The business is busy.
Sales are strong.
Your profit and loss statement doesn’t look bad.
And when you open the aged receivables report, customers owe the business hundreds of thousands of dollars.
So why does the bank account keep getting dangerously low?
This is a situation growing businesses can encounter.
You invoice the work today.
Your customer pays later.
But wages, suppliers, fuel and other operating costs don’t wait for the customer.
For businesses around Mackay, particularly those servicing mining, resources, construction, transport and other commercial customers, a growing debtor ledger can represent strong sales while simultaneously putting pressure on cashflow.
The problem may not be that the business isn’t earning enough.
The problem may be how long it takes to turn those earnings into cash.
Revenue Isn’t Cash
Suppose the business invoices $600,000 this month.
That’s significant revenue.
But if most customers pay 30, 45 or 60 days later, very little of that month’s invoicing may actually reach the bank account this month.
Meanwhile, the business still needs to pay:
wages
superannuation
PAYG
suppliers
fuel
insurance
equipment repayments
rent
subcontractors
other operating expenses
That’s the gap.
The business has made the sale.
It just hasn’t received the money.
Watch What Happens When Sales Grow
Imagine the business previously invoiced $300,000 each month and now invoices $600,000.
That’s excellent growth.
But if customers take an average of 45 days to pay, the amount sitting in receivables can increase substantially.
More employees may be required.
More materials are purchased.
More fuel is consumed.
More subcontractors are engaged.
The business needs more cash because it is growing.
This is why increasing revenue can sometimes make the bank balance worse before it makes it better.
Look at Debtor Days
One useful measure is how long customers generally take to pay.
If the business invoices on 30-day terms but the average collection period is closer to 50 days, those additional 20 days have to be funded somehow.
The money might come from:
cash reserves
an overdraft
credit cards
delayed supplier payments
owner funds
another business facility
Or the business simply runs tight until customers pay.
Knowing the actual collection period helps quantify the working-capital problem.
Don’t Just Look at the Total Debtor Ledger
A $900,000 debtor ledger sounds valuable.
But what’s inside it?
Look at the ageing.
How much is:
current
30 days
60 days
90 days
older
A large ledger consisting primarily of current, undisputed commercial invoices presents a different picture from one containing substantial old or disputed debt.
The headline number isn’t enough.
The quality of the receivables matters.
Why Are Customers Paying Late?
Sometimes the answer is simply their normal payment cycle.
But sometimes the business is creating unnecessary delays itself.
Invoices are issued a week after the work is completed.
Purchase-order numbers are missing.
Timesheets haven’t been approved.
The invoice goes to the wrong department.
Supporting documents aren’t attached.
A minor discrepancy causes the entire invoice to be rejected.
Before borrowing more money, tighten the invoicing process.
Every unnecessary day between completing work and issuing a correct invoice increases the cashflow gap.
Large Customers Can Have Complicated Payment Systems
Winning work from a major mining company, contractor or corporate customer can be excellent for a Mackay business.
But larger organisations can have formal procurement and accounts-payable processes.
The business may need:
purchase orders
approved timesheets
job numbers
portal submissions
specific invoice formats
supporting documentation
Getting one requirement wrong can push an invoice into the next payment cycle.
When the invoice is worth $150,000, an administrative delay can become a significant cashflow event.
Customer Concentration Matters
Suppose customers owe the business $1 million.
One customer owes $700,000.
The debtor ledger is large, but it is highly concentrated.
That creates two issues.
First, the business is financially dependent on one customer’s payment behaviour.
Second, debtor-finance lenders may have policies around customer concentration and the proportion of a facility supported by one debtor.
The exact treatment varies between lenders.
Tell us when one or two customers represent a large percentage of receivables.
What Is Debtor or Invoice Finance?
For an eligible business, debtor or invoice finance can potentially provide access to funding against approved business-to-business receivables.
Rather than waiting until the customer pays the invoice under its normal terms, the business may be able to access a proportion of eligible invoice value earlier.
The customer ultimately pays in accordance with the applicable facility structure, and the funding position is adjusted.
Available percentages, fees, facility structures and eligibility requirements vary between lenders.
The important concept is simple:
the business may be able to access some of the cash represented by eligible invoices before the normal customer payment date.
It Isn’t the Same as Borrowing Against Turnover
A business may turn over $10 million a year and still have a relatively small eligible debtor ledger.
Another business may turn over $4 million but regularly have $800,000 sitting in commercial receivables.
