Using AR Metrics to Predict Cash Shortfalls in Projects
Cost Construction Accounting- Apr 21
- 5 min read
Cash flow issues are prevalent in the construction business. Projects may appear successful on paper, but may still face financial difficulties due to late payments, retainage, or poor billing. Understanding how to monitor and interpret AR metrics (accounts receivable performance indicators) will help construction firm owners and project managers foresee and avoid cash shortages.
This article gives a thorough description of how to use AR metrics successfully. It also offers practical tools and methods for assessing financial health in real time, which are especially useful for contractors and business owners who are handling many projects at once.
What Are AR Metrics and Why Are They Important?
Key performance indicators (KPIs) called AR measures are used to figure out how well a company is doing with its accounts receivable. These metrics are very important for construction companies because payments are often spread out, late, or tied to project goals. They show when and how cash is expected to come into the business.
By keeping track of AR data, you can:
Late payments and clients who pay slowly
Unbilled income and how it affects cash flow
Possible gaps before they affect payments to employees or vendors
Trends in collection for all projects and clients
By knowing these measures, contractors can make plans ahead of time instead of reacting to financial stress after it has already slowed down operations.
Key AR Metrics for Contractors to Monitor
Several AR metrics are particularly important in the construction industry due to the unique payment structures and billing cycles:
Metric | Purpose | Warning Signs |
AR Aging Report | Categorizes outstanding invoices by age | High volume of invoices >60 days past due |
AR Turnover Ratio | Measures how efficiently receivables are collected | Lower turnover indicates collection inefficiency |
Days Sales Outstanding (DSO) | Tracks average collection time | DSO above 45–60 days suggests slow cash inflow |
Retainage Balance | Tracks money withheld until project completion | High retainage limits working capital availability |
Percentage of Unbilled Work | Measures work completed but not invoiced | High percentage delays recognition of incoming cash |
These metrics are foundational to any accounts receivable analysis process and serve as a cash forecasting mechanism for construction companies.
How AR Metrics Can Predict Cash Shortfalls
AR metrics provide early warning signs of potential cash flow disruptions. Here is how to use them effectively:
1. Review the AR Aging Report Weekly
Most businesses check aging once a month, but reviewing it once a week is a more proactive method. Contractors should pay extra attention to bills that are more than 30 days past due and follow up on any balances that hit 60 or 90 days past due.
If you keep missing payments, it could mean that there is a problem with billing, getting approvals from clients, or project disputes. It can also be a sign of bigger problems in the industry, like regular delays or cash flow issues for clients.
2. Calculate the AR Turnover Ratio
This ratio measures how frequently the business collects its receivables over a given period. A lower turnover rate may suggest ineffective collection processes or lenient credit terms.
Formula:
AR Turnover Ratio = Net Credit Sales / Average Accounts Receivable
If this ratio is declining, it is critical to review billing practices and client communication.
3. Use Days Sales Outstanding (DSO) for Forecasting
DSO helps forecast when cash is likely to be received. For instance, a DSO of 60 means it takes an average of 60 days to convert a sale into cash. If the company has upcoming payroll or vendor obligations, understanding the DSO provides context for whether current receivables will be liquid in time.
4. Monitor Retainage Separately
Usually, 5–10% of the contract value is held back until the project is finished and approved in full. Even though it's legally income, it can't be used right away to pay for running the business. Contractors should keep a separate log for tracking retainages to make sure they don't include this amount in their estimates of how much cash they have on hand.
5. Track the Percentage of Unbilled Work
If work is finished but not billed, there may be a delay between the progress of the job and the arrival of cash. This measure is especially helpful for finding billing mistakes that could cause payment to be late.
Common Causes of Payment Delays in Construction
Knowing why payments are late can help workers avoid or lessen the effects of late payments. Some common reasons are:
Change requests that are late or not approved
Not full or correct billing
Payment acceptance bottlenecks on the client side
Problems with the work of subcontractors that affect billing milestones
Disputes about the project's purpose or its progress
Having clear communication rules and structured billing processes can help lower these problems and make cash flow more stable.
Forecasting Cash Flow Using AR Data
Creating a cash flow projection spreadsheet that ties into AR data allows for informed planning and timely decision-making. Here is a sample format:
Week | Expected Receivables | Payroll Obligations | Vendor Payments | Projected Net Cash |
Week 1 | $25,000 | $12,000 | $8,000 | $5,000 |
Week 2 | $18,000 | $12,000 | $5,000 | $1,000 |
Week 3 | $10,000 | $12,000 | $6,000 | -$8,000 |
If projected net cash dips below zero, it is an indication that proactive steps such as accelerating collections, delaying expenses, or seeking credit may be needed.
How Contractors Can Manage AR Metrics Independently
Contractors interested in monitoring AR metrics internally can start with the following steps:
Use accounting software to generate AR aging reports weekly.
Set up dashboards that include DSO, turnover ratios, and aging trends.
Maintain a separate retainage ledger to track withheld funds.
Build a simple spreadsheet to forecast cash inflows and outflows.
Assign responsibility within the team to monitor receivables and follow up on overdue invoices.
The key to success lies in consistency, accuracy, and using the data to inform real decisions, rather than simply reviewing reports after the fact.
When to Consider Construction Bookkeeping Support
Many contractors try to handle accounts receivable data themselves, but it can be hard to keep track of all the different projects, clients, and payment schedules, which can make the process time-consuming and prone to mistakes. Professional help may be the best thing for your business if it has ongoing cash flow issues or doesn't have the resources to regularly check its AR data.
Construction Cost Accounting is an expert in keeping books for the building industry. They offer customized services to keep an eye on AR metrics, keep track of retainage, and make accurate cash flow projections. Our services are made to help builders and contractors:
Improve accuracy in AR aging reports
Track and reconcile retainage separately
Identify signs of cash shortfall before they become critical
Simplify reporting and forecasting across multiple projects
We provide insights and systems that align with your operational needs. Our goal is not only to manage the books but to help construction companies thrive by making better financial decisions through accurate and timely data.
Conclusion
For contractors who want to get a better handle on their cash flow, understanding and using AR data correctly can make all the difference. Because there are a lot of unknowns in building projects, being able to predict cash shortages ahead of time can protect operations, keep payments on time, and make sure the project goes more smoothly.
A construction company can make smart financial choices and avoid being caught off guard by keeping an eye on key indicators like AR aging, DSO, and retainage on a regular basis. Using AR metrics as a tool for financial planning is a smart move that will pay off in the long run, whether you do it yourself or get help from a construction-specific bookkeeping company.
If you want to make your building finances more organized and clear, you might want to work with a team that knows how to deal with the unique problems that come up in your industry. Don't just use AR metrics for reporting; use them to guide your plans too.
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