Welcome back to another edition of The Contractor Finance Playbook.

This week I cover a common habit that most home service or contractor business has done at one point or another: Managing the business through the bank account.

While bank account balances are obviously very important, it shouldn't be the north start of how you run your business.

Let’s dive on in!

One of the most common things that I've seen talking with contractors is that they don't manage their business from financial reports, they manage it from their bank accounts.

The logic is always something like "Well if I have a bunch of money in the bank I'm doing well. If money's low then I need to bring in more work."

And honestly? That's understandable. You're running jobs, managing crews, dealing with customers and when you’re dealing with all that, the bank account is the fastest snapshot you have. It feels like business 101.

While it sounds good in theory, the bank account is one of the worst financial tools for managing your business.

The bank account balance only shows you a snapshot of a specific moment in time. It doesn't tell you: - How much customers still owe you - What bills and expenses are coming up - Which jobs are actually profitable - Whether your actually making money, on paper I've seen businesses from $500K to $3M in revenue still operate this way. On the surface everything is good. Jobs are coming in, crews are busy and cash is moving. But underneath there’s no visibility into the business. And that’s where the problems start.

The real risk when you run your business from the bank account is that every decision you make is reactive.

You take jobs because you need cash. You delay purchases because the balance feels tight. You assume things are profitable because money came in this week.

Eventually this creates a cycle that looks like this: Revenue grows but stress grows with it because the business isn’t being managed with financial information. It’s being managed with best guesses.

You don’t need a full finance department, but you do need visibility. At minimum, review these three financial statements every month.

The P&L tells you if you are making money on paper. This is where you see revenue, cost of labor, materials, overhead and net profit.

For contactors, the P&L answers questions like:

Revenue growth doesn’t always mean the business is improving. You can bring in more revenue and still lose money if margins are thin or overhead is too high.

Tells you what you own and what you owe.

The balance sheet tells you what you own and what you owe — cash, receivables, unpaid bills, debt, credit card balances, equipment, and owner draws.

When you review it focus on a few things:

Accounts Receivable: Are customers paying on time? Your total receivable balance is on the balance sheet but pull the aging detail to see who owes what and how long it's been outstanding. If customers aren't paying, make sure you're following up.

Accounts Payable: Same exercise on the other side with unpaid bills. Review your AP aging and look for large unpaid bills coming due. No surprises.

Credit Card and Debt Balances: Are these going up, down, or staying flat? If they're consistently increasing it could mean the business is running on borrowed money without you realizing it.

This is the statement most contractors never look at. It's also the one that would have saved them the most headaches.

Your P&L can show you as profitable while your bank account is running low. Profit on paper and cash in hand are two completely different things. The Statement of Cash Flows is what connects them.

Take this situation for example: Think about a contractor who just wrapped up a strong quarter. Revenue is up, the P&L looks great, and they feel good about where the business is. But cash feels tight. Payroll is close to bouncing every two weeks. The credit card balance keeps going up. Something just isn’t adding up.

The cash flow statement tells them exactly what happened. A big receivable from a commercial job hasn’t been collected. Equipment purchase was made that month and owners draws outpaced cash being collected.

That's what this statement does. It shows you the actual movement of cash in and out of your business across three areas:

Cash from Operations - the day to day inflows and outflows of running the business

Cash from Financing - debt payments, credit card paydowns, loans taken on or paid off

Cash from Investing - equipment purchases, down payments, major asset transactions and owner draws and contributions

If you've ever had a month where the P&L said you made money but your bank account told a different story, this statement could have your answer.

Most contractors ignore it because it looks complicated. But once you understand what you're looking at it becomes one of the clearest pictures of business health you have.

Your bank account tells you where your business is today, but your financials tells you where its going. The contractors that build real, scalable businesses eventually make this shift. They stop managing from their bank account and start managing from their numbers.

Don’t be the business celebrating a "good month" while AR skyrockets and payroll barely clears. The bank balance feels good...until it doesn't.

Know your numbers.

Til next time, cheers!

Preston