A screener throws up an engineering contractor with revenue up 21%, profit up 24% and receivable days that have come down slightly, from 74 to 72. On the standard checks it looks like growth of decent quality — the one line everybody is trained to watch has moved in the right direction. The cash flow statement says operating cash flow was negative for the year. Nothing in the receivables line explains that, because in a contracting business the debtors figure is only the part of what the customer owes that has cleared three separate hurdles: the work has been done, the contract permits an invoice for it, and the client's engineer has certified it. Everything that has cleared the first hurdle and not the others is sitting somewhere else on the balance sheet, in lines a general-purpose ratio never looks at.
A wedding caterer keeps three ledgers. One lists bills issued and unpaid — the ordinary udhaar book. One lists work already done for which the contract says he may only bill after the reception, so no bill exists yet even though the food was cooked. And one lists the 8% every client holds back for a fortnight in case a complaint comes. A visitor shown only the first ledger will conclude the business collects well, having seen well under half of what the caterer is actually owed.
A contractor's balance sheet carries exactly those three, under other names, plus a fourth that runs the other way: money taken in advance before any work was done. Read together they are the business. Read one at a time, in a ratio built for a company that invoices on despatch, they mislead.
The four lines, and what distinguishes them
| Line | What it means | What has to happen for it to become cash |
|---|---|---|
| Trade receivables | Invoiced, and the right to the money is unconditional — only time stands between the company and payment | The client pays. This is the ordinary collection problem |
| Unbilled revenue, or contract asset | Revenue has been recognised because work was performed, but the contract does not yet permit an invoice — a milestone is unreached, or the client's engineer has not certified the measurement | A milestone, a certification or an approval. Something other than the passage of time, which is precisely what makes it not a receivable. Then it becomes a receivable, and then it gets collected |
| Retention money | A stated share of every certified bill — commonly a single-digit percentage — that the client withholds until the project is complete and the defect liability period has expired | Completion, handover, and the expiry of the defect liability period, often one to two years after the work finished. Frequently classified as non-current, which is the clue |
| Contract liability, including mobilisation advance | Money billed or received before the work it relates to has been performed. A liability, not revenue | Nothing — the cash is already in. It unwinds the other way, as the work is done and the advance is recovered by deduction from subsequent bills |
The mobilisation advance, and why a good year makes the next one worse
At the start of a large project the client typically pays an advance to let the contractor mobilise — bring plant to site, build a camp, order long-lead items. The advance is usually secured by a bank guarantee and it is recovered by deducting a percentage from every subsequent bill until it is extinguished. It is not revenue and it is not a loan on the borrowings line; it sits as a contract liability, and it makes working capital look excellent.
Which produces a pattern that catches out anybody reading a single year. A contractor that has just won and mobilised several large projects shows a large advance balance, low net working capital and strong operating cash flow. As those projects move into their middle years, the advances unwind — the deduction happens on every bill — while unbilled revenue and retention build. Nothing has gone wrong. The same business, executing well, consumes cash in year three that it generated in year one. A contractor's working capital is a function of where its projects are in their lives, not only of how well it collects, which is why the composition matters more than the total.
- Add the four only once
- Presentation varies and the arithmetic breaks if you do not check it. Retention money is sometimes shown as its own line, sometimes sitting inside trade receivables, and sometimes inside contract assets — adding a separately disclosed retention figure on top of a receivables figure that already contains it double counts the largest slow-moving balance in the business. Read the note under trade receivables before you add anything
- Why all four together
- Each one alone is manipulable by billing timing; the four together are not, because moving a balance from one to another leaves the total unchanged
- What a rising figure means
- The business is funding more of its customers' projects. Whether that is a maturing portfolio or a collection problem is answered by the composition
- What to compare it with
- Its own history over five years, and peers on identical definitions. The absolute level is meaningless across sectors
Example: On the company above: year one (850 + 600 + 320 − 900) ÷ 4,200 × 365 = 75.6 days; year two (1,010 + 980 + 520 − 620) ÷ 5,100 × 365 = 135.2 days.
- Large contract liabilities from freshly mobilised projects
- Unbilled revenue low relative to revenue
- Retention money small, because little has been completed
- Strong operating cash flow that flatters the business
- The next two years will consume cash even if execution is perfect
- Contract liabilities running down with no new mobilisation to replace them
- Unbilled revenue rising faster than revenue
- Retention money accumulating and ageing, with old projects still unhanded-over
- Weak or negative operating cash flow in a year of reported growth
- The order book will tell you which of the two situations this is
Unbilled revenue has doubled and management calls it timing
A contractor's unbilled revenue has gone from ₹380 crore to ₹790 crore in a year in which revenue grew 14%. On the call, management says it is purely a timing issue: several large bills were submitted in the last fortnight of March and will be certified in April.
A contractor's receivable days fall from 74 to 72 while unbilled revenue rises from 52 to 70 days of revenue, retention money rises from 28 to 37 days, and contract liabilities fall from 78 to 44 days. What is the correct reading?
Revenue ₹4,200 crore se ₹5,100 crore (21%). Udhaar khata: ₹850 se ₹1,010 crore — days 74 se 72, sudhaar. Par jo kaam ho gaya aur bill nahi ban sakta (unbilled) ₹600 se ₹980 crore, jo client ne rok rakha hai (retention) ₹320 se ₹520 crore, aur jo advance pehle mila tha ₹900 se ghat ke ₹620 crore. Chaaron jodo: pehle saal 850+600+320−900 = ₹870 crore, agle saal 1,010+980+520−620 = ₹1,890 crore. ₹1,020 crore balance sheet mein chala gaya, aur revenue badha sirf ₹900 crore — yaani poora growth aur thoda zyada. Days mein 75.6 se 135.2. Jo ek line screener dekhta hai, wahi ek line theek thi.
- A receivable is unconditional; a contract asset waits on a milestone or somebody else's certification.
- Retention money is a share of every bill held back until completion and the defect liability period expires.
- A mobilisation advance flatters working capital at the start of a project and unwinds through its middle years.
- Read receivables, unbilled, retention and contract liabilities as one number, in days of revenue.
- Unbilled revenue rising faster than revenue is either billing timing or an uncertified measurement — and only one of those reverses on its own.
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