By Kenny Schmidt, owner of Schmidt Bookkeeping, LLC, providing construction bookkeeping for contractors
Business is good. Crews are busy, jobs are getting completed, and the financial reports show a profit. So why does it still feel like there’s never enough money in the bank? It’s a frustrating situation for many construction business owners. The company appears to be making money, but paying employees, subcontractors, suppliers, and other bills can still be a challenge.
The problem often comes down to one important distinction: Making a profit and having cash available are not the same thing.
A Profitable Job Doesn’t Always Mean Cash in the Bank
Consider a contractor who completes a $100,000 project with $75,000 in job costs. On paper, that’s $25,000 in gross profit, assuming the revenue and costs are recorded in the same period. But what if the customer hasn’t paid yet?
The contractor may have already paid employees, purchased materials, and covered subcontractor invoices. Those expenses required real money, even though the customer payment hasn’t arrived. The job can be profitable while the business is still waiting for the cash.
That’s why looking at profit alone doesn’t tell the whole story.
Where Does the Cash Go?
There are several reasons a construction business can show a profit while its bank balance continues to shrink.
1. Customers haven’t paid.
Unpaid customer invoices represent money the business has earned but hasn’t collected. As those balances grow, more cash is tied up waiting for payment.
2. Job costs come before customer payments.
Contractors often pay for labor, materials, and subcontractors well before receiving final payment. Taking on additional projects can increase that pressure, even when those projects are expected to be profitable.
3. Equipment purchases use cash.
Buying a truck, trailer, or piece of equipment can take a significant amount of money out of the bank. Depending on how the purchase is recorded, the full amount may not appear as an immediate expense on the income statement.
4. Loan payments require cash.
The principal portion of a loan payment reduces the amount owed, but it doesn’t appear as an expense on the income statement. That doesn’t change the fact that the payment must come
out of the bank account.
5. Owner distributions reduce available cash.
Money taken out of the business by its owners also affects the bank balance. Depending on the business structure, those distributions generally don’t reduce the profit shown on the income
statement.
None of these situations necessarily means the business is losing money. But they can help explain why cash is tight.
Start With the Right Questions
Understanding what’s happening doesn’t require becoming an accountant. It starts with asking a few practical questions:
- How much money do customers currently owe the business?
- How much of that money is past due?
- What payroll, supplier bills, and loan payments are coming up?
- How much cash will upcoming projects require before customer payments arrive?
- Is the business generating enough cash to support its current pace of growth?
Different financial reports help answer different questions:
- An income statement helps show whether the business is profitable.
- A balance sheet shows cash, receivables, and liabilities at a particular point in time.
- An accounts receivable aging report helps identify customers who haven’t paid and how long invoices have been outstanding.
- A cash flow forecast brings expected incoming payments and upcoming obligations together to help anticipate potential shortages.
The important thing isn’t how many reports a contractor receives. It’s whether those reports help answer the questions needed to run the business.
Growth Makes Financial Visibility Even More Important
As a construction business grows, so does the amount of money needed to keep it running.
More jobs can mean more payroll, larger material purchases, additional equipment, and more subcontractors to pay.
That’s why increasing sales doesn’t automatically solve cash flow problems. Sometimes growth creates additional cash pressure.
Before taking on another large project, purchasing equipment, or adding employees, contractors need to understand not only whether the business is profitable, but also whether it has the cash to support those decisions.
Profit tells part of the story. Cash flow tells another. Understanding both gives contractors a clearer picture of where their business stands, what may be coming, and how to make better decisions moving forward.
