Education Library · Foundations · Article 11
A deck builder we talked with had grown from about $187,000 in revenue his first year to $850,000 by midsummer of his third. He took 50% upfront and 50% at the end, with nothing in the middle, on projects around $60,000. Payroll, including a sub crew, ran about $10,000 a week. The jobs made money. But as he put it, “when I have to pay for $6,000 of material, you know, before I even get a check, you know what I mean?”
That is a cash flow timing problem. Profit gets measured over a job or a year. Cash gets measured on a specific Tuesday, when payroll clears or doesn’t. Paul Childers describes it this way: “Cashflow is, in my opinion, a mixture of timing and liquidity.” A business can be profitable on its P&L and still run short, because the money it earned hasn’t arrived yet and the bills it owes have.
Where the gap comes from
In the trades, the business almost always pays first. Materials get bought before the job starts or as it goes. Crews get paid every week. Customers, general contractors and commercial accounts pay later, often on net 30 or net 45 terms, and later than that in practice.
Retainage widens the gap on commercial and GC work. Retainage is a portion of each progress payment held back until the job is finished, usually 5% to 10%. On federal construction contracts, the regulations cap it at 10% of the approved amount. States treat it differently: some set limits or release rules, a few restrict it heavily, and others leave it to the contract. On a $500,000 subcontract, 10% retainage is $50,000 of earned money that may not show up until months after your crew leaves the site. An electrical contractor running a large multifamily job told us his GC’s terms were net 30 on paper, but between submitting the pay application, the bank’s walk-through of progress and the release of funds, it was closer to 60 days. With roughly $700,000 owed to him across his jobs, he summed it up: “I don’t really get paid until the end of the year.”
Seasonality creates a different version of the same gap. A plumbing and HVAC company doing around $3.3 million a year brought in $1.2 million of that in its last four months. In the slow summer stretch, the owner had about $75,000 in the bank, roughly $90,000 in receivables (including $80,000 from two large jobs on net 45), and more techs than work. Some days a tech would come in for one call and go home. The business was fine for the year. The question was whether the bank balance would carry it to the busy season.
Growth and big jobs eat cash even when every job is profitable. A company going from $500,000 to $1 million has to front roughly twice as much in materials and payroll before the larger revenue comes back. A single project two or three times your normal size does the same thing at once, and if that one customer pays slowly, the whole company feels it.
Timing problem or profit problem
A timing problem means the work is priced right and the money is coming. If every open invoice and retainage balance got paid today, and you paid every bill you owe, there would be money left over. The pressure eases when collections catch up, and it tends to follow a pattern: the same season, the same customer’s pay cycle.
A profit problem means the jobs aren’t making enough, or more is going out of the business than it earns. Underbidding, cost overruns that never get billed, change orders that don’t get paid, debt payments that are too heavy, and owner draws that run ahead of profit all fall here. The gap doesn’t close when the receivables come in. It just moves to next month, a little larger.
The fixes are different. Short-term financing can bridge a timing gap because the money to repay it is already earned and on its way. Borrowing against a profit problem usually makes it bigger, because the debt payment gets added to a business that was already spending more than it made. Many companies have some of both.
How lenders read your bank statements
Almost every business lender asks for bank statements, usually three to 24 months, with larger requests looking further back.
Underwriters generally look at:
- Deposits: total deposits over the period, divided by the number of months, to estimate typical monthly revenue. They try to separate real revenue from transfers between your own accounts, owner contributions and loan proceeds.
- Average daily balance: how much cash typically sits in the account, which shows how much cushion the business runs with.
- NSFs and overdrafts: returned items and negative days are read as signs the business is running too tight. A few in a row before a loan application can matter more than a strong year on the P&L.
- Existing debt payments: daily or weekly debits from other lenders show up here, even if they aren’t on your credit report.
A seasonal business with a profitable year can still look risky if its statements show overdrafts every spring.
Seeing it coming
Two simple tools catch most timing problems before they turn into a missed payroll.
AR aging. Your accounting software can produce an accounts receivable aging report that sorts open invoices by how long they’ve been outstanding: current, 1 to 30 days past due, 31 to 60, 61 to 90 and over 90. Watch which customers are drifting into the older columns and how much of the total sits with one or two of them. Track retainage on its own line.
A short cash forecast. A weekly forecast for the next 13 weeks is enough for most trades businesses. Start with this week’s bank balance. Add the collections you expect each week, using when customers actually pay rather than the due date on the invoice. Subtract payroll, material and sub payments, loan and equipment payments, tax deposits and owner draws. The number to look at is the lowest week. If that week is the second week of a slow February, you know it in November, while there’s still time to do something about it.
The forecast will be wrong in the details, and that’s fine. Updated every week, it shows you where the money is going to be thin.
This article is educational and isn’t legal, tax, accounting or lending advice. Program rules, lender terms and credit bureau practices change, so verify current terms before acting.
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