You’ve won the work.
That’s the good part.
Now you need to fund it.
Perhaps you’re a transport operator adding another regular run.
A contractor has picked up a larger job.
An agricultural business has secured more work.
A trades business needs additional employees.
Or an Aberdeen business has landed a contract that is considerably larger than anything it has handled before.
The first reaction is often:
“I probably need about $100,000.”
Maybe.
But where did $100,000 come from?
Before deciding how much to borrow, work out how much cash the new work actually requires before the customer starts paying you.
That’s the next part of the working-capital journey.
The Bonnyrigg transport example showed us how a profitable business can invoice every week but wait three weeks for payment.
Now we need to answer the question that follows:
How much money does the business actually need to bridge that gap?
Start With the Contract, Not the Loan
Suppose you’ve secured a substantial new contract.
Don’t start by looking at finance products.
Start with the work.
What has to happen before the first dollar from the customer reaches your bank account?
You may need to:
employ additional people
purchase materials
pay subcontractors
buy fuel
hire equipment
pay freight
arrange accommodation
increase insurance
pay deposits
carry additional stock
Some of those expenses happen before work begins.
Others occur every week.
The customer may not pay until weeks later.
That’s the funding requirement we’re trying to identify.
When Does the First Dollar Leave?
This is an important date.
Suppose the contract starts on 1 September.
But materials need to be ordered on 15 August.
The working-capital cycle doesn’t start on 1 September.
It starts when the business first commits cash.
You might pay a supplier deposit two weeks before commencing.
Employees may need training.
Equipment may need to be mobilised.
Insurance may need changing.
A vehicle may need registration or repairs.
All of that happens before the first invoice.
When Can You Issue the First Invoice?
Next question.
Can you invoice:
daily?
weekly?
fortnightly?
monthly?
at milestones?
only after completion?
This makes an enormous difference.
Imagine two Aberdeen businesses each win a $300,000 contract.
Business A can invoice $30,000 every week.
Business B can’t issue its first $150,000 progress claim until a major milestone is reached six weeks into the job.
Same contract value.
Completely different working-capital requirement.
Then Ask When the Customer Actually Pays
Issuing the invoice isn’t the same as receiving the money.
If you invoice on Friday and the customer pays 30 days later, the business still has another month to fund.
And contractual payment terms don’t always tell the whole story.
Ask:
When do they actually pay?
A customer with 30-day terms may consistently pay on day 35.
Another may pay exactly on time.
A large organisation may have a scheduled payment run.
Missing the cut-off by one day could push payment into the next cycle.
Use actual behaviour where you have it.
Build the Cashflow Week by Week
This doesn’t need to be complicated.
Take a sheet of paper or spreadsheet.
Write:
Week 1
Cash going out.
Cash coming in.
Week 2
Cash going out.
Cash coming in.
Continue until customer receipts begin covering the ongoing costs.
You’ll quickly see where the lowest cash position occurs.
That’s much more useful than saying:
“I think $100,000 should be enough.”
Here’s a Simple Example
Imagine an Aberdeen contractor wins additional work.
The new contract requires:
Weekly wages: $18,000
Fuel and transport: $5,000
Materials: $12,000
Subcontractors: $8,000
That’s $43,000 of additional weekly expenditure.
The customer effectively pays three weeks behind.
Three weeks of those costs is already:
$129,000.
But that’s not necessarily the final answer.
There may also be mobilisation costs, insurance, equipment and unexpected expenses.
Suddenly the owner’s original guess of $100,000 looks very different.
Don’t Forget GST
This is where rough calculations can become misleading.
If you’re invoicing customers including GST, not every dollar received belongs to the business.
Similarly, expenses can have different GST treatment.
Work with your accountant or registered tax adviser where appropriate to understand the tax cashflow.
The objective is to calculate usable working capital, not simply compare invoice totals with expenses.
Wages Cost More Than the Amount Employees Receive
Another common mistake is looking only at wages transferred to employees.
