Updated: Jun 20
The construction industry is notorious for payment delays and nonpayments. The difference between a successful construction business and a struggling one often boils down to proper accounts receivables management.
Contractors recognize that accounts receivable is an extremely crucial part of construction accounting. It has a huge impact on the company’s cash flow and exposes them to greater financial risks. Given this, construction business owners and suppliers should stay on top of customer accounts, especially late-payment clients. Tracking and following up on outstanding invoices become a critical skill to improve accounts receivable (AR).
Here are some tips on managing accounts receivables in construction.
What is Accounts Receivable in Construction?
Most construction companies operate by allowing a portion of their trades to be on credits. When your company extends credit to clients for a job completed, the amount owned is referred to as “accounts receivables”.
Accounts receivable are recorded as an asset so it measures a company’s liquidity to cover short-term obligations without additional cash flow. It is a sort of cash inflow in waiting. In essence, AR is where you withdraw money to pay your employees, cover your company’s daily expenses, payroll, and grow your company. This is why payments must be collected in a timely manner and in a way that is beneficial for your construction company.
Manage Accounts Receivable in the Construction
Account receivable management involves improving the collection process efficiency, identifying the reasons for payments, and being proactive in reminding clients about outstanding and overdue accounts.
Clearly State Your Terms and Past Due Penalties
A sound credit policy is crucial to protect contractors, subcontractors, and suppliers from assuming financial risk due to payment delays. If you do not collect money as soon as your job is done and accepted, then you are basically giving your client a loan. While there’s nothing wrong with giving credits, your need to clearly define the terms and arguments of your credit and what consequences occur if your client fails to meet these terms.
In a credit policy, you should outline your business’s billing procedures and include the steps for collecting overdue accounts. Additionally, you’ll need to have money collection procedures in place, including past due penalties, for dealing with late-paying accounts.
With a credit policy, it’s a good idea to set expectations right from the start so your clients are likely to treat their obligations more seriously and pay you on your terms.
Systemize the Incentives for Early Payment
Everyone likes freebies or rewards so you can use this mindset to make your clients actually want to pay early and on time. Providing early payment incentives for clients can be a good motivator. There are several ways contractors can approach this effectively:
Discounts and bonuses
Offer, for example, free service maintenance
Future credits for early payment
A common technique is using early payment discounts. For example, you can put something like “1% 10 Net 30” in invoices, which means the invoice is due after 30 days, but the client will receive a 1% discount if they pay within 10 days. This also helps improve your bottom line, but it will increase the chance of turning a client into a repeat one. This policy can be useful for improving cash flow or alleviating the risk of not being paid, especially with a large invoice amount.
Despite the usefulness of the practice, take note that early payment incentives are potent in encouraging fast payment, but that discounts somehow affect your bottom line. So you have to take this into your account when it comes to using discounts or bonuses.
Automate the Invoicing Process
Gone are the days when snail mail was the only way to land invoices on the client’s desks. Manually sending invoices is time-consuming, and error-prone, causing a negative impact on a company’s bottom line. However, today contractor accounting software is transforming companies in the construction sector and tackling all the mentioned shortcomings. By leveraging software, the invoicing process is more accurate, timely, and streamlined. As soon as the projects are completed, the invoices can be sent automatically, so there’s no need to stick to monthly cycle billings.
As mentioned above, the nature of the construction industry is such that long periods exist between billing and collection. Without effective accounts receivable management in place, this long period can stack to a catastrophe that hurts the construction company's cash flow and even force it out of business.
Construction Cost Accounting Will Give You Fast, Efficient, and Automated Accounts Receivable Management
Our team of experienced A/R specialists provides customized account handling solutions that meet your construction business demands. We implement reliable methods of extending credit to credit-worthy clients and keep a close watch on unpaid invoices. Start a Free Consultation to see how we take your accounts receivable to the next level.