Why your jobs look profitable on paper but there's no cash in the bank

Profit is an accounting result, cash is a question of timing

Profit is what your P&L says happened over a period. Revenue earned minus costs incurred, whether or not anyone has actually paid anyone. The day you issue the invoice, that revenue lands on the P&L. The money might not land in the bank for another two months. Cash is a diary. It only cares about the date the money moves. So you can price properly, hit 15% net and still be short on a Thursday. Nothing has gone wrong. The maths is fine, the calendar isn't. You paid for the work long before anyone paid you for it. It gets worse as you grow, not better. A quiet business collects on last month's bigger work while doing less this month, so cash builds up. A busy one spends on this month's bigger job while collecting on last month's smaller one. Growth is what empties the account, and on the P&L it looks exactly like success.

The working capital cycle, and why growth makes the hole bigger

Line up the dates and the hole is obvious. Wages go out weekly. Work done Monday to Friday, paid the following week. Materials go out on supplier terms. Thirty days from statement, so 30 to 45 days from the day the apprentice picked them up. Your invoice goes out when the job's finished, or worse, at month end. Your customer pays 30 days after that if they're good, 45 to 60 if they're normal, later if you let them. Work done on the 3rd of March, invoiced on the 31st, paid on the 15th of May. You carried the labour for ten weeks. That's your working capital cycle, and it's roughly fixed in days. So the dollar size of it scales straight off revenue. Add 40% more revenue and you need 40% more cash sitting in the gap. Nobody sends you that cash. You fund it out of last year's profit, an overdraft, or the ATO's money.

Work in progress is the cash sink nobody counts

Work in progress is work you've done and haven't invoiced. Labour burned, materials on site, nothing issued. It's the biggest hidden cash sink in most trade businesses because it shows up nowhere. Not in debtors. Not in the bank. Where it comes from: The job that's 90% done and waiting on one part, so nobody invoices any of it. Variations done on a nod from the site supervisor and never written up. The crew did the work, the customer got the value, no paperwork. Over-servicing. Two extra days on site to make it right, priced at nothing. Invoicing at month end. On a job finished on the 2nd, that's 28 days of free credit. Measure it monthly: every open job, labour hours and materials committed, minus what you've invoiced. A rising WIP number is cash leaving before the bank balance shows it. That only works if the numbers are live. You want job costing that updates while the job runs, not a spreadsheet rebuilt from dockets a fortnight later. On StackLyft it's on every account.

Retention: revenue on the P&L, money in someone else's account

On commercial work you don't get all of it. Retention is commonly 5% held during the works, dropping to 2.5% at practical completion and released after the defects liability period. Read your own contract, because the percentages and the release dates are whatever you signed. On $800,000 of commercial work, 5% is $40,000 sitting in someone else's account. It's revenue and profit on your P&L. You can't spend it, and some of it you'll still be chasing in two years. Track every retention with its release date and diarise the claim, because nobody rings to offer it back. Two things to check with someone who knows your situation. Some states require retention above a certain contract value to be held in a trust account. Every state and territory has a security of payment act that gives you a statutory path to get paid, and the timeframes and deadlines differ. Miss one and you can lose the right. Check your state's act and get proper advice before you rely on it.

The money in your bank account that was never yours

Open the bank app and there's $84,000 sitting there. A decent chunk of that was never yours. GST. You charged 10% on top and you're holding it for the ATO until the BAS. On a quarter with $500,000 of sales that's $50,000 collected, less the GST on what you bought. PAYG withholding. The tax you took out of your crew's pay. Also not yours. Super. Super guarantee on ordinary time earnings, on top of every hour worked. The rules have been shifting towards paying super with the pay run rather than quarterly, so check the ATO for the current rate and due dates instead of going off what you've always done. The fix is boring and it works. Open a second account. On the day money lands, move the GST and the PAYG across and don't touch it. Costs you nothing, and it turns BAS day into a transfer instead of an event.

