Business Finances

The rule

Both collection days and payment days divide a balance by the annual flow it belongs to and multiply by 365: receivables against credit sales, payables against cost of goods sold.

When it applies — and when it does not

• –Receivable days pair with annual credit sales. Payable days pair with annual cost of goods sold. Pairing a balance with the wrong flow gives a number that means nothing.
• –These are year-long averages. One slow customer barely moves them; a change in how you bill or when you pay moves them a lot.
• –Days of inventory is a third, separate figure. It belongs to the cash conversion cycle, not to either of these two calculations.

Worked contrast

days = (balance / annual flow) x 365

Common mix-ups

• –A term you agreed to, net 30 or net 60, is not the same as the days you actually wait or actually take.
• –Receivable days use sales in the denominator; payable days use cost, because that is what the payables were incurred to buy.
• –Stretching payment days improves cash on paper and strains the supplier relationship at the same time.

The rule

On a California home improvement contract the down payment may not exceed $1,000 or 10 percent of the contract amount, whichever is less.

When it applies — and when it does not

• –The cap is on what the owner hands over before work starts. Later payments follow the schedule of payments and may not run ahead of the work performed.
• –Finance charges are excluded from the contract price used for the 10 percent test.
• –CSLB applies the same ceiling to a swimming pool job. There is no separate, lower pool figure in the current rule.
• –The prohibition is in Bus. & Prof. Code section 7159.5(a)(3). Section 7159(d)(8)(C) is the all-caps notice carrying the same figures inside the contract itself.

Worked contrast

Common mix-ups

• –Whichever is less, not whichever is greater. On a large contract the dollar figure binds; on a small one the percentage does.
• –The ceiling is on what the owner pays over, not on what the contractor has already spent on materials.

The rule

Markup is measured against cost and margin against the selling price, so for the same job the margin percentage is always the smaller of the two.

When it applies — and when it does not

• –Use markup when you are building a price up from an estimate. Use margin when you are checking what share of a price already agreed is profit.
• –For the same job the margin is always the smaller of the two numbers, because the selling price is always larger than the cost.
• –Gross margin and net profit margin share the same denominator, revenue, but net profit margin also has overhead taken out of the numerator.

Worked contrast

markup = margin / (1 - margin); margin = markup / (1 + markup)

Common mix-ups

• –Adding 20% to a cost and taking a 20% margin off a price produce two different prices, and the first one leaves less profit.
• –A markup percentage and a margin percentage that read the same are not the same money.
• –Net profit margin is not gross margin; overhead comes out before the net figure.

The rule

A cost you cannot charge to one identified job is overhead: you budget it as a share of revenue, and you subtract it after job costs to reach net profit.

When it applies — and when it does not

• –Direct costs are the labor, materials, subcontractors, permits and equipment that belong to one identified job.
• –Overhead runs whether or not a job is running: office rent, insurance, license renewal, administrative pay, advertising.
• –Fixed versus variable is a second, separate split. Materials are variable, office rent is fixed, and both splits can describe the same dollar.

Worked contrast

Common mix-ups

• –A liability premium rated on payroll still counts as overhead, because it cannot be assigned to one project.
• –Gross profit stops at job costs. Net profit is what is left after overhead comes out as well.
• –Budgeting overhead as a percent of revenue is not the same calculation as an overhead rate applied to direct costs.

The rule

Accrual accounting books income and cost in the period the work happens, not when the cash moves, and an asset's cost is spread across its useful life instead of expensed at purchase.

When it applies — and when it does not

• –Cash basis is the alternative: income the year you receive it, expense the year you pay it. Many small contractors use it.
• –Percentage of completion is for long contracts. The percentage itself can be measured by cost incurred against estimated total cost.
• –Straight-line depreciation subtracts salvage value from the basis first, then divides by useful life.

Worked contrast

Common mix-ups

• –Revenue recognized under percentage of completion is not the amount billed and not the amount collected.
• –Salvage value is subtracted before dividing. Adding it, or ignoring it, gives a different annual figure.
• –Percent complete measures the work done, not the share of the contract price you have already been paid.