Invoice finance is connected to eligible invoices and debtors rather than simply annual revenue.
That’s why we want to see the aged receivables report.
It tells us much more about the potential requirement.
Not Every Receivable Is Necessarily Eligible
Different lenders have different requirements.
The treatment of an invoice can potentially depend on factors such as:
debtor type
invoice age
whether the invoice is disputed
payment terms
contractual arrangements
customer concentration
related-party relationships
type of goods or services supplied
Don’t calculate a potential facility by simply applying a percentage to the entire debtor ledger.
The underlying receivables need to be considered.
What About Progress Claims?
Some industries don’t issue straightforward invoices for completed goods or services.
Construction and contracting businesses may use progress claims, milestone billing or other contractual payment processes.
Those arrangements can be treated differently depending on the lender and circumstances.
Tell us exactly how the business bills customers.
Don’t describe everything as an invoice if the underlying contractual arrangement is more complicated.
The documentation matters.
What About Mining and Resource Customers?
Businesses servicing mining and resources can have attractive commercial customers but substantial working-capital requirements.
A contractor might need to fund employees, vehicles, equipment, accommodation, travel and materials before receiving payment.
The stronger the contract pipeline becomes, the more capital may be tied up delivering the work.
If invoices are eligible, debtor finance may potentially form part of the working-capital strategy.
But the business still needs appropriate margins and sound operations.
Finance solves timing.
It doesn’t solve underpriced work.
Suppliers Can Tell You When Cashflow Is Tight
One of the clearest signs of a debtor-cycle problem is supplier behaviour.
A business that used to pay suppliers in 30 days starts paying in 45.
Then 60.
The owner may think:
“We’ll catch up when that big customer pays.”
Then another large receivable takes its place.
Soon the business is permanently using supplier terms to bridge customer payment terms.
That can damage important commercial relationships.
If suppliers are becoming the unofficial working-capital facility, it may be time to review the structure.
Early-Payment Discounts Need to Be Calculated
A supplier may offer a discount for paying earlier.
That can be attractive.
But the business can’t take advantage of it because cash is trapped in debtors.
If accessing working capital allows the business to capture genuine supplier savings, include those savings when assessing the economics of a finance facility.
Don’t assume the facility cost exists in isolation.
Compare it with what improved liquidity allows the business to do.
Don’t Pay Suppliers Early Just Because You Can
The reverse also applies.
If suppliers provide legitimate trading terms, there may be no commercial reason to pay every invoice immediately.
Working-capital management involves coordinating incoming and outgoing cash.
Use agreed supplier terms responsibly.
The objective isn’t to hold everybody’s money as long as possible.
It’s to avoid unnecessarily funding a 45-day customer with cash paid to a supplier on day one.
What About an Overdraft?
An overdraft can be an effective working-capital tool for some businesses.
It provides access to an agreed credit limit, subject to the facility terms.
Invoice finance operates differently because funding is linked to eligible receivables.
Which is more appropriate depends on factors such as:
funding amount
debtor ledger
available security
business history
how frequently the cash requirement changes
lender requirements
We can look at the actual business rather than assuming one product is always better.
What About a Business Line of Credit?
A revolving business facility may also be worth considering depending on the circumstances.
Again, understand what is causing the cash requirement.
If the business needs $150,000 occasionally for short periods, one structure may suit.
If the debtor ledger consistently ranges between $700,000 and $1.5 million as sales move, another structure may be more appropriate.
Match the facility to the cash cycle.
Avoid Stacking Short-Term Loans
A cashflow gap appears.
The business takes a short-term loan.
Three months later, another gap appears.
Another facility is added.
Soon the business has several repayments leaving the account every week or month.
The original working-capital problem remains, but now debt repayments make it worse.
If the funding requirement is recurring, consider whether a recurring facility is more appropriate than repeatedly adding term debt.
A Growing Debtor Ledger Can Increase the Facility Requirement
Suppose eligible receivables average $500,000 today.
The business wins more work.
Six months later, they average $900,000.
A working-capital facility designed around receivables may potentially respond differently to that growth from a fixed $200,000 term loan, subject to facility limits and lender requirements.
This is why debtor finance can be relevant to expanding businesses.
The funding need moves with sales.
But More Receivables Aren’t Always Good
A debtor ledger can grow for two very different reasons.
Reason one: sales are growing.
Reason two: customers aren’t paying.
Those aren’t the same problem.
If invoices are becoming older and collections are deteriorating, simply increasing finance may mask a credit-control issue.
