Recently the Sunday Edition of the Washington Post had the following headline, "Region's Builders Rein in Visions- With Real Estate Downturn Projects Scaled Back, Scrapped." Lenders are tightening credit standards. Time to hunker down and manage costs and to think cash flow not net income!

What is cash flow and how does it differ from net income? Simply put cash flow is the result of netting all sources of cash flowing into the business against all sources of cash flowing out of the business.

While both cash flow and net income are useful financial metrics, each reports the "timing" of transactions differently. Cash-basis accounting records construction revenue when cash is collected. Expenses are recorded when paid. If cash collected exceeds cash paid out positive cash flow is the result.

Under accrual-basis accounting revenues are recorded when earned and expenses when they are incurred. If revenues exceed expenses net income is the result.

An example will help show the difference between cash-basis and accrual-basis accounting. Assume that B Contractors signs a contract for $90,000. After the first month B Contractors has completed 1/3 of the contract and bills the customer $30,000 and records $30,000 of revenue earned. Also during this first month B Contractors incurred and recorded various expenses amounting to $25,000. Under accrual-basis accounting, the firm has earned net income of $5,000. But under the cash-basis method zero revenue is recorded and, in fact, no revenue will be recorded until a check is received from the customer. Lets further presume that $20,000 of the above $25,000 of expenses has been paid by check. Under the cash-basis method of accounting B Contractors would be showing a loss for the first month of $20,000.