Profitable on paper. Broke in the bank.
Your profit and loss statement says you have cleared $182,000 this year. Your operating account has $9,000 in it. Both numbers are correct, and here is where the difference went.
The short version
- Profit measures what you earned. Cash measures what you collected and paid. On a construction job those can be 90 days apart.
- Retainage, unbilled work, and loan principal are the three biggest hiding places.
- A one page bridge from net income to change in cash will find the difference in about 15 minutes.
This is the most common conversation I have with contractors in San Diego County. A framer, a plumbing outfit, a design build firm. Different trades, same question: if the business made money, where did it go?
The answer is that your profit and loss statement and your bank balance are answering two different questions. The P&L asks what you earned. Your bank account asks what you collected and paid. On a construction job those two events can be separated by 60, 90, sometimes 120 days.
Year to date
Same business. Same month. Two very different stories.
The gap is not fraud and it is usually not sloppy bookkeeping. It is timing. Your job is to know exactly where that timing is parked so it stops surprising you on a Friday payroll.
Five places your cash is hiding
-
Retainage you have earned but cannot touch
On private jobs, retainage is commonly 5 to 10 percent of each progress billing, held until closeout. That amount hits your P&L as revenue the day you bill it. It hits your bank account months later, sometimes after a punch list fight. On a $2 million year, 5 percent retainage is $100,000 sitting on the sideline.
-
Work you have performed but not billed
Underbilling is the quiet one. Your crew poured, framed, and trimmed in the last two weeks of the month, and the invoice does not go out until the 10th. The costs are already in your numbers. The revenue and the cash are not. A work in progress schedule surfaces this before it becomes a hole.
-
Receivables aging while payroll runs weekly
Your crew is paid every Friday. Your general contractor pays net 45, sometimes only when the owner pays them. That mismatch is the engine of the whole problem, and every extra day of collection time is real money out of your operating account.
-
Deposits, materials, and prepaid costs
You fronted $28,000 for cabinets and windows that will not be installed for six weeks. Booked as job costs today, your margin looks worse than it is. Booked to the balance sheet, your profit looks fine and the cash is simply gone. Either way, know which one is happening.
-
Loan principal, owner draws, and equipment
None of these appear on your profit and loss statement. Truck payments, an excavator note, your own distributions, and the down payment on a new lift all leave the bank without touching net income. This is the top reason a profitable owner feels broke.
The 15 minute check you can run this week
You do not need a new system for this. Pull your profit and loss and your balance sheet for the same month, side by side, then walk the bridge below. Every line is a place cash left or never arrived.
Sample month: net income to actual cash
| Line | Where to find it | Amount |
|---|---|---|
| Net income | Profit and loss | 42,000 |
| Increase in accounts receivable | Balance sheet, month over month | (26,400) |
| Increase in retainage receivable | Balance sheet | (18,100) |
| Material deposits paid | Balance sheet | (9,300) |
| Increase in accounts payable | Balance sheet | 14,500 |
| Loan principal paid | Balance sheet, loan balances | (4,200) |
| Owner distributions | Equity section | (4,500) |
| Change in cash | Bank statement | (6,000) |
Numbers are illustrative. Add a line for customer deposits collected if you take them. Done correctly, this bridge ties to your bank statement to the dollar, and if it does not tie, that is a bookkeeping issue worth finding.
What to fix first
If you change only three things this quarter, make it these.
- Bill on a schedule, not when you get around to it. Pick the 1st and the 15th and hold the line. Two weeks of billing delay on a $1.5 million year leaves roughly $58,000 permanently in transit.
- Track retainage in its own account. Not buried inside accounts receivable. You cannot chase what you cannot see, and closeout retainage is the easiest money most contractors leave uncollected.
- Build a rolling 13 week cash forecast. One tab, weekly columns, expected collections in against payroll, subs, and materials out. It takes an hour to build and tells you three weeks ahead whether you can take the next job.
Do those three and the surprises mostly stop. Add job level costing on top and you can answer the harder question, which is not where the cash went but which jobs are worth bidding at all.
Questions we get
Should my construction business use cash or accrual accounting?
Many contractors keep books on accrual for real job visibility and file taxes on a permitted method, which can differ by revenue size and contract type. Accrual is what tells you the truth about job performance. The tax method is a separate decision, and long term contracts carry their own rules, so talk it through with your CPA before switching anything.
How much cash should a contractor keep on hand?
A common working target is enough to cover payroll plus fixed overhead for eight to twelve weeks, adjusted for how concentrated your receivables are. If one general contractor is 40 percent of your revenue, you need a bigger cushion than a shop with 30 residential customers.
Is a work in progress schedule worth the effort on smaller jobs?
Once you regularly carry jobs across a month end, yes. It is the only report that shows whether you are overbilled or underbilled right now, and it is the first thing a bonding company or a lender will ask to see.
Want to see the gap in your own numbers?
We work with construction and trades businesses across San Diego County on job costing, cash flow forecasting, and monthly reporting that actually gets read. Book a 20 minute call and we will walk your last three months together.
Book a callAccounting Fresh CPA Inc. · 5451 Avenida Encinas, Suite B, Carlsbad, CA · This article is general information, not tax or accounting advice for your specific situation.