My accountant says I made money. Has anyone told my bank?
There is something particularly unfair about working all week, finding out your business made a profit and then wondering how you’re going to cover payroll. You did the work. Your customers seem happy. Your accountant hands you a report with a respectable number at the bottom. Yet the bank balance makes you check whether you accidentally opened somebody else’s account.
If you have ever been there, you deserve an explanation you can use before the next round of bills comes due.
My dad started our company in 1971, and carrying that history forward means everything to me. Today, I help small business owners throughout the Chicago area and across California, Arizona, Florida and New York. Behind every set of numbers is someone trying to make a living while keeping promises to their people.
Employees count on their paychecks. Customers count on the work being completed. At home, a family may be waiting for the owner to put down the phone long enough to hear how everybody’s day went. Financial worries have a habit of pulling up a chair at the dinner table, whether you’ve invited them or not.
When cash gets tight, the owner’s first instinct is to often sell more. That’s understandable. You built the business by finding work and getting it done. But before adding another job to an already crowded calendar, it helps to understand where the money from the previous job went. Sometimes you need more sales. Sometimes you simply need to collect what you’ve already earned, charge properly for what you deliver or stop spending money on challenges that keep repeating themselves.
Here is how a profitable job can leave you short of cash: Suppose your business completes a $50,000 project. You have already paid $35,000 in labor and materials, and the customer has 60 days to pay. Under accrual accounting, which records revenue when earned and expenses when incurred, the job can show a $15,000 profit before further expenses. Meanwhile, $35,000 has left your bank account and nothing has come back. The profit is real but payday is still somewhere down the road. Unfortunately, your employees cannot deposit “somewhere down the road.”
That gap between earning and collecting is where owners can get squeezed. The next payroll arrives while the invoice is still awaiting approval on someone’s desk. Another job requires materials, and the supplier expects payment.
Growth can make the squeeze worse because every additional order may require spending before the customer pays. You can have your busiest month and your most uncomfortable bank balance at the same time. Before accepting a large order, ask how much cash it will take to deliver it and when you can reasonably expect to get that cash back.
Other things pull money out of the bank without reducing profit in the same way. Under accrual accounting, inventory generally becomes an expense when sold, so cash can sit on a shelf for months. Equipment purchases can require a substantial payment even when their cost is spread over time in the accounts. A loan payment includes principal that reduces your debt rather than your profit. Understanding these differences helps answer the owner’s entirely reasonable question: “If I made it, where is it?”
The answer can also reveal opportunities to earn more from the sales you already have. Suppose a business has $1 million in annual sales and $900,000 in expenses, leaving $100,000 in profit. Finding $25,000 in avoidable costs, while maintaining quality and service, would lift profit to $125,000. That is a 25% increase without another dollar of sales. Those opportunities require a careful review, but they deserve attention before you decide the solution is another evening at work.
Look at estimates that consistently allow too little labor, material costs that have risen since prices were set and changes to a job that never make it onto the bill. Small business owners can be generous people, and there is nothing wrong with choosing to help a customer. But “could you just do this one little thing?” can become a surprisingly expensive customer loyalty program. You deserve to know what that generosity costs so you can make the choice deliberately.
The same care belongs on the expense side. Repeated mistakes, unnecessary trips, unused subscriptions and poor scheduling can consume money without helping anyone. Cutting costs deserves more thought than simply buying cheaper materials or asking good employees to do more with less.
Fixing the reason a job has to be done twice may protect both your margin and your employees’ patience. Then, once you have earned a fair profit, invoice promptly and follow up on payment. Collecting an existing invoice improves cash; it does not create a second profit. Both matter, and they solve different problems.
A weekly cash forecast helps connect all of this to the decisions ahead. Start with the money available today and look forward over the next 13 weeks at realistic customer collections and upcoming payments. Include payroll, suppliers, taxes and full loan payments. Update it every week, alongside a review of which work is making a worthwhile profit. Seeing a shortage early gives you time to act. Discovering it while payroll is processing gives you a very different kind of morning.
When I think about the company my dad started in 1971, I feel a responsibility to help owners understand these numbers well enough to use them. A business takes so much from the person who builds it, and it ought to give something back: a fair living and enough stability to make plans beyond the next payment.
I want an owner to be able to go home knowing the employees are paid, the bills are covered and there is something left for their own family. After putting your heart into a business all week, you deserve to bring some of yourself home, too.
Michael Leonard is the managing partner of Leonard & Associates CPAs, a 50+ year legacy accounting/CPA firm in Oak Park.