Do you encounter times when your company has strong profits on paper, but you’re still struggling with cash shortages? Frequently, the cause of this is how you record and interpret your financial data.
While cash flow problems aren’t caused by accounting, using the wrong method and distorted numbers can hide warning signs until it is too late. Without proper visibility and accurate data, you can end up with a skewed view of success.
Why Profitable Companies Still Run Out of Cash
Cash flow mismanagement can stunt your company’s growth, and it is commonly fueled by timing mismatches.
John Joestgen, principal of JJ Landscape Consulting, says one example of this is if you have a payroll-to-payment gap where you do weekly payroll for a month before you invoice the client, then do weekly payroll for another 1-2 months until the customer pays.
You may also be paying your vendors faster than the customer pays you.
“To make the situation worse, a general contractors hold 10% retention on every invoice for what could be 6 months or longer,” Joestgen says.
If you are getting squeezed by these types of situations, work to tighten your invoice timelines, shorten payment terms and be disciplined about collections.
Another issue arises when the P&L includes expenses that don’t reflect actual cash leaving the business. For example, if the cash down payment on a piece of equipment is not recognized on your P&L, it’s possible your monthly equipment payment is higher than the P&L’s monthly depreciation expense.
Utilizing a cash flow report in addition to the P&L and mapping out fixed cash obligations like loan payments, equipment financing and large one-time purchases can help owners keep an eye on elements that may not be fully reflected on the income statement.
Accounting Methods for Better Visibility
How you go about tracking your income and expenses will either hide issues or allow you to spot trends early on.
Cash basis accounting is great for companies when they’re on the smaller side due to its simplicity, only tracking revenue when it comes in and expenses when they are paid out. However, this method of accounting can be misleading and cause you to believe you had a high cash flow month when, in reality, it’s profit from last month’s work.
Joestgen argues that as landscape companies grow and face more complex cash issues such as AR, AP, WIP, retention, deposits, and prepaid maintenance, accrual-based accounting allows the management team to see trends and make informed decisions.
“Even if you take advantage of cash basis for tax purposes (which in many cases can be for revenues up to $31 million in 2025), I recommend also doing financials on an accrual basis for better decision-making,” Joestgen says.
Accrual-based accounting instead records income and expenses when they are incurred, not when the money is actually received. So if you bill a client in April but they don’t pay you until May, that income is still recorded in April. This gives you a more accurate picture of your company’s financial health.
A third accounting method is earned revenue, which is encouraged through many industry software platforms. Earned revenue accounting uses the estimated costs and estimated gross margin, then applies it to the actual costs to determine how much revenue you earned, but it doesn’t include cost overruns.
Joestgen says it is a good fit for monthly maintenance, enhancement jobs, or any work that is completed in a single month, as you know your revenue before you ever calculate a monthly invoice. However, you can run into trouble with using this accounting for large construction jobs that last for months or years.
He adds that if you are using the earned revenue accrual model and do not regularly revise your estimates and reforecast your budgets, you could be temporarily inflating your revenue.
That can make a job look profitable until late in the project, when cost overruns finally show up.
“I question whether the majority of companies that do large construction work actually have the procedures in place to make sure earned revenue doesn’t mislead them with inflated earnings for months, then one day the software informs you that you’ve used up your full cost estimate so you can invoice the full contract amount, but then you look at the site and realize you still have 20% of the job left to do,” Joestgen says. “That could cripple a company.”
The Danger of Incomplete Financial Data
No matter what accounting method you prefer to use, it can be hard to make solid financial decisions if you are missing certain revenue and expenses at the end of the month.
“Expect confusing variances and trends if you don’t get 100% of both included,” Joestgen says. “Normal thinking is to use whatever is submitted by the cutoff and not think much about what’s missing.”
Instead, he says it’s more important to include all the necessary revenue and costs by the cutoff date. Joestgen compares it to having to pick up three siblings from school at 5:30 so everyone can be home by 6. Only two of the three siblings come out of the school on time, so you go home without one sibling to maintain the deadline.
“Collecting everything needed for the deadline can be more important than going with an incomplete deliverable by the deadline,” Joestgen says.
He says when you have no choice, doing a journal entry accrual that has a counter entry the first day of the following month can allow you to be comprehensive and meet the deadline. Joestgen explains that having a significant amount of revenue or cost absent diminishes the value of what you can learn from the financials.
“The lack of accurate financials causes wild swings in gross profit and net profit,” Joestgen says. “Good decision-making relies on good, trustworthy metrics. Your bank and possibly bonding or other institutions will be looking at your financials to make their decisions on doing business with you.”
Another risk when you tolerate these wild swings in your gross and net profit is that it causes managers and decision-makers to stop caring about the financials because they can no longer trust them.
“When the team sits down to analyze financials and owners want answers, the response will likely be ‘I think we are missing some revenue,’” Joestgen says. “Some teams might give up at this point and cut the meeting short. Some groups might try to guess how much is missing, and then they might pull out a calculator to try to make revisions to the printed P&L because they just confirmed they cannot trust the numbers presented, so they can maybe salvage something from the meeting.”
On the flipside, missing costs can mislead owners into thinking everyone has done a great job and no one brings up the fact that some costs are probably missing.
Joestgen says companies have to get to a point where they decide whether ‘garbage on time’ is truly in their best interest.
Poor cash flow isn’t always caused by poor performance. Sometimes, it is misleading data that can result in detrimental business decisions.
