Revenue Is Not Profit, and Profit Is Not Cash

Part B: Understand the Money

A contractor finishes a kitchen remodel and the customer writes a check. It feels like a good day. But how much of that check is his? How much of it belongs to the lumber yard, to the crew that worked the job, to the insurance company, to the phone bill that comes due on the first of the month?

We see owners do this constantly. They look at money coming in and treat it as money they have. Three words get mixed together in that moment, revenue, profit and cash, and I want to pull them apart, because they answer three different questions.

Three words, three questions

Revenue is what you sold. It answers the question: how much business did I do? If you invoice $12,000 for a job, that is $12,000 of sales. Exactly when it counts as revenue in your books depends on the accounting method you use. Many small businesses record it when the money arrives (cash basis), and others record it when the work is billed (accrual basis), so ask your accountant which one you are on. Either way, in this lesson I keep three things separate: what you sold, what you kept and what you actually collected.

Profit is what is left of that sale after the costs of earning it. It answers the question: was the work worth doing? Say that $12,000 job cost you $9,000 in materials and the crew labor on that job. That leaves $3,000 after the direct costs of the job. That is not yet what the business keeps, because rent, insurance, software, advertising and your other overhead still have to be paid out of it, and the next lesson on gross versus net margin gives those two layers their proper names. The other $9,000 was never yours to keep.

Cash is the money actually sitting in your bank account today. It answers the question: can I pay what is due right now? Cash does not care what you billed or what the books say. It only cares what has landed and what has left.

Here is the distinction that matters most. Revenue tells you about your sales. Profit tells you about your work. Cash tells you about your survival. A business can be strong on the first two and weak on the third.

Why the three drift apart

If every customer paid the instant the work was done, and every cost were paid the same day, the three numbers would move together. They never do. You buy materials before the job starts. You pay a crew on Friday for work a customer will pay for next month. You pay a yearly insurance bill in one lump but earn the money to cover it twelve months at a time.

Even the timing of a single job can split the three apart. Say you sign a job in March, buy the materials in April, finish in May and get paid in June. Revenue was earned in May, the costs left your account in April, and the cash arrived in June. Same job, three different months, and a bank balance that looked worse before it looked better.

Then there are the things that hit cash but never show up as a cost of any single job. A truck payment. A new set of tools. Money you took out for yourself. None of these make a job less profitable, and all of them empty the bank account.

So when someone asks how business is going, which number are you answering with? When you say “great month,” do you mean you sold a lot, you made money, or you have money?

You do not need an accounting degree to keep these straight, only the habit of knowing which of the three questions you are asking at any moment and answering it truthfully.

Further along in this track, Your Business Can Be Profitable and Still Run Out of Money takes the cash side of this a step further.

Your next step

Pick the last job you completed and write three numbers on a piece of paper: what you billed for it, what it cost you to deliver it, and what has actually arrived in your bank account from it so far. Then write one sentence about the gap between the first number and the third. Where did the difference go, or when will it arrive?

What it costs

About 20 minutes with a pen and paper, using one job you already remember. It costs nothing. If the cost number is hard to pin down, that is useful information too, and the lessons on margins and pricing that come next show you how to pin it down.