For a manufacturer, contractor, trade business or industrial service company in Hallam, in Melbourne’s south-east, late September can be the point where the final quarter starts taking shape.
Quotes are being accepted.
Customers are discussing October and November work.
Materials may need to be ordered.
Production schedules are being reviewed.
Employees and subcontractors may need to be allocated.
Christmas itself is still some distance away.
That is why 22 September is a useful time to look at what upcoming work could require from the business before those costs become unavoidable.
A profitable final quarter can still create a working capital gap when materials, payroll and suppliers need to be funded well before commercial customers pay.
The question to ask now is:
If the workload increases over the next few months, how much cash will the business have tied up before it gets paid?
More work can put more pressure on cash before it improves it
A business owner may reasonably expect additional work to strengthen cashflow.
Eventually, it should.
But growth can initially have the opposite effect.
A manufacturer producing additional orders may need more raw materials.
A fabrication or engineering business may need steel, components and labour.
A contractor may need materials and subcontractors.
A maintenance business may increase staffing.
A commercial supplier may carry more stock.
All of those costs can increase before the additional customer receipts arrive.
That means the business can be:
busier
invoicing more
generating stronger revenue
earning healthy margins
while still having less available cash than usual.
That is not necessarily a sign something is wrong.
It can simply be the cost of carrying growth.
Look at the jobs expected to start, not only the jobs already underway
By late September, a business may already have visibility over part of its October and November pipeline.
This is a good opportunity to put those future jobs into a cashflow forecast.
For each significant job or order, consider:
materials required
supplier payment dates
expected labour
subcontractor costs
equipment hire
freight
fuel
expected invoice date
customer payment terms
realistic payment date
Then look at the jobs together.
One project might be easy to fund.
Four projects starting within a fortnight can create a much larger requirement.
The issue is often not the cost of any single job.
It is the amount of cash tied up across several jobs at the same time.
Manufacturers need to follow the complete production cycle
For a manufacturing business, the cashflow cycle can begin before production starts.
Raw materials are purchased.
Components arrive.
Employees complete the work.
Finished goods may need packaging.
Freight needs to be arranged.
The goods are delivered.
The customer is invoiced.
Then the business waits for payment.
If that cycle takes six or eight weeks, the business needs enough working capital to carry each stage.
When production volumes rise, more cash can become tied up at every point.
A larger order can therefore be very attractive commercially while still requiring careful planning.
Supplier terms can determine how much of the cycle you fund yourself
A supplier offering 30-day terms can create a very different cashflow position from one requiring payment before delivery.
That is why supplier terms deserve attention before larger orders are placed.
Review:
existing account limits
payment dates
deposit requirements
early-payment requirements
whether larger orders change normal terms
minimum purchase quantities
If a business expects to buy substantially more materials over the coming months, existing supplier limits may also be tested.
A supplier that normally allows $50,000 on account may require payment upfront once that limit is reached.
The business should know that before committing to the work relying on those materials.
Contractors can have cash tied up before an invoice even exists
A commercial contractor may face a different problem.
The business wins a project.
Employees and subcontractors begin work.
Materials are purchased.
Fuel and operating expenses continue.
But the project may not yet have reached a milestone that allows an invoice or progress claim to be raised.
The business is funding the work without yet having a receivable.
That early stage can create a significant working capital requirement.
Once the invoice exists, the problem changes from funding delivery to waiting for payment.
Understanding both stages can help determine whether the current cash reserves and facilities are suitable.
Progress claims can add another layer of timing
Businesses working under progress-payment arrangements should not treat the claim date as the cash receipt date.
There can be several stages:
complete work ? prepare claim ? obtain approval ? issue invoice ? customer processes payment ? money arrives
Each stage can add time.
If the business raises a November progress claim but does not receive payment until December or January, it may need to continue funding the next stage of work in the meantime.
That overlap can become difficult if several projects follow the same cycle.
Labour can be the fastest-growing commitment
Materials are often the obvious cost.
Payroll can be just as important.
Employees may be paid weekly or fortnightly regardless of when the customer pays.
If workloads increase and another crew is added, the business might carry several additional payroll runs before the associated customer revenue arrives.
For example, an extra $12,000 per week of payroll carried for six weeks represents $72,000 before considering materials, subcontractors or other operating expenses.
