The sales are there. The work is there. The invoices have gone out. But when payroll, suppliers and the ATO need to be paid, the money isn’t sitting in the bank.
For a business owner, that can be incredibly frustrating. You can look at the profit and loss statement and see a business that is making money while looking at the bank account and wondering where that money actually is.
Often, part of the answer is sitting in accounts receivable. Your customers owe you money. You just haven’t received it yet.
For businesses in Brisbane dealing with a growing gap between completing work and getting paid, the finance problem may not be profitability. It may be timing.
Profit and Cash Are Not the Same Thing
This distinction matters. A business can make a sale and issue an invoice today, but that doesn’t mean the cash arrives today.
If your customer pays in 30 days, 45 days or 60 days, the business may have to carry the cost of delivering that work until payment arrives.
Imagine a business completes $150,000 of work this month. On paper, that’s substantial revenue. But the business may already have paid wages, materials, subcontractors, fuel, freight, rent, insurance and equipment costs.
If the $150,000 isn’t collected for another month or two, the business has funded the gap. As the business grows, that gap can grow with it.
Growth Can Actually Make the Cash Problem Worse
This catches business owners by surprise. You win more work, employ more people, buy more materials and issue larger invoices. Revenue is increasing, so why does the bank account feel tighter?
Because growth often requires the business to spend money before it receives the additional revenue.
Suppose you win a new contract and need another three employees immediately. There are extra materials and subcontractor costs, and perhaps another vehicle or piece of equipment is required.
The customer won’t necessarily pay the first invoice as soon as the work begins. The new contract may be profitable, but somebody still needs to fund the period between starting the work and receiving the money.
That’s a working-capital requirement created by growth.
Look at How Long Customers Are Actually Taking to Pay
Your invoice might say 30 days. That doesn’t necessarily mean the money arrives on day 30.
Some customers pay promptly. Others don’t.
A debtor ledger can tell you much more than simply the total amount outstanding. Look at how much is current, 30 days outstanding, 60 days outstanding and 90 days or more outstanding.
Then look at which customers owe the money.
If a large proportion of your working capital is tied up with one or two slow-paying customers, that can create a very different risk from having many smaller invoices spread across a broad customer base.
A Big Debtor Ledger Isn’t Automatically a Bad Thing
If you’re invoicing more because the business is doing more work, accounts receivable will naturally increase.
The issue is whether the business has enough cash to support that level of activity while waiting for payment.
For some businesses, the gap is relatively small. For others, particularly businesses supplying other businesses, large organisations or projects, the timing difference can be substantial.
Industries that can experience this include:
construction
labour hire
transport
manufacturing
wholesale
engineering
civil contracting
maintenance services
professional services
commercial trades
The business can be busy every day and still feel cash constrained.
The First Question Is: Where Is the Cash Going?
Before looking for finance, understand the problem.
Is cash tied up in debtors? Has stock increased? Have margins fallen? Did the business make a large equipment purchase? Are customers paying more slowly? Has a major customer stopped paying altogether? Are tax obligations accumulating? Has the business grown faster than its available working capital?
Those are different problems.
Borrowing money without understanding which problem you’re solving can simply postpone the pressure rather than resolve the underlying cashflow issue.
What Is Working Capital Finance?
Working capital finance is a broad term for funding used to support the day-to-day financial requirements of a business.
Depending on the business and lender, there can be several possible structures. The appropriate option depends on why the cash is required, how long it is required for and how the business generates and receives revenue.
A temporary gap caused by a large customer paying in 45 days is different from a continuing cash shortfall caused by the business consistently spending more than it generates.
Finance can help with timing. It doesn’t fix an underlying business model that isn’t viable.
What Is Invoice or Debtor Finance?
For eligible businesses that sell to other businesses on credit terms, invoice or debtor finance may provide funding linked to eligible outstanding invoices or receivables.
Rather than waiting for the customer to pay before the business can access any of that cash, an eligible facility can potentially make part of the value of those receivables available earlier.
The customer still needs to pay the invoice. The finance is helping bridge the timing between issuing the invoice and collecting the money.
That can make debtor finance particularly relevant to businesses where accounts receivable grows alongside turnover.
Why Is That Different From a Normal Business Loan?
A standard business loan generally provides an agreed amount of funding that is repaid according to its structure.
Debtor finance works differently because the facility is connected to eligible receivables. As the business generates eligible invoices, the funding available may change. As customers pay, the position changes again.
The exact mechanics vary between providers.
