The short version
Contractors often run out of cash because revenue, costs, billing, collections, payroll, HST, equipment payments, and holdbacks do not move at the same speed. The income statement may say the business is profitable. The bank account may say something very different. The bank account is usually louder.
Why this happens
Construction businesses are full of timing gaps. Materials are purchased before the customer pays. Subcontractors need to be paid before the next draw clears. Payroll goes out every week or two, even when receivables sit for 45, 60, or 90 days. Holdbacks may be earned but not collected. HST may be collected in one period and payable in another. Equipment financing keeps moving whether the job is delayed or not.
That is why profit is not the same as cash. Profit is an accounting result. Cash is the fuel that keeps the business moving. A business can earn a margin and still be short on cash if that margin is trapped in receivables, work in progress, inventory, or holdbacks.
The usual warning signs
The most common warning sign is the owner saying, 'We are busy, but I do not know where the money went.' That usually means job costing, billing, collections, and cash forecasting are not being looked at together.
Other signs include using deposits from new jobs to finish old jobs, delaying supplier payments even when the year-to-date profit looks fine, relying on the line of credit as permanent working capital, or only finding out a job lost money after it is finished.
What owners should watch
A contractor should be looking at four things regularly: gross margin by job, receivables aging, upcoming cash commitments, and HST/payroll tax balances. Looking at only the income statement is like checking the speedometer while ignoring the gas gauge. Technically interesting, practically dangerous.
Job profitability matters, but so does cash conversion. A job that earns a 20 percent margin but collects slowly may create more pressure than a lower-margin job that bills and collects quickly. The timing of draws, change orders, retainage, and closeout documentation can be just as important as the quoted margin.
What to do next
Build a simple cash view that shows expected collections and payments for the next 13 weeks. Separate earned revenue from billed revenue. Separate billed revenue from collected cash. Track holdbacks separately. Review receivables every week, not just when cash gets tight.
The goal is not to make the reporting complicated. The goal is to see the pinch before it becomes a crisis. Cash issues are much easier to fix 60 days early than 6 days before payroll.
Practical takeaway
Profit tells you whether the work should be worth doing. Cash flow tells you whether you can survive while doing it. Contractors need both reports, because only one of them pays the bills.
How Seeds can help
If your business is profitable on paper but tight at the bank, Seeds can help you build reporting that connects job margin, billing, collections, and cash flow.
General information disclaimer: This article is general information only. It should not be relied on as tax, legal, assurance, or investment advice for a specific situation.
Seeds CPA
