This is the sort of question that catches business owners off guard.
“We’re busier than we were six months ago. Sales are up. We’ve got work booked. So why does the bank account feel tighter?”
It can happen when a business is struggling.
It can also happen when a business is growing.
For a Rockingham WA business taking on more commercial work, increasing production, adding staff or dealing with larger customers, more sales can mean more money has to leave the business before the extra revenue comes back.
You are paying for the growth while it is happening.
That might mean more payroll, more supplier purchases, more fuel, more subcontractors or more money sitting in unpaid customer invoices.
By the time the additional revenue shows up in the bank, the business may already have funded several weeks of the bigger operation.
That is why looking only at turnover can be misleading.
“Where is all the money going?”
Take a business that has gone from billing $180,000 a month to $260,000.
On the face of it, that should feel better.
But the bigger turnover came with another employee, more supplier orders and two larger commercial customers who pay on 30 day terms.
The business used to have $90,000 outstanding in customer invoices.
Now it regularly has $140,000 or $160,000 sitting there.
Nothing has disappeared.
More of the business’s money is simply outside the bank account waiting to come back.
The supplier side can move in the opposite direction.
Orders have increased, so supplier balances are bigger.
Payroll has increased because more people are doing the work.
Fuel and operating expenses are higher because more work is being delivered.
The business may be making more money over the year while needing more cash to keep each week moving.
That can feel completely wrong when you are looking at strong sales figures.
It is actually quite common in a growing business.
The month can look good while one particular week is horrible
This is where monthly numbers can hide the problem.
Imagine the business has a strong October.
Customers pay $210,000 during the month.
Everything looks healthy overall.
But one week has:
$38,000 payroll.
A $42,000 supplier account.
$11,000 of insurance, vehicles and other expenses.
A $25,000 equipment deposit.
The customer payment the business expected to help cover that week does not arrive until the following Tuesday.
The business does not necessarily have a profitability problem.
It has a timing problem.
That distinction matters because the solution is different.
Cutting profitable work because one week is tight may not make sense.
Ignoring the timing and hoping the payment arrives does not make sense either.
You need to know whether the business has enough room to carry the bigger operation through those weeks.
Growth can quietly use up the buffer you used to have
A business might have kept $100,000 in available cash for years and felt comfortable.
Then turnover grows by 30 or 40 per cent.
The same $100,000 buffer is still there, but it is supporting a much larger operation.
A payroll run that used to be $24,000 is now $35,000.
Supplier balances that used to average $50,000 are now $80,000.
Customer invoices are larger.
Vehicles and equipment are working harder.
That old buffer has not become smaller.
The business around it has become bigger.
This is often the point where an owner says:
“I don’t understand it. We’re doing better than ever but I’m watching the bank account more than I used to.”
That is worth paying attention to.
It does not automatically mean the business should borrow more.
It does mean the working capital needs should be reviewed against the size of the business today, not the business from two years ago.
Christmas can exaggerate it
Late September is early enough to look ahead without pretending Christmas trading has already started.
But if October, November and December are normally busier, the gap can become more noticeable.
A Rockingham business may take on extra work before Christmas.
Customers may want projects completed before shutdown periods.
Manufacturers or suppliers may increase purchasing.
Contractors may add labour.
Businesses supporting larger commercial customers can find themselves carrying higher costs while December invoices move into January.
That is when a business can have a very strong end to the year and still feel short of usable cash.
The sales have happened.
The money just has not all made its way back yet.
Is it cashflow, or is the margin actually too thin?
This is the part that should not be skipped.
Not every cash shortage is a timing problem.
If the business is making very little margin on the additional work, borrowing to keep doing more of it may make the position worse.
Look at the actual jobs or customers creating the growth.
Are they profitable after labour, materials, freight and overhead?
Are customers paying roughly when expected?
Is the business carrying too much old stock?
Are there expenses that have grown faster than revenue?
Is pricing still right?
If the answer is that the work itself is good and the money simply takes longer to return, that is a very different situation from a business consistently losing money on each job.
Finance can help manage timing.
It cannot turn bad margins into good ones.
Sometimes one customer changes everything
A business can also become cash tight because one account has become much larger.
Suppose an established customer used to buy $20,000 a month.
Now they are buying $70,000.
That may be excellent business.
But if they pay in 45 days, the amount of cash the business carries for that customer has increased considerably.
The customer might never pay late.
The problem can exist even when they pay exactly according to their terms.
More money is sitting outside the business for longer.
This is why the quality of the customer and the timing of the customer are two different questions.
A great customer can still use a lot of working capital.
What can the business change before looking at finance?
Some of the improvement may come from inside the business.
Invoices can go out immediately when work is completed.
Large customers can be asked about payment runs and approval cut offs.
Deposits may be appropriate for certain jobs.
Suppliers may be willing to extend an account limit or split a larger order.
Purchasing can be staged where possible.
Old debtors can be followed up.
Slow stock can be reviewed before more is ordered.
None of those things is particularly exciting.
They can make a meaningful difference.
A business that can reduce the gap by $40,000 through better billing and supplier arrangements may only need to finance the remaining amount rather than borrowing for the whole problem.
Where finance may fit
If the business is healthy but growth is increasing the amount of cash tied up, the finance conversation should start with where the money is stuck.
If there are eligible commercial invoices sitting unpaid, debtor or invoice finance may be relevant.
If the business needs broader funding for payroll, suppliers and operating costs before customer receipts catch up, a working capital facility, line of credit, overdraft or business loan may be worth looking at depending on the business and lender.
If the pressure comes from a significant eligible supplier purchase, trade finance may be another option.
If another vehicle, truck, machine or piece of equipment is required to support the additional work, asset finance can be considered separately rather than automatically using the operating account to pay cash.
The point is not to load the business with finance simply because it has grown.
It is to make sure a good business is not constantly short of room because too much cash is tied up between doing the work and getting paid.
What business owners usually want to know
“If sales are up, shouldn’t cash eventually catch up?”
It may, but if the business continues growing, the next round of costs can begin before the previous round of customer payments has arrived. The business can keep carrying a larger amount of work.
“How do I know if it is a timing problem or a real business problem?”
Look at the margins, debtor collection, supplier commitments and operating costs. A profitable business waiting for customer cash is different from a business losing money on its work.
“Can finance help if customers are paying on time?”
Potentially. A customer can pay exactly on time and still create a working capital gap if the business pays wages and suppliers weeks earlier.
“Do I need a large business loan?”
Not necessarily. The amount and structure should reflect the actual gap. A revolving facility may suit some businesses, debtor finance may suit others, and some businesses may solve part of the problem by changing billing or supplier arrangements.
“When should I look at it?”
Before the business is checking the bank account every morning hoping a particular customer pays that day.
If the next few months already look busier, the likely cash requirement can be reviewed before the pressure arrives.
A Broker’s Observation
When someone tells me their business is growing but they feel as though they have less cash, I would not assume the business is doing badly.
I would want to know where the extra sales are sitting.
Are they in customer invoices?
Are they in stock?
Have supplier purchases increased?
Has payroll moved up?
Has the business bought equipment out of cash?
Quite often the money is there in the business somewhere.
It just is not sitting in the bank account at the point the business needs it.
That is when it becomes worth looking at whether the cash cycle can be improved, whether existing facilities are still enough for the size of the business, and whether finance could give the business more room without simply covering up a margin problem.