9.3 Cash Flow, Banking & Financial Ratios
Key Takeaways
- Working capital is current assets minus current liabilities; on the Gulf Breeze June 30 worksheet that is $328,000 − $199,000 = $129,000.
- Current ratio is current assets divided by current liabilities: $328,000 / $199,000 = 1.65. A ratio below 1.0 means current bills already exceed current assets.
- Quick (acid-test) ratio is (cash + trade AR + retainage receivable) divided by current liabilities: ($42,000 + $180,000 + $28,000) / $199,000 = 1.26; inventory and prepaid insurance stay out.
- Debt-to-equity using total liabilities is $284,000 / $160,000 = 1.78. Do not invent unpublished bank or surety covenant thresholds; compute the ratio the stem asks for.
- Florida HVAC cash is seasonal: June equipment and weekly payroll go out before changeout AR and commercial retainage come in. Rule 61G4-15.006 still requires a credit report with no unsatisfied judgments or liens and a FICO-derived 660 — ratios do not replace that rule.
9.3 Cash Flow, Banking & Financial Ratios
Area D item 3 is manage cash flow: accounting principles, banking, mathematics, and financial ratios. Florida HVAC cash is seasonal. Cooling load, failed compressors, and changeouts peak from late spring through summer; winter is service, indoor coil work, and heat-pump heating. A P&L that looks fat in July can hide a checking account that went negative in June because equipment hit AP before the owner hit AR. Builder's Guide to Accounting (2001) treats cash flow as a forecast plus ratios, not as whatever is in the register tonight.
This section will not invent unpublished bank covenants. Lenders and sureties set their own tests in private loan documents. The exam can ask you to compute ratios from a balance sheet and to interpret whether working capital is positive. It cannot require a cutoff that DBPR did not publish.
Cash versus profit, and the contractor cash cycle
Profit is earned revenue minus expenses (accrual). Cash flow is deposits minus checks. They diverge whenever AR, retainage, inventory, AP, or over/underbillings move.
Florida HVAC cash cycle:
- Buy equipment and copper (AP / cash out, often net 30, sometimes 2/10).
- Pay technicians weekly (cash out immediately).
- Set the equipment (job cost).
- Bill the owner (AR in, cash not yet in).
- Wait 0–45 days (residential card/COD is fast; commercial GCs are slow).
- Collect retainage months later on commercial work.
- Meanwhile summer overtime and the next truckload of condensers are already due.
Overbilling (liability) is cash-positive if the owner actually paid — you are holding the owner's money. Underbilling (asset) is cash-negative — you are the bank. Retainage receivable is an asset that is not spendable. Inventory of 3-ton splits in May is a current asset that ate cash.
Statement of cash flows (Builder's Guide / three GAAP sections):
| Section | HVAC examples |
|---|---|
| Operating | Customer collections, vendor payments, payroll, insurance, rent, interest paid |
| Investing | Recovery machines, trucks, plasma cutter, buy/sell of shop property |
| Financing | Line-of-credit draws and paydowns, truck-loan principal, owner draws, capital contributions |
A shop can show positive operating cash in August from collecting July changeouts and negative operating cash in May from stocking equipment. That is seasonality, not necessarily failure. Failure is refusing to forecast it.
Worked monthly cash budget (Tampa Class A shop)
These dollars are exam-style arithmetic, not a required typical volume.
Beginning cash, May 31: $38,000
June (peak changeout; first commercial RTU draws still outstanding):
- Collections on May invoices: $142,000
- Equipment and copper paid (including one missed 2/10 that cost $960 extra): $88,000
- Payroll and burden: $71,000
- Overhead (rent, utilities, office, insurance installment): $24,000
- Truck-loan principal + interest payment: $2,800
June cash movement = 142,000 − 88,000 − 71,000 − 24,000 − 2,800 = −$43,800
Ending cash June 30 = 38,000 − 43,800 = −$5,800 without a line of credit.
