For a manufacturer or industrial business in Tottenham, in Melbourne’s west, September can be the point where the Christmas period starts appearing on the production calendar, even though the busiest weeks are still ahead.
Customers may be discussing larger orders. Suppliers may be asking for forecasts. Raw materials could need to be ordered earlier to allow for production lead times. Warehousing and freight requirements may also need to be planned before demand actually increases.
That creates an important question well before Christmas arrives:
If orders increase over the next few months, how much cash will the business need to spend before customers pay?
For businesses operating around Tottenham’s established industrial and logistics precinct, that question can become particularly important as production, stock and supplier commitments begin to increase.
Christmas cashflow planning can start before the busy period
A seasonal working capital problem does not necessarily begin when Christmas sales increase.
It can begin when the business commits to the costs required to create those sales.
A manufacturer might need to order raw materials several weeks before production.
A packaging business may need additional stock before customers confirm their final volumes.
A distributor could increase inventory to avoid running short later in the year.
An industrial supplier may need to place larger orders with its own suppliers to prepare for customer demand.
Those commitments can start while normal trading continues, meaning the business is funding today’s operations and tomorrow’s expected demand at the same time.
That is why September can be a useful time to look forward rather than waiting until the bank balance begins to tighten.
Start with the production cycle, not just the sales forecast
A sales forecast tells you what the business hopes to sell.
A cashflow forecast should show what has to be paid before those sales occur.
For a manufacturing or industrial business, consider the entire cycle:
Raw materials are ordered.
Suppliers are paid according to their terms.
Materials arrive.
Production takes place.
Labour and operating costs are incurred.
Finished goods may be stored before dispatch.
Freight is paid.
The customer is invoiced.
The customer pays according to their terms.
There can be weeks between the first cash leaving the business and the final customer payment arriving.
If production volumes rise in preparation for the end of the year, that timing gap can become significantly larger.
The business therefore needs to know not only whether additional orders will be profitable, but whether it has enough working capital to manufacture and deliver them.
Raw materials can absorb cash earlier than expected
Businesses preparing for stronger demand may need to secure materials before the customer order is ultimately delivered.
That can be particularly important where:
suppliers have long lead times
materials need to be imported
minimum order quantities apply
suppliers require deposits
pricing changes at different order volumes
production schedules need to be locked in early
customers expect short delivery timeframes later in the year
Paying for extra materials from existing cash can be perfectly reasonable where the business has sufficient reserves.
But it is worth looking at what happens to the rest of the business after the purchase.
If $200,000 is committed to materials, how much cash remains for payroll, GST, freight, equipment repairs and ordinary supplier accounts?
A profitable stock or material purchase can still create pressure if it leaves the business without enough liquidity for normal operations.
Supplier terms can determine when pressure appears
A business can have strong sales and good margins but still face a working capital squeeze because of the timing of its supplier payments.
Consider a manufacturer whose suppliers expect payment within 14 days while major customers pay 45 days after invoicing.
The business has to fund that difference.
If order volumes increase, the dollar value of the gap increases too.
Before committing to larger purchases for the coming Christmas period, it can help to review:
current supplier terms
proposed order values
deposits required
expected delivery dates
whether suppliers are offering additional credit
whether early payment attracts a discount
when customers are expected to pay
This may reveal that the business does not have a sales problem at all.
It has a timing mismatch between outgoing and incoming cash.
Could supplier or trade finance be considered?
Where a business needs to purchase stock, raw materials or inventory before it receives customer revenue, trade finance may be one option to investigate.
Depending on the lender and transaction, trade finance can sometimes be used to fund eligible purchases from domestic or overseas suppliers.
The purpose is generally to help bridge the procurement stage of the business cycle rather than forcing the business to use all of its own cash upfront.
Other working capital facilities may also be considered depending on the circumstances.
The important point is that the finance should match what is actually creating the need.
If the problem occurs when materials are purchased, a supplier or trade-related facility may deserve consideration.
If the pressure occurs later because customers take too long to pay, the appropriate solution may be different.
Manufacturing growth can create pressure before it creates cash
Imagine a Tottenham manufacturer receives indications that several customers expect to increase orders in November and December.
That sounds positive.
But meeting the demand might require the business to:
purchase more raw materials
increase production shifts
pay overtime
use additional casual labour
increase packaging supplies
pay higher freight costs
service machinery before peak production
hold more finished stock
All of those costs can occur before the additional customer receipts arrive.
This is one reason growing businesses sometimes feel tighter on cash even while turnover is rising.
Growth often requires funding first.
Rather than seeing additional working capital as a sign something is wrong, the better question is whether the proposed funding supports a genuine and measurable business requirement.
Production equipment needs to be part of the forecast too
Increased production can also put additional strain on machinery and equipment.
A business preparing for heavier use later in the year might bring forward servicing, repairs or replacement decisions to reduce the risk of downtime during an important production period.
That creates another potential cash requirement.
If machinery needs replacing, asset finance may be considered separately from working capital used for materials, wages or suppliers.
This is an important distinction.
Using a short-term working capital facility to fund a long-life asset may not always be the most appropriate structure.
Likewise, using all available cash to purchase machinery could leave too little working capital for the production increase the new equipment was purchased to support.
Looking at the equipment and cashflow requirements together can provide a clearer picture.
What happens after the goods leave the warehouse?
Preparing and delivering the order is only part of the cycle.
The business still needs to be paid.
