Planning working capital for a new contract: Can the job fund itself?
Updated: 1 day ago
Planning working capital for a new contract means covering delivery costs until the customer’s money becomes available.
Winning a substantial job can feel like the answer to a tight quarter. The difficulty is that staff, materials and subcontractors may need payment weeks before the first claim is accepted. An attractive profit margin does not itself fund that interval.
For Australian business owners, the decision starts with the job’s cash sequence. This guide builds on the distinction between profit and cash flow and focuses on the funding pressure created by one additional contract.
The short answer
Build a separate cash forecast for the proposed job before blending it into the business forecast.
Include mobilisation, existing operating commitments and the full path from work to collected payment.
Separate signed work from tenders, optional extensions and expected future orders.
Test whether the business can deliver and repay any finance if approvals or customer receipts slip.
What belongs in working capital for a new contract?
Start before the first day on site. Recruitment, onboarding, training, insurance changes, supplier deposits and equipment hire can require cash before revenue begins. A job that needs no new permanent assets can still have a substantial opening cash requirement.
Then map the direct delivery costs. Record when wages, subcontractors, consumables, freight and job-specific overheads must actually be paid. Ask which costs rise with activity and which are committed once the contract is accepted.
Include the effect on the existing business. A supervisor moved to the new project may need replacing elsewhere. A larger stock order can crowd out regular customer orders. The working capital needs guide helps distinguish the new job’s requirement from cash already needed to keep the rest of the business operating.
Avoid adding a general contingency percentage without explaining it. Identify the practical uncertainty behind each allowance, such as a delayed start, rework or a longer commissioning period. That explanation makes the forecast easier to challenge and update.
When does a signed contract become a cash receipt?
Read the payment pathway, not only the contract value. Work may have to be completed, documented, certified and invoiced correctly before the customer’s payment term begins. A nominal 30-day term can mean a longer interval from the first wage payment to collection.
The government’s payment terms guidance is a useful starting point for documenting payment expectations. For the proposed job, confirm the specific milestones, approval process and required invoice information with the customer.
Ask who approves claims and how disputes are handled. A missing delivery record or unapproved variation can prevent some or all of a claim progressing. Do not assume your invoice date overrides the agreement’s requirements.
Retention amounts, where relevant, need their own collection assumption. Money withheld until a later event should not fund next month’s payroll in the forecast. Obtain legal advice on material contract provisions, particularly where construction payment rules or state-specific requirements apply.
Keep confirmed and prospective work separate
A signed agreement, an accepted purchase order and an invitation to tender offer different evidence of future income. Even signed work can contain cancellation rights, conditions or uncertain volumes. Explain those features instead of labelling the entire pipeline as guaranteed revenue.
Build a base case from work with supportable timing and quantities. Show optional work or likely extensions separately. If the new funding can only be repaid when an unawarded tender succeeds, make that dependency visible.
The working capital application guide explains broader assessment information. For a contract-led request, useful supporting material may include the executed agreement, delivery schedule, cost breakdown and evidence of how similar customers have paid. Requirements depend on the proposed facility and assessor.
Clear evidence helps someone understand the request. It does not establish approval, remove contractual risk or mean the finance provider will accept every projected receipt.
A worked example: A profitable job with an early deficit
Consider a hypothetical services contract worth $180,000. Assume expected delivery costs of $138,000, leaving $42,000 before allocated business overheads, tax and finance costs. These figures illustrate timing and are not a valuation or lending offer.
Suppose mobilisation costs $18,000. Three fortnightly payroll and subcontractor payments of $24,000 then fall before the first substantial customer receipt. The job needs $90,000 before that receipt, even though the expected overall margin is positive.
If the business has $35,000 genuinely available after its existing commitments, the initial gap is $55,000. A customer deposit, different procurement sequence or agreed billing milestone might reduce that amount. None should be included until its timing and conditions are confirmed.
Now delay the first payment by a fortnight. If another $24,000 payroll falls due, the gap becomes $79,000 before financing payments or additional costs. That sensitivity can change whether the business accepts the job, negotiates terms or stages delivery.
The lesson is to identify the lowest cash point, rather than subtract total costs from total revenue and call the remainder affordable.
Blend the job into the whole-business forecast
Once the standalone job makes sense, add it to the business forecast. Include tax, superannuation, rent, existing debt service and other commitments on their actual dates. Check that the same opening cash is not allocated to two projects.
The government’s cash flow statement guide explains recording forecast cash movements. The 13-week forecasting guide provides a practical operating framework, although a longer job requires a forecast extending through its final receipts and funding repayments.
Check the transition after the opening gap closes. A second project can start before the first one has released its retention or final payment. Repeated contract wins can create an ongoing funding requirement even when each job eventually pays its way.
Show which management actions remain available if receipts slip. Deferring a discretionary purchase is different from delaying earned wages or simply assuming a supplier will tolerate late payment.
Match the funding to the actual stage of work
Funding used to buy materials before delivery addresses a different risk from funding an accepted invoice after completion. Do not assume every contract supports invoice finance from day one. Investigate the agreement, eligible receivables and any security or assignment restrictions.
The business loan, overdraft and line of credit comparison explains different access and repayment mechanics. Whatever structure is considered, model its net proceeds, payment dates, fees and remaining obligations beside the job’s receipts.
The government’s business loan application guide provides a broader preparation reference. Your finance broker can help explain the proposed use and timing, while your accountant and lawyer should review financial assumptions and material contract obligations within their respective roles.
Questions to resolve before accepting the job
What must happen before each customer payment becomes due?
Which costs become unavoidable as soon as the business commits?
How much cash remains if the first substantial receipt is delayed?
What evidence supports the repayment source, and what happens if optional work does not arrive?
Frequently asked questions
Is a signed contract enough to obtain finance?
No. Assessment may also consider repayment capacity, delivery risk, current trading, existing debt, security and the agreement’s conditions. A contract is evidence, not an approval.
Should the contract deposit pay ordinary overheads?
Check contractual restrictions and retain enough cash to complete the job. A deposit may reduce the opening gap without being freely available for unrelated spending.
Can invoice finance pay costs before the first invoice?
Do not assume so. A facility may require an eligible receivable arising from completed supply. Pre-delivery costs need a separately assessed funding plan.
What if the customer is a large organisation?
A strong customer does not remove invoice approval steps, payment timing or your responsibility to fund delivery. Forecast the actual process and contractual dates.
Accept the work with a credible cash plan
Before committing, reconcile the job budget, written payment milestones and business forecast. A useful funding request explains the peak gap, the evidence behind expected receipts and how the business will cope if the customer pays later than planned.
Planning Your Business Cash Flow?
Fairlane Finance can help you assess possible funding structures against your business’s cash-flow timing.
General information only. This article does not constitute financial, credit, legal, tax, accounting, compliance or valuation advice. Finance is subject to lender approval, eligibility criteria, terms, fees and conditions. Consider obtaining independent professional advice for your circumstances before acting.
