The P&L shows the best year in company history. The bank account is tighter than it was three years ago. This is not a bookkeeping error. It is a cash timing problem with a specific diagnosis.
A busy year in construction is not automatically a cash-generating year. It is a cash-consuming year — more jobs started means more upfront cash required before more payments arrive. The profit is real. The cash follows 6–12 months later as those jobs close and pay apps are collected. Understanding this lag is the difference between being surprised every year and planning around it.
A busy year generates more invoices than a normal year. If the collections system is the same — monthly statements, no follow-up calls — the AR backlog grows proportionally with revenue. At the end of the year, there is more uncollected AR than ever before. That backlog is cash that was earned but not received. It sits on the balance sheet as a receivable and feels invisible compared to the bank account balance.
A busy year usually requires adding a PM, buying equipment, expanding the yard, or taking on more insurance. Each addition is legitimate. Each one increases fixed overhead. If the overhead rate in bids did not update to reflect these additions, every job in the busy year was underpriced relative to what it actually cost to run the business during that year. The profit was lower than it appeared and the overhead gap consumed cash.
The P&L showed profit. The owner took distributions commensurate with that profit. But the profit on the P&L included WIP — work in progress that had been billed and recognized as revenue but not yet collected. Taking distributions based on recognized revenue before cash is received leaves the business cash-short going into the transition period. The distributions were appropriate. The timing was not.
Pull every invoice over 30 days. Call on every one. A busy year almost always creates an AR backlog because the same collections effort that worked at $3M does not keep up with $5M in billings. Most contractors coming to SPM after a busy year collect $100,000–$400,000 in the first 30 days from invoices generated during the busy period that nobody had time to chase. That cash is already earned. It just has not arrived yet.
A 13-week cash flow forecast mapped from the end of the busy period through the following 13 weeks shows exactly when the post-busy cash crunch hits and how deep it goes. Most post-busy-year cash crunches are visible 8 weeks before they arrive. With 8 weeks of lead time, the response is AR collection and billing acceleration. Without it, the response is an emergency MCA or LOC draw at crisis rates.
P&L profit is recognized when earned. Cash profit arrives when collected. The right rule: do not distribute more than the cash actually received in a period, net of the minimum operating reserve. A $200,000 P&L profit on a busy year where $150,000 in AR is still outstanding should result in distributions after the AR is collected — not before. This single rule eliminates most post-busy-year cash crunches.
Every hire, equipment purchase, and space expansion made during the busy year increased fixed overhead. The overhead rate in bids needs to reflect the current cost structure — not the one from before the growth. Recalculating overhead with the new cost base and updating the bid model is the difference between the next busy year actually generating cash and producing another profitable-on-paper, cash-tight result.
This contractor had grown from $5M to $7M in 18 months — genuinely the best 18 months in the company's history. Revenue was up. Backlog was full. The P&L showed strong performance. Cash was worse than it had been at $3M. Three new hires, a new truck, and distributions taken on P&L profit before AR was collected had consumed every dollar the growth generated.
AR generated during the growth period — money that was already earned and simply not followed up on. That cash covered the transition period without new financing.
The growth-period financing that had been taken to bridge the cash gap was eliminated once the AR was collected and the billing structure caught up to the new revenue level. Now on track for $12M.
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