Winning a major contract should be good news.
You’ve priced the job, beaten the competition and now have months or perhaps years of work ahead.
Then you start adding up what it will cost to actually begin.
New employees need to be hired. Materials need to be ordered. Equipment may need to be mobilised. Deposits, insurance, accommodation, fuel and subcontractors may need to be paid before the first invoice is even issued.
Suddenly a profitable new contract can create one of the biggest cashflow pressures the business has experienced.
For businesses in Townsville taking on larger projects or contracts, the question isn’t only “Will this work make money?”
It’s also “Can we afford to get it started?”
A $1 Million Contract Doesn’t Put $1 Million in the Bank
The headline contract value can sound enormous.
But contract value and available cash are completely different things.
Suppose a business wins $1 million of work to be completed over 12 months. The business won’t generally receive the entire contract value before starting.
Instead, it may have to begin spending immediately and invoice progressively as work is completed.
The first month could require substantial expenditure while producing little or no customer cash receipts.
That’s the gap that needs attention.
Work Out the Mobilisation Cost Before You Celebrate the Revenue
Before committing resources to a large new job, map out what has to happen before the first payment arrives.
Depending on the business, mobilisation could involve:
recruiting employees
wages and superannuation
subcontractors
materials
equipment hire
vehicles
machinery
fuel
freight
insurance
licences or permits
accommodation
travel
site establishment
uniforms and safety equipment
deposits to suppliers
Some costs may be relatively small individually.
Together, they can create a significant upfront requirement.
When Will You Actually Receive the First Payment?
This is one of the most important questions.
Don’t look only at the customer’s stated payment terms.
Work through the complete timeline.
When does work commence? When can you issue the first invoice? Does the customer need to approve the work before the invoice is accepted? Are there progress claims? Is there a cut-off date for the customer’s payment run? Are the terms calculated from the invoice date or another point in the process?
A contract might technically have 30-day payment terms, but the time between commencing work and actually receiving cash could be considerably longer.
That’s the period the business needs to fund.
Build a Cashflow Timeline
You don’t need an elaborate financial model to start understanding the problem.
Map the major cash movements.
For example:
Week 1: recruit staff and pay supplier deposits.
Week 2: purchase materials and mobilise equipment.
Week 3: wages and fuel.
Week 4: more wages, materials and subcontractors.
End of Month 1: issue first progress claim.
Month 2: continue paying operating costs while waiting for the first payment.
That timeline can reveal something the contract value doesn’t show.
The business may need to fund two months of operations before receiving meaningful cash from the customer.
Growth Can Consume Cash Faster Than a Slow Business
It sounds counterintuitive, but rapid growth can put enormous pressure on working capital.
A business doing $200,000 a month in revenue may have built its cash reserves and facilities around that level of activity.
Then it wins work that pushes monthly revenue towards $350,000.
That’s good growth.
But the business may now need to carry substantially higher wages, materials and operating expenses before the extra revenue is collected.
The business can be becoming more profitable while simultaneously becoming more cash constrained.
Don’t Assume Suppliers Will Fund the Gap
Supplier terms can help working capital, but they shouldn’t be taken for granted.
A supplier may offer 30-day terms to an established customer, but a substantial increase in purchasing could cause the supplier to review the account limit.
A new supplier may require payment upfront.
Special-order materials might require a deposit.
Subcontractors may expect to be paid before your customer pays you.
When planning the contract, understand when your suppliers expect their money, not just when you expect yours.
What About Wages?
Wages are one of the clearest examples of the timing problem.
Employees don’t generally wait for your customer’s 30 or 45-day payment cycle.
If a new contract requires ten additional employees, the business may need to fund several payroll cycles before receiving the corresponding customer payment.
Then there are superannuation and other employment-related costs.
This is why labour-intensive businesses can experience significant working-capital pressure when they grow quickly.
More work means more people.
More people means cash has to leave the business before the associated revenue necessarily arrives.
Equipment Finance and Working Capital Are Different Problems
A new contract might require a $200,000 excavator and another $150,000 of cash to mobilise the job.
Those are two different funding requirements.
The excavator is a productive asset that may potentially be funded using equipment finance.
The $150,000 might be required for wages, materials, fuel and other operating expenses.
Trying to fund everything using one type of finance isn’t necessarily the best approach.
