In This Issue:
👋 Intro
Happy Tuesday, folks!
Welcome back to another edition of The Contractor Finance Playbook.
Ever had a month, or year, that you absolutely crushed “on paper,” but your bank account doesn’t match?
Part of this is likely due to being on cash basis financials.
For businesses that are growing or trying to scale, this can prevent you from getting the visibility you need to make informed business decisions.
In today’s issue, I’ll break down the three types of accounting basis, what they are, how they differ, and whether you should change your accounting method, at least from a management standpoint.
I also have an accounting tip of the week as well as a question from the field that I found very interesting, and very timely since we are going headfirst into the holiday and Christmas season.
Now, let’s dive on in!
📖 Deep dive: Cash or Accrual Accounting
Should Your Business Be on Cash or Accrual Basis Accounting?
If your business is creeping past $1 million in revenue, or even if it’s just starting to experience big swings in cash flow, this question is worth asking:
Should I still be on cash basis accounting?
or
Is it time to switch to accrual?
Many contractors don’t know the difference, and even the ones who think they do often don’t.
Cash vs. Accrual vs. Tax Basis
Before we dive in, let’s define what these are because they often get mixed up.
Cash basis: Income (revenue) is recorded when the money hits your bank account, and expenses when paid and cash leaves.
Accrual basis: Income (revenue) is recorded when it is earned and expenses when they are incurred, regardless of when the money moves.
Tax Basis: The method that the IRS says you can use to file your taxes. It’s usually cash basis, even if you use accrual for management reporting.
So you can file taxes on cash basis and still manage the business on an accrual basis. This is usually the sweet spot.
When Cash Basis works (and when it doesn’t)
Cash basis works fine when your revenue and expenses move perfectly in sync. Think of your local restaurant that gets paid immediately as they sell food, or any other small business where there isn’t much timing between invoicing and payment.
But once you start experiencing large project swings, retainers or delayed payments, or hit $1M in revenue, cash basis books stop showing the whole picture.
Why? Because it hides the timing differences.
If you collect a deposit in March for work you deliver in April, your March P&L will look inflated.
On the flip side, if you pay annually for costs like insurance or your CRM, that month will look terrible even though they’re costs that should be spread out over 12 months.
What Accrual Accounting Means and Why It’s Not Just a QuickBooks Switch
A common misunderstanding I see is that contractors think that by switching their financial reports in QuickBooks from “cash” to “accrual,” they are then using accrual accounting.
Flipping the switch on your financial reports to “accrual” doesn’t mean your business is all of a sudden accrual-based.
Here’s what being on accrual basis actually means:
All bills are entered into Accounts Payable before you pay them.
Income is recorded when the work is earned, which could be different than the invoice date or the date the cash was collected.
You’re tracking accruals for expenses incurred but not yet billed (like subcontractor work that was done around the end of the month).
Schedules are maintained for expenses that are prepaid - things like insurance, annual subscriptions, etc.
You’re reconciling this activity through an actual month-end close process run by someone who knows how to handle the debits and credits.
Why It Matters For Contractors
So, why should you care?
Because accrual-based accounting gives you something most contractors are desperate for - clarity.
It’s the only way to:
Know if your business is actually profitable
Track whether your margins and pricing make sense
Compare true month-to-month performance
Spot when expenses are creeping ahead of revenue
Give bankers, buyers or advisors a clean financial picture
Without this, every decision you make is distorted by noise. You can’t tell if a good month is actually good or just the result of a huge check clearing early.
The ROI of Accrual Accounting
Control overhead creep before it starts impacting margin
Spot unprofitable jobs faster
Make pricing decisions based on real data
Easier trust with bankers when you need capital
Another point I didn’t mention above is that if you ever plan to sell your business, you must have accrual financials. Buyers will discount your valuation or even walk away if they can’t trust the data.
Are You Ready for Accrual Accounting?
If you’re making over $1M in revenue, want true margins by service line or job, or have significant timing differences between when work is done and when you’re paid, I highly suggest considering a move to accrual accounting.
If this is you, it’s time.
🧾 Accounting Tip of the Week: Undeposited Funds
Pro Tip: Make sure your undeposited funds are cleared monthly. Generally speaking, there shouldn’t be any deposits sitting in this account at the end of the month.
One exception to this is the timing of deposits at month end. For example, if you receive a payment on 11/30 but it doesn’t clear the bank, that’s fine. That will show open on November’s reconciliation but it will clear in the first week of the following month.
Anything around month end timing is fine, but regardless there shouldn’t be any aged deposits sitting in undeposited funds.
In the case where there are deposits or down payments for work to be completed at a future date that haven’t been invoiced, those items should go into a separate liability account until the work has been completed and the payment can be applied to the invoice.
I’m currently working with an HVAC company where I send them the list of all undeposited funds that haven’t cleared for that month, and we review and research what happened.
It could be as simple as an invoice that wasn’t pushed through from the business management software or it could be the timing of a refund that’s causing it not to clear.
Whatever the reason is, we review and investigate to get it figured out immediately so it doesn’t linger. It’s much harder to research and correct these items months after the fact than to go ahead and fix them while they’re fresh.
❓ From the Field: When to bring in admin help and start delegating
This is where I answer questions that either I was asked in person or were posted on social media. Individuals’ identities are kept anonymous.
Growing Business - I handle all the sales and business owner stuff; payroll, marketing, permits, etc.
Currently have 3 good techs and a helper. 3 Trucks on the road.
Having trouble keeping up. At what point should I bring on administrative support?
In short: You’re already past the point. With 3 techs, 3 trucks, and a helper, you should have brought on someone already.
I’m a big proponent of making an admin one of your first two hires because it allows you to delegate those admin tasks so you can focus on working “on” the business, not just “in” the business.
Look at it this way: What’s your time worth per hour when you’re running sales calls or closing installs? If it’s well above what an admin would cost, every hour you spend working on payroll or permits is a net loss. Admins usually cost between $18 and $25 per hour, so one extra job a month covers a part-time hire.
Another thing I want to mention here. The owner didn’t mention this specifically, but I’m assuming since they’re handling payroll in-house, they’re also likely handling the bookkeeping. I would look at outsourcing this as soon as possible as well. This would take it off their plate and give them a trusted partner to lean on. Keeping this in-house is just another task that needs to be overseen and managed.
Signs it’s time to bring on admin support:
Working
Doing paperwork on nights and weekends
Calls go to voicemail or callbacks or quotes sit for a day or more
Calls go to voicemail, callbacks are delayed, or quotes sit for a day or more
Can’t take a day off without the business stalling
The verdict: You’re past the point of needing admin help. I suggest hiring part-time to start (around 20-25 hours). It’s lower risk and often enough. Hand off the most painful work first. Write down your processes before they start. This gives them something to reference, and they can always go back and review it before asking for help. Outsource what you can. Hire a bookkeeping firm to handle the books and payroll; it’s cheaper in the long run, and it’s one less person and area you have to manage.
💈How’d I do?
What did you think of this week's newsletter?
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‘Til next time, cheers!
Preston