When forecasting the final quarter, estimate how much payroll could increase and how long that increased cost is likely to be carried.
Subcontractors may expect payment faster than customers
A business may use subcontractors to manage additional demand rather than permanently expanding its workforce.
That can provide operational flexibility.
It does not automatically solve the cashflow problem.
A subcontractor may expect payment in seven or 14 days.
The commercial customer may pay in 30 or 45 days.
The business is funding the difference.
If subcontractor usage increases later in the year, calculate:
total subcontractor cost
payment terms
customer invoice timing
realistic customer payment timing
This helps show how much working capital the business may need to support the additional capacity.
Industrial service businesses can have the same issue without manufacturing
Hallam businesses do not need to manufacture products to experience this timing gap.
A maintenance company might provide technicians to commercial sites.
A mechanical or repair business may purchase parts before completing the job.
An electrical contractor may need labour and materials before invoicing.
A cleaning or facilities business may carry payroll while customers pay monthly.
An equipment service business may need parts, vehicles and technicians.
The common issue is that expenses occur during delivery while customer receipts come later.
Customer terms should be treated as a cost of doing business
Offering a customer 30 or 45-day terms can help win and retain commercial work.
But those terms have a funding consequence.
The business effectively finances part of the customer’s payment cycle.
As customer volumes increase, the dollar amount carried increases too.
A customer owing $25,000 on 30-day terms may be easy to manage.
The same customer owing $150,000 can have a much greater effect on working capital.
Before significantly increasing work with a large customer, consider both the margin and the amount of cash likely to remain outstanding.
Look at how customers actually pay
Stated terms are only part of the story.
A customer may officially be on 30 days but normally pay in 38.
Another may regularly take 45 days.
Some customers require purchase orders, timesheets, completion certificates or other approvals before they will process an invoice.
When forecasting upcoming customer receipts, use actual payment behaviour where possible.
A realistic forecast is more useful than one built around the earliest possible payment date.
Can better billing reduce the gap before finance is considered?
Finance should not automatically be the first response.
Sometimes the invoicing and payment structure itself can be improved.
Depending on the business and customer, possibilities may include:
deposits
staged payments
more frequent progress claims
upfront material payments
shorter payment terms
immediate invoicing when work is complete
Even moving cash receipts forward by a week can reduce the amount of working capital the business needs to carry.
The same applies to supplier terms.
Small improvements on both sides of the cycle can materially change the funding requirement.
What happens if the business needs another machine or vehicle as well?
Additional work may require another ute, truck, machine or piece of specialised equipment.
That creates another decision.
If the business uses a large amount of cash to purchase the asset outright, less money remains for materials, payroll and suppliers.
Depending on the asset and circumstances, asset finance may be considered separately so the business can preserve working capital for operating expenses.
This does not automatically mean financing the asset is the right choice.
The important point is to consider the asset purchase alongside the business’s broader cash requirements.
Trade finance may be relevant where suppliers create the gap
Where the business needs to purchase eligible stock, components or raw materials before customer revenue is received, trade finance may be worth investigating.
Depending on the lender and transaction, trade finance may assist with eligible domestic or overseas supplier purchases.
This can potentially reduce the amount of business cash committed at the beginning of the cycle.
Lenders may consider:
trading history
financial performance
supplier transaction
goods being purchased
existing commitments
expected repayment source
Requirements vary, and trade finance will not suit every business.
Debtor finance may be relevant after the invoice is raised
Once eligible B2B work has been completed and commercial invoices exist, a different option may be relevant.
Debtor or invoice finance may allow a business to access part of the value of qualifying receivables before the customer completes its normal payment cycle.
A lender may consider:
debtor ledger
customer quality
invoice age
payment history
debtor concentration
disputes or credits
underlying transaction
For a growing industrial business, debtor finance may be particularly relevant where sales are strong but a significant amount of cash is sitting in unpaid customer invoices.
A business can experience several funding gaps at once
Consider a manufacturer completing a larger order.
It buys materials.
It pays employees.
It pays freight.
It delivers the goods.
It invoices the customer.
Then it waits.
At the same time, it may already be ordering materials for the next job.
Cash can therefore be tied up in:
raw materials
work in progress
finished goods
customer invoices
all at once.
