Why Is My Business Profitable but Always Short on Cash?

Where the cash waits: unbilled work, receivables, retainage, materials, deposits

The cash a profitable company cannot find sits in a short list of places: money earned and not yet collected, and money spent on work, stock or bills that has not yet come back as cash. Each one has a record that shows its size.

• Finished work not yet invoiced. The crew is paid, the materials are bought, the job is done, and no invoice has gone out. Depending on the books, this money may not even be in the profit yet; either way, its cost has already left the bank. The record is the job list: every job marked complete with no invoice number.
• Receivables. Invoices sent and not yet paid. On accrual books this is profit already counted. The record is the accounts receivable aging report; watch the share past terms, and days sales outstanding turns the whole balance into one figure.
• Retainage. On contracts that hold back part of each payment until closeout, that share is paid last, after the crew has moved on. The record is the retainage column on each pay application.
• Materials, parts and stock. Truck stock, parts on the shelf and materials bought for jobs that have not started are cash turned into things. The record is the inventory figure on the balance sheet, if the books keep one, or the supplier invoices for jobs not yet scheduled.
• Deposits, both ways. A job that starts without a deposit, where state law allows one, is funded by the company alone until its first invoice is paid. A deposit that was collected sits in the bank looking like spare cash while its work is still ahead; spent on last month’s bills, it leaves a hole when that job’s costs arrive.
• Bills paid up front. An annual insurance premium paid at once leaves the bank in one month and can reach the P&L a twelfth at a time.

Not every line matters for every business. A shop paid at pickup may carry almost nothing in receivables and a great deal in parts; a commercial subcontractor may carry the reverse. The point is to find which line is large here.

Why growing makes cash tighter, not looser

Growth adds profit to the P&L before it adds cash to the bank, because each new job’s costs go out before its payment comes in. Payroll runs every week or two, materials are bought at the start, the invoice goes out at the end, and the customer pays on its own schedule. More work at the same pace means more money in that gap at once.

Illustrative example, with invented numbers: a hypothetical company bills $200,000 a month, spends about $180,000 a month on payroll, materials and overhead, and waits about 60 days from paying for the work to collecting for it, so roughly two months of costs, $360,000, are always tied up. It adds a crew and bills $260,000 a month. If costs rise in step, to about $234,000, two months of them come to $468,000: the business needs $108,000 more cash in the gap than before. Monthly profit rose from $20,000 to $26,000, so a little over four months of the new, higher profit goes into the gap before any of it reaches the bank. If the owner raises draws because the P&L looks better, the bank balance falls while the profit climbs.

Bank examiners describe the same mechanics. The Comptroller of the Currency’s handbook on asset-based lending puts it in one sentence: “A company with a long operating cycle likely has a greater need for financing than a company with a short operating cycle.” It adds that a profitable, well-capitalized business can often meet that need from its own operations, while one that is “experiencing rapid growth” may need outside money. Among the employer firms in the Federal Reserve Banks’ survey that applied for financing, the most common reasons were meeting operating expenses (56 percent) and pursuing an expansion or new opportunity (46 percent).

The answer is not to stop growing. It is to shorten the gap before adding to it: invoice the day the work is done, bill large jobs in stages, take deposits where the law allows, and decide how much new work the cash can carry before signing it.

How to find which one holds the most money, from your own records

The bank has already said whether cash is tight. The useful question is which of the places above grew, and by how much, between two dates. That takes an afternoon, two balance sheets and the job list. The SEC’s guide describes the same exercise: the operating section of a cash flow statement “reconciles the net income (as shown on the income statement) to the actual cash the company received from or used in its operating activities.” If the bookkeeper already produces a statement of cash flows, read it line by line with the job list beside it.

• Pick two dates: the last month-end and the same month-end a year earlier. A quarter is enough if the squeeze is recent.
• Write down the profit for the months between them and the change in the bank balance. The difference is what the rest of the sheet has to explain.
• From the balance sheet on each date, write down receivables, retainage, inventory, prepaid bills, supplier bills owed, customer deposits held and loan balances, and the change in each. From the books, total owner draws and equipment bought, and add back depreciation, which lowered profit without using cash.
• Read the signs. A rise in anything the business is owed or holds used cash. A fall in anything it owes, such as supplier bills, deposits held or loans, used cash. Draws and equipment used cash. A rise in what it owes supplied cash, for now.
• Separately, total the finished work with no invoice on each date. Its cost is already in the P&L and its revenue may not be, so it sits outside the arithmetic, but every dollar of it is money earned and not yet asked for.

