The Cash-Flow Squeeze at a Growing Manufacturer
Halden Components makes metal brackets for construction firms. It has just won a contract worth £400,000 over twelve months, its largest ever, representing 50% revenue growth. The customer will pay 60 days after each monthly delivery of £33,333. Raw materials cost 55% of sales and must be paid on order, 30 days before delivery. Labour and overheads are £9,000 per month, paid in the month incurred. Halden holds £25,000 cash and has a £40,000 overdraft, of which £10,000 is currently used. The bank has signalled it will not increase the facility. The finance director is concerned despite the contract being profitable on paper.
1. Explain why a profitable contract can still cause a cash crisis at Halden, using the figures.
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Profit is not cash. The contract adds £400,000 of revenue and, on the stated margins, positive profit. But the timing of payments creates a gap:
- Materials (55% of £33,333 = £18,333) are paid 30 days before delivery.
- The customer pays 60 days after delivery.
- So cash leaves the business roughly 90 days before it returns on each monthly cycle.
Peak funding need. By the time the first customer payment arrives (month 3), Halden has paid materials and overheads for several deliveries. A rough cumulative gap of 90 days on £33,333 monthly revenue implies a working-capital requirement of around £75,000–£90,000 in the early months.
Available headroom. Cash £25,000 plus unused overdraft £30,000 = £55,000 - likely insufficient at peak.
Judgement: The contract is a growth trap unless funding is arranged. The FD is right to worry: the business can fail from a timing mismatch while its order book and profit look healthy. The key insight is that the cash conversion cycle (materials 30 days early + 60-day receivable) is the binding constraint, not margin.
2. Recommend actions Halden could take to manage the funding gap, and assess the risks of each.
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Options and risks:
- Negotiate supplier terms. Moving from pay-on-order to 30-day credit would shorten the gap dramatically. Risk: suppliers may refuse or raise prices; strong answers note this should be negotiated before signing.
- Invoice discounting/factoring. Borrow against the £33,333 monthly invoices. Risk: fees (often 1–3% of invoice value) erode the thin margin, and the customer may be notified.
- Request stage payments from the customer (e.g. 30% upfront, milestones). This directly attacks the 60-day term. Risk: the large customer may have negotiating power and refuse.
- Extend the overdraft or take a short-term loan. Risk: the bank has already signalled no increase, so this is the least reliable.
- Phase the contract - accept a smaller initial volume until cash flow stabilises. Risk: may breach the contract or damage the relationship.
Judgement: The most robust combination is customer stage payments plus supplier credit, because both reduce the gap without adding financing cost. Invoice finance is the fallback. A strong answer prioritises by cost and feasibility, not just lists options, and recognises that the largest customer holds the power.