9.1 Cash Management, Job Costing, and Working Capital

Cash Management, Job Costing, and Working Capital

Quick Answer: Cash is not profit. A roofing contractor buys material, pays a crew, and remits payroll taxes weeks before the customer pays — and on residential work California caps the deposit at 10 percent of the contract price or $1,000, whichever is less, so the customer's money cannot fund the job. The tools that keep a contractor solvent are job costing (every dollar charged to the job and cost code that caused it), a working capital cushion (current assets minus current liabilities), disciplined receivable aging, and an understanding of what trade credit actually costs. Passing up a 2/10 net 30 discount to keep cash 20 extra days costs about 37 percent annualized.

The Law and Business blueprint gives Business Finances 15 percent, and cash management is its first sub-topic. More California contractors fail from running out of cash than from losing money on jobs.

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1. The Construction Cash Cycle

Sequence a typical $48,000 residential tile reroof and watch the bank balance:

The job is profitable. It is also cash-negative for roughly three weeks, and every additional job started in that window deepens the hole. This is why fast growth bankrupts contractors — each new job consumes cash before it returns any.

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2. Job Costing

Job costing is the discipline of charging each dollar to the job and cost code that caused it, so estimated cost can be compared to actual cost while the job is still running.

The five standard direct cost categories:

1. Labor — hours by employee, burdened, charged to a cost code (tear-off, dry-in, field, detail, cleanup)
2. Material — delivered and taxed, by job
3. Subcontract — sheet metal, framing repair, solar detach-and-reset
4. Equipment — crane, conveyor, lift, owned-equipment cost per hour
5. Other direct — permit, dump fees, portable toilet, job-specific supervision

What does not belong on a job: office rent, the owner's salary, advertising, accounting fees, CSLB renewal, or the depreciation on a car for general use by the sales staff. Those are general and administrative costs recovered through overhead. Charging them to a job hides the real job margin and distorts every future estimate.

The Variance Report

The tear-off overrun is visible on day two. That is the point of job costing — a variance found while the crew is still on the roof can be managed; the same variance found in a year-end financial statement is just news.

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3. Working Capital and Liquidity

$\text{Working Capital} = \text{Current Assets} - \text{Current Liabilities}$

$\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} \qquad \text{Quick Ratio} = \frac{\text{Cash} + \text{Receivables}}{\text{Current Liabilities}}$

Current assets for a roofing contractor are cash, accounts receivable, retention receivable, inventory, and costs in excess of billings. Current liabilities are accounts payable, accrued payroll and payroll taxes, the current portion of debt, and billings in excess of costs.

• A current ratio below 1.0 means near-term obligations exceed near-term resources. Sureties and lenders treat that as a red flag.
• A ratio around 1.5 to 2.0 is a common comfort zone for a specialty contractor.
• The quick ratio strips out inventory and unbilled costs and asks the harder question: can you pay this month from cash and collectible receivables alone?

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4. The Real Cost of Trade Credit

Suppliers quote terms like 2/10 net 30: a 2 percent discount if paid within 10 days, otherwise the full amount in 30 days. Giving up that discount to hold cash 20 extra days is a borrowing decision, and an expensive one:

$\text{Annualized cost} = \frac{\text{Discount \%}}{100\% - \text{Discount \%}} \times \frac{365}{\text{Days gained}}$

$= \frac{2}{98} \times \frac{365}{20} = 0.0204 \times 18.25 = \mathbf{37.2\%}$

Any line of credit at less than 37 percent is cheaper than skipping the discount. On $500,000 of annual material purchases, taking the 2 percent discount is $10,000 straight to the bottom line.

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5. Collections, Receivables, and Retention

• Age the receivables every week in 0–30, 31–60, 61–90, and 90-plus buckets. The probability of collecting falls sharply past 90 days.
• Bill immediately. A progress billing sitting on a desk for a week is a week of free credit extended to the customer.
• Protect the remedies while you collect. The mechanics lien and stop payment notice deadlines in Chapter 11 run whether or not the customer is "about to pay." Serve the preliminary notice on schedule and calendar the lien deadline on day one, not when the account goes sour.
• Retention is a receivable you cannot spend. Five or ten percent held on commercial work is profit that arrives months late; budget for it as a permanent working-capital commitment, not as incoming cash.
• Down payment limits shape residential cash flow. Because California caps a residential down payment at 10 percent of the contract price or $1,000, whichever is less, the contractor supplies the working capital on almost every residential job. Structure progress payments against real milestones — dry-in, field complete — so cash comes in as the cost goes out.

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6. A Short Cash Discipline Checklist

Separate business and personal accounts. Keep a dedicated payroll tax account and move the withholding out of operating cash the day payroll runs — payroll taxes are trust money, and spending them is the fastest route to a personal liability assessment. Reconcile monthly. Maintain a cash reserve covering at least one full payroll cycle plus one month of overhead. Establish a line of credit before you need it, because banks lend to contractors who are not desperate. And review the job cost variance report weekly, not quarterly.