Meet John, a construction business owner who has been in the industry for over a decade. John takes pride in delivering quality projects on time and within budget. However, he often finds himself struggling with his cash flow, despite having multiple projects going on at once. Late payments, unpaid invoices, and bad debts are some of the issues that keep him up at night.
John knows that managing cash flow is crucial in the construction industry. Having cash on hand is essential to pay suppliers, subcontractors, and employees, and to invest in new projects. But managing cash flow is easier said than done, especially regarding credit and accounts receivable management.
John has taken some measures to improve his credit policy and accounts receivable management, but he still faces challenges. For example, he finds it hard to determine which clients are creditworthy, how much credit to extend, and how to enforce his credit policy. John also struggles with timely invoicing and collection, which affects his cash flow.
John's situation is not unique. Many construction business owners face similar challenges when it comes to managing their cash flow. That's why having solid procedures in place for credit policy and accounts receivable management is essential.
This blog post will explore how a company's credit policy and accounts receivable management are connected.
We'll also dive into the basics of credit policies and how you can create ones that work best for your business. Get ready to take control of your cash flow and keep your construction projects on track!
Table of Content:
The Relationship Between Credit Policy and AR Management
Is your construction business struggling to manage its cash flow? Did you know that having a solid credit policy and accounts receivable (AR) management process can help? Let's explore how these two aspects are connected:
What Is A Credit Policy?
A credit policy is a document that outlines the terms and conditions for extending credit to customers. It includes details such as credit limits, payment terms, interest rates, and penalties for late payments.
The purpose of a credit policy is to protect your business from financial losses that may arise due to non-payment or delayed payments. It is a crucial document in your business relationship with your customers.
How a Credit Policy Can Help Construction Businesses
Construction is an industry with a long sales cycle and high risks. Particularly, slow or non-payments When your customers don't pay on time, it drives up your carrying costs and makes it hard for you to get cash. That is why you will need a strong credit policy to speed up payments, maintain positive cash flow, and reduce the amount of bad debt.
Here are four ways a credit policy can help your construction business thrive:
Reduce the risk of non-payment: A credit policy helps you know how to assess the creditworthiness of a company. This helps you avoid extending credit to those who are unlikely to pay, reducing the risk of bad debt.
Improve cash flow: With clear payment terms set and enforced in your credit policy, you can make sure you get paid for the work you've done. Reducing the risk of bad debts and negative cash flow.
Maintain good relationships with your customers: A credit policy sets clear expectations for you and your customers. This helps you communicate more effectively and foster good relationships.
Increase transparency and accountability: A credit policy ensures that everyone knows what is expected of them. Therefore, reducing the risk of misunderstandings. This can also help your financial management more clear and more consistent.
What Is Accounts Receivable Management?
AR management involves collecting payments from customers who have been given credit. It includes tasks like sending invoices, following up, and collecting payments. Its goal is to ensure payments are received on time and in full.
The Relationship Between Credit Policy and AR Management
Your credit policy and accounts receivable management process are closely interconnected. In fact, a solid credit policy is the first step in a good strategy for managing accounts receivable.
A credit policy can streamline your AR management process and reduce delays in payments and collection efforts.
On the other hand, if you don't manage your AR well, it can be hard to stick to your credit policy and increase the risk of bad debts.
To ensure that your credit policy and AR management processes work together effectively, you should:
Coordinate communication and efforts between the credit policy development team and the AR management team
Regularly review and update both your credit policy and AR management processes
Provide training and support to staff involved
Essential Sections When You Make a Credit Policy
When it comes to creating a credit policy for your business, there's no one-size-fits-all approach. Your credit policy should be tailored to fit your specific financial goals and needs. So, it's essential to understand how extending credit can benefit your company.
Here are some key sections that you should include in your credit policy to ensure it's effective:
Credit Limits: How much credit are you willing to extend to each customer or customer segment?
Payment Terms: What are your expectations for payment after the invoice is issued? Will you accept net 30, 60, or 90 days or another term?
Payment Methods: What payment methods will you accept, and what methods will you not accept?
Billing Procedures: How will you handle the invoicing process? What will be included in the invoice?
Policies and Procedures for Dealing with Past-Due Payments: How will you handle customers who don't pay on time? Will you charge late fees or take other action?
4 Steps For a Good Credit Policy
Creating a credit policy for your construction business doesn't have to be complicated. Here are some steps you can take to create a credit policy that works for your business:
Evaluate your current credit practices
Define/ Update your credit policy
Communicate your credit policy to your customers
Enforce your credit policy consistently and fairly
Revamp Your Construction Business' Credit Management with AR Automation
Looking to level up your construction business' credit management process? Accounts receivable (AR) automation may just be the game-changer you need. By automating your AR processes, you can save time, minimize errors, speed up payment cycles, and boost your cash flow.
If you're ready to streamline your credit management processes, CCA has got you covered. As a bookkeeping service firm, we offer AR services that can automate your entire AR workflow, from invoicing to payments.
Our tailored solutions are designed specifically for construction businesses and can provide you with the most accurate insights into your cash flow. Plus, we'll help you identify areas where you can improve your credit policy for long-term success. Say goodbye to chasing late payments and hello to growing your business with CCA.
In Conclusion,
Controlling cash flow is critical to the success of any construction company. It's not just about having cash in the bank but also about maintaining a healthy cash flow. As we've seen through John's story, late payments, unpaid invoices, bad debts, and other challenges can hinder a construction business owner's ability to manage their cash flow effectively.
That is why having a solid credit policy is crucial. By implementing effective credit policies and AR management, you can avoid cash flow issues and maintain healthy financials. This, in turn, allows you to focus on delivering quality projects on time and within budget. In short, having a sound credit policy is a win-win for both you and your clients.
At CCA, we understand the pains that come with the construction industry. That's why we offer AR services that free you up from the entire workflow, and provide you with accurate insights into your cash flow. Trust us to navigate the ups and downs of your financials, and help you identify where you can improve your credit policy for long-term success. Don't lose sleep over cash flow concerns - contact us today to see how we can help your construction business thrive.