For a manufacturer, warehouse operator, wholesaler or growing service business in Mickleham and the Merrifield area, September can be a time when plans for the final quarter start becoming real commitments.
The Christmas trading period is still ahead.
But a business expecting to grow over the next few months might already be considering more warehouse space, additional stock, new employees, equipment, vehicles or a larger operating footprint.
Mickleham’s Merrifield Employment Precinct has developed as a significant manufacturing and industrial area, with further industrial development continuing.
Growth can be positive.
It can also require a surprising amount of cash before the extra capacity produces additional revenue.
That makes 21 September a sensible point to ask:
If we increase the capacity of the business before the end of the year, how much cash will be tied up before that expansion begins paying for itself?
Expansion costs rarely arrive one at a time
A business owner may initially think about one major expense.
Perhaps it needs a larger premises.
Another forklift.
More stock.
Three additional employees.
A new delivery vehicle.
But expansion usually creates several costs at the same time.
Moving into additional premises could involve:
a bond or deposit
rent in advance
racking and shelving
signage
electrical or data work
office furniture
security
insurance
forklifts or warehouse equipment
moving costs
additional stock
new employees
higher utilities
None of those expenses is necessarily unusual.
The problem arises when several need to be paid before the increased sales generated by the expansion begin arriving.
More capacity does not automatically create immediate cash
Imagine a wholesaler expands its warehouse so it can carry more inventory.
The business now has more capacity.
But the larger warehouse itself does not immediately produce money.
Stock must be purchased.
Customers need to order it.
Goods need to be dispatched.
Commercial customers may then receive 30-day terms.
There can be a significant period between paying for the expansion and receiving the extra cash it is intended to generate.
That period needs working capital.
The same principle applies to manufacturing capacity, additional staff, new vehicles or new equipment.
Growth generally requires investment first.
Revenue follows later.
Cash collection can come later again.
Separate the expansion cost from the operating cost
This distinction can make planning much clearer.
There is the cost of creating additional capacity.
Then there is the cost of operating that additional capacity.
For example, a business might spend $80,000 fitting out a larger warehouse.
But it may also need another $120,000 for additional stock, payroll, freight and suppliers over the following weeks.
If the owner budgets only for the fitout, the business could complete the expansion successfully and then discover it does not have enough working cash to use the extra capacity properly.
Before committing to growth, ask two questions:
What will it cost us to expand?
and
What additional cash will we need to operate at the new level?
They are not the same number.
Additional stock can become the next major cash requirement
A bigger warehouse often leads naturally to higher stock levels.
That may be exactly why the business expanded.
But buying inventory can consume cash quickly.
The business might secure a larger range, hold greater quantities or prepare for customer demand expected later in the year.
Suppliers may need deposits.
Some may require payment before dispatch.
Freight may be additional.
Imported goods may have longer lead times.
Once the inventory arrives, the cash remains tied up until the goods are sold and the customers pay.
September is still the planning stage.
That gives the business time to estimate the likely stock requirement instead of simply filling the available space because it is there.
Manufacturing expansion can create several funding layers
A manufacturer increasing capacity may need more than another machine.
It could also require:
raw materials
additional operators
tooling
consumables
packaging
maintenance
increased power usage
storage
freight
The machine may be financed over several years.
The raw materials and wages cannot.
They belong to the day-to-day working capital cycle.
This is why purchasing an asset and funding business growth should often be considered together.
Financing an eligible long-term asset separately may allow the business to retain more cash for the shorter-term costs required to actually use that asset.
The appropriate structure will depend on the business and lender requirements.
Equipment finance and working capital do different jobs
Suppose a business has $150,000 in available cash and needs a $100,000 piece of equipment.
Paying cash may seem attractive because it avoids another finance commitment.
But after the purchase, only $50,000 remains.
If the new equipment then requires extra stock, wages and operating expenses to produce additional revenue, the business could become unnecessarily tight on working capital.
Depending on the circumstances, asset finance may be considered for eligible vehicles or equipment while cash is preserved for the operating cycle.
That does not automatically mean financing the asset is the better choice.
The important point is to compare the effect on the entire business rather than looking at the asset purchase in isolation.
