Why your accounts say profit but your bank says otherwise

A set of accounts that shows a healthy profit while the overdraft creeps up is the most common thing we see in new construction clients. It isn't fraud and it isn't bad bookkeeping. It's bookkeeping designed for a business that sells things and gets paid, applied to a business that doesn't work like that.

The four gaps

1. Applications booked as sales

An application for payment is a request. Until it's certified, it isn't revenue. Booking it as a sale overstates profit and hides disputes.

2. Retentions treated as normal debtors

They aren't due yet. They inflate the debtor book and the apparent cash position.

3. Costs not matched to jobs

Materials, labour and subcontract costs booked to the period rather than the job means you can't tell which contracts made money. You find out when the job closes, which is too late to fix.

4. Work in progress ignored until year-end

Costs incurred on jobs not yet billed sit in the profit and loss, understating profit in some months and overstating it in others. Monthly WIP adjustments smooth that out.

What job costing gives you

Margin per job, per customer and per type of work, every month. It's the basis for pricing, for deciding which work to chase, and for spotting the job that's about to lose money while there's still time to do something about it.

This article is general guidance and not advice on your circumstances. Talk to your accountant before acting on it.