A manufacturer or wholesale business in Thomastown, in Melbourne’s north, might still be several months away from its busiest Christmas trading period.
But September is often when the decisions behind that future production begin.
How much stock will be needed?
Do raw materials or ingredients need to be ordered earlier?
Will packaging requirements increase?
Could extra shifts or casual staff be required?
Are suppliers likely to want deposits or larger payments before the additional customer revenue arrives?
For businesses that manufacture, process, distribute or wholesale goods, preparing for higher end-of-year demand can require cash well before those additional sales are collected.
The useful question now is not whether Christmas is busy yet.
It is:
If production or purchasing increases over the next few months, can the business comfortably fund the extra volume from supplier order through to customer payment?
Increasing production usually means increasing costs first
A business expecting stronger customer demand may decide it needs to produce more.
That sounds like a revenue decision.
Initially, however, it is often a spending decision.
More production can require:
ingredients or raw materials
packaging
labels and consumables
additional stock
higher electricity and operating costs
overtime or extra shifts
casual employees
freight
storage
equipment servicing
supplier deposits
Many of these expenses can arise before the finished product has been sold.
If commercial customers then pay on account, there may be another delay before the cash returns.
That is why an increase in sales can temporarily reduce available cash instead of increasing it.
Follow one production run from beginning to payment
One of the simplest ways to understand the working capital requirement is to follow a future production run from start to finish.
When will the materials need to be ordered?
When does the supplier expect payment?
When will production take place?
When will the finished product be dispatched?
When can the customer be invoiced?
How long does that customer normally take to pay?
Suppose materials are purchased in October.
Production takes place during November.
The customer receives the goods at the end of November and is given 30-day terms.
Even if payment arrives exactly on time, the cash used to fund that transaction may have been tied up for two months or more.
If the customer pays later than the stated terms, the cycle becomes longer.
The business needs enough working capital to carry the transaction through the entire period.
Food and product manufacturers may have more than stock to consider
Businesses producing food or other manufactured goods can have working capital tied up across several areas at once.
Raw materials are only one component.
Packaging may need to be ordered in larger quantities.
Production labour may increase.
Refrigeration, electricity or other operating expenses may rise with higher output.
Finished products may then require storage before delivery.
Freight comes next.
Then the customer payment cycle begins.
Looking only at the cost of ingredients or raw materials can therefore underestimate what increased production actually requires.
A better forecast includes the full cost of converting those materials into a delivered product and then waiting for payment.
Ordering early can protect supply but use cash sooner
Some businesses deliberately order inputs earlier to reduce the risk of running short later.
Commercially, that can make sense.
A business may know that a particular supplier becomes busy approaching the end of the year.
Imported components may have long lead times.
Certain ingredients or materials may be easier to secure before demand increases.
Packaging suppliers may require advance orders for larger volumes.
The trade-off is that the business commits its cash earlier.
If $120,000 is paid to secure materials in advance, that money may be unavailable for other operating expenses for several weeks.
Before placing the order, consider what the business expects its cash position to look like after payment rather than simply asking whether it has enough cash today.
Stock sitting on the floor is not available cash
Inventory has value, but it cannot usually pay this week’s payroll.
This becomes important when a business deliberately builds stock before an expected seasonal increase.
The stock may sell exactly as planned.
But between purchase and sale, the business still needs to operate.
Wages remain due.
Supplier accounts arrive.
Rent and finance repayments continue.
Tax obligations remain.
Unexpected repairs still happen.
Before increasing inventory, calculate how much working cash will remain after the purchase.
The aim is not simply to have enough stock for future demand.
It is to prepare for that demand without leaving the rest of the business unnecessarily tight.
Supplier terms can dramatically change the funding requirement
Payment terms on the purchasing side can make a major difference.
A supplier that allows 30 or 60 days to pay may effectively reduce the amount of cash the business needs to provide at the beginning of the cycle.
Another supplier may require payment before dispatch.
A third may request a deposit followed by the balance before delivery.
Businesses planning larger end-of-year orders should review these terms before forecasting their funding requirement.
Questions worth asking include:
When is payment actually due?
Will a larger order change the supplier’s normal terms?
Are deposits required?
Can the supplier offer additional credit?
Is there an early-payment discount?
Does the business need to pay freight separately?
When will the resulting goods realistically be sold?
The answers can materially change how much cash becomes tied up.
Could trade finance help fund eligible supplier purchases?
Where the working capital requirement is created by purchasing stock, inventory or raw materials, trade finance may be one option to investigate.
Depending on the lender and transaction, some trade facilities can fund eligible purchases from domestic or overseas suppliers.
This may allow a business to preserve more of its existing cash while goods move through the procurement and sales cycle.
Trade finance does not suit every business.
Lenders can consider factors such as trading history, financial performance, supplier transactions, existing liabilities and how the facility is expected to be repaid.
But where the primary pressure occurs because suppliers need payment before the business receives customer revenue, it can be worth comparing with other working capital options.
Increasing shifts means funding payroll earlier too
A manufacturing business preparing for greater production may need additional labour before the additional sales are collected.
That can mean overtime.
Additional shifts.
Casual employees.
Extra warehouse or dispatch staff.
Those employees are normally paid weekly or fortnightly.
Commercial customers may pay much later.
If additional labour starts in October to prepare for November or December orders, the business may fund several payroll cycles before the associated customer receipts arrive.
This can make payroll a significant part of the working capital requirement.
When planning additional production capacity, estimate not just the extra weekly wage cost but how long the business needs to carry it.
A major customer order can be good news and a cashflow challenge
Imagine an existing customer contacts the business in October with an order substantially larger than normal.
The customer is reliable.
The margin is good.
The business has the production capacity.
On the surface, saying yes seems obvious.
