Cash flow for contractors: why a full pipeline doesn't mean money in the bank

You have the best backlog you have ever had. Four months of booked work, crews busy, phone still ringing. And on Thursday you are moving money between accounts to make payroll, and you are genuinely not sure whether you are doing well or quietly going broke. See bookkeeping for HVAC and plumbing contractors is where we see this cash gap most often.

That feeling is not confusion. It is an accurate read on two different things being true at once. The jobs are profitable and the bank account is thin, because in construction the money goes out considerably earlier than it comes in — and the busier you get, the wider that gap opens.

Profit and cash are not the same measurement

Profit is what is left after you subtract the cost of the work from the value of the work, over a period. Cash is what is in the account on a given day. They answer different questions and they move on different clocks.

The bridge between them is timing. You buy material in week one and pay the supplier in week four. You pay your crew every Friday regardless. You invoice at milestones and get paid somewhere between 15 and 60 days later, minus whatever is held back. A job can be 30 percent profitable and still cost you cash for six straight weeks before it returns a dollar.

A worked example: the $12,000 HVAC install

A residential changeout — condenser, air handler, line set, a bit of duct correction. Contract $12,000. Your direct cost is $8,400, so $3,600 of gross profit at 30 percent. Good job, priced right.

Now put it on a calendar.

• Day 1 — equipment picked up from the supply house. $5,200 on your supplier account, due in 30 days.
• Day 3 and 4 — install. Two techs, two days, burdened labor about $2,400, paid on Friday of that week.
• Day 4 — miscellaneous materials, permit, and disposal, about $800, mostly on the company card.
• Day 5 — you invoice the full $12,000.
• Day 31 — the supplier bill comes due. You pay $5,200.
• Day 44 — the homeowner's payment clears.

By day 31 you have paid out $8,400 and received nothing. You are $8,400 in the hole on a job that will earn $3,600. The profit is real; it just arrives on day 44. For 43 days, this job is a loan you made to your customer.

The cash gap, and how to measure yours

The cash gap is the number of days between paying for a job and getting paid for it. Roughly: days until you pay your costs, subtracted from days until the customer's money lands. In the example above, your weighted average payout lands around day 20 and collection lands on day 44, so the gap is about 24 days — and that is with a customer who paid reasonably promptly.

You do not need a formula to act on this. Take your last ten completed jobs, note the date the first real cost hit and the date the final payment cleared, and look at the spread. That spread, multiplied by your monthly cost of work, is roughly how much cash your business needs to have access to just to operate at its current size.

Four levers that actually move the number

1. Get paid earlier in the job

This is the biggest lever and the one most contractors underuse. A deposit that covers material, progress billing tied to milestones rather than to completion, and invoicing the same day a milestone is hit rather than at the end of the month. On the HVAC example, a 40 percent deposit collected before pickup turns a 43-day hole into a mild dip.

One bookkeeping note: a customer deposit for work you have not performed is a liability, not revenue. It is cash in your account that you have not yet earned. Recorded correctly it keeps your income statement honest; recorded as income it makes a good month look great and a later month look terrible.

2. Shorten collection, deliberately

• Invoice the day the milestone is met, not on a monthly billing cycle. A week of internal delay is a week of your money.
• Put terms in writing and make them short — net 15 is normal in residential work.
• Accept card or ACH even at a processing fee. Two points to be paid three weeks earlier is usually a bargain.
• Run an aging report weekly and follow up at day 3 past due, not day 30. The first polite call is the one that works.

3. Use supplier terms as intentional financing

Trade credit is one of the few sources of free short-term money you have. Net 30 on material is worth real cash if you actually use it — and worth nothing if you pay everything the day the bill arrives. Match your payables to your receivables on purpose instead of paying whatever is on top of the pile.

4. Know what is being held back

On commercial and larger residential work you may face retainage — a percentage of each invoice, often 5 or 10 percent, that the customer holds until the job is complete and closed out. It is money you have earned and cannot spend. If it is buried inside your accounts receivable it will quietly overstate the cash you think is coming. Track it as its own line so you can see it and chase it at closeout.

The one report to run every week

A thirteen-week cash forecast sounds like corporate finance and is really just a spreadsheet with three rows: cash on hand, expected money in by week, expected money out by week. Expected money in comes from your open invoices and your milestone schedule. Expected money out comes from payroll dates, supplier due dates, loan payments, and known overhead.

It takes fifteen minutes once it is set up, and it changes decisions. You will see the week in November when a payroll, a truck payment, and an equipment order collide, and you will see it in September, when you can still do something about it — bring a milestone invoice forward, delay a purchase, or arrange a line of credit before you need it rather than during the week you do.

What to do this week

1. Pull your last ten jobs and calculate the average days between first cost and final payment.
2. List every open invoice by age, and call anything past 15 days.
3. Check whether customer deposits are sitting in your books as revenue instead of a liability.
4. Add a deposit or an earlier first milestone to your next three proposals and watch what it does to the account balance.
5. Build the thirteen-week forecast, even roughly. Rough and current beats precise and quarterly.

Cash flow management overlaps with tax planning — estimated payments, timing of equipment purchases, entity questions. Those are decisions for your CPA or tax preparer. Our part is making sure the numbers they work from are accurate and current.