The construction industry is the leading industry when it comes to late payments. Getting paid for work rendered, especially in huge and complex construction projects, is rarely direct and straightforward. Working with a negative cash flow most of the time is a reality that contractors face.
One of the most common issues in cash flow for construction companies is poor accounts receivable management. Losing grip of your receivables can bleed any company dry, leaving business owners to depend on cash reserves to stay afloat.
Importance of Proper Accounts Receivable Management
Construction business owners may not see the urgency of optimizing the efficiency of the collections process. After all, closing sales and starting construction projects get the most focus, resulting in contractors setting accounts receivable management aside. If you’re guilty of A/R mismanagement, sooner or later, you’ll feel the cash crunch. Taking a closer look at accounts receivable will help you identify opportunities for improving your cash flow.
Since the construction industry involves spending significant capital on equipment and materials, the risk of working with a negative working capital and negative cash flow is high. In an industry where the period between billing and collection is lengthy, it’s important to look into effective cash flow strategies to avoid payroll issues, bad debts, and stunted business growth. One such strategy is managing accounts receivable well.
Prioritizing accounts receivable management benefits your company in several ways. It reduces the instances of delinquent accounts and the risk of negative cash flow. In turn, you are less reliant on cash reserves, improving liquidity and allowing more opportunities for growth.
Actionable Accounts Receivable Management Practices
Accounts receivable management involves more than simply reminding customers when payment is due. It also involves identifying patterns of bad debts, determining customer reasons for non-payment, and optimizing the entire process for efficiency.
Here are some of the best practices for accounts receivable management in the construction industry.
1. Examine your client’s credit rating before closing the deal
Vetting your clients through their credit rating should be a part of your business process early on. Closing a lot of deals could amount to nothing if you did not research your customers’ credit history. If some of your potential clients are not known for paying dues on time, your company may not be able to collect for your hard work.
Extend credit only to individuals and businesses that you’re confident will be able to pay. In addition, researching your clients’ credit history and credit rating will let you make reliable and realistic credit terms and payment plans for them. This reduces the risk of bad debts and improves your collection rate.
2. Practice good record-keeping and documentation
Proper documentation and record-keeping is the foundation of accounts receivable management. Creating a centralized location for your accounts receivable data ensures the accuracy of all pertinent information needed for the payment collection process.
For instance, wrong physical or email addresses can lead your invoices to be sent to the wrong recipient, causing delays on your customer payments.
You also need a regular audit of your customer accounts. This includes the credit payment terms as well as documentation of the communication between you and the client. Analyzing this data, especially those that refer to issues regarding payment, allows you to refine your credit policy and pinpoint problems before they arise
3. Automate your accounts receivable process
Managing several customer accounts using spreadsheets is not the most efficient way to work on accounts receivable. If you are dealing with several clients and construction projects, handling multiple spreadsheets makes you prone to outdated information or data entry mistakes. Automation removes these issues entirely and eliminates this time-consuming manual activity.
There are several parts of the accounts receivable process that you can automate. For example, you can use a dedicated software that connects to your accounting system to automatically identify at-risk invoices. You can also automate sending invoices, payment demands, preliminary notices, and follow-up emails when the due date has passed.
Another way to improve your accounts receivable management is the use of online bill pay options. This allows your customers to pay through a method most convenient to them, reducing friction in the payment process.
The construction industry may be marred by payment delays, but that doesn’t mean you can’t protect your business from the risks of working with a negative working capital. Prioritize accounts receivable management and you will see significant improvement in your cash flow.
Aki Merced is the content manager at Handle.com, where they build software that helps construction businesses get paid faster by automating the collection process of unpaid construction invoices.