For a manufacturer, wholesaler or industrial business in Campbellfield, in Melbourne’s north, the Christmas cashflow cycle can start well before Christmas itself.
September may still feel early. Customer demand has not necessarily increased yet and the end-of-year rush is still ahead.
But businesses that rely on stock, raw materials, suppliers, freight or commercial customer accounts may already be thinking about what needs to be ordered over the next few months.
That is when a useful cashflow question can be asked:
If we increase supplier orders in preparation for the end of the year, how much of our cash could be tied up before customers eventually pay us?
The answer can affect decisions around stock levels, supplier terms, staffing, freight and whether additional working capital should be investigated before those commitments are made.
The cashflow cycle can start with the supplier order
Businesses often think of Christmas cashflow in terms of December sales.
For manufacturers and wholesalers, the financial cycle can begin much earlier.
Raw materials may need to be ordered.
Finished inventory may need to be purchased.
Suppliers may require deposits.
Imported goods can have longer lead times.
Freight and storage may need to be arranged.
The business then holds those goods until they are used or sold.
If the eventual customer also receives payment terms, there can be another wait before the money comes back.
That means a transaction expected to produce revenue in November or December could require cash from the business weeks or months earlier.
Understanding that timeline now can help prevent a future sales opportunity from becoming an unexpected working capital problem.
More purchasing power can require more working capital
Imagine a wholesaler expects customers to increase orders later in the year.
The owner decides to increase stock so the business is ready.
That sounds straightforward.
But suppose an additional $150,000 is committed to suppliers.
That $150,000 is no longer available for:
payroll
rent
GST and tax obligations
freight
fuel
repairs
equipment expenses
existing loan repayments
other supplier accounts
The stock may eventually produce a good margin.
But until it sells and the customer pays, the business has to fund the gap.
This is why a stronger sales forecast can actually increase the amount of working capital required.
Supplier terms can have a major effect on the gap
A business that receives generous supplier terms may have a very different cashflow requirement from one that has to pay upfront.
Consider two wholesalers expecting the same level of sales.
One receives 60 days to pay suppliers.
The other pays before goods are dispatched.
If both sell to customers on 30-day commercial terms, their revenue may eventually look similar, but the second business has substantially more money tied up earlier in the cycle.
Before increasing orders, review:
when deposits are required
when final supplier payments fall due
existing supplier credit limits
whether larger orders change those terms
expected delivery dates
when goods are likely to be sold
customer payment terms
how long customers actually take to pay
The purpose is to see how long the business may be carrying the cost itself.
Could paying suppliers earlier actually create an opportunity?
Cashflow planning is not always about a business being short of money.
Some suppliers may offer better pricing or discounts for earlier payment.
If the discount is meaningful, a business might want to compare the benefit of paying earlier with the cost of using a finance facility to do so.
That needs to be assessed carefully.
A discount does not automatically make finance worthwhile.
But it is an example of why supplier finance should be looked at commercially rather than simply as emergency funding.
The question becomes:
What does access to working capital allow the business to do differently?
That could be securing stock, negotiating supplier terms, accepting a larger order or preserving existing cash for other operating commitments.
Manufacturing businesses need to look at more than material costs
For a manufacturer, preparing for increased production can affect several parts of the business simultaneously.
Raw materials may increase.
Production hours may rise.
Employees may work overtime.
Casual staff may be required.
Packaging and consumables may need to be purchased.
Machinery may require preventative maintenance.
Finished goods may need additional storage.
Freight costs may increase when the goods are dispatched.
If all of these expenses rise before customers pay, the business may need considerably more cash than the raw material order alone suggests.
A useful forecast should therefore follow the entire production cycle rather than concentrating on one purchase.
Freight businesses can experience the same timing issue differently
For freight and transport operators, additional activity usually means immediate operating costs.
More work may require:
additional fuel
more driver hours
subcontractors
tyres and maintenance
repairs
tolls
trailer or vehicle expenses
The commercial customer may not pay for another 30, 45 or 60 days.
If freight volumes increase later in the year, the operator may be funding the additional work for several weeks.
The value of the new contract is important.
So is the amount the business needs to spend before receiving its first payment.
That second number is the one that determines the working capital requirement.
What happens if a customer places a much larger order?
A significant new order can create an interesting decision.
Suppose an existing customer asks the business to supply twice its normal quantity before the end of the year.
The margin is attractive.
Operationally, the business can handle it.
But fulfilling the order requires a large supplier purchase now.
Before accepting it, calculate:
How much cash will need to leave before the customer pays?
Include:
stock or raw materials
supplier deposits
labour
packaging
freight
subcontractors
storage
other direct costs
Then consider the customer’s actual payment history.
If the invoice will not realistically be paid until January, the business may need to carry that cost for much longer than the sales figure suggests.
Trade finance may be worth investigating for supplier purchases
Where the funding requirement relates to eligible stock, inventory or raw-material purchases, trade finance may be one option to investigate.
Depending on the lender and structure, trade finance can potentially be used for purchases from domestic or overseas suppliers.
The aim is generally to fund the procurement side of the business cycle without requiring the business to use all of its own cash at the beginning.
Requirements vary.
Lenders may consider the business’s financial performance, trading history, supplier transaction, purpose of the purchase and expected repayment source.
Trade finance will not suit every business or transaction.
But where the primary issue is paying suppliers before inventory generates revenue, it can be worth comparing with other working capital options.
What if the problem occurs after the goods have been sold?
The cashflow problem can shift once the sale takes place.
The stock has left.
The customer has been invoiced.
The revenue has been earned.
But the cash is still outstanding.