The June income statement can still show a profit: POC on a 40-ton job (Class A; Class B is capped at 25 tons / 500,000 Btu in any one system) earned $40,000 of gross profit, and residential changeouts ran at 28% gross. Profit did not meet payroll. The bank conversation in May should have been: we need a seasonal line because June cash goes negative by about $6,000 even when we are busy. That is banking: a revolving line, a deposit account, positive pay, and a bank reconciliation — outstanding checks, deposits in transit, NSF customer checks from HOAs, debit-card shop charges not yet in AP.
Bank reconciliation math:
Bank statement balance $44,200
- deposits in transit $8,500
− outstanding checks $11,200
= $41,500 should-be book cash
Book cash before rec $42,100
− bank service charges $25
− NSF check $575
= $41,500. Reconciled.
Computer skill: the cash account in the GL must tie to the reconciled bank balance. Unreconciled cash is how a current ratio lies. A line-of-credit draw is financing cash in, a liability increase, not sales. Repayment is not an expense except for interest. Owner draws are financing cash out; they cut equity and working capital. Do not take June draws because the P&L looks strong.
July, collections catch the June invoices: $210,000 in, AP $70,000, payroll $68,000, overhead $24,000, truck $2,800 → net +$45,200, and the June hole closes if you did not already bounce payroll. Seasonal HVAC: borrow or retain cash in April/May; do not wait until June 28.
Working capital and the four ratios
Working capital = current assets − current liabilities
Positive working capital means current assets (cash, AR, retainage, inventory, underbillings, prepaids) exceed the bills due inside a year (AP, accrued payroll, overbillings, current portion of debt, the line of credit if payable on demand or within a year). Negative working capital means next year's bills already exceed next year's convertible assets — a going-concern problem, and a licensing problem if it produces judgments.
Current ratio = current assets ÷ current liabilities
Quick ratio (acid test) = quick assets ÷ current liabilities
Quick assets = cash + cash equivalents + marketable securities + net receivables (trade AR and retainage). Exclude inventory and prepaid expenses. Underbillings are contractor-specific near-receivables; some analysts include them with AR. Unless the exam includes them in a defined quick-assets figure, exclude inventory and prepaids and include cash + trade AR + retainage.
Debt-to-equity = total liabilities ÷ owner's equity
Some worksheets use only interest-bearing debt in the numerator. If the exam says total debt-to-equity, use all liabilities. If it lists notes and the line of credit only, use that subset. Read the stem.
Worked balance sheet — Gulf Breeze Mechanical, June 30 (peak season):
Current assets
| Account | Amount |
|---|---|
| Cash (reconciled) | $42,000 |
| Trade accounts receivable | $180,000 |
| Retainage receivable | $28,000 |
| Inventory (equipment/parts not issued) | $55,000 |
| Costs and estimated earnings in excess of billings | $15,000 |
| Prepaid insurance | $8,000 |
| Total current assets | $328,000 |
Current liabilities
| Account | Amount |
|---|---|
| Accounts payable | $95,000 |
| Accrued payroll and burden | $22,000 |
| Billings in excess of costs and estimated earnings | $18,000 |
| Current portion of notes | $24,000 |
| Line of credit (short-term) | $40,000 |
| Total current liabilities | $199,000 |
Net fixed assets $116,000. Total assets = $444,000.
Long-term debt $85,000. Total liabilities = 199,000 + 85,000 = $284,000.
Owner's equity = 444,000 − 284,000 = $160,000.
Now the math:
Working capital = 328,000 − 199,000 = $129,000
Current ratio = 328,000 / 199,000 = 1.65 (two decimals)
Quick assets = 42,000 + 180,000 + 28,000 = $250,000
Quick ratio = 250,000 / 199,000 = 1.26
If the stem includes underbillings ($15,000) as quick: 265,000 / 199,000 = 1.33. Inventory and prepaid stay out of the quick ratio either way — you cannot pay technicians with filters in the cage or with unexpired insurance.
Debt-to-equity = 284,000 / 160,000 = 1.775, typically stated 1.78 (or 1.78:1).
Interest-bearing only = (24,000 + 40,000 + 85,000) / 160,000 = 149,000 / 160,000 = 0.93.
