Why Profit Is an Opinion and Cash Is a Fact
"I do not care how much a man is worth, I only care when he can get his hands on it."
I have met contractors who show impressive revenue numbers and declare themselves successful, yet they cannot pay their bills on time. I have met contractors who operate quietly, showing modest revenue, yet always have cash in the bank and sleep well at night. The difference between these contractors is not revenue. The difference is cash flow.
Profit is an accounting concept. Cash flow is a survival concept. You can be technically profitable on paper while being practically bankrupt in reality. The customer who owes you money is not paying you. The materials you bought for the job are paid for but not yet billed. The employee you paid last week was working on a job that will not be invoiced for another thirty days. The taxes you owe are due regardless of when your customers pay.
This gap between cash out and cash in is the killer of contractors. It is the reason that most contracting businesses fail despite showing apparent profitability on their income statements.
The Gap Between Work and Payment
In the home service business, there is an inherent delay between the moment you perform work and the moment you receive payment. This delay is the source of almost all cash flow problems. Unlike a retail store where the customer pays at the moment of purchase, you are extending credit to your customers, whether you mean to or not.
This credit extension happens in several ways. You complete a job on Monday. You send an invoice on Tuesday. The customer receives the invoice and places it in their processing queue. Their accounts payable department schedules payment for the end of their cycle. The check is mailed or electronically transferred. It arrives in your bank account seven to fourteen days after the invoice date. During this period, you have performed the work and incurred the costs, but you have not received the revenue. This is the cash flow gap, and it exists on every single job you complete.
The gap is manageable when you have a few jobs in progress. You complete job A, invoice it, and receive payment while working on jobs B and C. The payments from A arrive in time to cover the costs of B and C, and so on in a continuous cycle. This is how a healthy contracting business operates.
The gap becomes unmanageable when it expands. When customers begin paying in sixty days instead of thirty. When you have to order expensive materials that are not reimbursed for weeks. When you take on a large job that requires significant upfront investment. When several customers delay payments simultaneously. When any of these situations occur, the gap widens. Your cash reserves, if you have any, get consumed. You begin borrowing to cover your obligations. You pay interest on loans. You delay your own payments to suppliers. You are now operating in cash flow crisis, even though your income statement may still show profitability.
The Three Cash Flow Killers
In my observation, three patterns account for the majority of cash flow problems in contracting businesses. Understanding these patterns is essential to avoiding them.
The first killer is Net-30 Delusion.
Many contractors offer net-30 payment terms as a matter of course. They believe this is standard business practice and that offering shorter terms would be unprofessional or uncompetitive. This is a mistake. Net-30 terms mean you are extending thirty days of free credit to every customer who requests it. Most customers will take the full thirty days, and many will take longer. You are funding their working capital at your own expense.
The contractors who manage cash flow effectively do not offer net-30 terms as a default. They offer net-15 or even net-10 when appropriate. They understand that faster payment is worth something and should be priced accordingly. They offer small discounts for early payment. They establish relationships with customers who value paying quickly and are willing to pay a small premium for that privilege. They do not give away thirty days of free credit to customers who would happily pay in fifteen.
The second killer is Progress Payment Blindness.
Large jobs present particular cash flow challenges. A contractor agrees to a ten-thousand-dollar project that will take three weeks to complete. He orders materials, pays his crew, completes the work, and then invoices the full amount. The customer pays thirty days later. During those thirty days, the contractor has spent perhaps six thousand dollars on materials and labor but has not received a single dollar in return. He is now operating at a six-thousand-dollar deficit, hoping and praying that the payment arrives on time.
The solution to this problem is progress payments. Break the job into phases. Invoice at the completion of each phase. Request deposits for materials. Structure your contracts so that you are never more than a week or two away from a payment. This is not being difficult. It is being smart. Customers who are serious about your services will accept reasonable payment terms. Customers who resist progress payments are often customers who have no intention of paying promptly.
The third killer is Invoicing Laziness.
Some contractors are terrible at invoicing. They complete a job and then take two weeks to send the invoice. They send incomplete or unclear invoices that prompt customer questions and delays. They do not follow up on overdue invoices. They hope the customer will remember to pay without being reminded. This is not a strategy. It is avoidance dressed up as optimism.
The contractors who manage cash flow effectively treat invoicing as a critical business function. They send invoices immediately upon job completion. They send clear, professional invoices that are easy to process. They follow up on overdue invoices within a few days of the due date. They have systematic processes for collecting late payments. They do not hope for payment. They actively manage the payment relationship.
The Cash Reserve Principle
I want to describe a concept that most contractors neglect. The cash reserve. This is money that you set aside and do not touch, not for equipment purchases, not for expansion, not for anything except the survival of your business during difficult periods.
Most contractors operate with no cash reserve. They keep enough money in their account to cover this week's bills, but not enough to survive a significant disruption. This is a fragile existence. If a major customer delays payment, if a job goes over budget, if an unexpected expense arises, they are immediately in crisis. They borrow money at high interest rates. They delay payments to suppliers. They damage relationships. They survive, but barely, and at significant cost.
The contractors who build durable businesses maintain substantial cash reserves. They typically keep enough to cover three to six months of operating expenses, even when business is good. This reserve sits in a bank account, earning modest interest, waiting for a crisis that may never come. When that crisis does come, a slow season, a customer bankruptcy, an unexpected expense, the contractor does not panic. He has the reserves to weather the storm. He makes decisions based on long-term strategy rather than short-term survival pressure.
Building a cash reserve requires discipline. It requires paying yourself last, after your business obligations are met. It requires resisting the temptation to spend every dollar that comes in. It requires saying no to equipment purchases that are nice to have but not necessary to have. This is difficult for contractors who have spent their careers living hand to mouth. But the transition from fragile to resilient is one of the most important transformations in building a sustainable business.
A Final Thought on Independence
I have spoken about cash flow mechanics, payment terms, invoicing processes, and reserves. But I want to end with something more fundamental: independence.
The contractor who has strong cash flow is independent. He can choose which customers to work with. He can decline work that does not meet his standards. He can invest in his business on his own timeline. He can weather difficult periods without panic. He operates from a position of strength.
The contractor who has weak cash flow is dependent. He needs every customer because he cannot afford to lose any. He cannot turn down difficult work because he needs the revenue. He cannot invest in improvements because he has no surplus cash. He is always one customer away from crisis. He operates from a position of vulnerability.
Cash flow is not just about money. Cash flow is about freedom. Building strong cash flow is building the independence to run your business on your terms. This is worth more than any amount of revenue.