A growing commercial debtor ledger can absorb substantial working capital.
For eligible B2B businesses, debtor or invoice finance may provide earlier access to part of the value of qualifying receivables rather than waiting for customers to complete their normal payment cycle.
An assessment may look at:
debtor ledger value
customer quality
payment history
debtor concentration
invoice age
disputes or credits
underlying goods or services
This means the finance solution may depend on which side of the transaction is creating the gap.
Paying the supplier and waiting for the goods is one issue.
Waiting for the customer after the sale is another.
One business may experience both sides of the cycle
Some businesses experience both.
They pay a supplier.
Receive the goods.
Hold stock.
Sell to a commercial customer.
Issue an invoice.
Then wait for payment.
The business is carrying cash through several stages.
This is why it can be limiting to start a finance conversation by saying:
“We need a business loan.”
A better starting point is mapping where cash enters and leaves the business.
Once the cycle is understood, different funding structures can be compared.
There may be no need for additional finance.
There may be one clear facility that fits the requirement.
Or different parts of the cycle may need to be considered separately.
Preserve enough cash for the unexpected
A business may technically have enough cash to fund additional supplier orders itself.
That does not necessarily mean using all of it is the best decision.
Think about what remains afterwards.
If most available cash is committed to inventory, what happens if:
machinery breaks down
a truck needs repairs
a major customer pays late
a tax payment is larger than expected
another attractive order arrives
freight costs increase
stock sells more slowly than forecast
Working capital planning should include a buffer.
The objective is not simply to prove that the business can pay for the order.
It is to determine whether it can fund the order and still operate comfortably afterwards.
Customer payment behaviour matters more than the invoice terms
A customer on 30-day terms does not necessarily pay on day 30.
When forecasting future cash receipts, look at actual payment behaviour.
If a customer generally pays in 42 days, use 42 days.
If another customer regularly runs beyond 60 days, account for that.
This becomes especially important when invoices may fall across the Christmas and New Year period.
Some customer businesses close.
Accounts staff take leave.
Approval processes can take longer.
An optimistic forecast can make the working capital position look stronger than it really is.
A realistic forecast gives the business a better basis for deciding whether additional funding may be required.
September is the planning stage, not the panic stage
The advantage of reviewing working capital now is that the business is not necessarily under pressure.
There is time to estimate future supplier purchases.
There is time to talk to customers.
There is time to review debtor behaviour.
There is time to check existing finance limits.
There is time to investigate whether a lender would require additional information.
And there is time to decide that no additional finance is required.
Planning early should create more options, not create unnecessary borrowing.
Extend the forecast into January
A supplier order made in October may eventually become a customer invoice in December.
That customer could pay in January.
So the Christmas cashflow cycle does not necessarily finish on Christmas Eve.
Businesses should consider what happens when the new year begins.
Payroll resumes.
Supplier accounts remain due.
Rent and finance repayments continue.
Tax obligations remain.
Stock may need replenishing.
At the same time, some December invoices may still be outstanding.
A forecast that includes January can produce a very different working capital figure from one that stops at the end of December.
What information can help if finance is being considered?
Requirements depend on the lender and facility, but a business may benefit from preparing:
recent business bank statements
financial statements or management accounts
debtor ledger
creditor ledger
existing finance commitments
ATO position
supplier terms
customer payment terms
proposed stock or raw-material purchases
contracts or purchase orders where relevant
amount required
purpose of funding
date funding may be needed
expected repayment source
The business should also be able to explain why the requirement is changing.
Funding additional profitable activity is a different scenario from borrowing simply because ordinary expenses cannot be met.
Five questions Campbellfield businesses may ask while planning ahead
Can finance be used to pay suppliers before the Christmas trading period?
Potentially. Depending on the lender and transaction, working capital or trade finance may be considered for eligible supplier, stock or inventory purchases.
Can trade finance be used for Australian suppliers?
Some trade finance facilities can fund eligible domestic supplier transactions as well as overseas purchases. Requirements vary between lenders and structures.
What if we need to buy more stock before customers place their final orders?
A lender may consider the purpose, trading history, expected demand and overall business position. Forecast requirements should be realistic rather than based solely on hoped-for sales.
What if our biggest problem is customers taking too long to pay?
For eligible B2B businesses, debtor or invoice finance may be worth considering. The lender will generally assess the invoices and the customers responsible for paying them.
Is September too early to review supplier and working capital requirements for Christmas?
No. If the business expects stock, raw materials, production or supplier commitments to increase over the coming months, reviewing the likely funding cycle now can provide more time to prepare.
Follow the cash from supplier to customer
For businesses around Campbellfield VIC, preparing for the final months of the year may involve suppliers, production, stock, freight and commercial customer terms long before the Christmas trading period itself arrives.
Thrive Broking can help Campbellfield businesses review the expected movement of cash through that cycle and compare working capital, trade finance, debtor finance and other commercial finance options across our lender panel where appropriate.
The objective is not to predict that every business will experience a Christmas cashflow shortage.
It is to identify how much money may become tied up, how long it could remain tied up and whether the current funding structure is likely to support the business comfortably.
A Broker’s Observation
A large supplier order can look manageable because the business has enough money in the account to pay it today.
I would also want to know what the bank account is expected to look like after that payment and before the stock turns back into cash.
That period in the middle is easy to overlook.
The business may have paid the supplier successfully but still have wages, freight, tax and everyday operating costs to fund while the stock is sitting in the warehouse or the customer invoice remains unpaid.
For businesses preparing ahead of Christmas, that middle part of the cashflow cycle is often where the real funding requirement becomes visible.