If customers operate on commercial account terms, an invoice raised in November or December may not produce cash immediately.
For businesses with substantial B2B receivables, debtor or invoice finance may be another option worth investigating.
These facilities can potentially provide access to part of the value of eligible customer invoices earlier rather than waiting for the usual payment date.
Lender assessments can consider factors such as:
size of the debtor ledger
customer quality
payment history
debtor concentration
invoice age
disputes or credits
type of goods or services supplied
This means a business may have one cashflow issue when purchasing materials and another after the finished product has been delivered.
Understanding both stages can help determine what type of finance, if any, makes sense.
Large orders should be assessed for cash requirement as well as profit
Suppose a customer approaches the business with an unusually large order for delivery before Christmas.
The first instinct may be to calculate the profit.
That matters, but there is another number worth calculating:
What is the maximum amount of our own cash that will be tied up before this customer pays us?
That calculation might include:
supplier deposits
raw materials
wages
overtime
packaging
freight
subcontracting
storage
other direct production costs
The order may produce an attractive margin and still require a substantial amount of temporary working capital.
Knowing that before accepting the order allows the owner to decide whether the business can fund it internally or whether finance should be investigated.
Preparing early can preserve more choices
Working capital is usually easier to consider when the requirement can be explained and forecast.
September planning provides time to determine:
what additional demand is realistically expected
how much extra stock or material will be required
when supplier payments fall due
how staffing costs may change
when customer invoices are likely to be issued
how long those customers usually take to pay
whether January creates an additional gap
The business may discover it does not require finance at all.
Or it may find that an existing overdraft or cash reserve is sufficient.
The value of planning early is that the decision can be made with information rather than urgency.
Do not stop the forecast at 24 December
An end-of-year production plan should also consider what happens after Christmas.
A customer invoice raised shortly before a shutdown may not be processed as quickly as one raised at another time of year.
Some customers may have reduced accounts staff.
Others may close for a period.
At the same time, normal business expenses can continue or restart quickly in January.
That can include:
payroll
supplier accounts
finance repayments
rent
utilities
tax obligations
restocking
freight
production inputs
This means the highest cash requirement may not necessarily occur before Christmas.
For some businesses it may happen during the transition into January.
Forecasting through until normal customer payments resume can give a more realistic view of the total working capital requirement.
What information can help with a working capital review?
Different lenders require different information, but an industrial or manufacturing business may find it useful to have:
recent business bank statements
current financial statements
management accounts if available
debtor ledger
creditor ledger
ATO position
existing finance facilities
details of major customers
supplier terms
expected raw material or inventory purchases
contracts or purchase orders where relevant
required funding amount
timing of the requirement
expected source of repayment
It is also helpful to explain why the requirement is changing.
For example, a business preparing for a forecast increase in customer orders presents a different scenario from one borrowing simply because routine operating costs can no longer be met.
Is the business funding seasonal growth or covering an ongoing shortfall?
That distinction should be understood before choosing finance.
A temporary increase in production before the Christmas period may create a genuine short-term working capital requirement.
But if the business has difficulty paying suppliers throughout the year, there may be another issue that needs attention.
That could include:
customer payment terms
slow debtor collection
insufficient margins
excess stock
existing debt repayments
tax arrears
supplier terms
growth beyond the capacity of the current funding structure
Finance may form part of the answer, but understanding the underlying cause helps avoid simply shifting the same cashflow pressure into another month.
Five questions Tottenham businesses may ask while preparing for Christmas
Can finance be arranged before we receive confirmed Christmas orders?
Potentially, although lenders generally need to understand the funding purpose and business position. Existing trading patterns, forecasts, supplier requirements and purchase orders may all be relevant depending on the lender.
Can finance help us purchase raw materials ahead of expected demand?
Some trade finance, working capital and business finance products may be considered for eligible raw material or inventory purchases. The right structure depends on the transaction and lender.
What if we need more working capital because production is increasing?
Growth can increase the amount of cash required to fund materials, wages and operating costs before customer revenue arrives. A lender will generally assess the business’s financial position and how the proposed funding will be repaid.
What if customers pay us after we have already paid our suppliers?
That timing difference is a common working capital issue. Depending on the circumstances, options could include working capital facilities, trade finance, debtor finance or another commercial funding structure.
Should we wait until orders actually increase before reviewing finance?
Not necessarily. If the business can already identify likely supplier commitments, material purchases or staffing requirements, reviewing the expected cashflow gap earlier can provide more time to compare options.
Plan the funding before production ramps up
For industrial and manufacturing businesses around Tottenham VIC, the Christmas cashflow decision can begin well before the Christmas trading period itself.
Raw materials may need to be ordered. Suppliers may need deposits. Production may need to increase. Staff and freight costs may rise. Customers may then take weeks to pay after delivery.
Thrive Broking can help Tottenham businesses review that complete funding cycle and compare working capital, trade finance, debtor finance, asset finance and other commercial finance options across our lender panel.
The starting point is not choosing a product.
It is working out where cash becomes tied up, how much will be required and when it is expected to return to the business.
A Broker’s Observation
One of the most useful questions to ask a manufacturer before a busy period is not, “How many more orders do you expect?”
It is:
“When will you have to start spending money to fulfil those orders?”
The answer may be several weeks or even months before the sales revenue appears.
That is why waiting until the Christmas rush arrives can be too late to properly understand the cashflow requirement.
For businesses with production lead times, September planning can reveal a funding gap long before it appears in the bank account.