A profitable contractor wants to borrow more money.
The explanation sounds reasonable. The company has won additional work, needs another crew, and cannot wait for customer payments before covering payroll and materials. The income statement shows a profit. Backlog looks healthy. The proposed loan payment fits inside the annual forecast.
Then the owner asks:
“Can we afford the loan?”
An advisor can calculate the payment in a few minutes. That calculation matters, but it is not the whole decision.
Profit does not make loan payments. Cash does.
The contractor pays employees every Friday. Suppliers may need to be paid before customers pay their invoices. Retainage may hold back cash long after the work is complete. One slow-paying customer can turn a profitable month into a cash scramble.
Borrowing may be exactly what the company needs to carry that timing gap.
It may also give the owner more time to repeat whatever created the cash problem in the first place.
That is where advisory begins.
The question is not simply whether the company can make the payment. The advisor needs to understand why cash is tight, what the borrowed money will change, what should happen after the money arrives, and how the client will know whether the decision worked.
I call the structure for working through those questions Milan’s Four Laws of Financial Improvement.
They do not replace a forecast, debt-service calculation, or borrowing-capacity analysis. They help keep the advisor from confusing a calculation with a recommendation.
LAW 1: THE NUMBER DOES NOT EXPLAIN ITSELF
The contractor’s reports show profit, rising receivables, and less available cash.
Those numbers tell us something deserves attention.
They do not tell us why it happened.
Maybe the company is growing faster than its cash can support. Maybe customers are paying more slowly. Maybe project managers wait several days after completing a billing milestone before getting the information to accounting. Maybe change orders are approved in the field but delayed in the billing process. Maybe the company has taken on larger jobs with longer payment terms.
The same receivable balance can be produced by very different business conditions.
That distinction matters because different causes require different actions.
Before recommending more debt, the advisor should ask questions such as:
- What changed before the cash pressure appeared?
- Which customers and jobs account for the increase in receivables?
- How long does it take from completed work to an issued invoice?
- Have customer payment patterns changed?
- Is the shortage temporary, recurring, or both?
- What evidence would cause us to reconsider our current explanation?
The goal is not to create certainty where none exists.
It is to keep our confidence in the explanation from getting ahead of the evidence.
Financial reports describe what happened. They do not automatically explain why it happened.
The advisor has to investigate.
LAW 2: CHANGE WHAT PRODUCES THE NUMBER
The contractor still has to make Friday payroll.
Finding a billing problem does not make the immediate cash shortage disappear. The company may still need financing.
But that creates two separate decisions.
The first is a liquidity decision:
How should the company fund the temporary cash gap?
The second is an operating decision:
What needs to change so the business does not continue producing the same problem?
Suppose the review finds that completed-work invoices take an average of eight business days to leave the office.
The operating action might be:
Issue every eligible completed-work invoice within one business day.
That is an action.
“Improve cash flow” is not.
“Watch receivables” is not.
“Collect faster” is not specific enough either.
A useful intervention has to act on something reasonably capable of changing the desired result.
The borrowing decision should receive the same scrutiny.
What happens if customers continue paying in 45 to 60 days? What happens if a project is delayed? Can the margin on the additional work support the added payroll, job costs, and financing expense? How much of the line does management expect to use? What is each draw intended to fund?
A 13-week cash forecast can be especially useful here because an annual forecast can make financing look comfortable while the company still has a serious cash shortage three Fridays from now.
Borrowing may be part of the solution.
But a higher bank balance is not evidence that the underlying business improved.
A loan can buy time. It does not automatically fix the reason the company was running out of time.
LAW 3: PREDICT BEFORE YOU ACT
Before the client signs the loan documents, the advisor and owner should state what they expect to happen.
Not because the prediction will always be right.
Because without an expectation recorded in advance, almost any result can be explained after the fact.
For this contractor, the expectations might be:
- Eligible completed-work invoices will leave the office within one business day instead of the current eight-day average.
- The credit line will be used to cover payroll and approved job costs during the collection gap, not owner distributions or unrelated purchases.
- If customer payment behavior remains similar, reducing the billing delay should begin shortening the receivable cycle during the next 90 days.
- The company will protect an agreed minimum cash balance.
- Management will review any additional borrowing that would push projected cash below that floor.
The advisor should also identify what would cause the original thinking to be reconsidered.
If the line remains nearly fully drawn after the expected collection cycle, the company may have a structural cash problem rather than a temporary timing problem.
If revenue increases while gross margin falls, the new work may actually be making the cash problem worse.
If invoices begin leaving the office faster but the receivable cycle does not improve, the next investigation may belong in customer payment behavior, contract terms, collections, or retainage.
A prediction creates something valuable:
A future test.
Instead of asking six months later, “Did this seem to work?” the advisor can ask, “Did what we expected to happen actually happen?”
That is a much better advisory conversation.
LAW 4: MEASURE AND LEARN
Six months later, everyone may remember that the company borrowed money.
They may not remember why that amount was chosen, what management agreed to change, or what was supposed to happen next.
Without that record, the next review becomes a new story built around whatever outcome occurred.
The advisor should preserve the reasoning behind the decision:
- The client’s original question
- The financial observation that triggered the discussion
- The working explanation and what remained uncertain
- The amount and intended purpose of the financing
- The operating action management agreed to take
- The expected operational and financial response
- Important guardrails, including the minimum cash floor
- Who was responsible for the action
- When the decision would be reviewed
Then measure what actually happened.
Was the loan approved?
How much did the company draw?
Were the funds used as intended?
Did invoices actually begin leaving the office within one day?
Did customer payment timing change?
Did the new crew create the expected capacity and margin?
And before judging the financial outcome, ask another important question:
Did the company actually execute the plan as prescribed?
Maybe management followed the recommendation exactly. Maybe they modified it. Maybe they completed only part of it. Maybe they never implemented it at all.
Those are very different outcomes.
If the action changed, the expected result may need to change with it.
The purpose of measurement is not to prove that the advisor was right.
The purpose is to learn enough from this decision to improve the next one.
THE MOMENT THE ADVISOR IS BUILT FOR
When a business owner asks, “Can we afford the loan?” the math may be straightforward.
The decision usually is not.
The financial statements cannot explain by themselves why cash is tight. A payment calculation cannot determine whether borrowing addresses the cause. And an annual forecast cannot tell the advisor whether the company will have enough cash to make payroll several weeks from now.
The advisor has to connect the pieces.
That is the work behind Milan’s Four Laws of Financial Improvement:
- The number does not explain itself.
- Change what produces the number.
- Predict before you act.
- Measure and learn.
The result is more than an answer to today’s borrowing question.
It creates evidence that can make tomorrow’s decision better.
That moment when the client has seen the numbers, looks across the table, and asks, “What should we do?”
That is where reporting ends.
And it is exactly what an advisor should be Built For That Moment® to handle.
ABOUT THE AUTHOR
Mike Milan, known as Cash Flow Mike, is a small-business financial management expert, consultant, speaker, author, and creator of Clear Path To Cash®. His mission is to eliminate cash flow as a reason businesses fail by helping accountants, bookkeepers, fractional CFOs, bankers, business advisors, and business owners turn financial information into better business decisions. Learn more at cashflowmike.com.
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