That is why revenue alone does not tell you how much working capital the business needs.
Existing overdrafts should be tested against the expected peak
A business may already have an overdraft or line of credit that works comfortably during ordinary trading.
If activity increases later in the year, the important question is how much capacity remains at the point when cash usage is highest.
Review:
current limit
normal utilisation
expected materials purchases
payroll increase
customer receivables
supplier due dates
tax obligations
existing finance repayments
The business should understand its likely peak funding requirement, not only today’s available balance.
Do not ignore December simply because the jobs start earlier
Work beginning in October or November can create receivables extending into December and January.
That is where the Christmas period starts influencing the forecast.
Customer accounts teams may take leave.
Approval processes can slow.
Some businesses close temporarily.
An invoice that would ordinarily be paid quickly may take longer if it falls across the holiday period.
On 22 September, we do not need to assume those delays will occur.
But it is reasonable to test what the business would look like if some payments arrive later than usual.
January may contain the final part of the cashflow cycle
A job does not stop affecting cashflow because the calendar reaches 31 December.
A November job may produce a January customer payment.
A December invoice may remain outstanding after the business reopens.
Meanwhile:
payroll resumes
suppliers still need paying
fuel and operating costs return
tax commitments remain
finance repayments continue
new materials may be required
The forecast should therefore run until normal customer receipts are expected to catch up again.
Late September is still about preparation
At this point, the purpose is not to assume Christmas demand has begun.
It has not.
Businesses may still be quoting work and deciding how much additional capacity they actually need.
That gives owners the opportunity to model different scenarios.
What if sales rise by 10 per cent?
What if three major jobs commence together?
What if a customer pays ten days later?
What if another employee needs to be added?
What if a supplier requires a larger upfront payment?
The business does not need perfect answers.
It needs enough information to understand where pressure could develop.
What information may help if additional finance is considered?
Requirements vary between lenders and products, but useful information may include:
recent business bank statements
financial statements or management accounts
debtor ledger
creditor ledger
current contracts and pipeline
supplier quotes or purchase orders
materials requirements
payroll
customer payment terms
supplier terms
existing finance commitments
ATO position
amount required
intended use of funds
expected timing
anticipated repayment source
The clearer the relationship between the funding requirement and the work being delivered, the easier it becomes to assess relevant finance options.
Five questions Hallam businesses may ask while planning the final quarter
Can working capital finance help fund materials and payroll for upcoming work?
Potentially. Depending on the lender and business, commercial finance may be considered for eligible materials, payroll, suppliers and other operating expenses.
Can trade finance help with components or raw materials?
Some trade finance facilities may assist with eligible supplier purchases, including stock, components and raw materials. Requirements vary between lenders and transactions.
What if customers do not pay until after we have completed the work?
That timing gap should be included in the working capital forecast. Once eligible commercial invoices exist, debtor or invoice finance may also be worth considering.
Should we use cash to buy new equipment if workloads are increasing?
That depends on the asset, cash reserves and the amount of working capital the business needs for operations. Asset finance may be worth comparing for eligible vehicles and equipment.
Is 22 September too early to think about end-of-year cashflow?
No. If October and November workloads, materials, staffing or supplier requirements are already becoming visible, late September is an appropriate time to forecast what the business may need before those commitments are made.
Understand how much cash the final quarter could absorb
For industrial and commercial businesses in Hallam VIC, the period ahead can bring additional work across manufacturing, trades, maintenance, contracting and business services.
That opportunity may also mean more cash tied up in materials, wages, subcontractors and customer invoices.
Thrive Broking can help Hallam businesses review that cycle and compare working capital, trade finance, debtor finance, asset finance and other commercial funding options across our lender panel where appropriate.
On 22 September, the aim is not to treat Christmas as though it has already arrived.
It is to understand whether the business’s existing working capital can support the work expected through the final quarter and into the point where customers actually pay.
A Broker’s Observation
I would not judge a busy final quarter by the value of the work booked.
I would look at the point where the business has the most money tied up.
That may be after materials have been purchased, several payrolls have been made and multiple customer invoices are still outstanding.
A business could have an excellent pipeline and strong margins while still needing considerably more working capital than usual.
Knowing that number in September gives the business time to decide how it wants to manage the gap before the work becomes a commitment.