Rank the lines by size; the largest is where the profit went. Illustrative example, with invented numbers: a hypothetical company shows $240,000 of profit for the year, and its bank balance ended $15,000 lower. Receivables rose $120,000, materials on the shelf rose $20,000, loan balances fell $25,000 and owner draws came to $110,000, while supplier bills owed rose $20,000; to keep the arithmetic short, it bought no equipment and booked no depreciation. That accounts for the whole difference: receivables alone absorbed half the year’s profit. Its job list also showed $40,000 of finished work with no invoice. For that company the fix starts in billing and collections, and the worked example of what one slow invoice costs shows how fast days past terms add up.

Will factoring or a line of credit fix it, or hide the cause?

Factoring and a line of credit both put cash in the bank against money customers already owe. Neither shortens the wait or removes its cause; each changes who carries the wait, at a price. That makes them useful for a gap that is known and temporary, and expensive for a gap that comes from the company’s own habits.

• Factoring. The business sells its invoices to a factoring company, which pays part of each invoice now and the rest, less its fee, after the customer pays. Under recourse terms, an invoice the customer does not pay comes back to the business. Factoring reaches only invoices already sent: it does nothing for unbilled work, materials or deposits never taken, and the fee comes out of the margin on every invoice it touches. For a trucking company weighing a factor against brokers’ quick pay, the freight factoring guide works through that arithmetic.
• A line of credit. The Comptroller of the Currency’s handbook describes the sale of inventory and the “collection of receivables” as “the typical source of repayment” for a revolving line, and adds: “A service company may also rely on a revolver to fund accounts receivable.” A line that never comes down is not bridging a gap; it is financing a permanent one.
• The catch in a receivables-based line. The same handbook lists “Unbilled accounts receivable” among the receivables commonly designated as ineligible collateral, and says an account is normally ineligible “when it is past due by three times the terms, e.g., 90 days for 30-day terms.” Finished work never invoiced and invoices far past terms are exactly the receivables such a line commonly leaves out.

Either one fits a gap with a known cause and an end date: a seasonal build-up, a large contract on long terms, a growth step with a plan to fund it. If the two-date comparison shows the largest line is receivables past terms, unbilled work or draws above what the cash supports, borrowing pays a fee to leave that line unfixed. This is general information, not financing advice; terms differ by lender and agreement, so take the agreement to the company’s banker or CPA.

What to check every week so it does not happen again

The two-date comparison finds where the money went once. A weekly check keeps it from going there again. It should fit in fifteen minutes, belong to one named person, and happen on the same day each week, before payroll rather than after it.

• Cash against the next four weeks. Today’s bank balance beside every payment already committed: payroll runs, rent, loan payments, supplier bills coming due, insurance and scheduled tax payments. If the line goes negative in week three, the owner finds out in week zero.
• The three Friday numbers. Finished jobs not yet invoiced, invoices due this week against invoices collected, and the age of the oldest past-due invoice; the weekly cash-gap check lays out how to pull each one by hand.
• Deposits on the next jobs. For every job starting in the next two weeks: deposit due, received or waived, and who decided.
• Big decisions against the four-week line, not the P&L. A truck, a hire or a larger draw gets checked against the cash line first.
• Once a month, profit beside cash. Write the month’s profit and its change in cash side by side, and explain the difference in five lines or fewer. A difference nobody can explain is the first item on next month’s list.

The free Cash Gap Calculator draws the wait from finished work to cash on one ruler, from four numbers: revenue in an ordinary month, days to invoice, the agreed terms and the actual days to get paid. It shows quickly whether receivables are the line worth starting with.

When this is not a leak, and where the Review fits

Not every gap between profit and cash is a problem. A truck bought for cash, a loan paid down early, a draw the owner planned for: each is a decision, and the comparison simply shows it. If payroll is at risk this week, the first calls are to the bank and the CPA; a diagnosis can wait a month.

Where the largest line is receivables past terms, finished work never invoiced or extras that never reached an invoice, the Revenue Review counts it under the Invoice → Payment hand-off and the ones before it. It reads twelve months of the company’s own job records, invoices and payment history, prices where the earned money waited and why, and ends in a written fix list in priority order. It does not prepare financial statements, arrange financing or give tax advice. It takes two weeks, and the report is the company’s to keep.

Start with the two-date comparison; if the answer is clear, the fix may need no outside help. If it is not, the 20-minute call is free, and it is where we say whether the Review is worth it for this business, including when it is not.