November 3, 2020 Managing Accounts Receivable in Construction

7 essential tips to manage accounts receivable in the construction industry.

Every industry runs into different challenges when it comes to managing accounts receivable.

Operators in the construction industry recognize that accounts receivable can get complex and frustrating. This can quickly stack up to a problem the sum of which is greater than its parts, causing problems so severe that they may even force construction companies out of business.

At the end of the day, there will always be some customers who make late payments. However, there are a number of steps that you can take in order to make this an unlikely and uncommon occurrence, and thereby reduce any strain on your cashflow and any trickle-down consequences that might cause.

Let’s check out our seven insights and tips to help you manage accounts receivable in the construction industry without breaking a sweat.

Tip #1 – The Early Bird Gets the Worm

Offering early payment incentives is one way to encourage your construction clients not just to pay on time, but also to happily pay early.

Markdowns do affect your margins, but the benefits of receiving less late payments generally significantly outweigh this caveat. The net benefit presents itself in available cash flow volume that can have a real impact on the business in every way versus a micro-optimization of your profit margin at the cost of long-term potential.

By automating your invoicing systems with a solution such as InvoiceSherpa, your business can ensure that invoices are sent as soon as possible, giving customers plenty of time to make their payments.

The more streamlined you can make your process, the more your customers will be willing to make their payments promptly.

Even the smallest thing, such as an invoice reminder, or a thank-you note after the fact, can help bring your company back to the forefront of the customer’s mind.

Don’t rely on your own ability to follow through with laggard customers. Instead, pool your efforts and prepare systems that can automatically do the work for you so you can focus on your business while minimizing inertia and mistakes.

Tip #2 – The Customer’s Perspective

Having a deep understanding of the accounts payable process and how the client side of things works can help you design systems that run smoothly for all involved parties.

The reason a customer might not pay on-time isn’t always nefarious; after all, life can get in the way and having some empathy regarding your clients’ reality is a sure way to create effective messaging and mechanisms that gently follow up without causing any unnecessary friction.

Indeed, late payments are sometimes a simple matter of disorganization or miscommunication. Since you don’t control your clients’ business, the onus is on yours to provide the rails and infrastructure required to reduce those occurrences and increase the likelihood that everything will run smoothly.

Ensure that your invoices are correct and include all the information necessary for the client to make prompt payment.

As you do this, keep the client’s preferred method of payment in your mind’s eye. By offering the easiest and most flexible options to your customers, you make it easier for them to pay you on time. Integrated payment buttons inside of invoices are a fantastic way to achieve this.

Tip #3 – Don’t Forget About the Rules

As a business in the construction industry, there are laws and policies in place to protect you.

Be sure to understand how to use these laws to your advantage and protect yourself from significant financial risk.

There are different laws depending on where you’re located, which can ensure prompt payment and impose penalties on customers who make late payments.

Being well-versed on these legal matters will help you stay protected and one step ahead of any sinkhole you might ever come across.

Tip #4 – Stay On Top of Your Records

Stay on top of your customer data and contact information.

The smallest mistake like a typo in a customer’s address, or a name spelled wrong, could cause your invoicing to be delayed by weeks or months.

Without forgetting that important data about your customers’ payment terms and credit limits should be verified on a consistent basis to ensure they have the ability to pay you.

There’s nothing more frustrating than finally reaching a difficult client only to find out they do not have the means to do good on their invoices.

Tip #5 – Keep A Tidy Credit

Construction projects are a huge undertaking, and as such, the financial orchestration permitting their creation is quite involved and deliberate.

For that reason and so many others, it’s crucial for businesses to keep an eye on their credit approval processes on a rolling basis.

If you’re using lenient credit habits to make more sales, you may come across new elements in the future that were previously too obscure to foresee, but are now too late to avoid.

Establish a credit approval process with clear guidelines and regulations, and review it regularly to see if any circumstances have changed.

Why Is It So Important to Properly Manage Your Accounts Receivable?

Proper management of your business’ accounts receivable takes time and effort.

In the construction business, in particular, it has a monumental impact on the project, its timeline, its eventual net costs, and your ability to efficiently manage it accurately and reliably.

Many construction businesses tend to deal with cash flow problems, related to problems with their accounts receivable. According to a TSheets survey, only 13% of construction companies said that they didn’t ever struggle with cash flow.

That means that the overwhelming majority of them have, at some point, felt a business impairment from unhealthy cash flow. On average, it takes them over 30 days after the completion of the project to get paid, putting huge strain on rolling cash flow funds without a reliable way to know exactly when costs will be balanced.

Putting a focus on proper management of accounts receivable in construction is absolutely crucial to succeed. In order to avoid cash flow or collections issues, making this a priority can ensure that your business stays afloat in the long run.

If your business uses cloud accounting software to manage its books, pairing complimentary software like InvoiceSherpa can amplify your ability to automate the most error-prone processes in your business while creating a considerable cash flow benefit that you can use to reinvest in your business and achieve your goals.

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