The construction industry is filled with challenges and risks of all kinds. One of the most serious for contractors and suppliers is getting paid. Because of the nature of the business, there is typically a lengthy time period between the delivery of the goods or services and the receipt of payment. This can be a huge drain on the supplier’s cash flow and even be a threat to its very survival. Staying on top of your accounts receivable (AR) is imperative. Here are some tips for effectively managing AR in construction.
Start with a sound credit policy
An effective AR management system starts before you ever seal the deal. You need a strong credit policy that provides clear and concise guidelines for the terms and conditions of providing goods and services on credit. It should define the criteria used to determine whether to extend credit to a subcontractor wishing to purchase goods and services. If it is too lenient, you may find yourself unable to collect on debt owed; however, if it is too strict, you will turn away potential customers and cut into your cash flow.
It’s not enough to perform a thorough Credit Risk Analysis (CRA) on your customer before extending credit. In the construction and building supply industry, you also need to worry about the project and third parties involved in the project. Set policies for analyzing the credit risk for third-party partners in the customer’s supply chain. If your customers can’t collect on their debts, it will affect their ability to repay what they owe you.
Your credit policy also should cover how to deal with bad debts (e.g., when to start assessing penalties, how much and when to start collection procedures). The policy should state how to deal with liens when customers default. Make sure you are familiar with the laws in your state — requirements and others may vary.
Invoicing is key
Proper and prompt invoicing is key to good AR management. Make sure to invoice as soon as supplies are delivered, or work is performed. Make sure the invoice is clear, complete, and accurate. Use a standard invoice template and make sure it is very detailed. If the customer finds a mistake in an invoice or the invoice doesn’t contain all the necessary information, it can significantly delay payment. Also, monitor your AR closely and send reminder notices before the invoice is due.
Documentation is crucial in the construction industry. Keep all receipts and documents related to the invoice. They will be necessary if there is a dispute about the invoice or work performed.
With the continual advancements in technology, you may consider automating your invoicing. For example, you could use your customer relationship management (CRM) system to track AR, invoices, and other documentation. You also may choose to select one of the many invoicing software solutions that help automate the invoicing process, allowing credit managers to focus on other tasks that require a human touch.
Handle delinquent accounts quickly
Despite due diligence in your CRA of the customer and careful AR management, you will have customers who don’t pay on time. This is especially true in the construction and building supply trades because of the long duration between billing and payment, as well as the number of subcontractors and vendors involved in the project.
Be proactive. The longer a debt goes unpaid, the less likely you’ll receive payment. Don’t wait until an account is past due before you contact the person responsible for payment. Listen to the reasons the payment is late. Is it due to a misunderstanding, mistake on the invoice, dissatisfaction, or financial troubles? Be willing to negotiate if the business relationship is important. When other methods fail, rely on the mechanics lien as a valuable option for recovery.
Managing AR in the construction industry presents special challenges, but by following these guidelines, you will increase your chances of getting paid. When all else fails, it’s time to get the courts involved. Mountain States Commercial Credit Management can help you navigate the collections process and help you get paid quicker.