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Contractor glossary

Cash flow

Updated

Definition

Cash flow is the money moving into and out of your business, and when it moves. Profit tells you whether your work makes money; cash flow tells you whether the money is in the bank when payroll, suppliers and taxes come due.

Profit is not cash

Your profit and loss statement shows whether jobs earn more than they cost. Your bank balance shows whether you can make Friday's payroll. The two drift apart because money moves on its own schedule:

  • You pay before you're paid. Materials, wages and fuel go out while the job is underway. The customer pays at the end, or later on terms.
  • Earned isn't collected. Invoiced work sits in accounts receivable, and retainage or an insurance holdback is paid only once the project or the paperwork is finished.
  • Some cash leaves without being an expense. Loan principal and owner draws drain the account but never show up as costs on the P&L. Equipment can be expensed over several years as depreciation, while the cash goes out when you pay for it.
  • Some cash in the account isn't yours. A deposit is money for work you still owe, and sales tax you collect isn't yours to spend.
  • Profit creates a tax bill, due on a schedule that ignores your busy season.

A profitable job that drains the account

Example: A $20,000 job runs four weeks. Materials cost $8,000, paid in week one, and crew pay is $1,500 a week, $6,000 in all. The job earns $6,000 of gross profit. If the customer pays in full 30 days after completion, the job is $14,000 out of pocket by week four and stays there until about week eight. Now take a $5,000 deposit at signing (within your state's rules), bill $7,500 at the halfway point and $7,500 at completion, each paid when billed. The low point shrinks to $6,000, and the job is cash positive the day it's finished. The numbers are made up for illustration.

Where the gap hurts most

Growth. Every new job ties up cash in materials and labor before it pays, so a jump in sales can empty the account even when every job is profitable.

Slow seasons. Revenue bunches into the busy months, but insurance, truck payments, rent and your own pay come due every month. If the season's profit goes to equipment, debt and draws as it comes in, a profitable year can still leave the account empty when the work slows down. Work out your break-even point for the slow months and set money aside from each busy month to cover the gap. A service agreement program also brings revenue into the slow weeks.

How to close the gap

  • Invoice the day the work is done, and collect on site for service calls.
  • Use deposits and progress billing on bigger jobs, within your state's rules.
  • Set clear payment terms and follow up the day an invoice goes past due.
  • Match supplier terms to customer terms. If your supply house gives you 30 days, collecting from customers sooner means they fund the materials, not you.
  • Set aside a share of each month's profit for taxes, and ask your CPA how much to hold and when it's due.
  • Every week, look ahead at expected money in and out for the next 13 weeks.
  • Arrange a line of credit while your numbers look strong, not once you're already short.

Common mistakes

  • Reading the bank balance as profit. A big balance after a run of deposits is mostly money for work you still owe.
  • Reading the P&L as cash. A strong month on paper can still leave you short if customers haven't paid.
  • Covering the gap with credit cards month after month instead of fixing when you bill and collect.

How it connects

How to get paid faster turns the billing side of this into a routine, and how much deposit to ask for covers deposit sizing and the rules that can limit it. When invoices stall, start with how to collect overdue invoices.

Go deeper

GuideHow to Get Paid Faster as a ContractorHow contractors get paid sooner: payment terms set at booking, invoices sent the day the job ends, pay links, deposits, progress billing and reminders.GuideHow Much Deposit Should a Contractor Ask For?How to size a contractor deposit from what you'd lose if the customer cancels, check state limits and cancellation rights, and write terms customers sign.GuideHow to Read a Profit and Loss Statement for ContractorsRead a contractor P&L line by line: revenue, job costs, gross margin, overhead and net profit, plus cash vs accrual and a 30-minute monthly review.GuideHow to Collect Overdue InvoicesA contractor's plan for past-due invoices: a reminder schedule, a call script, payment plans, a final notice letter, late fees, liens and small claims.
Accounts receivableAccounts receivable (AR) is the total your customers owe you for work you've done and invoiced but haven't been paid for yet. It's money you've earned but can't spend, which is why a busy month can still leave you short on cash.Profit and loss statementA profit and loss statement (P&L), also called an income statement, reports a business's revenue, costs and profit over a period such as a month, quarter or year. It shows whether the work you did made money, not how much cash you have.DepositA deposit is a payment the customer makes before work starts, credited toward the final price. Contractors use it to cover materials bought for the job and to hold a place on the schedule. Some states limit how much a contractor can collect up front on home improvement work.Progress billingProgress billing is invoicing a job in stages as the work is completed, instead of sending one invoice at the end. Each invoice bills the part of the contract earned so far, either for reaching agreed milestones or by percent complete against a schedule of values.Payment termsPayment terms are the conditions on your estimate, contract and invoice that say when payment is due, how the customer can pay and what happens if they pay late. Common terms include due at completion, due on receipt, net 15 and net 30.Break-even pointThe break-even point is the revenue at which your business makes zero profit: gross profit from jobs exactly covers overhead. For a contractor, break-even revenue equals fixed overhead divided by gross margin, written as a decimal.

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