This means debtor finance can potentially grow alongside an eligible business’s sales rather than being based solely around one fixed lump sum. But it isn’t appropriate for every business.
The type of customers you invoice, the quality of the receivables and the way the business trades can all matter.
What If Your Customers Are Large Companies?
Large customers can be excellent customers, but they can also have payment processes that don’t match the cash cycle of a smaller supplier.
A business might complete the work today, submit the invoice, wait for it to be approved through the customer’s system and then wait for the next payment run.
Meanwhile, wages still need to be paid every week or fortnight.
That creates a mismatch. The fact that the debtor is a large organisation doesn’t put money into your bank account any faster.
If your business regularly invoices established commercial customers, understanding the debtor cycle can be an important part of planning working capital.
What If One Customer Owes You a Lot of Money?
Customer concentration deserves attention.
Imagine your debtor ledger is $500,000, but $350,000 is owed by one customer. The business is heavily exposed to that customer’s payment behaviour.
What happens if they dispute an invoice? What happens if their payment is delayed? What happens if their own financial position deteriorates?
A lender considering debtor finance may look at the quality and concentration of the debtor book, not simply the total invoice value.
As a business owner, you should be looking at that concentration too.
Don’t Use Finance to Ignore a Collection Problem
Sometimes the answer isn’t more finance. It’s collecting the money you’re already owed.
If invoices are overdue because customers haven’t been followed up, finance shouldn’t become a substitute for good debtor management.
Look at when invoices are issued, whether purchase orders are correct, whether invoices are reaching the right person, whether customers are disputing them, how quickly overdue accounts are followed up and whether a few customers are consistently slow.
Improving collections can release cash without increasing debt.
Finance and debtor management should complement each other, not replace each other.
What If the Cash Gap Is Seasonal?
Some businesses have predictable periods where cash gets tighter.
A wholesaler may build inventory ahead of a busy period. A contractor may carry higher costs during a major project. An agricultural supplier may have strongly seasonal sales.
A business that understands its cycle can potentially investigate funding before the pressure arrives.
That’s usually a better position than waiting until payroll is due on Friday and discovering on Wednesday that the bank account won’t cover it.
Don’t Wait Until the Account Is Empty
The best time to discuss working capital isn’t necessarily when the business has run out of it.
If you can already see the gap developing, start the conversation.
Perhaps turnover has jumped substantially. Maybe you’ve won a contract that will require another $100,000 in operating costs before the first payment. Maybe your debtor days have stretched, or you’re approaching a predictable busy period.
Those are signals.
Having time gives us an opportunity to understand the requirement and investigate available options without the entire process being driven by tomorrow’s payment deadline.
How Much Working Capital Do You Actually Need?
Don’t just pick a round number. Work it out.
What payments need to be made and when are they due? When are customer receipts expected? How much cash is already available? What buffer does the business need? When should the funding no longer be required?
A business asking for $300,000 when the actual peak cash gap is $90,000 has a different requirement from one that genuinely needs $300,000 to deliver secured work.
Understanding the cash cycle makes the finance conversation much more useful.
What Information Should You Have Ready?
If you’re approaching us about a working-capital requirement, it helps to explain the situation rather than simply saying, “I need $100,000.”
Tell us why.
Depending on the business and finance being considered, useful information may include:
how long the business has traded
turnover
recent financial information
business bank statements
debtor ledger
creditor position
existing loans and facilities
tax obligations
details of major contracts
the amount required
what the funding will be used for
Requirements vary depending on the lender and facility. The clearer the story behind the cash requirement, the easier it is to investigate which type of funding may fit.
Busy Business, Empty Bank Account?
If your Brisbane business is generating work and issuing invoices but cash is continually getting trapped between completing the job and getting paid, look beyond the balance in the bank.
The timing between when the business spends money, issues invoices and actually receives payment can tell you far more about the working-capital problem than turnover alone.
Thrive Broking can look at what is creating the cashflow gap and investigate available business finance options, including working-capital and debtor-finance solutions where appropriate.
The objective isn’t simply to put more debt into the business. It’s to understand why a business that’s making sales doesn’t have the cash when it needs it and determine what funding structure, if any, makes sense.
Talk to Us Before the Next Cashflow Crunch
If you can see a cashflow gap developing, you don’t need to wait until wages, suppliers or another major payment is due.
Contact Thrive Broking and tell us what your business is waiting to be paid, how much funding you think you need and what the money needs to cover. We can look at the position with you and investigate the finance options that may be available.