The rule

A business that hires gets a federal Employer Identification Number to report and deposit payroll taxes, and issues a Form W-2 to each employee at year end showing wages and tax withheld.

When it applies — and when it does not

• –A non-employee paid for services gets a Form 1099-NEC instead. For tax years beginning after 2025 that reporting threshold is $2,000, raised from the $600 figure older materials still carry.
• –Form W-9 travels the other way: the payer collects it from the payee to get the taxpayer identification number the 1099-NEC will carry.
• –California payroll needs a second registration, an employer account number with the Employment Development Department, on top of the federal EIN.

Worked contrast

Common mix-ups

• –The W-2 goes to an employee; the 1099-NEC goes to someone who is not your employee. The worker's status decides the form.
• –A CSLB license number identifies you for licensing. It is never a federal tax identification number.
• –Personal identifiers, an SSN or an ITIN, identify an individual rather than the business that files the payroll returns.

The rule

FUTA is the employer's alone, 6.0% on the first $7,000 of each employee's wages, falling to 0.6% where the full 5.4% state credit applies.

When it applies — and when it does not

• –Social Security at 6.2% and Medicare at 1.45% are paid by employee and employer alike. Federal income tax and California SDI come out of the employee's pay.
• –In California, Unemployment Insurance and the Employment Training Tax are employer contributions; SDI and state income tax are withheld from wages.
• –The 5.4% credit shrinks in a state that has not repaid its federal unemployment loans. For tax year 2025 California's credit reduction is 1.2 percent, so a California employer's effective FUTA rate is 1.8%, not 0.6%.
• –California's new-employer UI rate is 3.4 percent on the first $7,000 for two to three years. Experience-rated employers fall between 1.5 and 6.2 percent under the 2026 Schedule F+.

Worked contrast

Common mix-ups

• –The employer-only taxes are FUTA, California UI and ETT. SDI is not one of them, even though the employer is the one who remits it.
• –0.6% is a rate after a credit, not the statutory rate, and the credit is not automatic in every state or every year.
• –The 1.5 to 6.2 percent band is the experience-rated schedule; the new-employer rate is a single figure inside it.

The rule

The contractor's license bond is $25,000, and that penal sum is the ceiling on everything recoverable from it: when claims exceed it, the bond is split among claimants in proportion to their claims.

When it applies — and when it does not

• –A judgment larger than the bond is not paid by the bond. The claimant may still pursue the contractor personally for the balance.
• –On a claim for wages and fringe benefits the surety's aggregate liability is capped lower still, at $4,000.
• –An unsatisfied final construction-related judgment triggers a separate bond: one sufficient to guarantee payment of all unsatisfied judgments, filed within 90 days of the board's notice or the license is suspended.
• –The Bond of Qualifying Individual is a different $25,000 bond, required when the qualifier does not own at least 10 percent of the licensed entity.

Worked contrast

Common mix-ups

• –The bond is a fixed pool of money, not security that grows to match whatever judgment is entered.
• –California has no CSLB recovery fund for general consumer claims, so a claim does not get routed to one.
• –The Bond of Qualifying Individual answers a non-owner qualifier, not an unsatisfied judgment.

The rule

Working capital is current assets minus current liabilities, stated as an amount of money.

When it applies — and when it does not

• –Current means inside the year. Current assets are what the company expects to turn into cash within one year; current liabilities are what it expects to pay off within the year.
• –The answer is an amount of money. Dividing the same two figures instead of subtracting them produces a ratio, which is a different measure and carries no dollar sign.
• –The result can be negative. When the current liabilities are the larger of the two, working capital is a shortfall rather than a cushion.

Worked contrast

working capital = current assets - current liabilities

Common mix-ups

• –Adding the two balances is not the calculation. The liabilities come off the assets.
• –A dollar answer and a ratio answer are different measures, even though both are built from the same two balances.
• –Either balance on its own is an input to the calculation, never its result.