Employment costs may also include:
superannuation
PAYG withholding
workers compensation
payroll tax where applicable
allowances
overtime
leave entitlements
recruitment
training
If a new contract requires additional employees, calculate the real employment cost.
The customer’s payment cycle needs to fund the entire obligation.
What About Your Existing Business?
This is critical.
The new contract isn’t operating in isolation.
Your existing business still has bills.
Existing truck repayments continue.
Existing staff still need wages.
Rent still leaves the account.
Insurance continues.
The owner’s household still needs income.
Don’t calculate only the incremental cost of the new job if the existing business is already operating with very little cash buffer.
You need to understand the combined position.
Look for the Lowest Point
When building the cashflow, we’re looking for the point where the business requires the greatest amount of external funding.
Perhaps:
Week one: minus $35,000.
Week two: minus $71,000.
Week three: minus $112,000.
Week four: first customer receipt arrives, reducing the gap to $76,000.
In that example, the peak requirement isn’t $35,000.
It’s around $112,000 before allowing for a buffer.
That’s the number we need to understand.
Don’t Borrow Exactly the Lowest Number
Suppose your calculation says the maximum gap should be $112,000.
Does that mean you need a $112,000 facility?
Not necessarily.
Real businesses don’t operate exactly according to spreadsheets.
A customer pays four days late.
Diesel increases.
A machine needs repairing.
An employee works overtime.
A supplier changes terms.
The business may need some tolerance.
How much depends on the circumstances.
But funding the mathematical minimum with absolutely no buffer can leave the business vulnerable.
Don’t Borrow Twice What You Need Either
The opposite mistake is equally important.
If the genuine requirement is around $120,000, don’t automatically take $300,000 simply because somebody offers it.
Additional debt can mean:
additional interest
additional fees
greater repayment commitments
greater temptation to use the money elsewhere
Finance should solve a defined problem.
The question isn’t:
“How much can I borrow?”
It’s:
“How much does the business need, and what facility structure matches that requirement?”
Is the Gap Temporary or Permanent?
This is one of the most important questions.
Suppose a customer pays three weeks behind.
Every week you invoice again.
That means the gap continually renews.
The first customer payment doesn’t eliminate the working-capital requirement because newer invoices are still outstanding.
That’s a recurring working-capital cycle.
Compare that with a one-off requirement.
Perhaps the business needs $80,000 to mobilise a project, after which customer payments comfortably fund operations.
Different problem.
Potentially different finance structure.
This Is Where the Bonnyrigg Truck Example Matters
Our Bonnyrigg transport operator invoices every week but gets paid three weeks later.
The truck keeps running.
Therefore there may continually be several invoices outstanding.
If each week’s operating cost were $8,000, the business might need to bridge around $24,000 just to cover the normal three-week cycle, before allowing for other expenses and a buffer.
The amount should come from the business cycle.
Not a guess.
What If the Business Is Growing?
Now things become interesting.
Suppose today’s working-capital gap is $100,000.
But the business expects revenue to double over the next year.
The funding requirement may grow too.
More sales can mean:
more wages,
more materials,
more fuel,
more invoices outstanding.
A facility that comfortably supports the business today may become restrictive six months later.
Consider expected growth when selecting the structure.
Could Debtor Finance Grow With the Ledger?
Potentially.
Where a business has eligible commercial receivables, debtor or invoice finance may provide funding linked to eligible invoices, subject to the lender’s facility limits and requirements.
As eligible receivables change, available funding can potentially change too.
That’s different from receiving a fixed $100,000 term loan.
It doesn’t automatically mean debtor finance is the best answer.
But for businesses with a recurring invoice cycle, it can be worth comparing.
What About a Revolving Facility?
A revolving business facility may suit some working-capital requirements.
The business accesses funds as needed within the agreed structure and limit.
That may be useful where the requirement moves up and down.
Again, understand:
limit
interest
fees
repayments
security
redraw/access conditions
lender requirements
Don’t choose the product before understanding the cash cycle.
What About an Overdraft?
An overdraft can also be appropriate for some businesses.
