can be resold if the customer does not proceed
whether the margin is sufficient
whether a deposit is available
Finance should not turn a weak transaction into an apparently affordable one.
The underlying order still needs to make commercial sense.
The strongest orders can create repeat funding needs
A large customer order may be the beginning of a bigger relationship.
That is positive, but it can increase working capital pressure.
If the first $120,000 order is followed by another before the customer has paid the first invoice, the business may suddenly be carrying two significant orders at once.
That can happen quickly.
The business has proven it can deliver.
The customer wants more.
Revenue grows.
Cash becomes tighter.
At this point, the funding question may move from a one-off loan to an ongoing working capital structure.
Avoid assuming the customer payment date will solve everything
Even when a customer has reliable terms, payment timing can vary.
An invoice may be queried.
Delivery documentation may be missing.
An approval may take longer than expected.
The customer’s accounts team may process payments only on certain days.
If the finance structure depends on payment arriving on one exact date, there may be little room for delay.
A sensible cash plan should usually include some tolerance around expected receipts.
That becomes even more important around December and January, when customer accounts departments may operate on reduced staffing or altered payment schedules.
Year-end orders can carry into the new year
A large order received in November or December may appear to be part of a strong Christmas trading period.
But the cash may arrive much later.
Materials are purchased in November.
Production occurs in December.
The customer is invoiced before Christmas.
Payment arrives in late January.
Meanwhile, the business still has wages, rent, supplier accounts, tax obligations and other customers to support.
That is why year-end growth should be assessed across the entire cash cycle rather than simply by the invoice date.
Accept the order because the numbers work, not because the revenue looks impressive
For a Dandenong business considering a large customer order, the first question should not be whether the sales value looks attractive.
It should be whether the business can fund the order without weakening the rest of its operations.
Thrive Broking can review the upfront cost of the order, customer payment terms, supplier requirements, existing cash reserves and current finance commitments.
Depending on the circumstances, options may include working capital, invoice finance, debtor finance or another commercial facility.
The objective is to help the business take on profitable larger orders without having to use every available dollar before the customer pays.