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4 Tips for Effectively Managing Accounts Receivable in Construction

Updated: Oct 29, 2023

Managing accounts receivable in your construction business can be tough. The construction industry is notorious for delayed payments and non-payments. These problems can put significant financial stress on your business. How well you manage accounts receivable can often decide whether your firm thrives or struggles.

effectively-managing-accounts-receivable-in-construction

All contractors know that accounts receivable play a key role in construction accounting. This element of finance can deeply impact a company's cash flow. Furthermore, it can expose the business to higher financial risks. If you own a construction business or are a supplier, keeping a close eye on customer accounts is necessary. This is particularly important for accounts that are often late on payments.


Becoming better at tracking and chasing unpaid invoices is crucial. This improvement is key to enhancing your accounts receivable management.


Now, we're going to discuss expert tips. These will help you better manage accounts receivable in the construction industry.



What is Accounts Receivable in Construction?

What does "accounts receivable" mean for the construction industry? Many construction firms offer credit for part of their work. When a job is done and your company has given credit to clients, the money owed is "accounts receivable."


Accounts receivable is an asset. It shows a company's ability to meet short-term financial commitments without needing more cash. In simple terms, it's the money you will extract later on and use to pay your staff, handle daily costs, meet payroll, and help your company grow. That's why it's so important to collect payments quickly and in a way that benefits your firm. If you want a deeper understanding, you can check out our blog post titled: "Construction Accounts Receivable Definition.



4 Proven Strategies for Effective Accounts Receivable Management

Having a solid credit policy is key. It can protect contractors, subcontractors, and suppliers from unnecessary financial risks. If payment isn't collected promptly upon job completion, you are basically giving your client a loan. It's vital to lay out the terms of credit extension and detail what happens if these terms aren't met.


Your credit policy should explain your business's billing procedures. It should also explain how you collect overdue accounts. It's crucial to have procedures for collecting money. This includes penalties for late-paying accounts.


A credit policy sets clear expectations from the start. It encourages clients to take their obligations seriously. It also encourages them to pay on your terms. For more information on late payments, check out our blog post titled "How to Handle Late Payments.”


Incentivize Early Payment

Everyone appreciates a good deal. Rewarding those who pay early can greatly improve cash flow and reduce the risk of non-payment. Here are a few ways to encourage early payments:


1. Discounts and bonuses

2. Free service maintenance

3. Future credit


A popular technique is to offer early payment discounts. For instance, you could include "1% 10 Net 30" in invoices. This means the invoice is due in 30 days. But, if the client pays within 10 days, they get a 1% discount. This can help improve your cash flow and get repeat clients. However, remember that early payment incentives can affect your profit. So, when you offer discounts or bonuses, make sure to account for this.



Automate Your Invoicing Process

In today's digital age, manual invoicing has become an outdated practice. It's time-consuming and prone to errors, which can negatively affect your company’s financial health. Thankfully, contractor accounting software is revolutionizing the construction sector, remedying these issues. By leveraging technology, the invoicing process becomes more accurate, timely, and efficient. As soon as projects are completed, invoices can be dispatched automatically, eliminating the need for monthly cycle billings.


For more practical invoicing tips, check out our blog post, How to Invoice as a Contractor: Practical Tips.


The construction industry often has long gaps between billing and payment collection. If accounts receivable aren't managed well, these long gaps can lead to financial trouble. This could seriously hurt your construction company's cash flow. It could even force the company to close.


Maintain Regular Communication with Clients

Keeping in touch with your clients is crucial. You should remind them regularly about their payment schedules and any upcoming due dates. This can encourage them to pay faster.


There are many ways to stay in contact with your clients. You could send them emails with the details of their accounts. These emails can also include a friendly reminder about upcoming due dates. Phone calls are another option. A quick call can serve as a reminder and give your clients a chance to ask any questions they might have about their accounts.


In today's digital age, SMS reminders are also a handy tool. A short text message can effectively remind clients about their payment obligations. It's a quick and easy way to get the message across.


Remember, maintaining regular communication isn't about pestering your clients. It's about building strong relationships. By providing clear and consistent information, you're helping your clients stay on top of their payments. This can lead to better cash flow for your business. Plus, it can help cultivate a strong and positive business relationship with your clients.


Can Construction Cost Accounting Assist in Managing Accounts Receivable Effectively?

Absolutely! Our team at CCA includes experienced accounts receivable (A/R) specialists. We offer customized solutions that fit your construction business's unique needs. We have a reliable workflow for issuing invoices to credit-worthy clients. Plus, we keep a close eye on unpaid invoices and make sure you get paid for your hard work.


We put strategies in place to handle customers who didn't pay. Our goal is to help you keep a healthy accounts receivable balance on your balance sheet. and track your business performance using key performance indicators Accounts Receivable KPI.


You can start a free consultation with us. We'll show you how we can improve your accounts receivable management. Remember, effectively managing accounts receivable is key to your construction business's growth and success.


In Conclusion

Think of it like constructing a well-built structure - clear payment terms are the foundation, early payment rewards act as the pillars, automated invoicing is the roof that saves you from unexpected issues, and regular client communication illuminates the whole building. On top of this, using professional services like ours at Construction Cost Accounting is like hiring a skilled architect - a game changer in perfecting your design.


Here's the bottom line: enhancing your accounts receivable management is more than just ensuring you get paid on time. It's about setting up robust systems that let you concentrate on the heart of your business - constructing great buildings.


At Construction Cost Accounting, we're ready to roll up our sleeves and help you lay the foundation for stronger accounts receivable management. Start a free consultation with us today, and together, we'll blueprint your way to financial stability in the construction industry. With the right tools and team, managing accounts receivable effectively becomes a piece of cake!

accounts receivable in construction

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