It can provide working capital through a limit attached to the business banking structure.
But availability, security requirements, pricing and assessment vary.
Compare the structure against the actual requirement.
If the business continually has $800,000 in eligible commercial receivables, the discussion may be different from a business needing an occasional $40,000 buffer.
Don’t Automatically Use Your Home
Business owners sometimes immediately think:
“I’ll just use the equity in my house.”
Property-backed finance can potentially provide access to larger amounts or different pricing depending on the circumstances.
But the existence of property equity doesn’t automatically mean it should be the first option.
Understand:
how much is required
how long it’s required
what the money is funding
other available structures
total cost
security implications
Match the finance to the requirement.
Keep Equipment Out of the Working-Capital Calculation Where Appropriate
Suppose the Aberdeen contractor also needs a $180,000 excavator.
That’s not necessarily another $180,000 of working capital.
Eligible equipment may potentially be financed through asset finance.
Perhaps the business needs:
$120,000 working capital + equipment finance for the excavator.
That’s very different from saying:
“I need a $300,000 business loan.”
Breaking the requirement into its components can create more appropriate finance structures.
The Same Applies to Trucks
A transport company wins more work.
It needs:
another prime mover,
another trailer,
and $80,000 of working capital.
Those are potentially three identifiable requirements.
Depending on lender and facility, multiple eligible assets may sometimes be considered together or through broader asset or fleet facilities.
The working capital still has a separate job.
We want every dollar of finance to have a purpose.
What If You Already Have Equipment Finance?
Include those repayments in the calculation.
A business with $40,000 a month in truck and machinery repayments has a different fixed-cost base from a business with no existing asset debt.
Those commitments don’t disappear while you’re waiting for the new customer’s first payment.
Existing debt matters when calculating how much breathing room the business needs.
What If You Already Have ATO Debt?
Don’t ignore it.
Sometimes the working-capital shortage has already been funded indirectly through unpaid tax.
The business needed cash.
Customers hadn’t paid.
So GST, PAYG or other obligations were deferred.
Now the business has two problems:
historical ATO debt + ongoing working-capital shortage.
Refinancing the historical debt without fixing the recurring cash gap can leave the business back in the same position.
We need to understand both.
What If Suppliers Are Already Overdue?
That’s another clue.
If the business continually waits for customer receipts before paying suppliers, suppliers may effectively be funding the debtor cycle.
List:
overdue suppliers
current suppliers
payment terms
amounts due
critical accounts
If new finance is being considered, understand whether part of the requirement is actually catching up historical creditors.
Don’t Hide the Messy Parts
If you’re talking to us about working capital, tell us what is really happening.
If the credit card is full, tell us.
If the ATO is owed money, tell us.
If suppliers are overdue, tell us.
If one customer accounts for 80% of revenue, tell us.
If you need another truck next month, tell us.
A finance structure built around half the story can create another problem later.
What Documents Help?
For a working-capital discussion, useful information can include:
recent business bank statements
aged debtor report
aged creditor report
recent financial statements
management accounts
BAS
existing loan statements
major contracts
customer payment terms
upcoming equipment requirements
Exactly what’s required depends on the lender and facility.
But we can start by understanding the story.
Working Capital for Businesses Around Aberdeen
Businesses around Aberdeen and the Upper Hunter can have substantial cash requirements across transport, agriculture, construction, contracting and businesses servicing larger industries.
Winning more work can be an excellent development.
But bigger contracts can require the business to fund considerably more expenditure before customer payments catch up.
That’s why the finance conversation should begin before the new work consumes the existing cash reserves.
Won More Work and Need to Know How Much Cash You’ll Need?
Don’t start by choosing a loan amount.
Send Thrive Broking an outline of:
the contract value, when you can invoice, when the customer pays, weekly costs, existing business commitments and any equipment you need to purchase.
We’ll start by working through what is actually creating the funding requirement.
Then we can investigate finance structures that may suit the way the business operates.
Winning the contract is only the first part. The business also needs enough cash to carry the work until the contract starts paying for itself.