This is probably the conversation I have more than any other. A contractor calls me stressed because they can't figure out why they're struggling to pay bills when their accountant just told them they had a good year. Or the opposite: they think everything is fine because cash has been coming in strong, then they get to tax season and owe way more than they expected because they weren't tracking what they were actually keeping.

Profit and cash flow are two completely different things and mixing them up is one of the fastest ways to get into financial trouble in a trade business.

Profit Is What You Earned. Cash Flow Is What You Have.

Profit is the number that shows up on your income statement after you subtract your expenses from your revenue. It tells you whether your business is making money over a given period of time. Cash flow tells you whether you actually have money available right now to pay your bills, your crew, and yourself.

The reason they're so different in construction and trades work comes down to timing. You might complete $80,000 worth of work in March but not get paid until May. Your income statement shows that revenue in March. Your bank account doesn't see it until May. In the meantime, you still have payroll in April. That gap is where contractors get into trouble.

Common Situations Where This Goes Wrong

Here are a few scenarios I see regularly that trip contractors up:

  • A big job closes in December, the customer pays in January. You show a loss on this year's taxes but have plenty of cash sitting there. You spend it. Then taxes come due for next year when that payment hits income.
  • You have three jobs running simultaneously and you're billing as work is completed. Material costs hit in week one, labor is every two weeks, but payment doesn't come until the job is done. Cash feels tight even though you're technically profitable.
  • Retainage sits on the books for months. That's earned income you can't touch yet, but it can give you a false sense of your financial position if you're not accounting for it correctly.

How to Track Both Without Losing Your Mind

The simplest thing you can do is keep a 13-week cash flow projection. That's just a rolling look at what money is coming in and what bills are coming due over the next three months. It doesn't have to be fancy. Even a basic spreadsheet that you update weekly will tell you when you're going to hit a tight spot before it becomes a crisis.

On the profit side, look at your income statement monthly and make sure your bookkeeper is recording revenue when it's earned, not just when cash hits the bank. If you're on cash-basis accounting right now, it might be worth talking to someone about whether accrual accounting makes more sense for how your business operates.

My Take

Most contractors I work with are naturally good at knowing roughly what's in their bank account. What they're usually missing is the forward-looking piece. Cash flow problems in construction are almost always visible weeks in advance if you're paying attention to the right numbers. The goal is to never be surprised by a tight month, because you saw it coming and planned around it.