Tell us about the whole requirement.
We can then distinguish between assets being purchased and the cash the business needs to operate.
What Types of Finance Could Be Considered?
There isn’t one working-capital product that suits every contract.
Depending on the business, purpose, financial position and lender criteria, options might include business loans, revolving facilities, overdraft-style facilities, debtor or invoice finance, or other commercial funding structures.
The appropriate option depends on what is creating the gap.
For example, if the business will generate substantial eligible business-to-business invoices, debtor finance may be relevant.
If the requirement is a defined upfront amount that will be repaid over time, another business finance structure may be more appropriate.
The product should follow the problem, not the other way around.
What If the Contract Requires New Vehicles or Machinery?
Tell us about those too.
If the business needs two utes, a truck and an excavator to perform the new work, we want to understand that before arranging the first transaction.
Depending on the circumstances and lender, there may be opportunities to consider multiple asset purchases together or investigate a broader asset finance facility.
More importantly, those asset repayments need to be included when considering the business’s total commitments after the contract begins.
The contract has to support the entire expansion, not simply the wages.
What Happens If the Customer Pays Late?
Build some tolerance into the plan.
If your cashflow forecast works only if every customer payment arrives on the earliest possible date, there isn’t much room for error.
A delayed progress claim, disputed invoice or administrative issue could put the business under immediate pressure.
Ask what happens if the first payment is two weeks later than expected.
Can the business still pay wages?
Can it still buy materials?
Can it keep the project moving?
Finance should provide appropriate support for a genuine requirement, but good planning still needs to allow for real-world delays.
Be Careful With Retentions
Some contracts may involve amounts being retained from progress payments until particular contractual conditions or milestones are satisfied.
That means the amount invoiced isn’t necessarily the same as the cash available to the business.
If retentions apply, understand how they work under the contract and incorporate them into the cashflow planning.
Don’t build the funding requirement around money the business won’t actually receive when expected.
What If You Need to Provide a Deposit or Security?
Some projects can require bonds, guarantees, deposits or other forms of security.
Those requirements can affect the business’s available cash or banking facilities.
They should be identified before the contract begins.
If a substantial amount of cash is going to be tied up as security, that changes the working-capital position.
Again, the contract value alone doesn’t tell us what the business needs to fund.
Don’t Use the ATO as Your Working Capital Facility
When cash gets tight, tax obligations can become one of the payments a business delays.
That can create a second problem on top of the first.
If a business is deliberately relying on accumulating tax debt to finance a new contract, the underlying working-capital requirement hasn’t really been solved.
Tax liabilities remain liabilities.
If the business needs funding to deliver growth, it’s better to understand that requirement upfront rather than allowing unpaid obligations to become the default funding source.
How Much Should You Ask For?
Start with the cashflow requirement rather than choosing a number that sounds comfortable.
Calculate the expected peak funding gap.
If the business needs $250,000 at the worst point before customer receipts begin catching up, that’s useful information.
If the peak gap is only $80,000, borrowing $250,000 may be unnecessary.
Also think about contingency.
The objective is to understand the likely requirement with enough realism to cope with ordinary variations, not to borrow the largest amount available.
What Will a Broker Want to Understand?
If you contact Thrive Broking because you’ve won a large contract, tell us the story behind it.
We may want to understand the contract value, commencement date, expected revenue, payment terms, upfront costs, existing business turnover, current commitments and what additional assets or employees are required.
Depending on the finance being considered, financial statements, bank statements, contracts, forecasts or other supporting information may also be relevant.
Don’t worry if you haven’t worked out the exact finance product.
That’s not the first question.
Start with:
“We’ve won this work. This is what it will cost us to start. This is when we expect to get paid.”
That’s a much better finance conversation.
Won a Contract in Townsville? Talk to Us Before Mobilisation
If your business has secured a significant new contract, purchase order or project, don’t wait until the first payroll is approaching before working out how you’ll fund the ramp-up.
Map the gap between the first dollar the business needs to spend and the first meaningful customer payment it expects to receive.
Then talk to us.
Contact Thrive Broking with the contract or project details, your expected upfront costs and the approximate funding gap. We can look at the requirement with you and investigate business and asset finance options that may be available.
Winning the work is the first step.
Making sure the business has enough cash to deliver it is what turns that opportunity into revenue.