Hiring ahead of growth creates another gap
Businesses expanding before the final quarter may need people before they need them at full capacity.
Employees may require training.
Managers may want additional warehouse or production staff in place before volumes increase.
A new driver might start before a delivery contract reaches full volume.
Those decisions can make operational sense.
But payroll begins immediately.
The additional customer revenue may not.
A business adding $8,000 a week to payroll for six weeks before customer receipts catch up has funded almost $50,000 before considering superannuation and other employment costs.
That belongs in the expansion budget.
Moving premises can temporarily duplicate costs
Businesses changing premises can also experience a period where old and new costs overlap.
There might be:
rent on two sites
moving expenses
duplicated utilities
temporary storage
additional labour
downtime
fitout expenses
Even if the overlap lasts only a few weeks, it can materially change the working capital requirement.
A forecast should reflect what will actually happen during the transition rather than assuming the old costs stop on the same day the new site opens.
Do not spend the operating buffer on the expansion
A business may be able to afford its expansion from cash.
That is not quite the same as being able to afford it comfortably.
Suppose an expansion requires $250,000 and the business has $300,000 available.
Technically, it can pay.
But leaving only $50,000 for normal operations may create a very different risk profile.
The business still needs to fund:
payroll
suppliers
tax
insurance
fuel and freight
existing finance repayments
customer payment delays
unexpected repairs
Before deciding how much cash to commit, it can help to determine the minimum operating buffer the business wants to preserve.
That may influence how the expansion is funded.
Christmas planning adds another layer
An expansion taking place in October or November can overlap with the business preparing for Christmas and year-end trading.
A wholesaler may be increasing inventory at the same time as it pays for additional premises.
A manufacturer may be commissioning equipment while purchasing more raw materials.
A logistics business may be adding staff while preparing vehicles for greater activity.
A retailer or supplier may be increasing stock while also funding fitout costs.
That can make the final quarter more cash-intensive than either the expansion or Christmas period would have been on its own.
This is why the two should be forecast together.
Supplier finance and trade finance may be relevant for stock
Where the cashflow requirement comes from eligible stock, inventory or raw-material purchases, trade finance may be worth investigating.
Depending on the facility and lender, trade finance may assist with eligible purchases from Australian or overseas suppliers.
The business can then preserve more of its existing cash for other expenses while the goods move through the sales cycle.
Lender requirements vary and the transaction needs to be assessed.
The important point is to match the finance to the expense.
Long-term assets, supplier purchases and operating cashflow can have very different useful lives and repayment cycles.
They do not necessarily need to be funded in the same way.
The debtor ledger can grow after the expansion succeeds
A business may successfully increase capacity and start generating higher sales.
Then a different working capital issue can appear.
The debtor ledger grows.
A business selling $400,000 a month on commercial terms has more money tied up in receivables than one selling $200,000 a month, even if customers pay at exactly the same speed.
Growth can therefore increase the amount of working capital required after the sale as well as before it.
For eligible B2B businesses, debtor or invoice finance may be one option to investigate where valid commercial invoices are waiting to be paid.
The lender will generally look at the receivables, customers and underlying business.
Expansion can expose customer payment terms that were previously manageable
When the business is smaller, a customer taking 45 days to pay might be manageable.
As sales to that customer increase, the dollar amount being carried increases too.
A customer owing $30,000 is different from the same customer owing $150,000.
The payment behaviour has not changed.
The impact on the business has.
Before relying heavily on larger customers following an expansion, look at:
payment terms
actual payment history
debtor concentration
expected invoice values
dispute processes
credit limits
The business should understand how much of its own cash it may effectively be using to fund customer payment terms.
Do not let the new premises dictate the amount of stock
One risk after moving into a larger warehouse is feeling compelled to fill it.
Available floor space does not automatically mean the business needs more inventory.
Stock purchasing should still be driven by:
customer demand
turnover
margins
supplier lead times
minimum order quantities
seasonal expectations
working capital availability
An empty section of warehouse space costs less than excess inventory that does not sell.
That is particularly important when the business is already using cash for expansion.
Forecast the business after the expansion, not just during it
The working capital forecast should continue beyond the opening day of the new premises or installation date of the new equipment.