Track both sales growth and debtor ageing.
You want more good receivables, not simply more unpaid invoices.
Review Your Customer Credit Policy
Businesses are often careful about which suppliers they’ll use but remarkably relaxed about who they allow to owe them $100,000.
Before extending substantial credit, understand the customer.
Set appropriate payment terms.
Establish credit limits where relevant.
Monitor overdue accounts.
A sale isn’t complete from a cashflow perspective until the money arrives.
Good credit control reduces the amount of working capital the business needs.
What If a Customer Represents 60% of Revenue?
That isn’t only a debtor-finance issue.
It’s a business risk.
If the customer reduces orders, changes suppliers or experiences financial difficulty, the impact can be substantial.
Consider how dependent the business has become on that relationship.
Finance can help bridge payment timing.
It can’t remove customer concentration risk.
Where possible, diversification can strengthen both cashflow and the broader business.
What If You Need Another Truck or Machine?
A growing business may need additional equipment at exactly the same time its debtor ledger is absorbing more cash.
Don’t automatically pay cash for the asset.
Eligible vehicles, trucks or machinery may potentially be financed separately through asset finance.
That can preserve working capital for wages, fuel and suppliers.
The asset finance and debtor facility can perform different jobs.
Tell us about both requirements.
Equipment Finance Shouldn’t Fund Payroll
Likewise, don’t try to make an equipment transaction solve an unrelated working-capital problem.
Asset finance is structured around eligible assets.
Payroll, suppliers and operating expenses are different funding needs.
A business can have multiple facilities where each has a clear purpose.
The objective is to structure them coherently rather than making one loan do everything.
What If the Business Has ATO Debt?
A growing debtor ledger and ATO debt can be connected.
The business waits for customers to pay.
Wages and suppliers are prioritised.
GST and PAYG money gets absorbed into operations.
Eventually the business has both a large debtor ledger and a large tax balance.
If that’s the position, tell us.
Addressing historical ATO debt without fixing the underlying cash cycle may leave the business vulnerable to creating new tax debt.
Keep Current Tax Out of the Funding Cycle
Working capital should be funded deliberately.
Tax money shouldn’t become the default overdraft.
As sales grow, GST, PAYG and superannuation obligations can grow too.
Work with your accountant or registered tax adviser to ensure current obligations are appropriately managed.
A debtor facility may potentially improve access to cash.
That doesn’t change the need for sound financial discipline.
Could Better Collections Reduce the Facility Needed?
Absolutely.
Suppose the business has $1 million in receivables and reduces average payment time by ten days.
That could release a meaningful amount of cash without increasing debt.
Review:
invoice timing
reminder processes
overdue follow-up
disputed invoices
customer terms
internal responsibility for collections
Finance and better debtor management can work together.
Don’t borrow money to compensate for avoidable administrative delays.
What Happens When Sales Fall?
A receivables-based facility may be linked to the level of eligible invoices.
If sales fall, the amount of funding supported by the ledger can also change depending on the facility.
Understand how the structure behaves in quieter periods.
A business shouldn’t permanently spend as though peak-season receivables will always be available.
Seasonality needs to be considered.
What Should You Send Us?
If your debtor ledger is growing while the bank account remains tight, send Thrive Broking:
aged debtor report
approximate monthly invoicing
major customer names
customer payment terms
average collection time
existing overdraft or working-capital facilities
other business loans
upcoming equipment purchases
approximate funding requirement
If one customer represents a large proportion of the ledger, tell us that as well.
The actual receivables are the starting point.
Debtor and Invoice Finance Around Mackay
For businesses around Mackay servicing mining, resources, construction, transport and other commercial sectors, strong sales can require substantial working capital.
Employees and suppliers are often paid before customers.
As the business grows, the amount tied up in receivables can grow with it.
A large debtor ledger can therefore be a sign of commercial success and a source of cashflow pressure at exactly the same time.
The objective is to shorten the financial distance between doing the work and having usable cash from the work.
Plenty of Work but Never Enough Cash in the Account?
Send Thrive Broking the aged debtor report, monthly invoicing, major customer payment terms and approximate amount of additional working capital required.
If the business is also purchasing trucks, vehicles or machinery, include those requirements too.
We can investigate debtor or invoice finance and other business funding options based on the actual cash cycle.
A growing debtor ledger means customers owe the business more money. The working-capital question is whether the business can keep operating comfortably while it waits for that money to arrive.