When it comes to late payments, there is no industry more notorious than the construction industry. Contractors and suppliers often deal with payment delays and even nonpayment, especially for huge and complex construction projects. Frequent payment issues have a big impact on a company’s cash flow – and, sadly, working with negative cash flow is a reality that construction companies face.
Poor accounts receivable management is one of the reasons for cash flow issues in construction. The industry has a long period between billing and collection largely due to the nature of construction projects. If a company fails to stay on top of their receivables, sooner or later, it will experience a cash crunch and will have to depend on cash reserves.
Prioritizing accounts receivable management gives several benefits to a construction company. As it reduces the cases of accounts that are way past due and the risk of negative cash flow, a construction company will be able to improve its cash standing, pay employees on time, and fund its growth.
Accounts receivable management is not just sending reminders to customers every now and then. It involves optimization of the collection process, finding patterns of bad debts, and identifying the reasons for nonpayment. Here are some of the best practices for accounts receivable management that construction companies must follow.
To be able to control your receivables, you need to have a solid foundation of guidelines in your credit policy. One of the main goals of a sound credit policy is to ensure companies are not extending credit to clients who cannot afford to pay them back. Thus, one of the first things companies need to examine is a client’s credit-worthiness.
Vetting a client’s credit-worthiness is one of the things a company should do on day one. This will involve checking their credit rating and asking for references. The goal is to determine if the client has a history of paying on time. If the client says they do not have references, such as when they are a new company, it is not necessarily a red flag, but companies need to pay close attention. One way to reduce the risk of bad debt in this instance is to ask for a significant deposit.
Companies also need to recognize signs of financial trouble. If a client has recent repossessions or foreclosures, a company should think twice before extending credit.
Record-keeping and documentation are an integral part of the accounts receivable management process. Having a centralized location for accounts receivable data ensures the accuracy of the information that companies can refer to when needed. If the data is inaccurate, such as when a physical or email address is wrong, an invoice may be sent to the wrong recipient, causing the payment to be delayed.
It is important to keep records of all contacts with a customer. This includes questions and concerns regarding their accounts. These should be recorded with the date it happened, the situation, and the resolution. Analyzing this data allows companies to refine their credit policies and address similar problems in the future.
Working on several projects and with multiple clients makes construction companies prone to inefficiencies. Without adequate staff members to handle billing and collection, sending invoices will be slow, and the collection will be even slower – not to mention the risk of human errors when entering data or referring to outdated information. To prevent these issues, companies can streamline the billing and collections process via automation.
Companies can use dedicated software to handle sending invoices, payment demands, pre-liens, and follow-up emails. This software can automatically identify accounts that are at risk and suggest the proper course of action. In addition, streamlining the collection process also involves adding more payment options that are more convenient to clients, such as online bill payment or credit card payment.
Accounts receivable management in the construction industry is rarely straightforward, but that doesn’t mean companies can’t protect their payment rights. By employing the best practices outlined above, companies will be able to improve cash flow and get paid faster.
About the Author:
Chris Woodard is the Co-Founder of Handle, where they build software that helps contractors, subcontractors, and material suppliers secure their lien rights and get paid faster by automating the collection process for unpaid construction invoices.