Winning a five-year contract can feel like the kind of success that guarantees stability. You have more revenue visibility, a stronger backlog, and a customer commitment that stretches well beyond the next quarter. However, the payment terms attached to that contract can quietly create a cash flow problem if nobody models them ahead of time.
We recently reviewed that situation with a Mountain West energy-services company operating across Colorado and Wyoming. The company had secured a new multi-year award, but the customer was moving to net 60 payment terms starting in January while the second half of the award remained uncertain. The contract strengthened the revenue outlook, but the cash implications needed their own model.
If your business is taking on larger contracts or expanding into new markets, forecasting the cash requirements behind that growth can help you avoid a liquidity crunch even when sales are strong.
Why Can a Good Contract Create a Cash Flow Problem?
A larger contract can increase revenue while also increasing the amount of working capital your business has to carry. You still have to cover payroll, subcontractors, fuel, equipment, insurance, and other operating costs while the work is being performed. If the customer doesn’t pay until 60 days after invoicing, those costs can leave the bank well before the related cash comes back in.
That gap matters even when the contract is profitable.
Under accrual accounting, revenue may be recognized before the customer pays, so the income statement can improve while liquidity tightens.
Our case study: For an energy-services company expanding geographically, the pressure can be greater because crews, mobilization, travel, equipment, and support costs may rise at the same time receivables take longer to turn into cash.
How Do Net 60 Payment Terms Change Working Capital?
Net 60 payment terms generally give the customer 60 days from the invoice date to pay. For the supplier, that keeps cash tied up in accounts receivable longer.
What matters is how the new terms change your current collection cycle and how much of your monthly billing moves onto the longer schedule.
For example, if a customer that bills $500,000 a month moves from 30-day to 60-day terms, the business has to fund roughly one extra month of work before that cash comes back, which ties up about $500,000 more in receivables. As billing grows under the contract, that gap grows with it, so the award needs more liquidity from the very first invoice.
Why Would We Forecast Two Years Before the New Terms Start?
For this client, we recommended a two-year cash flow forecast before the January change took effect. A short forecast might capture the first receivable build but miss what happens as the contract ramps, other work changes, or expansion plans require more capital.
A two-year horizon gives management room to see the initial cash dip, the ongoing working capital requirement, and whether liquidity recovers as expected.
We would first make sure the current balance sheet is reliable, especially cash, receivables, payables, and debt. A forecast built on unreconciled starting balances can project an accounting problem forward and give management false confidence.
Then we would model the customer at the full 60-day terms instead of assuming collections arrive early. The forecast should connect expected monthly billing to cash receipts, then layer in payroll, vendor payments, taxes, debt service, planned capital spending, and other known commitments.
How Should You Model the Uncertain Second Half of the Contract?
The forecast should separate committed work from the portion of the award that is still uncertain. For this client, we wouldn’t treat the second half of the five-year opportunity as guaranteed cash flow. If it sits in the base forecast as though it were certain, future liquidity can look stronger than the business can actually support today.
We would build scenarios around the range management can defend. One view can reflect committed work, while another shows what happens if the additional award materializes. The related cost assumptions should change too because more revenue may require more labor, equipment, travel, and working capital. This gives management a view of the cash requirement under each credible version of the contract.
How Should You Size Your Line of Credit Before the Cash Dip?
Once the forecast shows the lowest projected cash point, management can evaluate whether existing liquidity is enough to carry the contract.
A line of credit can support short-term operating needs such as payroll and other working capital requirements. We would compare the projected cash trough with current reserves, expected collections, existing credit capacity, and the minimum liquidity management wants to preserve.
Running that comparison before January gives you time to increase the line or revisit terms with your lender while it’s still a planning conversation. If you wait until receivables have already expanded, a funding need you could have forecast turns into a reactive financing problem.
Which Investments Should You Time Around the Cash Flow Dip?
A major contract often creates confidence to invest, especially when the company is also expanding into new markets. Equipment purchases, hiring, new locations, and systems all compete for the same cash supporting the contract.
The forecast can show which investments are essential to deliver the award and which have more timing flexibility. Sequencing those decisions around the projected cash trough helps management protect liquidity during the months when operations are absorbing the most working capital while still moving forward with expansion.
Can You Negotiate a Phased Transition Into 60-Day Terms?
If the customer is open to it, a phased transition can reduce the initial working capital shock created by extended payment terms. One approach is to keep shorter terms during the early months and move toward net 60 after the contract has ramped. Another is to negotiate payment milestones or a billing structure that keeps more cash moving while the new operating requirements are being established.
We would still build the base forecast using the full 60-day terms unless a different arrangement has been approved. The forecast then gives management something concrete to bring to the negotiation because it shows how much additional liquidity the new terms require and how much a phased transition would reduce that need.
FAQs About Net 60 Payment Terms
How often should a cash flow forecast be updated?
Most businesses benefit from rolling the forecast forward at least monthly and comparing actual collections and spending with what was projected. Bigger changes—such as a new contract phase, a shift in payment terms, or an expansion decision—are a good reason to update it right away.
Can a customer with net 60 terms still push DSO above 60 days?
Yes. Days sales outstanding (DSO) measures how long it actually takes to collect after you invoice. Billing delays, invoice disputes, customer approval or acceptance requirements, and late payment can all push it past the stated term.
Can customer concentration affect a working capital line of credit?
It can. Lenders may consider the quality and concentration of accounts receivable when evaluating working capital financing, although underwriting standards vary by lender.
Is an early payment discount better than borrowing against a line of credit?
It depends on the economics. Compare the cost of the discount with the financing cost and liquidity benefit of collecting sooner before deciding which option is more favorable.
Can accounts receivable financing help with a large net 60 contract?
It may provide another source of liquidity, but pricing, eligibility, recourse, and customer requirements vary. Compare those costs and restrictions with your existing line of credit before using receivables financing.
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Janine Smith is a Consulting CFO with TGG. She has a wealth of experience in accounting process development and management, supervising both TGG staff and client’s internal staff (banking, AR, AP, inventory management, payroll), and working with many different types of accounting software. She has worked with clients to develop KPIs that fit their current needs and coached them to support the goals of the business. One of her favorite tasks is budget development and using that as a tool to help organizations meet their goals.