Your Landscaping Company Is Profitable. So Why Are You Worried About Making Payroll?
By ProfitWise - A Visa Business Plans company
A landscaping business owner recently described a situation online that caught our attention.
His company was busy and profitable. He had a substantial amount of money in accounts receivable, and both his bookkeeper's reports and his CPA's information indicated the business was doing well.
But when he looked ahead, he was worried.
Customers owed the company six figures, yet relatively little cash sat in the bank. Some commercial customers were paying on Net 60 terms, while the company still had to cover all the expenses required to keep those projects moving.
Nothing in the financial reports necessarily suggested that the company was in trouble. The owner simply needed an answer to a question those reports weren’t designed to answer:
What is going to happen to my cash over the next several weeks?
His Reports Weren’t Wrong
This is an important distinction.
The bookkeeper could accurately report what had already happened in the business, and the CPA could look at the company’s financial position and confirm that it was profitable. The problem was that neither of those things answered the owner’s immediate concern.
He needed to know when the money would actually arrive and whether enough cash would be available to cover everything that had to be paid before then.
For a landscaping company, when customers pay can significantly affect cash flow. The company may be covering several payrolls and paying for fuel, plants, sod, irrigation supplies, equipment, and other operating expenses while the work is being completed. If a large commercial customer doesn’t pay for 30, 45 or 60 days, the business may have to carry all of those costs for weeks before collecting the revenue associated with the job.
That’s how a profitable landscaping company can find itself with plenty of money in accounts receivable and still feel uncomfortable every time payroll approaches.
$150,000 in Receivables Doesn’t Mean You Have $150,000 to Spend
Suppose customers owe the landscaping company $150,000.
Knowing that number is important, but it doesn’t tell us when the money will be available.
Perhaps $25,000 is expected next week, another $40,000 three weeks from now and the remainder much later. To understand the company’s cash position, we would need to compare that timing with payroll, materials, equipment payments and everything else coming due during the same period.
Once we do that, the problem may look very different.
The company may not have a profitability problem at all. It may simply have a period when more money needs to leave the business than is expected to come in.
This Is Where Looking Forward Changes the Conversation
Historical financial reports remain extremely important. We need accurate bookkeeping to understand how the business has performed and where it stands today.
But this owner was asking a forward-looking question.
A cash-flow forecast could take the information the company already has and map expected customer payments against upcoming payroll, materials, debt payments and operating expenses.
Instead of discovering a cash shortage when payroll is only a few days away, the owner could potentially see the problem several weeks in advance.
Seeing the problem several weeks ahead gives the owner time to figure out what is creating the gap and what can realistically be done about it. For this landscaping company, that could mean collecting outstanding invoices more aggressively or looking at whether Net 60 still makes sense for future commercial contracts. For larger projects, the owner might consider negotiating deposits or progress payments so the company isn’t financing so much of the work itself. And if these timing gaps are a normal part of the company’s business model, it may be worth evaluating whether a line of credit would provide the additional working capital needed during those periods.
Growth Can Make the Gap Even Bigger
This becomes especially important when a landscaping company is growing.
Winning another large commercial contract may be excellent news, but the company also needs to consider how much money it will have to put into that project before getting paid.
If the new contract requires additional labor, materials and equipment for several weeks while the customer pays on Net 60 terms, the company is effectively financing part of that growth itself.
The contract may be profitable and still create additional pressure on cash.
Before accepting more work, the owner should therefore understand whether the company has enough working capital to comfortably support it.
Sometimes You Need More Than a Report
This is where many small-business owners can benefit from CFO-level support.
The bookkeeper and CPA may both be doing their jobs perfectly well. The owner simply needs a different type of financial analysis.
Instead of looking only at what happened last month, we can start looking at what is expected to happen over the next several weeks or months. We can compare expected collections with upcoming expenses, test what happens if a major customer pays late and evaluate whether the company has enough cash to take on additional work.
For a small business that doesn’t need a full-time CFO, this is where Fractional CFO support can be particularly useful.
The landscaping owner who raised this concern wasn’t saying that his bookkeeper or CPA had failed him. In fact, according to him, both were telling him that the company was doing well.
His concern was that historical reports couldn’t tell him what his bank account might look like several weeks from now.
As a business grows, there often comes a point when knowing what happened last month is no longer enough. The owner also needs to understand what is likely to happen next and have enough time to make decisions before a cash-flow problem arrives.
