Cash Flow Discipline for Contractors

Profitable businesses go bankrupt. It happens every day. Cash flow discipline is what separates survivors from casualties.

Revenue is growing. Jobs are booked solid. Margins look healthy on paper. The P&L says you’re making money. And then the business runs out of cash.

This isn’t rare. According to U.S. Bank, 82% of small business failures involve cash flow problems. Not bad products. Not lack of demand. Not even poor management in the traditional sense. They simply ran out of money to operate.

Here’s the uncomfortable truth: profit and cash are not the same thing. You can be profitable on paper while your bank account hits zero. Understanding this distinction — and building systems to manage it — is one of the most important things you’ll ever do for your business.

Cash vs. Profit

Let me explain why profit doesn’t equal cash.

Profit is an accounting concept. It’s revenue minus expenses, calculated over a period. But it doesn’t account for timing — when you actually receive money versus when you actually pay it out.

Cash is what’s in your bank account. It’s what you use to make payroll, buy materials, and pay your bills. Right now. Today.

Here’s a simple example:

You complete a $10,000 job. Your costs were $7,000 (labor, materials, overhead). Your profit is $3,000.

But:

• You paid your technician last Friday
• You bought materials two weeks ago
• The customer pays in 45 days

On paper, you made $3,000 profit. In reality, you’re $7,000 poorer until that customer pays. And if you have three more jobs this month with the same pattern, you’re financing $21,000 of customer work with your own money.

This is the cash conversion problem. The time between when you spend money and when you collect it.

The Working Capital Trap

For contractors, this problem is structural. You’re always spending before you collect.

Materials — You buy them before you can bill for them

Labor — You pay weekly or bi-weekly, collect monthly or later

Overhead — Rent, insurance, trucks — all due regardless of when you get paid

Retainage — On commercial work, 5-10% is held until project completion, sometimes months

The result: contractors have some of the longest cash conversion cycles in business. It’s common to wait 45-90 days between when you spend money and when you collect it.

How Growth Makes It Worse

Here’s the trap: when you grow, you need more working capital, not less.

More jobs means more upfront investment in labor and materials — for each job.

Bigger jobs mean longer payment terms, higher retainage, and more complexity.

More staff means higher payroll before revenue catches up.

More overhead as you add trucks, equipment, office space — all fixed costs due regardless of collections.

I’ve seen contractors grow their revenue 50% and nearly go bankrupt. Not because they were unprofitable — because their cash needs grew faster than their cash generation.

This is why growth can be dangerous without cash flow discipline. You’re not just managing a business; you’re managing a financing operation.

The Warning Signs

Watch for these red flags:

AR growing faster than revenue — If your receivables are increasing faster than your sales, you’re financing more and more customer work.

DSO creeping up — Days Sales Outstanding measures how long it takes to collect. If it’s over 60 days and climbing, you have a problem.

Using credit lines for operations — If you’re regularly tapping credit cards or lines of credit to make payroll or buy materials, that’s a cash flow problem masked as a credit solution.

Fixed overhead eating slow periods — If a slow month means you can’t pay bills, your fixed costs are too high relative to your cash reserves.

Payroll anxiety — If you’re regularly worried about making payroll, something is broken.

Billing Velocity

The fastest way to improve cash flow is to invoice faster.

I covered this in Chapter 7, but it bears repeating: every day you delay invoicing is a day added to your cash conversion cycle.

If you can move from invoicing a week after the job to invoicing same-day, you just shortened your cash cycle by 7+ days. On a $1M business, that’s tens of thousands of dollars that flows back to you faster.

Same-day invoicing should be the standard. Mobile invoicing from the job site. Credit card payment at time of service when possible. Automated invoice generation when the job is marked complete.

At Office OS, we invoice for our clients the same day the job is complete. No delays. No paperwork sitting on someone’s desk. The faster you invoice, the faster you get paid.

AR Enforcement

Getting paid requires systems, not willpower.

Most contractors hate collections. They avoid it. They hope customers will pay. They let accounts age until they’re uncollectable.

