Transcript:
Your income statement shows you made $100,000, but your bank account went down by $20,000. Those are just made-up numbers, but if you’re a general contractor, at some point you’ve had this exact situation come up, and it likely caused you some confusion. Typically, you might go to your bookkeeper and assume there was an error, but most often the issue is just that profit and cash are not the same thing.
As a business owner, if you’re looking at the difference between those two and you can’t make sense of why your profit doesn’t match how your bank balance changed, you’re likely giving up on reviewing your financials in a way that actually helps you make decisions for your business. You don’t necessarily need to know all the nuances of cash versus accrual accounting or how bookkeeping works. You just want to know what it means and how to use it.
As a quick explanation of the difference you’re likely seeing: profit is how your business performed during that month, but it doesn’t necessarily capture everything that hits your bank account, and not everything that hits your bank account shows up on your income statement. That can be confusing as an owner. For example, when you send a customer an invoice, the income is reported in that month right away, but you may not receive the cash from that customer for another month or two. That could be an area where your business doesn’t have strong processes, and you’re losing cash without even knowing it.
As a general contractor, you’re dealing with a lot of different payments to a lot of different people. You’re dealing with draws from customers, payroll, the overhead to run the business, marketing, material purchases, and subcontractors, who can’t work on the job until they’ve been paid. You often have money going out of your business before you’ve received the draw from your client.
How you set up the contracts with your customers can set you up for success or failure before the job even starts. If your contract structures the project so you get paid much later, it’s going to be harder to make the decisions you need to manage your cash so you can still make payroll and continue to grow your business.
The first actionable step, if you’re experiencing this problem, is to make sure your invoicing process is actually integrated with your financials. It’s pretty common, especially early on, for invoicing to be done in a way where the data isn’t being accurately captured. So first, make sure that once you invoice a customer, it flows directly into your financials.
Once that’s in place, the next step is to receive what’s called an accounts receivable aging report. It shows all the invoices that have been sent to current customers, whether they’ve been paid, and how far past due they might be. If you have an up-to-date operations and financial team, you should be getting that report at least once a week. If it’s sent automatically to your project managers and leadership team, within seconds of opening that email you can see which projects are the problem, what action needs to be taken to chase down payment on a certain job, and whether those funds have been collected.
In my experience, this is a problem even on small jobs. Pretty often, a client verbally agrees to a change that the project manager then forgets to bill, or the bill gets sent but there’s no clear follow-up. That’s cash your business should have collected and is missing out on. It’s common in my experience that when we engage with a company, one of the first things I look at is their accounts receivable report, and in my eyes it’s a complete mess.