What will the business look like four weeks later?
Eight weeks later?
At Christmas?
In January?
Consider:
increased rent
higher payroll
additional stock
larger suppliers
customer payment timing
higher utility costs
new finance repayments
tax obligations
The goal is to make sure the expanded business can sustain its new cost base after the initial project is complete.
January remains important
An expansion completed before Christmas may begin producing additional sales during November and December.
But commercial customer payments from those sales may not arrive until January.
At the same time, the new cost base continues.
Employees still need paying.
The larger premises still has rent.
Finance repayments continue.
Suppliers may require fresh orders.
Tax commitments remain.
That is why an expansion forecast should extend into the new year rather than stopping once the Christmas trading period is complete.
Working capital finance may help bridge a defined growth period
Depending on the business, a working capital facility, line of credit or other commercial finance structure may be considered where the business has a defined temporary cash requirement associated with growth.
A useful discussion should identify:
how much is required
what the money will fund
when it will be required
how long the gap is expected to last
what business activity is expected to repay it
Growth funding should have a commercial purpose.
It should not simply mask an ongoing inability to meet ordinary expenses.
September is the time to model the expansion before committing
By 21 September, businesses still have time to test different options.
What if the move is delayed?
What if less stock is initially purchased?
What if equipment is financed rather than bought with cash?
What if the business hires two employees initially rather than four?
What if customer payments take another ten days?
What if the Christmas sales increase does not eventuate until later than expected?
Testing these scenarios can reveal how sensitive the plan is to small changes.
The strongest expansion plan is not necessarily the one built around the most optimistic sales forecast.
It is often the one that can still operate comfortably if things happen a little more slowly.
What information can help when funding expansion?
Depending on the finance being considered, useful information may include:
recent business bank statements
financial statements or management accounts
current turnover
expected turnover after expansion
existing and proposed premises costs
proposed equipment purchases
stock requirements
payroll forecasts
supplier terms
debtor and creditor ledgers
existing finance commitments
ATO position
amount required
intended use of the funds
expected timing
source of repayment
Lenders will have different criteria, but clearly explaining the purpose and expected commercial benefit of the expansion is important.
Five questions Mickleham businesses may ask while planning growth
Can finance help with working capital when we move into a larger premises?
Potentially. Depending on the lender and circumstances, commercial finance may be considered for eligible working capital requirements associated with expansion. Premises, fitout and operating expenses may need to be considered separately.
Should we pay cash for new equipment or finance it?
That depends on available cash, the asset, existing commitments and the amount of working capital the business needs to preserve. Asset finance may be worth comparing for eligible equipment.
Can trade finance help us increase stock after expanding?
Some trade finance facilities may assist with eligible stock, inventory or raw-material purchases from domestic or overseas suppliers. Requirements vary between lenders.
What if our debtor ledger grows after we expand?
For eligible B2B businesses, debtor or invoice finance may be worth investigating if increased sales result in substantially more cash being tied up in unpaid commercial invoices.
Is 21 September too early to review funding for an expansion planned before Christmas?
No. If premises, equipment, stock or staffing decisions are likely to be made over the coming weeks, this is a useful planning stage to understand both the expansion cost and the additional working capital the larger business may require.
Fund the business after the expansion, not just the expansion itself
For businesses in Mickleham VIC, including those operating around the growing Merrifield employment area, increasing capacity can create new opportunities across manufacturing, warehousing, wholesale, logistics and commercial services.
Thrive Broking can help Mickleham businesses look at the whole funding requirement and compare working capital, asset finance, trade finance, debtor finance and other commercial finance options across our lender panel where appropriate.
The important calculation is not simply what it costs to expand.
It is how much cash the business will need after the expansion is complete, while it waits for the additional capacity to turn into collected revenue.
A Broker’s Observation
One of the easiest mistakes to make when expanding is spending nearly all available cash getting the business ready for growth.
The premises looks right.
The equipment is installed.
The stock has arrived.
Then the owner realises the business still needs money for wages, suppliers and normal operating expenses while customers work through their payment terms.
I would want the funding plan to cover both stages.
Can we afford to expand?
And just as importantly:
Can we afford to operate the bigger business once we have?
Those two numbers can be very different.