Updated: Jun 28
As a contractor, we understand you may show no interest in accounts payable and overpaying bills is often the last thing a business owner wants to care about. However, accounts payable are crucial as these costs drive your income. Managing accounts payables, including ensuring accurate records and quick payments is the key to all construction companies staying well in business. Improving the management of construction accounts payables benefits you in several ways.
In this article, we’ll walk you through easy techniques that help you deeply understand the importance of the accounts payable process and how to improve it.
What is Accounts Payable in Construction?
Accounts payable is all expenses a company owns its vendors and subcontracts. Accounts payable are considered short-term liabilities. These accounts include all of your costs, such as overhead, direct and indirect expenses. They are represented on the company’s balance sheet as the snapshot of a company’s financial health.
Typically, in construction, business owners often wait to receive payment from customers before paying their bills. In other words, you probably don’t want to pay for project bills out of pocket until you receive payment from your customers. This means you’ll still receive invoices for overhead costs and general business expenses on a regular basis, but these invoices often sit around unpaid for a short period of time.
Similar to construction accounts receivable, your number of outstanding bills will fluctuate over time.
Importance of the Accounts Payable Management
Managing accounts payable means ensuring that all invoices have been accounted for and that everyone gets paid in a timely fashion and accurately. AP is also a core in construction bookkeeping and accounting because:
Track supplier's and subcontractors' information to ensure payments are properly approved and process payments
Keep accurate and up-to-date books to ensure cash forecasts are accurate and working capital can be optimized
Make sure suppliers are paid on time and boost relationships to gain favorable payment terms and discounts
Prevent duplicated payment mistakes and fraud
How to Improve Your Construction Accounts Payable
Maintain a Single Point of Entry of All Invoices
Encouraging suppliers to send invoices to a single designated email address make it easier for you to track if the invoice has been received. This way also allows you to recall or reprint invoices when they go missing, so all bills can get paid on time.
Ensuring your invoices are submitted via email because papers easily get lost. Additionally, it’s hard to keep your paper invoices and cheques organized.
Taking advantage of construction accounting software enables you to save digital copies of your invoices. Entering your invoices in the accounting system as you receive so you’ll never be stuck searching for an invoice or left in the dark about your job cost again.
Keep Track of the Terms of Your Invoices
The terms of your invoices are the amount of time that vendors or suppliers give you to pay an invoice. Some suppliers might even offer you discounts for submitting a payment early. If the terms require you to pay the invoice within 90 days, you need to submit payment within that timeframe so you don’t incur a penalty. Here are some of the most common terms you often see, please bear it in mind if you are unfamiliar with them:
PIA: Payment is due before the work is completed
X MFI: Payment is due on the X of the month following the invoice date (for instance 10 MFI = Payment due on the 10th day of the month following the invoice date)
Net X: Payment is due X days after the invoice date (ex. Net 30 = payment due to 30days after invoice date)
EOM: Payment is due at the end of the month.
Automate Your Accounts Payable with Construction Accounting Software
The best way to reduce the chance of missing invoices or outstanding payments is to automate your accounts payable process. By applying technology, you save time and resources, better manage hundreds of invoices associated with each project. You easily import accurate reports, giving you a clear picture of your cash flow, bottom line, and operating costs.
Tracking and paying accounts payable accurately and in a timely manner is essential for any construction business to help manage their cash flow. We are Construction Cost Accounting. We are a large team of financial experts and experienced bookkeepers. Having expertise in construction and being well-trained in automated software, we help you improve your accounts payable at a fraction of the cost. Start A Free Consultation here.