Cash flow is difficult to manage in the construction industry because of the irregular flow of projects and the document intensive nature of the payment process. If you want to avoid a cash crunch and borrowing to keep operations running smoothly, you need to stay on top of your accounts receivable. Here are our top five tips for managing accounts receivable in the construction industry.
ELIMINATE REASONS FOR YOUR CUSTOMER NOT TO PAY
Don’t give your customers reasons, or excuses, not to pay on time. Invoices should be complete, easy to read, and error free. Descriptions on invoices should be detailed and easy to understand. Required documents should be attached to the invoice. Payment terms should be clearly stated and consistent with the terms of the contract.
Disputes are frequently the reason for not paying. Prompt follow-up on past due invoices will flush out a dispute holding up payment. Once identified, you need to follow up with the people who can resolve the dispute at your firm and the customer. Disputes don’t just go away over time, you need to be persistent, but tactful, to get the right players to settle them.
PROMPT FOLLOW-UP OF PAST DUE ACCOUNTS RECEIVABLE
Time is always the adversary you combat in collecting past due accounts receivable. This is particularly true for accounts receivable in the construction industry. The construction industry is date and document driven. Prompt follow-up on past due accounts receivable is essential.
Use automatic reminders to nudge customers who have payment amnesia. Resend invoices and make reminder calls to customers. If your customer is short of cash, you are more likely to be paid if you stay on top of slow pay situations.
MAKE IT EASY TO PAY
Include a hyper-link on your invoice, so your customer can make payment with a credit card or ACH transfer through a secure payment portal. This can be easier and less costly for your customer than cutting and mailing a check and paying bank fees. In turn, you benefit from the certainty of payment and better cash flow, which should be weighed compared to the cost of the credit card or ACH fee.
EARLY PAYMENT DISCOUNT
Offer a discount off your invoice total for early payment. A small discount can be a big incentive for some customers to pay early; when you consider the time value of money. The trade-off for you to consider is the benefit of better cash flow versus the cost of the discount.
Take advantage of the mechanic’s lien laws in your state to protect yourself in case the worst happens and you are not paid. The requirements of mechanic’s lien laws are very specific and are document and date driven. You should consult with your attorney on how to administer the mechanic’s lien process in your state.
Don’t be intimidated by the requirements of mechanic’s lien laws. Successful construction firms routinely use mechanic’s liens to protect themselves.
These five tips are much easier to incorporate into your operations, if you have an automated accounts receivable system with billing and invoicing; which includes features such as work flow, online notes, automated reminders and online bill pay.
Automated accounts receivable software, which includes these important features, is available from Lockstep Collect, a leader in the field with a track record of assisting construction firms with billing, invoicing and accounts receivable management. If your firm would like to learn more about how you can improve billing, invoicing and accounts receivable management please contact Lockstep Collect at www.lockstep.io.