But fulfilling the order might require $200,000 of additional materials, labour, packaging and freight.
If the customer pays 45 days after delivery, the business may have a significant amount of cash committed for an extended period.
That does not necessarily make the order unattractive.
It means the business should consider two separate questions:
Is this order profitable?
and
Can we comfortably fund it from production through to payment?
Both matter.
Growth can expose a facility that has become too small
Established businesses may already have an overdraft, line of credit or other working capital facility.
The problem may be that the facility was established when turnover and production were lower.
As the business grows, an amount that once provided a comfortable buffer can gradually become fully utilised.
Before activity increases later in the year, consider:
the existing facility limit
normal monthly usage
how much is genuinely available
upcoming supplier payments
expected payroll increases
tax obligations
existing finance repayments
If an overdraft is regularly close to its limit during normal trading, there may be little flexibility available for a larger production run or unexpected expense.
September is a better time to identify that than after the additional commitments have been made.
What happens once the customer has been invoiced?
The business may successfully fund production and deliver the goods.
Then the cashflow gap changes shape.
The money may now be sitting in accounts receivable.
For businesses selling primarily to other businesses, debtor or invoice finance may be worth investigating where appropriate.
Some facilities can provide earlier access to part of the value of eligible commercial invoices rather than requiring the business to wait for the customer’s normal payment cycle.
Lenders may consider:
the debtor ledger
quality of customers
invoice age
payment history
debtor concentration
disputes or credits
the nature of the underlying transaction
This means the business could experience one funding requirement when purchasing materials and another while waiting for customers to pay.
Mapping the whole cycle helps identify which stage is actually creating the pressure.
Christmas shutdowns can extend the customer payment cycle
When planning expected receipts for December and January, it is worth being conservative.
A customer may technically have 30-day terms.
That does not guarantee an invoice due during the Christmas and New Year period will be paid on the exact due date.
Accounts teams may operate with fewer staff.
Approvals can take longer.
Some businesses close for part of the holiday period.
Payment runs may change.
If a customer normally pays in 40 days rather than 30, use the more realistic figure when forecasting.
The goal of a cashflow forecast is not to produce the most optimistic result.
It is to give the business a useful picture of what could actually happen.
January belongs in the Christmas cashflow forecast
A manufacturer may spend through October and November, deliver goods in December and receive the associated cash in January.
That makes January part of the Christmas cashflow cycle.
At the same time, the business may need to fund:
returning payroll
supplier accounts
fresh materials
restocking
freight
rent
finance repayments
tax obligations
If most available cash was used preparing for the end-of-year period, the new year can begin with little remaining buffer.
This is why the forecast should continue until normal customer receipts and production patterns are expected to resume.
Planning now does not mean assuming finance will be required
Early planning is about understanding the position.
The business may ultimately find it has enough cash to manage the expected increase.
Supplier terms may provide enough breathing room.
Customers may pay deposits.
Existing facilities may be sufficient.
Production forecasts may change.
But if a funding gap is likely, identifying it now gives the business time to investigate options without rushing.
That can include looking at:
existing cash reserves
supplier terms
customer deposits
progress payments
existing overdrafts
working capital facilities
trade finance
debtor finance
other commercial funding
The appropriate response depends on where the gap occurs.
What information can help if finance is being considered?
Lenders and products have different requirements, but useful information may include:
recent business bank statements
financial statements or management accounts
current turnover
debtor ledger
creditor ledger
existing finance
ATO position
proposed supplier purchases
customer orders or contracts
supplier terms
customer payment terms
amount required
intended purpose
timing of the requirement
expected repayment source
A clear explanation of why more working capital is required can be just as important as the amount itself.
Funding a defined increase in production is different from borrowing simply because ordinary expenses cannot be met.
Five questions Thomastown businesses may ask while preparing for Christmas
Can finance help us increase production before Christmas demand arrives?
Potentially. If increasing production creates a genuine requirement for materials, payroll, stock or supplier payments, working capital options may be considered depending on the lender and business.
Can trade finance fund raw materials or inventory?
Some trade finance facilities may fund eligible stock, inventory or raw-material purchases from domestic or overseas suppliers. Eligibility and structure vary between lenders.
What if customers will not pay us until after we have produced and delivered the goods?
That timing difference can create a working capital gap. For eligible B2B businesses, debtor finance may also be worth considering once invoices have been issued.
Should we use cash reserves to increase production?
That depends on the size of the purchase, remaining cash reserves, other commitments and how quickly the money is expected to return. It is useful to forecast the business’s cash position after the additional spend before deciding.
Is September too early to look at Christmas production funding?
No. If supplier orders, production planning or staffing decisions are likely to begin over the next few months, September can be a sensible time to estimate the working capital requirement before those commitments are made.
Understand the full cost of producing more
For manufacturing, wholesale and industrial businesses in Thomastown VIC, preparing for the final months of the year can involve much more than estimating additional sales.
Materials need to be purchased.
Staff need to be paid.
Production costs increase.
Goods may need to be stored and transported.
Then customers need time to pay.
Thrive Broking can help Thomastown businesses review that cashflow cycle and compare working capital, trade finance, debtor finance and other commercial funding options across our lender panel where appropriate.
The purpose of planning ahead is not to assume Christmas will create financial pressure.
It is to understand what additional production may require from the business before the additional revenue arrives.
A Broker’s Observation
When production is expected to increase, business owners often focus first on whether they have enough materials and capacity.
I would add another question:
How many dollars will be tied up in the production cycle at its highest point?
Raw materials may already have been paid for.
Staff have been paid.
Freight may be booked.
The finished goods might even have left the warehouse.
But the customer payment can still be weeks away.
That maximum amount tied up between purchasing the inputs and collecting the sale is often the number that tells us whether the existing working capital structure is likely to be enough.