4 Ways to Improve Construction Accounts Payable Process
- Hannah Nguyen
- Mar 14, 2022
- 4 min read
Updated: Jul 14, 2024
As a contractor, we understand you may show no interest in accounts payable, 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.
Table of contents
What is Accounts Payable in Construction?
Accounts payable are 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 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 regularly, but these invoices often sit around unpaid for a short period. 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
1. Maintain a Single Point of Entry for All Invoices
To keep track of bills easily, it's a good idea to ask all your suppliers to send their invoices to one specific email address that you set up just for this purpose. This way, all the invoices are in one place, making it easier for you to see if you've received them all. If you ever lose an invoice or need to look at one again, you can quickly find and print it out from this email address. This helps make sure that you don't miss paying any bills on time because you'll have all the invoices organized in one spot.
2. Go Paperless
It's a good idea to use email for sending and receiving invoices instead of paper. Paper can get lost easily, and it's hard to keep track of all the paper bills and checks. When you use email, your invoices are safe in your inbox, and you won't lose them.
Also, using a computer program for construction accounting can help a lot. This program lets you save all your invoices on your computer. As soon as you get a new invoice, you can put it into the program. This way, you won't lose any bills, and you'll always know how much your construction job is costing you. You won't have to waste time looking for lost invoices anymore.
3. 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 them 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.
4. Automate Your Accounts Payable with Construction Accounting Software
In the construction industry, automating the payment process is a key step towards efficiency. Automated payment systems streamline tasks by scheduling payments, reducing manual errors, and ensuring timely compliance with financial regulations. This not only saves valuable time but also minimizes the risk of errors in payments. Moreover, these systems offer real-time financial insights, which are essential for informed decision-making. By automating, construction companies can ensure that all transactions are handled consistently, payments to suppliers and contractors are made on time, and financial data is always up-to-date and readily accessible.
The integration of accounts payable systems with project management tools marks a significant advancement in managing project finances. This integration provides a holistic view of a project's financial health, allowing for better budget management and financial planning. Project managers gain real-time visibility into expenses, helping them track budget variances and make proactive adjustments. This unified approach ensures efficient communication between finance and project teams, leading to more strategic resource allocation and improved forecasting of future expenses and revenues. Ultimately, this integration streamlines financial operations and enhances the overall effectiveness of project management in the construction sector.
Conclusion
Improving the accounts payable process in construction is not just about paying bills. It's about leveraging technology, managing relationships, and ensuring compliance. By adopting these strategies, construction companies can achieve financial efficiency, project success, and long-term growth.
Tracking and paying accounts payable accurately and promptly is essential for any construction business to help manage its 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.
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