RHACOVA

Financial fundamentals

Cash Flow vs Profit for Contractors

A healthy bank balance and a profitable job are two different facts. Deposits, payment terms and supplier credit decide the first; price and cost decide the second.

The short answer

Cash flow is when money moves. Profit is whether the work was worth doing. A job can be profitable and still leave you unable to make payroll, and a job can lose money while your bank balance rises because the customer paid a deposit and the supplier has not invoiced yet. They are different questions, and neither one answers the other.

Definitions

Cash flow
The timing of money in and out of the business. It is driven by deposits, billing schedules, payment terms and when bills fall due.
Profit
Revenue earned minus every cost of earning it, regardless of when either was paid.
Working capital
The money you must front between paying for materials and labor and being paid for them.

The two questions

Profit = revenue − all costs of delivering the work

Cash position = money received to date − money paid out to date

Worked example

A $38,000.00 job that costs $31,000.00 to deliver makes $7,000.00 of profit, a margin of 18.42%. That is the profit answer, and it does not change with the payment schedule.

The cash answer is a different sequence entirely:

  • Week 1: 30% deposit received — cash up, profit unchanged.
  • Weeks 1–3: material invoices and payroll paid — cash down, profit unchanged.
  • Week 5: final invoice issued — profit is earned, cash unchanged.
  • Week 9: customer pays — cash up, profit unchanged.

Profit was decided the moment the price and the cost were set. Cash was decided by the calendar. Confusing the two is how a contractor spends a deposit that was never profit — it was the next job's material money.

A deposit is not income you have earned

A deposit is money for work you have not done yet. Until the work is delivered, that cash belongs to the job, not to you. The same goes for retainage in reverse: work you have delivered and earned, but whose cash is held back. Both gaps are normal. Both become dangerous only when the bank balance is used as a profit report.

Why you have to watch both

Chronic cash trouble on profitable jobs is a terms and billing problem: deposits too small, progress billing too slow, payment terms too long, too much work running at once. Chronic cash trouble on unprofitable jobs is a pricing problem, and no billing schedule will fix it. Telling them apart requires knowing the profit of each job independently of its payment timeline — see how to calculate job profit and why high revenue is not profit.

Common mistakes

  • Reading the bank balance as a profit-and-loss statement.
  • Funding the current job from the next job's deposit, repeatedly.
  • Discounting to win work in order to solve a cash problem, which converts a temporary timing issue into a permanent margin issue — see how discounts affect contractor profit.
  • Closing out a job in your head when the final invoice is sent, before the last subcontractor bill arrives.

Quick answers

Is a customer deposit profit?
No. A deposit is money for work you have not delivered yet. It is cash, and usually it is the job's own material money.
Can a profitable job cause a cash crisis?
Yes. If you pay for materials and payroll weeks before the customer pays you, a profitable job still drains cash while it runs.
Which problem does discounting fix?
Neither, reliably. Discounting to generate cash permanently reduces margin to solve a timing problem that billing terms address better.

Run the numbers

Revenue including approved change orders, total cost, profit in dollars, profit margin and markup on cost.

Open the Job Profit Calculator

Free, no account, and the answer stays on the page.

Know each job's profit independently of its payment schedule

A RHACOVA Job tracks cost against a frozen baseline as the work happens, so profit stops depending on which invoices happen to have cleared.

Open Jobs

How RHACOVA defines these terms

Every calculator, estimate and job in RHACOVA uses one set of financial definitions, and they are written down rather than implied. Read the RHACOVA methodology for the full list of definitions this article relies on.

Keep reading