Cash management

Cash management means planning and controlling the money that comes into and goes out of your business. On a job site you pay workers every week, but the owner may pay you 30 or more days after you bill, and may hold back part of each payment. The gap between paying and getting paid is where contractors get into trouble.

Cash flow is not the same as profit

Profit is what is left after you subtract all costs from the revenue you earned. Cash flow is the actual movement of money in and out of your bank account during a period. A job can show a profit on paper while your bank account is empty, because the money is still owed to you in accounts receivable or held as retention.

Cash flow projections

A cash flow projection (also called a cash budget) estimates the cash you will receive and pay out, usually month by month, for the next several months. It shows ahead of time when you will be short, so you can arrange a line of credit, delay a purchase, or speed up billing before a crisis.

1. 1Start with the cash in the bank at the beginning of the month.
2. 2Add the cash you expect to collect. Use when customers actually pay, not when you bill. Subtract any retention they will hold.
3. 3Subtract the cash you expect to pay: payroll and payroll taxes, materials, subcontractors, equipment, loan payments, and overhead.
4. 4The result is the ending cash. It becomes next month’s beginning cash.
5. 5Compare the ending cash with the minimum balance you want to keep. Plan how to cover any shortfall.

Working capital

Working capital is current assets minus current liabilities. Current assets are things you expect to turn into cash within one year, such as cash, accounts receivable, and retention receivable. Current liabilities are debts you expect to pay within one year, such as accounts payable, payroll taxes owed, and short-term loans. Positive working capital is the cushion that lets you pay bills while you wait to be paid.

Lines of credit and loans