Here’s the system that works:

Day 1: Invoice sent (same day as job completion)

Day 7: Friendly reminder (“Just confirming you received our invoice”)

Day 14: Second reminder (“This is now past due”)

Day 30: Escalation notice (“We need to discuss payment”)

Day 60+: Collection action (payment plan, collection agency, legal)

The key is automation. These reminders should happen automatically, not when someone remembers. The escalation should be documented and followed consistently.

At Office OS, we manage AR for our clients as part of the service. We send the reminders, make the calls, run the escalation. Cash flow discipline is built into every engagement from day one.

The 13-Week Rolling Forecast

This is the PE standard for cash management, and you should adopt it.

A 13-week rolling cash flow forecast projects your cash position weekly for the next 13 weeks (roughly one quarter). Every week, you update it: drop the oldest week, add a new week at the end, and reconcile last week’s forecast against reality.

Why 13 Weeks?

• Short enough to be accurate — You know your receivables, payables, and fixed costs for the near term
• Long enough to see problems — You can spot a cash crunch 6-8 weeks before it happens
• Matches fiscal quarter — Natural planning horizon
• PE and bank standard — If you ever want financing or investment, this is what they’ll ask for

What It Includes

Cash Inflows:

• Collections from accounts receivable (based on AR aging)
• New sales expected to convert to cash
• Other receipts (deposits, loans, interest)

Cash Outflows:

• Payroll and employee costs
• Fixed operating costs (rent, insurance, subscriptions)
• Variable costs (materials, supplies)
• Vendor/AP payments
• Debt payments (principal + interest)
• Taxes
• Capital expenditures

Key Outputs:

• Weekly ending cash balance
• Minimum cash threshold (your alert level)
• Weeks of runway
• Problem weeks flagged

How to Use It

The forecast isn’t just a report — it’s a decision tool.

If a shortfall is coming, you can:

• Accelerate collections (call overdue accounts now)
• Delay non-critical outflows (push a payment, defer a purchase)
• Draw on credit line (before you’re desperate)
• Negotiate with vendors (extend terms)

If surplus is building, you can:

• Pay down debt
• Invest in growth
• Build reserves
• Take owner distributions

The power is in seeing problems before they become crises.

Working Capital Guardrails

How much cash should you have on hand?

There’s no single answer, but here are the benchmarks:

For a contractor doing $2M in revenue with $100K/month in operating expenses, that’s $200K-$400K in cash reserves.

That sounds like a lot. It is. But consider the alternative: one slow month, one big customer who doesn’t pay, one material cost spike — and you’re scrambling.

The Minimum Cash Threshold

In your 13-week forecast, set a minimum cash threshold. This is your “never go below” number.

Calculate it based on:

• 2 weeks of payroll (non-negotiable)
• 1 month of fixed costs
• Buffer for unexpected expenses

When your forecast shows you approaching this threshold, that’s the signal to take action.

Cash Flow Metrics to Track

Beyond the 13-week forecast, track these metrics:

Days Sales Outstanding (DSO) — Average days to collect payment

• Target: <45 days for service work
• Red flag: >60 days

Cash Conversion Cycle — Days from spending to collecting

• Target: <60 days
• Red flag: >90 days

Current Ratio — Current assets ÷ current liabilities

• Target: >1.5
• Red flag: <1.0

Quick Ratio — (Cash + AR) ÷ current liabilities

• Target: >1.0
• Red flag: <0.8

Weeks of Runway — Cash on hand ÷ weekly cash burn

• Target: >12 weeks
• Red flag: <6 weeks

The Growth Funding Question

When you’re growing, you have three ways to fund working capital needs:

1. Profits — The healthiest source. Retain earnings to fund growth.

2. Debt — Credit lines, equipment financing, SBA loans. Works if managed carefully. Dangerous if overextended.

3. External investment — Bringing in investors or partners. Gives up equity but provides capital.

Most healthy growth is funded by a combination of retained profits and appropriate debt. The 13-week forecast helps you know when to tap credit lines versus when to wait.

Cash flow discipline isn’t glamorous. But it’s what separates businesses that survive from businesses that don’t — regardless of how profitable they are on paper.