A contracting business can be profitable on paper and still experience serious cash pressure.
That is because:
Profit and cash are not the same thing.
Construction makes that distinction particularly important because money rarely moves through a project evenly.
You may need to pay labour, suppliers and subcontractors before receiving the corresponding payment from the customer.
Add:
- payment cycles
- certification delays
- retentions
- disputed variations
- programme movement
- advance material purchases
and the gap can become significant.
A profitable job can consume cash
Imagine a project is expected to achieve a healthy margin.
The job may ultimately make money.
But before that happens:
- materials need purchasing.
- subcontractors submit applications.
- wages become due.
- plant needs paying for.
- supplier accounts fall due.
Meanwhile, the customer payment may not arrive for several weeks.
The project may still be profitable.
The problem is timing.
Your business needs enough cash to fund that gap.
Multiply this across several live projects and the working capital requirement can become significant.
Growth can actually increase cash pressure
Winning more work feels positive.
And usually it is.
But more projects also create more commitments.
Growth can mean:
- more labour
- more materials
- more subcontractors
- more supplier payments
- more VAT
- more retentions
- more money tied up in applications
- larger timing gaps
That means a growing contractor can increase turnover and profitability while simultaneously increasing pressure on cash.
Growth therefore makes forward visibility more important, not less.
Your bank balance is not a forecast
A bank balance tells you how much money the business has today.
It does not necessarily tell you what the business will need six, eight or twelve weeks from now.
For that, management needs visibility over expected:
- customer receipts
- applications
- subcontractor payments
- supplier payments
- payroll/labour
- major material purchases
- tax/VAT where appropriate
- exceptional outflows
Putting those together creates a forward-looking commercial cash view.
You don’t need perfect prediction
The purpose of a cash forecast is not to predict every pound perfectly.
Construction is too dynamic for that.
The objective is to see potential pressure early enough to respond.
If management can see a cash gap eight weeks away, there may be several options available.
If the same gap becomes visible on Friday afternoon and payroll is due Monday, there are considerably fewer.
That is why good commercial control is often about one thing:
Seeing problems early enough to act.
Cash and margin should be reviewed together
A live project should not only be reviewed by asking:
Is it profitable?
Management should also ask:
- What is it expected to make?
- What are we owed?
- When are we likely to receive it?
- What commitments are coming?
- What cash do we need?
Margin and cash are different commercial controls.
A well-run contractor needs visibility over both.
From reactive to controlled
As a business grows, cash management should move away from:
checking the bank balance and reacting
towards:
looking forward and planning
That does not require an elaborate finance department.
It requires the right information, updated consistently and reviewed as part of the management rhythm.
That is one of the core ideas behind the Treasury & Cash element of The Commercial Control Method™.