A worked example: 15% net profit, 40% growth, no cash by March

A commercial electrical business. Last year: $2.0m revenue, 15% net, so $300,000 profit. Real profit, priced properly, jobs costed. This year they grow 40% to $2.8m. That's $233,000 of revenue a month instead of 67,000. Follow one month of it. Labour at 30%: $70,000, out the door within a week. Materials at 35%: $82,000, out about 40 days later on supplier terms. Overheads at 20%: $46,000, monthly. The customer pays about 85 days after the work is done, allowing for invoicing lag and 45 day habits. At 85 days, every dollar of monthly revenue ties up about $2.80 of cash. The extra $66,000 a month locks up roughly 85,000 more than last year. Then the rest. Tax on last year's profit plus instalments, call it $95,000, and your accountant will give you the real figure for your structure. A second fitted ute and tools for the extra crew, $78,000. Retention on the new work, $40,000. That's $398,000 of cash out against $420,000 of profit that mostly hasn't arrived. They opened the year with $95,000 in the bank. By March they're at 1,000 with a $46,000 BAS due, and the P&L says it's their best year ever.

A P&L looks back, a cash flow forecast looks forward

A P&L tells you whether the work was worth doing. It's the right tool for pricing, and for spotting that maintenance runs at 32% gross margin while new installs run at 19%. It will not tell you whether you can pay wages in week six. It has no dates on it. A cash flow forecast is a different document. Thirteen weeks across the top, one column a week. Opening bank, cash in, cash out, closing bank. Cash in is every invoice with the date you actually expect payment, not the date your terms say. Cash out is wages by pay run, supplier payments by due date, BAS, super, tax instalments, finance, rent, insurance. Thirteen weeks is the useful horizon. Long enough to see a hole coming with time to do something, short enough that you'll keep it updated. Twenty minutes on a Monday, correcting last week's guesses against what landed. Inside a month it gets uncomfortably accurate.

The fixes, roughly in order of what they're worth

Progress claim instead of invoicing at the end. Anything running more than two weeks, claim monthly or at milestones. It's one clause in the quote, and the biggest single change most trade businesses can make. Take a deposit that covers materials. If you're buying 8,000 of switchgear, don't fund it. Say so in the quote. Invoice the day the job is done. If the crew mark it complete on the phone before they leave site and the invoice goes out that afternoon, you've pulled the whole month-end lag out of the cycle. Tighten your terms and enforce them. Chase at day one overdue, not day thirty. Automated reminders do that without anyone in the office having an awkward conversation. Know your debtor days: debtors divided by revenue, times 365, measured monthly. If it's 62 and your terms say 30, you're lending customers a month of turnover for free. Going from 62 days to 40 on $2.8m releases about 69,000, once, and it stays released. Whatever system you run, check what it costs per phone in the field, because that's where the price hides. Ours sits on one pricing page, no tiers.

Questions

Can a trade business be profitable and still go under?

Yes, and it happens to growing trade businesses regularly. Insolvency is about whether you can pay debts when they fall due, not what your P&L says. If you're juggling which supplier gets paid this week, talk to your accountant early, because directors carry duties around trading while insolvent.

What's the difference between WIP and debtors?

Debtors is work you've invoiced and haven't been paid for. WIP is work you've done and haven't invoiced at all. Debtors show up in your accounting software and on an aged receivables report. WIP usually shows up nowhere, which is exactly why it grows quietly.

How much cash should a trade business hold in reserve?

There's no legal figure and no universal answer. A common starting point is one full payroll cycle plus the next BAS, and plenty of operators aim for two to three months of fixed overheads. Work yours off your own 13 week forecast and hold at least the deepest projected trough.

Is an overdraft or invoice finance a sensible way to cover the gap?

Both are legitimate ways to fund a working capital cycle and both cost money. An overdraft is usually cheaper and more flexible. Invoice finance advances against your debtors, which suits long paying commercial clients but eats margin. Get your accountant or broker to check the numbers against your net percentage.