Interpretation without invented covenants:
- Current ratio below 1.0 means current liabilities exceed current assets. Working capital is negative. That is a distressed shop even if the trucks look new.
- Current ratio of 1.65 means $1.65 of current assets per $1.00 of current bills. It is not the same as cash. $180,000 of that 1.65 is AR that Florida GCs have not paid.
- Quick ratio 1.26 is the can we pay bills without selling inventory test. A shop stuffed with May condensers can have a decent current ratio and a weak quick ratio.
- Debt-to-equity 1.78 means creditors have $1.78 in the business for every $1.00 of owner equity. Higher leverage means lenders and sureties have less cushion if a job goes bad.
- Rule 61G4-15.006 still wants a consumer credit report with no unsatisfied judgments or liens and a FICO-derived 660. Ratios on an internal balance sheet do not replace that rule, and a beautiful current ratio does not cure a recorded judgment.
Banks underwrite character, capacity, capital, collateral, and conditions. They will ask for these ratios and for an AR aging. They may place covenants in a private loan agreement. Those covenant thresholds are not published in the 2026 B&F reference list. If a question does not give a covenant number, do not invent 1.50 or 2.00 as a legal requirement. Compute what the statements show.
Seasonal Florida HVAC and banking products
Deposit account for collections and payroll; keep owner draws from being mixed with overbilling cash you have not yet earned. Lockbox or remote deposit speeds residential checks. ACH/card for service tickets shortens AR; card fees are overhead, not a reason to skip the sale. Line of credit sized to the June hole in the cash budget, not to the vanity of the truck. Positive pay and dual signatures reduce the computer-skill version of fraud (the bookkeeper who prints an extra AP check).
Summer changeouts: Class B 3–5 ton residential volume is cash-faster (often COD or card on completion, completed-contract, little retainage) but AP-spiky (truckloads of splits). Class A chiller and large RTU work is cash-slower (progress billings, 5–10% retainage, GC pay cycle) but larger draws. A mixed shop uses residential collections to fund commercial retainage lag — that is working-capital management, not two different accounting equations.
Traps:
- Treating the line of credit as revenue.
- Counting retainage and underbillings as cash in a weekly forecast. They belong in ratio analysis and in a collection forecast with dates.
- Paying owner draws in June because the P&L looks strong.
- Skipping 2/10 discounts (37% money) to protect a checking account that a cheaper line could protect.
- Letting Chapter 713 clocks die while waiting for a ratio to impress a lender. Unsatisfied liens on the credit report fail 61G4-15.006 regardless of a 1.65 current ratio.
Florida HVAC scenario
Gulf Breeze's June 30 ratios are current 1.65, quick 1.26, working capital $129,000, D/E 1.78. Cash is only $42,000. Accrued payroll is $22,000. The 40-ton job is overbilled $18,000 (liability) while residential underbillings are $15,000 (asset). The bank asks for the June statements and the AR aging. The correct presentation is: here is a reconciled cash balance, an aging that flags a 53-day HOA invoice and retainage with a 90-day lien tickler, AP with discount dates, and a July cash budget that returns cash to about $40,000+ if collections hit. The incorrect presentation is telling the lender we have a 1.65 current ratio so we do not need a line, then bouncing the July 3 payroll because $180,000 of AR is not cash and $28,000 of retainage is not due yet.
CILB does not license your current ratio. It does deny or discipline around financial responsibility when judgments and liens appear. Cash-flow management — discounts taken (9.2), AR collected or liened on time (9.1), and a bank relationship that matches the Florida cooling season (9.3) — is how Area D's 32% of B&F shows up in the shop after you pass.
Gulf Breeze Mechanical reports current assets of $328,000 and current liabilities of $199,000. What is the current ratio?
Using the same June 30 statement — cash $42,000, trade AR $180,000, retainage receivable $28,000, inventory $55,000, prepaid insurance $8,000, current liabilities $199,000 — what is the quick (acid-test) ratio if quick assets are cash plus receivables including retainage?
On the Gulf Breeze June 30 worksheet, current assets are $328,000, current liabilities $199,000, total liabilities $284,000, and owner's equity $160,000. Which statement is correct?