Why Positive Profits Don’t Always Mean Money in the Bank
- Yvonne Root
- 1 hour ago
- 3 min read
We’re exploring the difference between being profitable on paper and having cash available.
It’s About Those Apples
Do you remember those long-ago lessons concerning addition and subtraction where you were told you had ten apples and asked if you gave four apples to your friend, how many would still be in your possession? Recall it was about the plus (+) or the minus (-) and the equals (=).
In today’s lesson, boys and girls, the question is, “If you have ten apples and promise that tomorrow you will give four of those apples to your friend, how many apples do you still have?” While it might look like you have ten (after all, they’re still in your possession), you have only six apples.
Therefore, what will you do if another friend comes along, sees you have ten apples, and asks for eight?
Well, you could give eight apples to the friend, run to the orchard, and pick another peck, so tomorrow you’ll have plenty for the friend who wants only four. But what if the orchard is closed? What if the folks who own the orchard promised you fifteen apples, but they can’t be picked for two more days or until next month?
Let’s consider tens of thousands of apples . . . I mean dollars. Yes, let’s turn those apples into dollars. Add in that you have many “friends” who are each asking to receive a portion of those dollars.
Profitable on Paper ≠ Cash Available
From the Apple example above, you probably noticed the difference between being profitable on paper and the cash flow available.
Understanding revenues earned and expenses incurred can reveal a construction company’s financial position. There are three key components:
Accrued revenue (income earned but not yet received).
Accrued expenses (costs incurred but not yet paid).
Matching revenues with expenses in the same accounting period.
It isn’t about when cash changes hands.
Example: Profitable Job Struggling With Payroll
The difference between profit and cash flow in construction is often accepted as “business as usual.” Here’s why:
There is usually a long and complex payment cycle.
There are often high upfront project costs.
There is generally an industry culture that has historically normalized delayed and unpredictable payments.
Of course, you don’t have to accept the status quo. You can change how your construction business operates to cope with uncertainty and overcome obstacles to cash flow.
This means that when a construction subcontractor struggles with payroll – even though the job is profitable, there are typically cash flow issues. Things like these may cause these issues:
Slow collections from clients.
High overhead and operating expenses.
Poor financial management (like a lack of job costing or budgeting).
Insufficient working capital due to unnecessary spending or spending that should be delayed.
It isn’t enough to believe that you can make payroll just because you have a profitable job. You must act, you must take steps to ensure that the necessary cash is available.
Therefore, looking only at a Profit and Loss (P&L) statement without considering the Cash Flow Forecast will cause significant problems, including difficulties with payroll obligations.
The Big Idea: To understand your company's financial standing, you must use your Profit and Loss (P&L) statement (which tells you if you’re profitable) and your Cash Flow Forecast (which shows if you have cash to pay the bills) together.
Cement the Big Idea: Whenever you see an apple, think Profit and Loss + Cash Flow = Whole Picture.
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Clients and customers
Employees and subcontractors
Vendors and service providers
Governmental entities
Working with The Profit Constructors gives Construction Contractors the means to organize their operations in ways that help them:
Remain informed
Avoid hassles
Reduce risks
Be future-ready
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